<PAGE> 1
As filed with the Securities and Exchange Commission on February 24, 1997.
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. 12 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 13 [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 LLP MERRILL LYNCH ASSET MANAGEMENT
ONE WORLD TRADE CENTER P.O. BOX 9011
NEW YORK, NEW YORK, 10048-0557 PRINCETON, NEW JERSEY 08543-9011
ATTENTION: THOMAS R. SMITH, JR.
</TABLE>
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
[X] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[ ] this post-effective amendment designates a new
effective
date for a previously filed post-effective amendment.
---------------------
The Registrant has registered an indefinite number of its shares under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act
of 1940. The notice required by such rule for the Registrant's most recent
fiscal year was filed on December 20, 1996.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
PROPOSED
PROPOSED MAXIMUM
AMOUNT OF MAXIMUM AGGREGATE
TITLE OF SECURITIES SHARES BEING OFFERING PRICE OFFERING AMOUNT OF
BEING REGISTERED REGISTERED PER UNIT PRICE(1) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------
Shares of Common Stock (par value
$.10 per share................. 1,893,298 $11.18 $329,989 $100
=================================================================================================
</TABLE>
(1) The calculation of the maximum aggregate offering price is made pursuant to
Rule 24e-2 under the Investment Company Act of 1940.
(2) The total amount of securities redeemed or repurchased during Registrant's
previous fiscal year was 4,446,755 Shares of Beneficial Interest.
(3) 2,582,973 of the Shares described in (2) above have been used for reduction
pursuant to Rule 24e-2(a) or Rule 24f-2(c) under the Investment Company Act
of 1940 in previous filings during Registrant's current fiscal year.
(4) 1,863,782 of the Shares redeemed during Registrant's previous fiscal year
are being used for the reduction of the registration fee in this amendment
to the Registration Statement.
================================================================================
<PAGE> 2
MERRILL LYNCH GLOBAL 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; Merrill Lynch Select
PricingSM System; Additional
Information
7. Purchase of Securities Being Offered... Cover Page; Merrill Lynch Select
PricingSM System; Fee Table; Purchase
of Shares; Shareholder Services;
Additional Information; Inside Back
Cover Page
8. Redemption or Repurchase............... Merrill Lynch Select PricingSM 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........ Additional Information
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, 1997
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
------------------------
Merrill Lynch Global Convertible Fund, Inc. (the "Fund") is a mutual fund
that seeks to provide shareholders with high total return by investing primarily
in an internationally diversified portfolio of convertible debt securities,
convertible preferred stocks and "synthetic" convertible securities consisting
of a combination of debt securities or preferred stock and warrants or options.
The investment philosophy of the Fund is based on the belief that the
characteristics of convertible securities make them appropriate investments for
an investment company seeking a high total return from capital appreciation and
investment income. There can be no assurance that the investment objective of
the Fund will be realized. For more information on the Fund's investment
objective and policies, see "Investment Objective and Policies" on page 11.
------------------------
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares and other relevant circumstances. See
"Merrill Lynch Select Pricing(SM) System" on page 3.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081
[(609)282-2800], or from securities dealers that have entered into selected
dealer agreements with the Distributor, including Merrill Lynch, Pierce, Fenner
& Smith Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000
and the minimum subsequent purchase is $50, except that for retirement plans the
minimum initial purchase is $100 and the minimum subsequent purchase is $1.
Merrill Lynch may charge its customers a processing fee (presently $4.85) for
confirming purchases and repurchases. Purchases and redemptions made directly
through the Fund's transfer agent are not subject to the processing fee. See
"Purchase of Shares" and "Redemption of Shares."
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
------------------------
This Prospectus is a concise statement of information about the Fund that
is relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated February 24, 1997 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission (the
"Commission") and is available, without charge, by calling or by writing the
Fund at the above telephone number or address. The Statement of Additional
Information is hereby incorporated by reference into this Prospectus.
------------------------
MERRILL LYNCH ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
<PAGE> 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
proceeds, whichever is lower).......... None(d) 4.0% during the first year, 1.0% for None(d)
decreasing 1.0% annually to one year(f)
0.0% after the fourth year(e)
Exchange Fee............................. None None None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS):
Investment Advisory Fees(g)............ 0.65% 0.65% 0.65% 0.65%
12b-1 Fees(h):
Account Maintenance Fees............. None 0.25% 0.25% 0.25%
Distribution Fees.................... None 0.75% 0.75% None
(Class B shares convert to Class
D
shares automatically after
approximately eight years and
cease being subject to
distribution fees)
Other Expenses:
Custodial Fees....................... 0.03% 0.03% 0.03% 0.03%
Shareholder Servicing Costs(i)....... 0.36% 0.43% 0.44% 0.31%
Other................................ 0.53% 0.53% 0.53% 0.53%
----- ----- ----- -----
Total Other Expenses............. 0.92% 0.99% 1.00% 0.87%
----- ----- ----- -----
Total Fund Operating Expenses............ 1.57% 2.64% 2.65% 1.77%
===== ===== ===== =====
</TABLE>
- ---------------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and certain participants in
fee-based programs. See "Purchase of Shares -- Initial Sales Charge
Alternatives -- Class A and Class D Shares" -- page 28 and "Shareholder
Services -- Fee-Based Programs" -- page 39.
(b) Class B shares convert to Class D shares automatically approximately eight
years after initial purchase. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares" -- page 29.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of Class
A shares by certain retirement plans in connection with certain fee-based
programs. Class A and Class D purchases of $1,000,000 or more may not be
subject to an initial sales charge. See "Purchase of Shares -- Initial Sales
Charge Alternatives -- Class A and Class D Shares" -- page 28.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more which
are not subject to an initial sales charge may instead be subject to a CDSC
of 1.0% of amounts redeemed within the first year after purchase. Such CDSC
may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 39.
(e) The CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 39.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 39.
(g) See "Management of the Fund -- Management and Advisory Arrangements" -- page
23.
(h) See "Purchase of Shares -- Distribution Plans" -- page 33.
(i) See "Management of the Fund -- Transfer Agency Services" -- page 24.
2
<PAGE> 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 on page 2,
(2) a 5% annual return throughout the periods and (3)
redemption at the end of the period (including any
applicable CDSC for Class B and Class C Shares):
Class A.............................................. $ 68 $ 99 $ 134 $229
Class B.............................................. $ 67 $ 102 $ 140 $279*
Class C.............................................. $ 37 $ 82 $ 141 $298
Class D.............................................. $ 70 $ 105 $ 143 $250
An investor would pay the following expenses on the same
$1,000 investment assuming no redemption at the end of
the period:
Class A.............................................. $ 68 $ 99 $ 134 $229
Class B.............................................. $ 27 $ 82 $ 140 $279*
Class C.............................................. $ 27 $ 82 $ 141 $298
Class D.............................................. $ 70 $ 105 $ 143 $250
</TABLE>
- ---------------
* Assumes conversion to Class D shares approximately eight years after purchase.
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR ANNUAL RATE OF RETURN, AND ACTUAL EXPENSES OR ANNUAL
RATE OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE
EXAMPLE. Class B and Class C shareholders who hold their shares for an extended
period of time may pay more in Rule 12b-1 distribution fees than the economic
equivalent of the maximum front-end sales charge permitted under the Conduct
Rules of the National Association of Securities Dealers, Inc. ("NASD"). Merrill
Lynch may charge its customers a processing fee (presently $4.85) for confirming
purchases and repurchases. Purchases and redemptions made directly through the
Fund's transfer agent are not subject to the processing fee. See "Purchase of
Shares" and "Redemption of Shares."
MERRILL LYNCH SELECT PRICINGSM SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
PricingSM System. The shares of each class may be purchased at a price equal to
the next determined net asset value per share subject to the sales charges and
ongoing fee arrangements described below. Shares of Class A and Class D are sold
to investors choosing the initial sales charge alternatives, and shares of Class
B and Class C are sold to investors choosing the deferred sales charge
alternatives. The Merrill Lynch Select PricingSM System is used by more than 50
registered investment companies advised by Merrill Lynch Asset Management, L.P.
("MLAM" or the "Manager") or Fund Asset Management, L.P. ("FAM"), an affiliate
of MLAM. Funds advised by MLAM or FAM that utilize the Merrill Lynch Select
PricingSM System are referred to herein as "MLAM-advised mutual funds."
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the
3
<PAGE> 6
deferred sales charge arrangements. The CDSCs, distribution fees and account
maintenance fees that are imposed on Class B and Class C shares, as well as the
account maintenance fees that are imposed on the Class D shares, are imposed
directly against those classes and not against all assets of the Fund and,
accordingly, such charges will not affect the net asset value of any other class
or have any impact on investors choosing another sales charge option. Dividends
paid by the Fund for each class of shares will be calculated in the same manner
at the same time and will differ only to the extent that account maintenance and
distribution fees and any incremental transfer agency costs relating to a
particular class are borne exclusively by that class. Each class has different
exchange privileges. See "Shareholder Services -- Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges and distribution fees with respect to the
Class B and Class C shares in that the sales charges and distribution fees
applicable to each class provide for the financing of the distribution of the
shares of the Fund. The distribution-related revenues paid with respect to a
class will not be used to finance the distribution expenditures of another
class. Sales personnel may receive different compensation for selling different
classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select Pricing(SM) System that the investor
believes is the most beneficial under his particular circumstances. More
detailed information as to each class of shares is set forth under "Purchase of
Shares."
<TABLE>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
- -------------------------------------------------------------------------------------------------
A Maximum 5.25% initial No No No
sales charge(2)(3)
- -------------------------------------------------------------------------------------------------
B CDSC for a period of 4 0.25% 0.75% B shares convert to
years, D shares automatically
at a rate of 4.0% during after approximately
the first year, decreasing eight years(5)
1.0%
annually to 0.0%(4)
- -------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(6) 0.25% 0.75% No
- -------------------------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(3)
- -------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. Contingent deferred sales charges ("CDSCs") are imposed
if the redemption occurs within the applicable CDSC time period. The charge
will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares -- Initial Sales
Charge Alternatives -- Class A and Class D Shares -- Eligible Class A
Investors."
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class A
shares by certain retirement plans in connection with certain fee-based
programs. Class A and Class D share purchases of $1,000,000 or more may not
be subject to an initial sales charge but instead may be subject to a 1.0%
CDSC if redeemed within one year. Such CDSC may be waived in connection with
certain fee-based programs. A 0.75% sales charge for 401(k) purchases over
$1,000,000 will apply. See "Class A" and "Class D" below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans was modified. Also, Class B
shares of certain other MLAM-advised mutual funds into which exchanges may
be made have a ten year conversion period. If Class B shares of the Fund are
exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked
onto the holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
4
<PAGE> 7
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares.
Investors who currently own Class A shares of the Fund in a
shareholder account are entitled to purchase additional Class A shares
of the Fund in that account. Eligible investors also include certain
retirement plans and participants in certain fee-based programs. In
addition, Class A shares will be offered at net asset value to Merrill
Lynch & Co., Inc. ("ML & Co.") and its subsidiaries (the term
"subsidiaries" when used herein with respect to ML & Co. includes FAM,
the Manager and certain other entities directly or indirectly wholly
owned and controlled by ML & Co.), and their directors and employees
and to members of the Boards of MLAM-advised mutual funds. The maximum
initial sales charge is 5.25%, which is reduced for purchases of
$25,000 and over and waived for purchases by certain retirement plans
and participants in connection with certain fee-based programs.
Purchases of $1,000,000 or more may not be subject to an initial sales
charge, but if the initial sales charge is waived such purchases may
be subject to a 1.0% CDSC if the shares are redeemed within one year
after purchase. Such CDSC may be waived in connection with certain
fee-based programs. Sales charges are also reduced under a right of
accumulation which takes into account the investor's holdings of all
classes of all MLAM-advised mutual funds. See "Purchase of
Shares -- Initial Sales Charge Alternatives -- Class A and Class D
Shares."
Class B: Class B shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.75% of the Fund's average net
assets attributable to the Class B shares, as well as a CDSC if they
are redeemed within four years of purchase. Such CDSC may be modified
in connection with certain fee-based programs. Approximately eight
years after issuance, Class B shares will convert automatically into
Class D shares of the Fund, which are subject to an account
maintenance fee but no distribution fee; Class B shares of certain
other MLAM-advised mutual funds into which exchanges may be made
convert into Class D shares automatically after approximately ten
years. If Class B shares of the Fund are exchanged for Class B shares
of another MLAM-advised mutual fund, the conversion period applicable
to the Class B shares acquired in the exchange will apply, as will the
Class D account maintenance fee of the acquired fund upon the
conversion, and the holding period for the shares exchanged will be
tacked onto the holding period for the shares acquired. Automatic
conversion of Class B shares into Class D shares will occur at least
once a month on the basis of the relative net asset values of the
shares of the two classes on the conversion date, without the
imposition of any sales load, fee or other charge. Conversion of Class
B shares to Class D shares will not be deemed a purchase or sale of
the shares for Federal income tax purposes. Shares purchased through
reinvestment of dividends on Class B shares also will convert
automatically to Class D shares. The conversion period for dividend
reinvestment shares and for certain retirement plans is modified as
described under "Purchase of Shares -- Deferred Sales Charge
Alternatives -- Class B and Class C Shares -- Conversion of Class B
Shares to Class D Shares."
Class C: Class C shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.75% of the Fund's average net
assets attributable to the Class C shares. Class C shares are also
subject to a 1.00% CDSC if they are redeemed within one year of
purchase. Such CDSC may be waived in connection with certain fee-based
programs. Although Class C shares are subject to a 1.0% CDSC for only
one
5
<PAGE> 8
year (as compared to four years for Class B), Class C shares have no
conversion feature and, accordingly, an investor who purchases Class C
shares will be subject to distribution fees and higher account
maintenance fees that will be imposed on Class C shares for an
indefinite period subject to annual approval by the Fund's Board of
Directors and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. The maximum initial sales charge is 5.25%, which is
reduced for purchases of $25,000 or more. Purchases of $1,000,000 or
more may not be subject to an initial sales charge, but if the initial
sales charge is waived such purchases may be subject to a 1.0% CDSC if
the shares are redeemed within one year after purchase. Such CDSC may
be waived in connection with certain fee-based programs. The schedule
of initial sales charges and reductions for Class D shares is the same
as the schedule for Class A shares, except that there is no waiver for
purchases in connection with certain fee-based programs. Class D
shares also will be issued upon conversion of Class B shares as
described above under "Class B." See "Purchase of Shares -- Initial
Sales Charge Alternatives -- Class A and Class D Shares."
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing(SM) System that the investor believes is most beneficial under his
particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because there is an account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative particularly
attractive because similar sales charge reductions are not available with
respect to the deferred sales charges imposed in connection with purchases of
Class B or Class C shares. Investors not qualifying for reduced initial sales
charges who expect to maintain their investment for an extended period of time
also may elect to purchase Class A or Class D shares, because over time the
accumulated ongoing account maintenance and distribution fees on Class B or
Class C shares may exceed the initial sales charge and, in the case of Class D
shares, the account maintenance fee. Although some investors who previously
purchased Class A shares may no longer be eligible to purchase Class A shares of
other MLAM-advised mutual funds, those previously purchased Class A shares,
together with Class B, Class C and Class D share holdings, will count toward a
right of accumulation which may qualify the investor for reduced initial sales
charges on new initial sales charge purchases. In addition, the ongoing Class B
and Class C account maintenance and distribution fees will cause Class B and
Class C shares to have higher expense ratios, pay lower dividends and have lower
total returns than the initial sales charge shares. The ongoing Class D account
maintenance fees will cause Class D shares to have a higher expense ratio, pay
lower dividends and have a lower total return than Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the benefit
of putting all of the investor's dollars to work from the time the investment is
made. The deferred sales charge alternatives may be particularly appealing to
investors who do not qualify for a reduction in initial sales charges. Both
Class B and Class C shares are subject to ongoing account maintenance fees and
distribution fees; however, the ongoing account maintenance
6
<PAGE> 9
and distribution fees potentially may be offset to the extent any return is
realized on the additional funds initially invested in Class B or Class C
shares. In addition, Class B shares will be converted into Class D shares of the
Fund after a conversion period of approximately eight years, and thereafter
investors will be subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend to
hold their shares for an extended period of time. Investors in Class B shares
should take into account whether they intend to redeem their shares within the
CDSC period and, if not, whether they intend to remain invested until the end of
the conversion period and thereby take advantage of the reduction in ongoing
fees resulting from the conversion into Class D shares. Other investors,
however, may elect to purchase Class C shares if they determine that it is
advantageous to have all their assets invested initially and they are uncertain
as to the length of time they intend to hold their assets in MLAM-advised mutual
funds. Although Class C shareholders are subject to a shorter CDSC period at a
lower rate, they forego the Class B conversion feature, making their investment
subject to account maintenance and distribution fees for an indefinite period of
time. In addition, while both Class B and Class C distribution fees are subject
to the limitations on asset-based sales charges imposed by the NASD, the Class B
distribution fees are further limited under a voluntary waiver of asset-based
sales charges. See "Purchase of Shares -- Limitations on the Payment of Deferred
Sales Charges."
7
<PAGE> 10
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in
conjunction with the annual audits of the financial statements of the Fund by
Deloitte & Touche LLP, independent auditors. Audited financial statements for
the fiscal year ended October 31, 1996 and the independent auditors' report
thereon are included in the Statement of Additional Information. Further
information about the performance of the Fund is contained in the Fund's most
recent annual report to shareholders which may be obtained, without charge, by
calling or by writing the Fund at the telephone number or address on the front
cover of this Prospectus.
The following per share data and ratios have been derived from information
provided in the Fund's audited Financial Statements:
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------
FOR THE YEAR ENDED OCTOBER 31,
----------------------------------------------------
1996++ 1995 1994 1993 1992
------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....................................... $ 10.71 $ 10.75 $11.08 $ 9.79 $ 9.39
------- ------ ------ ------ ------
Investment income--net..................................................... .32 .42 .33 .23 .21
Realized and unrealized gain (loss) on investments and foreign currency
transactions--net......................................................... .62 .11 (.27) 1.45 .68
------- ------ ------ ------ ------
Total from investment operations........................................... .94 .53 .06 1.68 .89
------- ------ ------ ------ ------
Less dividends and distributions:
Investment income--net.................................................... (.48) (.46) (.30) (.23) (.25)
Realized gain on investments--net......................................... (.63) (.11) (.09) (.16) (.24)
------- ------ ------ ------ ------
Total dividends and distributions.......................................... (1.11) (.57) (.39) (.39) (.49)
------- ------ ------ ------ ------
Net asset value, end of period............................................. $ 10.54 $ 10.71 $10.75 $11.08 $ 9.79
======= ====== ====== ====== ======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share......................................... 9.34% 5.10% 0.61% 17.64% 10.00%
======= ====== ====== ====== ======
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement............................................. 1.57% 1.38% 1.66% 2.22% 2.47%
======= ====== ====== ====== ======
Expenses................................................................... 1.57% 1.38% 1.66% 2.22% 2.86%
======= ====== ====== ====== ======
Investment income--net..................................................... 3.05% 4.03% 2.97% 2.36% 2.61%
======= ====== ====== ====== ======
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................................... $17,741 $23,634 $7,850 $4,557 $2,283
======= ====== ====== ====== ======
Portfolio turnover......................................................... 14.72% 101.12% 38.04% 26.02% 4.91%
======= ====== ====== ====== ======
Average Commission Rate Paid##............................................. $ .0679 $ -- $ -- $ -- $ --
======= ====== ====== ====== ======
<CAPTION>
1991 1990 1989+
------ ------ ------
<S> <C<C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....................................... $ 8.37 $ 9.95 $ 9.97
------ ------ ------
Investment income--net..................................................... .25 .38 .39
Realized and unrealized gain (loss) on investments and foreign currency
transactions--net......................................................... 1.22 (1.11) .21
------ ------ ------
Total from investment operations........................................... 1.47 (.73) .60
------ ------ ------
Less dividends and distributions:
Investment income--net.................................................... (.37) (.42) (.45)
Realized gain on investments--net......................................... (.08) (.43) (.17)
------ ------ ------
Total dividends and distributions.......................................... (.45) (.85) (.62)
------ ------ ------
Net asset value, end of period............................................. $ 9.39 $ 8.37 $ 9.95
====== ====== ======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share......................................... 18.09% (7.86)% 6.29%#
====== ====== ======
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement............................................. 2.47% 2.39% 1.77%*
====== ====== ======
Expenses................................................................... 2.87% 2.39% 1.77%*
====== ====== ======
Investment income--net..................................................... 3.16% 4.55% 5.62%*
====== ====== ======
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................................... $ 448 $ 162 $ 194
====== ====== ======
Portfolio turnover......................................................... 18.02% 22.76% 15.91%
====== ====== ======
Average Commission Rate Paid##............................................. $ -- $ -- $ --
====== ====== ======
</TABLE>
- ------------------------
+ Class A shares commenced operations on November 4, 1988.
++ Based on average shares outstanding during the period.
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been converted into U.S.
dollars using the prevailing exchange rate on the date of the transaction.
Such conversions may significantly affect the rate shown.
8
<PAGE> 11
FINANCIAL HIGHLIGHTS (CONCLUDED)
<TABLE>
<CAPTION>
CLASS C
--------
FOR THE
CLASS B YEAR
--------------------------------------------------------------------------------------- ENDED
OCTOBER
FOR THE YEAR ENDED OCTOBER 31, 31,
--------------------------------------------------------------------------------------- --------
1996++ 1995 1994 1993 1992 1991 1990 1989 1988+++ 1996++
------- ------- ------- ------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net
Asset Value:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period........................ $ 10.77 $ 10.80 $ 11.13 $ 9.84 $ 9.44 $ 8.39 $ 9.95 $ 9.94 $ 10.00 $10.75
------- ------- ------- ------- ------- ------- ------- ------- ------- ------
Investment income--net......... .21 .37 .21 .13 .12 .18 .29 .37 .27 .21
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions--net............. .62 .05 (.25) 1.46 .67 1.20 (1.10) .17 (.10) .62
------- ------- ------- ------- ------- ------- ------- ------- ------- ------
Total from investment
operations.................... .83 .42 (.04) 1.59 .79 1.38 (.81) .54 .17 .83
------- ------- ------- ------- ------- ------- ------- ------- ------- ------
Less dividends and
distributions:
Investment income--net........ (.36) (.34) (.20) (.14) (.15) (.25) (.32) (.36) (.23) (.36)
Realized gain on
investments--net............ (.63) (.11) (.09) (.16) (.24) (.08) (.43) (.17) -- (.63)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------
Total dividends and
distributions................. (.99) (.45) (.29) (.30) (.39) (.33) (.75) (.53) (.23) (.99)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------
Net asset value, end of
period........................ $ 10.61 $ 10.77 $ 10.80 $ 11.13 $ 9.84 $ 9.44 $ 8.39 $ 9.95 $ 9.94 $10.59
======= ======= ======= ======= ======= ======= ======= ======= ======= ======
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share......................... 8.13% 4.01% (0.37)% 16.45% 8.77% 16.79% (8.68)% 5.58% 1.70%# 8.14%
======= ======= ======= ======= ======= ======= ======= ======= ======= ======
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of
reimbursement................. 2.64% 2.37% 2.69% 3.26% 3.49% 3.50% 3.41% 2.63% 2.48%* 2.65%
======= ======= ======= ======= ======= ======= ======= ======= ======= ======
Expenses....................... 2.64% 2.37% 2.69% 3.26% 3.96% 3.88% 3.41% 2.97% 2.60%* 2.65%
======= ======= ======= ======= ======= ======= ======= ======= ======= ======
Investment income--net......... 1.98% 2.95% 1.95% 1.32% 1.53% 2.25% 3.51% 3.62% 3.74%* 1.97%
======= ======= ======= ======= ======= ======= ======= ======= ======= ======
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).................... $38,830 $58,660 $53,121 $29,831 $13,975 $14,973 $18,296 $30,813 $41,232 $4,123
======= ======= ======= ======= ======= ======= ======= ======= ======= ======
Portfolio turnover............. 14.72% 101.12% 38.04% 26.02% 4.91% 18.02% 22.76% 15.91% 20.24% 14.72%
======= ======= ======= ======= ======= ======= ======= ======= ======= ======
Average Commission Rate
paid##........................ $ .0679 -- -- -- -- -- -- -- -- $.0679
======= ======= ======= ======= ======= ======= ======= ======= ======= ======
<CAPTION>
CLASS D
------------------------------
FOR THE FOR THE
PERIOD FOR THE YEAR ENDED PERIOD
OCT. 21, OCT. 21,
1994+ TO OCTOBER 31, 1994+ TO
OCT. 31, ------------------- OCT. 31,
1995 1994++ 1996++ 1995 1994++
-------- -------- -------- -------- --------
<S> <<C> <C> <C> <C> <C>
Increase (Decrease) in Net
Asset Value:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period........................ $10.81 $10.74 $10.72 $10.76 $10.69
------ ----- ------ ------ -----
Investment income--net......... .36 -- .31 .42 --
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions--net............. .05 .07 .61 .09 .07
------ ----- ------ ------ -----
Total from investment
operations.................... .41 .07 .92 .51 .07
------ ----- ------ ------ -----
Less dividends and
distributions:
Investment income--net........ (.36) -- (.46) (.44) --
Realized gain on
investments--net............ (.11) -- (.63) (.11) --
------ ----- ------ ------ -----
Total dividends and
distributions................. (.47) -- (1.09) (.55) --
------ ----- ------ ------ -----
Net asset value, end of
period........................ $10.75 $10.81 $10.55 $10.72 $10.76
====== ===== ====== ====== =====
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share......................... 3.89% 0.65%# 9.07% 4.87% 0.65%#
====== ===== ====== ====== =====
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of
reimbursement................. 2.41% 5.64%* 1.77% 1.62% 5.13%*
====== ===== ====== ====== =====
Expenses....................... 2.41% 5.64%* 1.77% 1.62% 5.13%*
====== ===== ====== ====== =====
Investment income--net......... 2.99% (1.74)%* 2.85% 3.79% (1.24)%*
====== ===== ====== ====== =====
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).................... $4,598 $ 203 $8,585 $3,499 $ 179
====== ===== ====== ====== =====
Portfolio turnover............. 101.12% 38.04% 14.72% 101.12% 38.04%
====== ===== ====== ====== =====
Average Commission Rate
paid##........................ -- -- $.0679 -- --
====== ===== ====== ====== =====
</TABLE>
- ------------------------
+ Commencement of operations.
++ Based on average shares outstanding during the period.
+++ Class B shares commenced operations on February 26, 1988.
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The "Average Commission Rate" includes
commissions paid in foreign currencies, which have been converted into U.S.
dollars using the prevailing exchange rate on the date of the transaction.
Such conversions may significantly affect the rate shown.
9
<PAGE> 12
SPECIAL CONSIDERATIONS
As a global fund, the Fund may invest in United States and foreign
securities. Investments in securities of foreign entities and securities
denominated in foreign currencies involve risks not typically involved in
domestic investments, including fluctuations in foreign exchange rates, future
foreign political and economic developments, and the possible imposition of
exchange controls or other foreign or United States governmental laws or
restrictions applicable to such investments. Since the Fund may invest in
securities denominated or quoted in currencies other than the U.S. dollar,
changes in foreign currency exchange rates may affect the value of investments
in the portfolio and the unrealized appreciation or depreciation of investments
insofar as United States investors are concerned. Changes in foreign currency
exchange rates relative to the U.S. dollar will affect the U.S. dollar value of
the Fund's assets denominated in that currency and the Fund's yield on such
assets. Foreign currency exchange rates are determined by forces of supply and
demand on the foreign exchange markets. These forces are, in turn, affected by
the international balance of payments and other economic and financial
conditions, government intervention, speculation, and other factors. Moreover,
individual foreign economies may differ favorably or unfavorably from the United
States economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resources, self-sufficiency and balance of
payments position.
With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social instability
or diplomatic developments that could affect investments in those countries.
There may be less publicly available information about a foreign financial
instrument than about a United States instrument, and foreign entities may not
be subject to accounting, auditing and financial reporting standards and
requirements comparable to those of United States entities. In addition, certain
foreign investments may be subject to foreign withholding taxes. See "Taxes."
Foreign financial markets, while growing in volume, have, for the most part,
substantially less volume than United States markets, and securities of many
foreign companies are less liquid and their prices more volatile than securities
of comparable domestic companies. The foreign markets also have different
clearance and settlement procedures and in certain markets there have been times
when settlements have been unable to keep pace with the volume of securities
transactions making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when assets of the Fund are
uninvested and no return is earned thereon. The inability of the Fund to make
intended security purchases due to settlement problems could cause the Fund to
miss attractive investment opportunities. Inability to dispose of a portfolio
security due to settlement problems could result either in losses to the Fund
due to subsequent declines in value of such portfolio security or, if the Fund
has entered into a contract to sell the security, could result in possible
liability to the purchaser. Costs associated with transactions in foreign
securities are generally higher than with transactions in United States
securities. There is generally less government supervision and regulation of
exchanges, financial institutions and issuers in foreign countries than there is
in the United States.
The operating expense ratio of the Fund can be expected to be higher than
that of an investment company investing exclusively in United States securities
since the expenses of the Fund, such as custodial costs, are higher.
The Fund may engage in various portfolio strategies to seek to increase its
return through the use of options on portfolio securities and to hedge its
portfolio against movements in the equity markets, interest rates and exchange
rates between currencies by the use of options, futures and options thereon.
Utilization of options and futures transactions involves the risk of imperfect
correlation in movements in the price of options
10
<PAGE> 13
and futures and movements in the price of the securities, interest rates or
currencies that are the subject of the hedge. There can be no assurance that a
liquid secondary market for options and futures contracts that are held by the
Fund will exist at any specific time. See "Investment Objective and
Policies -- Portfolio Strategies Involving Options and Futures". The Fund may
also purchase call options and stock index call options as an element of
synthetic convertible securities. See "Investment Objective and
Policies -- Convertible Securities."
The Fund has established no rating criteria for the convertible securities
and other debt securities in which it may invest, and such securities may not be
rated at all for creditworthiness. Securities rated in the medium to lower
rating categories of nationally recognized statistical rating organizations are
predominately speculative with respect to the capacity to pay interest and repay
principal in accordance with the terms of the security and generally involve a
greater volatility of price than securities in higher rating categories. The
Fund does not intend to purchase debt securities that are in default.
The Fund may borrow up to 20% of its total assets taken at market value,
but only from banks as a temporary measure for extraordinary or emergency
purposes including to meet redemptions or to settle securities transactions.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek high total return from a
combination of capital appreciation and investment income. The Fund will seek to
achieve its objective by investing primarily in an internationally diversified
portfolio of convertible debt securities, convertible preferred stocks and
"synthetic" convertible securities consisting of a combination of debt
securities or preferred stock and warrants or options. Under normal
circumstances, the Fund will invest at least 65% of its total assets in
convertible securities and 80% of its assets in convertible securities and
synthetic convertible securities of at least three different countries including
the United States. The investment objective described in this paragraph is a
fundamental policy of the Fund and may not be changed without the approval of
the holders of a majority of the Fund's outstanding voting securities.
The convertible securities to be held by the Fund include any corporate
debt security or preferred stock that may be converted into underlying shares of
common stock. The common stock underlying convertible securities may be issued
by a different entity than the issuer of the convertible securities. Convertible
securities entitle the holder to receive interest payments paid on corporate
debt securities or the dividend preference on a preferred stock until such time
as the convertible security matures or is redeemed or until the holder elects to
exercise the conversion privilege. "Synthetic" convertible securities, as such
term is used herein, are created by combining separate securities that possess
the two principal characteristics of a true convertible security, i.e., fixed
income and the right to acquire equity securities. See "Convertible Securities"
below for additional information concerning convertible securities and synthetic
convertible securities eligible for purchase by the Fund.
The Fund believes that the characteristics of convertible securities make
them appropriate investments for an investment company seeking a high total
return from capital appreciation and investment income. These characteristics
include the potential for capital appreciation as the value of the underlying
common stock increases, the relatively high yield received from dividend or
interest payments as compared to common stock dividends and decreased risks of
decline in value relative to the underlying common stock due to their
11
<PAGE> 14
fixed-income nature. As a result of the conversion feature, however, the
interest rate or dividend preference on a convertible security is generally less
than would be the case if the securities were issued in nonconvertible form.
Although the Fund may invest in securities denominated in any currency that
are convertible into common stocks of companies located throughout the world, it
is expected that a majority of its assets will be invested in securities
denominated in United States dollars, currencies of Pacific Basin countries
(such as Japan, Australia, Hong Kong and Singapore), and currencies of Western
European countries (such as the United Kingdom, Germany, the Netherlands,
Switzerland, Sweden, France, Italy, Belgium, Norway, Denmark, Austria and Spain)
and that are convertible into equity securities of United States, Pacific Basin
or Western European corporations. To the extent the Fund acquires synthetic
convertible securities, it is expected that the debt securities or preferred
stock will principally be denominated in United States dollars, Pacific Basin
currencies or Western European currencies and the warrants or options will
principally be exercisable to purchase equity securities of United States,
Pacific Basin or Western European issuers.
Under normal circumstances, the Fund may invest up to 20% of its assets in
other types of securities including equity securities and nonconvertible debt
securities of United States and non-United States issuers.
The Fund has established no rating criteria for the debt securities in
which it may invest and such securities may not be rated at all for
creditworthiness. Securities rated in the medium to lower rating categories of
nationally recognized statistical rating organizations and unrated securities of
comparable quality are predominantly speculative with respect to the capacity to
pay interest and repay principal in accordance with the terms of the security
and generally involve a greater volatility of price than securities in higher
rating categories. See the Statement of Additional Information for additional
information regarding ratings of debt securities. In purchasing such securities,
the Fund will rely on the Manager's judgment, analysis and experience in
evaluating the creditworthiness of an issuer of such securities. The Manager
will take into consideration, among other things, the issuer's financial
resources, its sensitivity to economic conditions and trends, its operating
history, the quality of the issuer's management and regulatory matters. The Fund
does not intend to purchase debt securities that are in default or that the
Manager believes will be in default.
The Fund reserves the right as a temporary defensive measure to hold money
market securities, including repurchase agreements and purchase and sale
contracts, of United States and non-United States issuers, or cash (foreign
currencies or United States dollars), in such proportions as, in the opinion of
the Manager, prevailing market, economic or political conditions warrant. The
Fund has established no rating criteria for money market securities that it may
hold as a defensive measure. For this purpose, investments made for defensive
purposes will be maintained only during periods in which the Manager determines
that economic or financial conditions are adverse for holding or being fully
invested in convertible and synthetic convertible securities of United States
and non-United States issuers. A portion of the portfolio normally will be held
in U.S. dollars or dollar-denominated money market securities, including
repurchase agreements and purchase and sale contracts, to provide for possible
redemptions.
In evaluating proposed investments, the Manager will seek to maximize the
total return on the Fund's portfolio in terms of United States dollars. In this
regard, the Manager will consider factors that relate both to various securities
markets and to specific securities traded in those markets. In evaluating
markets, the Manager will consider such factors as the condition and growth
potential of various economies and securities markets, currency and taxation
factors (including the applicability and rate of withholding taxes) and other
pertinent financial, social, national and political factors. In analyzing
convertible securities, the Manager will
12
<PAGE> 15
consider both the yield on the convertible security and the potential capital
appreciation that is offered by the underlying common stock. There can be no
assurance that the Fund will achieve its investment objective.
The table below shows the average monthly dollar-weighted market value, by
Standard & Poor's Ratings Service ("S&P") rating category, of the convertible
securities held by the Fund during the fiscal year ended October 31, 1996:
<TABLE>
<CAPTION>
% TOTAL
RATING ASSETS
------------------------------------------------------------------- -------
<S> <C>
AAA................................................................ 14.121%
AA................................................................. 4.995
A.................................................................. 16.203
BBB................................................................ 16.591
BAA................................................................ 0.000
BB................................................................. 2.909
BA................................................................. 0.000
B.................................................................. 3.735
C.................................................................. 0.000
Not Rated*......................................................... 29.517
Commercial Paper & U.S. Gov't...................................... 11.929
-------
100.000%
=======
</TABLE>
- ---------------
* Convertible securities that are not rated by S&P. Such bonds may be rated by
nationally recognized statistical rating organizations other than S&P, or may
not be rated by any of such organizations. With respect to the percentage of
the Fund's assets invested in such securities, the Fund's Manager believes
that 2.204% are of comparable quality to obligations rated AAA, 5.395% are of
comparable quality to obligations rated AA, 11.879% are of comparable quality
to obligations rated A, .639% are of comparable quality to obligations rated
BBB, 4.689% are of comparable quality to obligations rated BAA, 1.798% are of
comparable quality to obligations rated BA, .952% are of comparable quality to
obligations rated B and 1.961% are of comparable quality to obligations rated
C. This determination is based on the Manager's own internal evaluation and
does not necessarily reflect how such securities would be rated by S&P if it
were to rate the securities.
For a description of the above referenced ratings, see the appendix to the
Statement of Additional Information. The Fund has established no rating criteria
for the securities in which it may invest and such securities may not be rated
at all for creditworthiness. The above percentages are for the fiscal year ended
October 31, 1996; the rating composition of the portfolio of the Fund may vary
over time.
CONVERTIBLE SECURITIES
Set forth below is additional information concerning traditional
convertible securities and "synthetic" convertible securities.
Convertible securities are issued and traded in a number of securities
markets. For the past several years, the principal markets have been the United
States, the Euromarket and Japan. Issuers during this period have included major
corporations domiciled in the United States, Japan, France, Switzerland, Canada
and the United Kingdom. Since the Fund will invest a substantial portion of its
assets in the United States market and the Euromarket, where convertible bonds
have been primarily denominated in the United States dollar, it is expected that
ordinarily a substantial portion of the convertible securities held by the Fund
will be
13
<PAGE> 16
denominated in United States dollars. However, the underlying equity securities
typically will be quoted in the currency of the country where the issuer is
domiciled. With respect to convertible securities denominated in a currency
different from that of the underlying equity securities, the conversion price
may be based on a fixed exchange rate established at the time the security is
issued. As a result, fluctuations in the exchange rate between the currency in
which the debt security is denominated and the currency in which the share price
is quoted will affect the value of the convertible security. As described below,
the Fund is authorized to enter into foreign currency hedging transactions in
which it may seek to reduce the impact of such fluctuations.
Apart from currency considerations, the value of convertible securities is
influenced by both the yield of nonconvertible securities of comparable issuers
and by the value of the underlying common stock. The value of a convertible
security viewed without regard to its conversion feature (i.e., strictly on the
basis of its yield) is sometimes referred to as its "investment value." To the
extent interest rates change, the investment value of the convertible security
typically will fluctuate. However, at the same time, the value of the
convertible security will be influenced by its "conversion value," which is the
market value of the underlying common stock that would be obtained if the
convertible security were converted. Conversion value fluctuates directly with
the price of the underlying common stock. If, because of a low price of the
common stock, the conversion value is substantially below the investment value
of the convertible security, the price of the convertible security is governed
principally by its investment value.
To the extent the conversion value of a convertible security increases to a
point that approximates or exceeds its investment value, the price of the
convertible security will be influenced principally by its conversion value. A
convertible security will sell at a premium over the conversion value to the
extent investors place value on the right to acquire the underlying common stock
while holding a fixed-income security. The yield and conversion premium of
convertible securities issued in Japan and the Euromarket are frequently
determined at levels that cause the conversion value to affect their market
value more than the securities' investment value.
Holders of convertible securities have a claim on the assets of the issuer
prior to the common stockholders but may be subordinated to similar
non-convertible securities of the same issuer. A convertible security may be
subject to redemption at the option of the issuer at a price established in the
charter provision, indenture or other governing instrument pursuant to which the
convertible security was issued. If a convertible security held by the Fund is
called for redemption, the Fund will be required to redeem the security, convert
it into the underlying common stock or sell it to a third party. Certain
convertible debt securities may provide a put option to the holder which
entitles the holder to cause the security to be redeemed by the issuer at a
premium over the stated principal amount of the debt security.
As indicated above, "synthetic" convertible securities, for purposes of
this Prospectus, are created by combining separate securities that possess the
two principal characteristics of a true convertible security, i.e., fixed income
("fixed-income component") and the right to acquire equity securities
("convertibility component"). The fixed-income component is achieved by
investing in nonconvertible fixed-income securities such as nonconvertible
bonds, preferred stocks and money market instruments. The convertibility
component is achieved by investing in warrants, exchanges or NASDAQ listed call
options or stock index call options granting the holder the right to purchase a
specified quantity of securities within a specified period of time at a
specified price or to receive cash in the case of stock index options.
A warrant is an instrument issued by a corporation that gives a holder the
right to subscribe to a specified amount of capital stock at a set price for a
specified period of time. Warrants involve the risk that the price of
14
<PAGE> 17
the security underlying the warrant may not exceed the exercise price of the
warrant and the warrant may expire without any value. The Fund has not
established any limits on the purchase of warrants in connection with the
creation of synthetic convertible securities. See "Portfolio Strategies
Involving Options and Futures" for a discussion of call options and stock index
call options.
The synthetic convertible security differs from the true convertible
security in several respects. Unlike a true convertible security, which is a
single security having a unitary market value, a synthetic convertible security
is comprised of two or more separate securities, each with its own market value.
Therefore, the "market value" of a synthetic convertible security is the sum of
the values of its fixed-income component and its convertibility component. For
this reason, the values of a synthetic convertible security and a true
convertible security will respond differently to market fluctuations.
More flexibility is possible in the assembly of a synthetic convertible
security than in the purchase of a convertible security. While synthetic
convertible securities may be selected where the two components represent one
issuer or are issued by a single issuer, thus making the synthetic convertible
security similar to the true convertible security, the character of a synthetic
convertible security allows the combination of components representing distinct
issuers, when management believes that such a combination would better promote
the Fund's investment objective. A synthetic convertible security also is a more
flexible investment in that its two components may be purchased separately. For
example, the Fund may purchase a warrant for inclusion in a synthetic
convertible security but temporarily hold short-term investments while
postponing the purchase of a corresponding bond pending development of more
favorable market conditions.
A holder of a synthetic convertible security faces the risk of a decline in
the price of the stock or the level of the index involved in the convertibility
component, causing a decline in the value of the call option or warrant. Should
the price of the stock fall below the exercise price and remain there throughout
the exercise period, the entire amount paid for the call option or warrant would
be lost. Since a synthetic convertible security includes the fixed-income
component as well, the holder of a synthetic convertible security also faces the
risk that interest rates will rise, causing a decline in the value of the
fixed-income instrument.
Debt securities with attached equity warrants have been issued in the
United States, the Euromarket and Japan. These securities have been sold with
detachable warrants in the United States, Europe and Japan. In Japan, however,
warrant bonds (the term used to refer to these securities) were only issued with
non-detachable warrants prior to December 1986. Eurobonds with warrants have
been denominated in several currencies, including the United States dollar,
Japanese yen, German mark, Dutch guilder and British pound. However, the
exercise price of the warrants is typically expressed in the currency of the
country where the issuer is domiciled.
OTHER FACTORS
While it is the policy of the Fund generally not to engage in trading for
short-term gains, the Manager will effect portfolio transactions without regard
to holding period, if, in its judgment, such transactions are advisable in the
light of a change in circumstances of a particular company or within a
particular industry or in the general market, economic or financial conditions.
The Fund will, however, monitor its trading so as to comply with the
requirements for the special tax treatment afforded regulated investment
companies under the Code. See "Taxes."
Portfolio Turnover. The portfolio turnover rate is calculated by dividing
the lesser of the Fund's annual sales or purchases of portfolio securities
(exclusive of purchases or sales of all securities whose maturities at
15
<PAGE> 18
the time of acquisition were one year or less) by the monthly average value of
the securities in the portfolio during the year. For the fiscal years ended
October 31, 1995 and 1996, the portfolio turnover rates were 101.12% and 14.72%,
respectively. High portfolio turnover involves correspondingly greater
transaction costs in the form of dealer spending and brokerage commissions,
which are borne directly by the Fund. Such turnover also has certain tax
consequences for the Fund.
PORTFOLIO STRATEGIES INVOLVING OPTIONS AND FUTURES
The Fund may engage in various portfolio strategies to seek to increase its
return through the use of options on portfolio securities and to hedge its
portfolio against movements in the equity markets, interest rates and exchange
rates between currencies. This use of options and futures transactions is in
addition to the Fund's ability to purchase call options and stock index call
options as an element of synthetic convertible securities. The Fund has
authority to write (i.e., sell) covered call options on its portfolio
securities, purchase put and call options on securities and engage in
transactions in stock index options, stock index futures and financial futures,
and related options on such futures. The Fund may also deal in forward foreign
exchange transactions and foreign currency options and futures, and related
options on such futures. Each of these portfolio strategies is described below.
Although certain risks are involved in options and futures transactions (as
discussed below in "Risk Factors in Options and Futures Transactions"), the
Manager believes that, because the Fund will (i) write only covered call options
on portfolio securities, (ii) in connection with the formation of synthetic
convertible securities, purchase call options or stock index call options only
as an element of synthetic convertibles, and (iii) engage in other options and
futures transactions only for hedging purposes, the options and futures
portfolio strategies of the Fund will not subject the Fund to the risks
frequently associated with the speculative use of options and futures
transactions. While the Fund's use of hedging strategies is intended to reduce
the volatility of the net asset value of Fund shares, the Fund's net asset value
will fluctuate. There can be no assurance that the Fund's hedging transactions
will be effective. Furthermore, the Fund will only engage in hedging activities
from time to time and may not necessarily be engaging in hedging activities when
movements in the equity markets, interest rates or currency exchange rates
occur. Reference is made to the Statement of Additional Information for further
information concerning these strategies.
Writing Covered Call Options. The Fund is authorized to write (i.e., sell)
covered call options on the securities in which it may invest and to enter into
closing purchase transactions with respect to certain of such options. A covered
call option is an option where the Fund in return for a premium gives another
party a right to buy specified securities owned by the Fund at a specified
future date and price set at the time of the contract. The principal reason for
writing call options is to attempt to realize, through the receipt of premiums,
a greater return than would be realized on the securities alone. By writing
covered call options, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price. In addition, the Fund's ability to sell the underlying
security will be limited while the option is in effect unless the Fund effects a
closing purchase transaction. A closing purchase transaction cancels out the
Fund's position as the writer of an option by means of an offsetting purchase of
an identical option prior to the expiration of the option it has written.
Covered call options serve as a partial hedge against the price of the
underlying security declining. The Fund may not write covered call options in
underlying securities in an amount exceeding 15% of the market value of its
total assets.
Purchasing Options. The Fund is authorized to purchase put options to
hedge against a decline in the market value of its securities. By buying a put
option the Fund has a right to sell the underlying security at the
16
<PAGE> 19
exercise price, thus limiting the Fund's risk of loss through a decline in the
market value of the security until the put option expires. The amount of any
appreciation in the value of the underlying security will be partially offset by
the amount of the premium paid for the put option and any related transaction
costs. Prior to its expiration, a put option may be sold in a closing sale
transaction and profit or loss from the sale will depend on whether the amount
received is more or less than the premium paid for the put option plus the
related transaction costs. A closing sale transaction cancels out the Fund's
position as the purchaser of an option by means of an offsetting sale of an
identical option prior to the expiration of the option it has purchased. In
certain circumstances, the Fund may purchase call options on securities held in
its portfolio on which it has written call options or on securities which it
intends to purchase or, as discussed above, as an element of synthetic
convertible securities. The Fund will not purchase options on securities
(including options purchased as an element of synthetic convertible securities)
if, as a result of such purchase, the aggregate cost of all outstanding options
on securities held by the Fund would exceed 5% of the market value of the Fund's
total assets.
Stock Index Options and Futures and Financial Futures. The Fund is
authorized to engage in transactions in stock index options and futures and
financial futures, and related options on such futures. In addition to the
purchase of stock index call options as an element of synthetic convertible
securities as discussed above, the Fund may purchase or write call options and
purchase put options on stock indexes to hedge against the risks of market-wide
stock price movements in the securities in which the Fund invests. The
effectiveness of the hedge will depend on the degree of diversification of the
Fund's portfolio and the sensitivity of the securities comprising the portfolio
to factors influencing the market as a whole. Because the value of an index
option depends upon movements in the level of the index rather than the price of
a particular stock, whether the Fund will realize a gain or loss on the purchase
or sale of an option on an index depends upon movements in the level of prices
in the stock market generally or in an industry or market segment rather than
movements in the price of a particular stock. Currently, stock index options
traded include the S&P 100 Index, the S&P 500 Index, the NYSE Composite Index,
the AMEX Market Value Index, the National Over-the-Counter Index, the FT Index
and other standard, broadly based stock market indices in the United States and
in foreign countries.
The Fund may also purchase and sell stock index futures contracts and
financial futures contracts ("futures contracts") as a hedge against adverse
changes in the market value of its portfolio securities and interest rates, as
described below. A futures contract is an agreement between two parties which
obligates the purchaser of the futures contract to buy and the seller of a
futures contract to sell a security for a set price on a future date. Unlike
most other futures contracts, a stock index futures contract does not require
actual delivery of securities, but results in cash settlement based upon the
difference in value of the index between the time the contract was entered into
and the time of its settlement. The Fund may effect transactions in stock index
futures contracts in connection with equity securities in which it invests and
in financial futures contracts in securities issued or guaranteed by the
government of any country which is a member of the Organization for Economic
Cooperation and Development, United States government and agency securities and
corporate debt securities. Transactions by the Fund in stock index futures and
financial futures are subject to limitations as described below under
"Restrictions on the Use of Futures Transactions."
The Fund may sell stock index futures contracts in anticipation of or
during a market decline to attempt to offset the decrease in market value of the
Fund's securities portfolio that might otherwise result. When the Fund is not
fully invested in the securities markets and anticipates a significant market
advance, it may purchase stock index futures in order to gain rapid market
exposure that may in part or entirely offset increases
17
<PAGE> 20
in the cost of securities that the Fund intends to purchase. As such purchases
are made, an equivalent amount of stock index futures contracts will be
terminated by offsetting sales. The Fund does not consider purchases of futures
contracts to be a speculative practice under these circumstances. It is
anticipated that, in a substantial majority of these transactions, the Fund will
purchase such securities upon termination of the long futures position, whether
the long position is the purchase of a stock index futures contract or the
purchase of a call option on a stock index future, but under unusual
circumstances (e.g., the Fund experiences a significant amount of redemptions),
a long futures position may be terminated without the corresponding purchase of
securities.
The Fund may sell financial futures contracts in anticipation of an
increase in the general level of interest rates. Generally, as interest rates
rise, the market value of debt securities which may be held by the Fund will
fall, thus reducing the net asset value of the Fund. However, as interest rates
rise, the value of the Fund's short position in the futures contract will also
tend to increase, thus offsetting all or a portion of the depreciation in the
market value of the Fund's investments which are being hedged. While the Fund
will incur commission expenses in selling and closing out futures positions,
these commissions are generally less than the transaction expenses which would
have been incurred had the Fund sold portfolio securities in order to reduce its
exposure to increases in interest rates. The Fund also may purchase financial
futures contracts in anticipation of a decline in interest rates when it is not
fully invested in a particular market in which it intends to make investments to
gain market exposure that may in part or entirely offset an increase in the cost
of securities it intends to purchase. It is anticipated that, in a substantial
majority of these transactions, the Fund will purchase securities upon
termination of the futures contract.
The Fund also has authority to purchase and write call and put options on
futures contracts in connection with its hedging activities. Generally, these
strategies are utilized under the same market and market sector conditions
(i.e., conditions relating to specific types of investments) in which the Fund
enters into futures transactions. The Fund may purchase put options or write
call options on futures contracts rather than selling the underlying futures
contract in anticipation of a decrease in the market value of a security or an
increase in interest rates. Similarly, the Fund may purchase call options, or
write put options on futures contracts, as a substitute for the purchase of such
futures to hedge against the increased cost resulting from an increase in the
market value or a decline in interest rates of securities which the Fund intends
to purchase.
The Fund may engage in options and futures transactions on exchanges and in
options in the over-the-counter markets ("OTC options"). In general,
exchange-traded contracts are third-party contracts (i.e., performance of the
parties' obligations is guaranteed by an exchange or clearing corporation) with
standardized strike prices and expiration dates. OTC options transactions are
two-party contracts with price and terms negotiated by the buyer and seller. See
"Restrictions on OTC Options" below for information as to restrictions on the
use of OTC options.
Foreign Currency Hedging. The Fund has authority to deal in forward
foreign exchange among currencies of the different countries in which it will
invest and multinational currency units as a hedge against possible variations
in the foreign exchange rates among these currencies. This is accomplished
through contractual agreements to purchase or sell a specified currency at a
specified future date (up to one year) and price set at the time of the
contract. The Fund's dealings in forward foreign exchange will be limited to
hedging involving either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of forward foreign currency with
respect to specific receivables or payables of the Fund accruing in connection
with the purchase and sale of its portfolio securities, the sale and redemption
of shares of the Fund or the payment of dividends and distributions by the Fund.
Position hedging is the sale of forward foreign currency
18
<PAGE> 21
with respect to portfolio security positions denominated or quoted in such
foreign currency. The Fund will not speculate in foreign forward exchange. The
Fund will not attempt to hedge all of its foreign portfolio positions. The Fund
may not commit more than 15% of its total assets to position hedging contracts.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates.
The Fund is also authorized to purchase or sell listed or over-the-counter
foreign currency options, foreign currency futures and related options on
foreign currency futures as a short or long hedge against possible variations in
foreign exchange rates. Such transactions may be effected with respect to hedges
on non-U.S. dollar denominated securities owned by the Fund, sold by the Fund
but not yet delivered, or committed or anticipated to be purchased by the Fund.
As an illustration, the Fund may use such techniques to hedge the stated value
in United States dollars of an investment in a yen denominated security. In such
circumstances, for example, the Fund may purchase a foreign currency put option
enabling it to sell a specified amount of yen for dollars at a specified price
by a future date. To the extent the hedge is successful, a loss in the value of
the yen relative to the dollar will tend to be offset by an increase in the
value of the put option. To offset, in whole or in part, the cost of acquiring
such a put option, the Fund may also sell a call option which, if exercised,
requires it to sell a specified amount of pounds for dollars at a specified
price by a future date (a technique called a "straddle"). By selling such call
option in this illustration, the Fund gives up the opportunity to profit without
limit from increases in the relative value of the yen to the dollar. The Manager
believes that "straddles" of the type which may be utilized by the Fund
constitute hedging transactions and are consistent with the policies described
above.
Certain differences exist between these foreign currency hedging
instruments. Foreign currency options provide the holder thereof the right to
buy or sell a currency at a fixed price on a future date (with exchange-traded
contracts and OTC options having the characteristics described above). A futures
contract on a foreign currency is an agreement between two parties to buy and
sell a specified amount of a currency for a set price on a future date. Futures
contracts and options on futures contracts are traded on boards of trade of
futures exchanges. The Fund will not speculate in foreign currency options,
futures or related options. Accordingly, the Fund will not hedge a currency
substantially in excess of the market value of securities that it has committed
or anticipates to purchase that are denominated in such currency, and in the
case of securities that have been sold by the Fund but not yet delivered, the
proceeds thereof in its denominated currency. The Fund may not incur potential
net liabilities of more than 20% of its total assets from foreign currency
options, futures or related options.
Restrictions on the Use of Futures Transactions. Under regulations of the
Commodity Futures Trading Commission ("CFTC"), the futures trading activities
described herein will not result in the Fund being deemed to be a "commodity
pool," as defined under such regulations, provided that the Fund adheres to
certain restrictions. In particular, the Fund may purchase and sell futures
contracts and options thereon (i) only for bona fide hedging purposes, and (ii)
for non-hedging purposes, if the aggregate initial margins and premiums required
to establish positions in such contracts and options does not exceed 5% of the
liquidation value of the Fund's portfolio assets after taking into account
unrealized profits and unrealized losses on any such contracts and options.
(However, as stated above, the Fund intends to engage in such options and
futures
19
<PAGE> 22
transactions only for hedging purposes.) Margin deposits may consist of cash or
securities acceptable to the broker and the relevant contract market.
When the Fund purchases a futures contract, or writes a put option or
purchases a call option thereon, it will maintain an amount of cash, cash
equivalents (e.g., high grade commercial paper and daily tender adjustable
notes) or liquid securities in a segregated account with the Fund's Custodian so
that the amount so segregated, plus the amount of initial and variation margin
held in the account of its broker, equals the market value of the futures
contract, thereby insuring that the use of such futures is unleveraged.
Restrictions on OTC Options. The Fund will engage in OTC options,
including over-the-counter foreign currency options and options on foreign
currency futures, only with member banks of the Federal Reserve System and
primary dealers in United States Government securities or with affiliates of
such banks or dealers that have capital of at least $50 million or whose
obligations are guaranteed by an entity having capital of at least $50 million.
The Fund will acquire only those OTC options for which the Manager believes the
Fund can receive on each business day at least two independent bids or offers
(one of which will be from an entity other than a party to the option).
The staff of the Securities and Exchange Commission (the "Commission") has
taken the position that purchased OTC options and the assets used as cover for
written OTC options are illiquid securities. Therefore, the Fund has adopted an
investment policy pursuant to which it will not purchase or sell OTC options
(including OTC options on futures contracts) if, as a result of such
transactions, the sum of the market value of OTC options currently outstanding
that are held by the Fund, the market value of the underlying securities covered
by OTC call options currently outstanding that were sold by the Fund and margin
deposits on the Fund's existing OTC options on futures contracts exceed 10% of
the net assets of the Fund, taken at market value, together with all other
assets of the Fund that are illiquid or are not otherwise readily marketable.
However, if the OTC option is sold by the Fund to a primary U.S. Government
securities dealer recognized by the Federal Reserve Bank of New York and the
Fund has the unconditional contractual right to repurchase such OTC option from
the dealer at a predetermined price, then the Fund will treat as illiquid such
amount of the underlying securities as is equal to the repurchase price less the
amount by which the option is "in-the-money" (i.e., current market value of the
underlying security minus the option's strike price). The repurchase price with
the primary dealers is typically a formula price which is generally based on a
multiple of the premium received for the option, plus the amount by which the
option is "in-the-money." This policy as to OTC options is not a fundamental
policy of the Fund and may be amended by the Directors of the Fund without the
approval of the Fund's shareholders. However, the Fund will not change or modify
this policy prior to the change or modification by the Commission staff of its
position.
Risk Factors in Options and Futures Transactions. Utilization of options
and futures transactions to hedge the portfolio involves the risk of imperfect
correlation in movements in the price of options and futures and movements in
the price of the securities, interest rates or currencies that are the subject
of the hedge. If the price of the options or futures moves more or less than the
price of the subject of the hedge, the Fund will experience a gain or loss which
will not be completely offset by movements in the price of the subject of the
hedge. The successful use of options and futures also depends on the Manager's
ability to predict correctly price movements in the market involved in a
particular options or futures transaction.
The Fund intends to enter into options and futures transactions on an
exchange or in the over-the-counter market, only if there appears to be a liquid
secondary market for such options or futures or, in the case of over-the-counter
transactions, the Manager believes the Fund can receive on each business day at
least two
20
<PAGE> 23
independent bids or offers. However, there can be no assurance that a liquid
secondary market will exist at any specific time. Thus, it may not be possible
to close an options or futures position. The inability to close options and
futures positions also could have an adverse impact on the Fund's ability to
hedge effectively its portfolio. There is also the risk of loss by the Fund of
margin deposits or collateral in the event of bankruptcy of a broker with whom
the Fund has an open position in an option, a futures contract or related
option.
The exchanges on which the Fund intends to conduct options transactions
have generally established limitations governing the maximum number of call or
put options on the same underlying security or currency (whether or not covered)
that may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through
one or more brokers). "Trading limits" are imposed on the maximum number of
contracts that any person may trade on a particular trading day. The Manager
does not believe that these trading and position limits will have any adverse
impact on the portfolio strategies for hedging the Fund's portfolio.
OTHER INVESTMENT POLICIES AND PRACTICES
Portfolio Transactions. In executing portfolio transactions, the Fund
seeks to obtain the best net results, taking into account such factors as price
(including the applicable brokerage commissions or dealer spread), size of
order, difficulty of execution, operation facilities of the firm involved and
the firm's risk in positioning a block of securities. While the Fund generally
seeks reasonably competitive commission rates, the Fund does not necessarily pay
the lowest commission or spread available. The Fund contemplates that,
consistent with its policy of obtaining the best net results, it will place
orders for transactions with a number of brokers and dealers, including Merrill
Lynch, an affiliate of the Manager. Subject to obtaining the best price and
execution, brokers who provide supplemental investment research to the Fund may
receive orders for transactions by the Fund. Information so received will be in
addition to, and not in lieu of, the services required to be performed by the
Manager and the expenses of the Manager will not necessarily be reduced as a
result of the receipt of such supplemental information. See "Management of the
Fund -- Management and Advisory Arrangements." In addition, consistent with the
Conduct Rules of the National Association of Securities Dealers, Inc. (the
"NASD"), the Manager may consider sales of shares of the Fund as a factor in the
selection of brokers or dealers to execute portfolio transactions for the Fund.
It is expected that the majority of the shares of the Fund will be sold by
Merrill Lynch.
The Fund anticipates that its brokerage transactions involving securities
of companies domiciled in countries other than the United States will be
conducted primarily on the principal stock exchanges of such countries.
Brokerage commissions and other transaction costs on foreign securities
exchanges are generally higher than in the United States, although the Fund will
endeavor to achieve the best net results in effecting such transactions.
Repurchase Agreements. The Fund may invest in money market securities
pursuant to repurchase agreements. Repurchase agreements may be entered into
only with a member bank of the Federal Reserve System or a primary dealer in
United States Government securities or an affiliate thereof. Under such
agreements, the bank or primary dealer or an affiliate thereof agrees, upon
entering into the contract, to repurchase the security at a mutually agreed upon
time and price, thereby determining the yield during the term of the agreement.
This results in a fixed rate of return insulated from market fluctuations during
such period. In repurchase agreements, the prices at which the trades are
conducted do not reflect accrued interest on the underlying obligation. Such
agreements usually cover short periods, such as under one week.
21
<PAGE> 24
Repurchase agreements may be construed to be collateralized loans by the
purchaser to the seller secured by the securities transferred to the purchaser.
In a repurchase agreement, the Fund will require the seller to provide
additional collateral if the market value of the securities falls below the
repurchase price at any time during the term of the repurchase agreement. In the
event of default by the seller under a repurchase agreement construed to be a
collateralized loan, the underlying securities are not owned by the Fund but
only constitute collateral for the seller's obligation to pay the repurchase
price. Therefore, the Fund may suffer time delays and incur costs or possible
losses in connection with disposition of the collateral. In the event of a
default under such a repurchase agreement, instead of the contractual fixed
rate, the rate of return to the Fund shall be dependent upon intervening
fluctuations of the market value of such security and the accrued interest on
the security. In such event, the Fund would have rights against the seller for
breach of contract with respect to any losses arising from market fluctuations
following the failure of the seller to perform. The Fund may not invest in
repurchase agreements maturing in more than seven days if such investments,
together with the Fund's other illiquid investments, would exceed 15% of the
Fund's total assets.
Lending of Portfolio Securities. The Fund may from time to time lend
securities from its portfolio with a value not exceeding 33 1/3% of its total
assets to banks, brokers and other financial institutions and receive collateral
in cash or securities issued or guaranteed by the United States Government. Such
collateral will be maintained at all times in an amount equal to at least 100%
of the current market value of the loaned securities. During the period of such
a loan, the Fund receives the income on the loaned securities and either
receives the income on the collateral or other compensation, i.e., negotiated
loan premium or fee, for entering into the loan and thereby increases its yield.
In the event that the borrower defaults on its obligation to return borrowed
securities, because of insolvency or otherwise, the Fund could experience delays
and costs in gaining access to the collateral and could suffer a loss to the
extent that the value of the collateral falls below the market value of the
borrowed securities.
INVESTMENT RESTRICTIONS
The Fund has adopted a number of restrictions and policies relating to the
investment of its assets and its activities, which are fundamental policies and
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company Act.
Among the more significant restrictions, the Fund may not borrow amounts in
excess of 33 1/3% of its total assets taken at market value (including the
amount borrowed), and an additional 5% of its total assets for temporary
purposes. As a non-fundamental restriction, the Fund is further limited and may
not borrow amounts in excess of 20% of its total assets taken at market value
(including the amount borrowed), and then only from banks as a temporary measure
for extraordinary or emergency purposes.
Investors are referred to the Statement of Additional Information for a
complete description of such restrictions and policies.
22
<PAGE> 25
MANAGEMENT OF THE FUND
DIRECTORS
The Directors of the Fund consist of six individuals, five of whom are not
"interested persons" of the Fund as defined in the Investment Company Act. The
Directors are responsible for the overall supervision of the operations of the
Fund and perform the various duties imposed on the directors or trustees of
investment companies by the Investment Company Act.
The Directors are:
ARTHUR ZEIKEL* -- President of the Manager and its affiliate, FAM;
President and Director of Princeton Services, Inc. ("Princeton Services");
Executive Vice President of ML & Co.; and Director of the Distributor.
JAMES H. BODURTHA -- Director and Executive Vice President, The China
Business Group, Inc.
HERBERT I. LONDON -- John M. Olin Professor of Humanities, New York
University.
ROBERT R. MARTIN -- Former Chairman, Kinnard Investments, Inc.
JOSEPH L. MAY -- Attorney in private practice.
ANDRE F. PEROLD -- Professor, Harvard Business School.
- ---------------
*Interested person, as defined by the Investment Company Act, of the Fund.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager, which is an affiliate of FAM and is owned and controlled by ML
& Co., a financial services holding company, acts as the Manager for the Fund
and provides the Fund with investment management services. The Manager or FAM
acts as the investment adviser for more than 130 registered investment
companies. The Manager also offers portfolio management and portfolio analysis
services to individuals and institutions. As of January 31, 1997, the Manager
and FAM had a total of approximately $239.8 billion in investment company and
other portfolio assets under management, including accounts of certain
affiliates of the Manager.
Subject to the direction of the Directors of the Fund, the Manager is
responsible for the actual management of the Fund's portfolio and constantly
reviews the Fund's holdings in light of its own research and analysis and that
from other relevant sources. The responsibility for making decisions to buy,
sell or hold a particular security rests with the Manager. The Manager performs
certain of the other administrative services and provides all of the office
space, facilities, equipment and necessary personnel for management of the Fund.
Harry E. Dewdney is the Portfolio Manager of the Fund. Mr. Dewdney has been
a Vice President and Portfolio Manager of the Manager since 1986. From 1978 to
1986, he was Senior Vice President of the International Trading and Foreign
Exchange Department of Prescott, Ball & Turben, Inc.
The Fund pays the Manager a monthly fee at the annual rate of 0.65% of the
average daily net assets of the Fund. For the fiscal year ended October 31, 1996
the fee paid by the Fund to the Manager was $463,001 (based upon average net
assets of approximately $71.2 million). Of this amount, none was reimbursed by
the Manager to the Fund pursuant to certain operating expense limitations.
23
<PAGE> 26
Also, the Manager has entered into a sub-advisory agreement (the
"Sub-Advisory Agreement") with Merrill Lynch Asset Management U.K. Limited
("MLAM U.K."), an indirect, wholly owned subsidiary of ML & Co. and an affiliate
of the Manager, pursuant to which the Manager pays MLAM U.K. a fee for providing
investment advisory services to the Manager with respect to the Fund, in an
amount to be determined from time to time by the Manager and MLAM U.K. but in no
event in excess of the amount the Manager actually receives for providing
services to the Fund pursuant to the Management Agreement. MLAM U.K. has offices
at Milton Gate, 1 Moor Lane, London EC2Y 9HA, England.
The Management Agreement obligates the Fund to pay certain expenses
incurred in its operations including, among other things, the management fee,
legal and audit fees, registration fees, unaffiliated Directors' fees and
expenses, custodian and transfer fees, accounting costs, the costs of issuing
and redeeming shares and certain of the costs of printing proxies, shareholder
reports, prospectuses and statements of additional information distributed to
shareholders. Accounting services are provided to the Fund by the Manager and
the Fund reimburses the Manager for its costs in connection with such services.
For the fiscal year ended October 31, 1996, the Fund reimbursed the Manager
$79,047 for accounting services. For the fiscal year ended October 31, 1996, the
ratio of total expenses to average net assets was 1.57% for Class A shares,
2.64% for Class B shares, 2.65% for Class C shares and 1.77% for Class D shares.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-l of the Investment Company Act which incorporates the Code of Ethics of the
Manager (together, the "Codes"). The Codes significantly restrict the personal
investing activities of all employees of the Manager and, as described below,
impose additional, more onerous, restrictions on fund investment personnel.
The Codes require that all employees of the Manager preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed investment.
The substantive restrictions applicable to all employees of the Manager include
a ban on acquiring any securities in a "hot" initial public offering and a
prohibition from profiting on short-term trading in securities. In addition, no
employee may purchase or sell any security which at the time is being purchased
or sold (as the case may be), or to the knowledge of the employee is being
considered for purchase or sale, by any fund advised by the Manager.
Furthermore, the Codes provide for trading "blackout periods" which prohibit
trading by investment personnel of the Fund within periods of trading by the
Fund in the same (or equivalent) security (15 or 30 days depending upon the
transaction).
TRANSFER AGENCY SERVICES
Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent"), which
is a subsidiary of ML & Co., acts as the Fund's Transfer Agent pursuant to a
transfer agency, dividend disbursing agency and shareholder servicing agency
agreement (the "Transfer Agency Agreement"). Pursuant to the Transfer Agency
Agreement, the Transfer Agent is responsible for the issuance, transfer and
redemption of shares and the opening and maintenance of shareholder accounts.
Pursuant to the Transfer Agency Agreement, the Fund pays the Transfer Agent a
fee of up to $11.00 per Class A or Class D account and up to $14.00 per Class B
or Class C account and is entitled to reimbursement from the Fund for certain
transaction charges and out-of-pocket expenses incurred by it under the Transfer
Agency Agreement. The term "account" includes a shareholder
24
<PAGE> 27
account maintained directly by the Transfer Agent and any other account
representing the beneficial interest of a person in the relevant share class on
a recordkeeping system, provided the recordkeeping system is maintained by a
subsidiary of ML & Co. For the fiscal year ended October 31, 1996, the Fund paid
the Transfer Agent $286,532 pursuant to the Transfer Agency Agreement for
providing transfer agency services.
PURCHASE OF SHARES
The Distributor, an affiliate of the Manager, FAM and Merrill Lynch, acts
as the distributor of the shares of the Fund. Shares of the Fund are offered
continuously for sale by the Distributor and other eligible securities dealers
(including Merrill Lynch). Shares of the Fund may be purchased from securities
dealers or by mailing a purchase order directly to the Transfer Agent. The
minimum initial purchase is $1,000 and the minimum subsequent purchase is $50,
except for retirement plans, for which the minimum initial purchase is $100 and
the minimum subsequent purchase is $1. Different minimums may apply to purchases
made through the Merrill Lynch BlueprintSM Program. See "Purchase of
Shares -- Merrill Lynch BlueprintSM Program" in the Statement of Additional
Information.
The Fund offers its shares in four classes, at a public offering price
equal to the next determined net asset value per share plus sales charges that
are imposed either at the time of purchase or on a deferred basis, depending
upon the class of shares selected by the investor under the Merrill Lynch Select
PricingSM System, as described below. The applicable offering price for purchase
orders is based upon the net asset value of the Fund next determined after
receipt of the purchase order by the Distributor. As to purchase orders received
by securities dealers prior to the close of business on the New York Stock
Exchange ("NYSE") (generally, 4:00 p.m., New York time), which includes orders
received after the close of business on the previous day, the applicable
offering price will be based on the net asset value determined as of 15 minutes
after the close of business on the NYSE on that day, provided the Distributor in
turn receives the order from the securities dealer prior to 30 minutes after the
close of business on the NYSE on that day. If the purchase orders are not
received by the Distributor prior to 30 minutes after the close of business on
the NYSE, such orders shall be deemed received on the next business day. The
Fund or the Distributor may suspend the continuous offering of the Fund's shares
of any Class at any time in response to conditions in the securities markets or
otherwise and may thereafter resume such offering from time to time. Any order
may be rejected by the Distributor or the Fund. Neither the Distributor nor the
dealers are permitted to withhold placing orders to benefit themselves by a
price change. Merrill Lynch may charge its customers a processing fee (presently
$4.85) to confirm a sale of shares to such customers. Purchases directly through
the Fund's Transfer Agent are not subject to the processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
PricingSM System, which permits each investor to choose the method of purchasing
shares that the investor believes is most beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares and other
relevant circumstances. Shares of Class A and Class D are sold to investors
choosing the initial sales charge alternatives and shares of Class B and Class C
are sold to investors choosing the deferred sales charge alternatives. Investors
should determine whether under their particular circumstances it is more
advantageous to incur an initial sales charge or to have the entire initial
purchase price invested in the Fund with the investment thereafter being subject
to a CDSC and ongoing distribution fees. A discussion of the factors that
25
<PAGE> 28
investors should consider in determining the method of purchasing shares under
the Merrill Lynch Select PricingSM System is set forth under "Merrill Lynch
Select PricingSM System" on page 3.
Each Class A, Class B, Class C and Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
deferred sales charges, distribution fees and account maintenance fees that are
imposed on Class B and Class C shares, as well as the account maintenance fees
that are imposed on Class D shares, will be imposed directly against those
classes and not against all assets of the Fund and, accordingly, such charges
will not affect the net asset value of any other class or have any impact on
investors choosing another sales charge option. Dividends paid by the Fund for
each class of shares will be calculated in the same manner at the same time and
will differ only to the extent that account maintenance and distribution fees
and any incremental transfer agency costs relating to a particular class are
borne exclusively by that class. Class B, Class C and Class D shares each have
exclusive voting rights with respect to the Rule 12b-1 distribution plan adopted
with respect to such class pursuant to which account maintenance and/or
distribution fees are paid (except that Class B shareholders may vote upon any
material changes to expenses charged under the Class D Distribution Plan). See
"Distribution Plans" below. Each class has different exchange privileges. See
"Shareholder Services -- Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges and distribution fees with respect to Class B and
Class C shares in that the sales charges and distribution fees applicable to
each class provide for the financing of the distribution of the shares of the
Fund. The distribution-related revenues paid with respect to a class will not be
used to finance the distribution expenditures of another class. Sales personnel
may receive different compensation for selling different classes of shares.
Investors are advised that only Class A and Class D shares may be available for
purchase through securities dealers, other than Merrill Lynch, which are
eligible to sell shares.
26
<PAGE> 29
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select PricingSM System.
<TABLE>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
- -------------------------------------------------------------------------------------------------
A Maximum 5.25% initial No No No
sales charge(2)(3)
- -------------------------------------------------------------------------------------------------
B CDSC for a period of 4 0.25% 0.75% B shares convert to
years, D shares automatically
at a rate of 4.0% during after approximately
the first year, decreasing eight years(5)
1.0%
annually to 0.0%(4)
- -------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(6) 0.25% 0.75% No
- -------------------------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(3)
- -------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs are imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives -- Class A and Class D Shares -- Eligible Class A Investors."
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class A
shares by certain retirement plans in connection with certain fee-based
programs. Class A and Class D share purchases of $1,000,000 or more may not
be subject to an initial sales charge but, if the initial sales charge is
waived, may be subject to a 1.0% CDSC for one year. A 0.75% sales charge for
401(k) purchases over $1,000,000 will apply.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans are modified. Also, Class B
shares of certain other MLAM-advised mutual funds into which exchanges may
be made have a ten year conversion period. If Class B shares of the Fund are
exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked
onto the holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
27
<PAGE> 30
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible
to purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternative is the next determined net asset
value plus varying sales charges (i.e., sales loads), as set forth below:
<TABLE>
<CAPTION>
SALES CHARGE DISCOUNT TO
AS SELECTED DEALERS
SALES CHARGE AS PERCENTAGE* OF AS PERCENTAGE OF
PERCENTAGE OF THE NET AMOUNT THE OFFERING
AMOUNT OF PURCHASE OFFERING PRICE INVESTED PRICE
- ------------------------------------------------ --------------- -------------- ----------------
<S> <C> <C> <C>
Less than $25,000............................... 5.25% 5.54% 5.00%
$25,000 but less than $50,000................... 4.75 4.99 4.50
$50,000 but less than $100,000.................. 4.00 4.16 3.75
$100,000 but less than $250,000................. 3.00 3.09 2.75
$250,000 but less than $1,000,000............... 2.00 2.04 1.80
$1,000,000 and over**........................... 0.00 0.00 0.00
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more and on Class A share purchases in connection with certain
fee-based programs. If the sales charge is waived in connection with a purchase
of $1,000,000 or more, such purchases may be subject to a CDSC of 1.0% if the
shares are redeemed within one year after purchase. Such CDSC may be waived in
connection with certain fee-based programs. A sales charge of 0.75% will be
charged on purchases of $1 million or more of Class A or Class D shares by
certain Employer Sponsored Retirement or Savings Plans.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act of 1933,
as amended (the "Securities Act").
For the fiscal year ended October 31, 1996, the Fund sold 685,844 Class A
shares for aggregate net proceeds of $7,246,703. The gross sales charges for the
sale of Class A shares of the Fund for that year were $1,648, of which $117 and
$1,531 were received by the Distributor and Merril Lynch, respectively. For the
fiscal year ended October 31, 1996, the Distributor received no CDSCs with
respect to redemptions within one year after purchase of Class A shares
purchased subject to a front-end sales charge waiver. For the fiscal year ended
October 31, 1996, the Fund sold 225,183 Class D shares for aggregate net
proceeds of $2,423,111. The gross sales charges for the sale of Class D shares
of the Fund for that year were $25,194, of which $1,818 and $23,376 were
received by the Distributor and Merrill Lynch, respectively. During the fiscal
year ended October 31, 1996, the Distributor received CDSCs of $497 with respect
to redemptions within one year after purchase of Class D shares purchased
subject to a front-end sales charge waiver.
Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Certain employer sponsored retirement or savings
plans, including eligible 401(k) plans, may purchase Class A shares at net asset
value provided such plans meet the required minimum number of eligible employees
or required amount of assets advised by MLAM or any of its affiliates. Class A
shares are available at net asset value to corporate warranty insurance reserve
fund programs provided that the program has $3 million or more initially
invested in MLAM-advised
28
<PAGE> 31
mutual funds. Also eligible to purchase Class A shares at net asset value are
participants in certain investment programs including TMASM Managed Trusts to
which Merrill Lynch Trust Company provides discretionary trustee services,
collective investment trusts for which Merrill Lynch Trust Company serves as
trustee and certain purchases made in connection with certain fee-based
programs. In addition, Class A shares are offered at net asset value to ML & Co.
and its subsidiaries and their directors and employees and to members of the
Boards of MLAM-advised investment companies, including the Fund. Certain persons
who acquired shares of certain MLAM-advised closed-end funds in their initial
offerings who wish to reinvest the net proceeds from a sale of their closed-end
fund shares of common stock in shares of the Fund also may purchase Class A
shares of the Fund if certain conditions set forth in the Statement of
Additional Information are met (for closed-end funds that commenced operations
prior to October 21, 1994). In addition, Class A shares of the Fund and certain
other MLAM-advised mutual funds are offered at net asset value to shareholders
of Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain conditions set
forth in the Statement of Additional Information are met, to shareholders of
Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income
Municipal Bond Fund, Inc. who wish to reinvest the net proceeds from a sale of
certain of their shares of common stock pursuant to a tender offer conducted by
such funds in shares of the Fund and certain other MLAM-advised mutual funds.
Reduced Initial Sales Charges. No sales charges are imposed upon Class A
and Class D shares issued as a result of the automatic reinvestment of dividends
or capital gains distributions. Class A and Class D sales charges also may be
reduced under a Right of Accumulation and a Letter of Intention. Class A shares
are offered at net asset value to certain eligible Class A investors as set
forth above under "Eligible Class A Investors." See "Shareholder
Services -- Fee-Based Programs."
Class A and Class D shares are offered at net asset value to Employee
Access AccountsSM available through qualified employers that provide
employer-sponsored retirement and savings plans that are eligible to purchase
such shares at net asset value. Subject to certain conditions Class A and Class
D shares are offered at net asset value to shareholders of Merrill Lynch
Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund, Inc., and
Class A shares are offered at net asset value to shareholders of Merrill Lynch
Senior Floating Rate Fund, Inc., who wish to reinvest in shares of the Fund the
net proceeds from a sale of certain of their shares of common stock pursuant to
tender offers conducted by those funds.
Class D shares are offered at net asset value, without a sales charge, to
an investor who has a business relationship with a Merrill Lynch Financial
Consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Class D shares are offered with reduced sales charges and, in certain
circumstances, at net asset value, to participants in the Merrill Lynch
BlueprintSM Program.
Additional information concerning these reduced initial sales charges is
set forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES -- CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
29
<PAGE> 32
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four year CDSC,
while Class C shares are subject only to a one year 1.0% CDSC. On the other
hand, approximately eight years after Class B shares are issued, such Class B
shares, together with shares issued upon dividend reinvestment with respect to
those shares, are automatically converted into Class D shares of the Fund and
thereafter will be subject to lower continuing fees. See "Conversion of Class B
Shares to Class D Shares" below. Both Class B and Class C shares are subject to
an account maintenance fee of 0.25% of net assets and distribution fees of 0.75%
of net assets as discussed below under "Distribution Plans." The proceeds from
the account maintenance fees are used to compensate Merrill Lynch for providing
continuing account maintenance activities.
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution related
services to the Fund in connection with the sale of the Class B and Class C
shares, such as the payment of compensation to financial consultants for selling
Class B and Class C shares from the dealers' own funds. The combination of the
CDSC and the ongoing distribution fee facilitates the ability of the Fund to
sell the Class B and Class C shares without a sales charge being deducted at the
time of purchase. Approximately eight years after issuance, Class B shares will
convert automatically into Class D shares of the Fund, which are subject to an
account maintenance fee but no distribution fee; Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately ten years. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange will
apply, and the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See "Limitations on
the Payment of Deferred Sales Charges" below. The proceeds from the ongoing
account maintenance fee are used to compensate Merrill Lynch for providing
continuing account maintenance activities. Class B shareholders of the Fund
exercising the exchange privilege described under "Shareholder
Services -- Exchange Privilege" will continue to be subject to the Fund's CDSC
schedule if such schedule is higher than the CDSC schedule relating to the Class
B shares acquired as a result of the exchange.
Contingent Deferred Sales Charges -- Class B Shares. Class B shares that
are redeemed within four years of purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. Accordingly, no CDSC will
be imposed on increases in net asset value above the initial purchase price. In
addition, no charge will be assessed on shares derived from reinvestment of
dividends or capital gains distributions. For the year ended October 31, 1996,
the Distributor received CDSCs of $110,201 with respect to redemptions of Class
B shares, all of which were paid to Merrill Lynch.
30
<PAGE> 33
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B
CDSC AS A
YEAR SINCE PERCENTAGE OF
PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
--------------------------------------------------------------------- -----------------
<S> <C>
0-1.................................................................. 4.0%
1-2.................................................................. 3.0%
2-3.................................................................. 2.0%
3-4.................................................................. 1.0%
4 and thereafter..................................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
applicable rate being charged. Therefore, it will be assumed that the redemption
is first of shares held for over four years or shares acquired pursuant to
reinvestment of dividends or distributions and then of shares held longest
during the four-year period. The charge will not be applied to dollar amounts
representing an increase in the net asset value since the time of purchase. A
transfer of shares from a shareholder's account to another account will be
assumed to be made in the same order as a redemption.
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares through dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to a CDSC because of dividend reinvestment. With respect to
the remaining 40 shares, the charge is applied only to the original cost of $10
per share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the third year after purchase).
The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from Individual Retirement Account ("IRA")
or other retirement plans or following death or disability (as defined in the
Internal Revenue Code of 1986, as amended (the "Code")) of a shareholder.
The Class B CDSC also is waived on redemptions of shares by certain
eligible 401(a) and eligible 401(k) plans and in connection with certain group
plans placing orders through the Merrill Lynch BlueprintSM Program. The CDSC is
also waived for any Class B shares that are purchased by an eligible 401(a) plan
that are rolled over into a Merrill Lynch or Merrill Lynch Trust Company
custodied IRA and held in such account at the time of redemption and for any
Class B shares that were acquired and held at the time of redemption in an
Employee Access Account(sm) available through employers providing eligible
401(k) plans. The Class B CDSC also is waived for any Class B shares which are
purchased by a Merrill Lynch rollover IRA that was funded by a rollover from a
terminated 401(k) plan managed by the MLAM Private Portfolio Group and held in
such account at the time of redemption. Additional information concerning the
waiver of the Class B CDSC is set forth in the Statement of Additional
Information. The terms of the CDSC may be modified in connection with certain
fee-based programs. See "Shareholder Services -- Fee-Based Programs."
Contingent Deferred Sales Charges -- Class C Shares. Class C shares which
are redeemed within one year after purchase may be subject to a 1.0% CDSC
charged as a percentage of the dollar amount subject thereto. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost
31
<PAGE> 34
of the shares being redeemed. Accordingly, no Class C CDSC will be imposed on
increases in net asset value above the initial purchase price. In addition, no
Class C CDSC will be assessed on shares derived from reinvestment of dividends
or capital gains distributions. No Class C CDSC will be assessed in connection
with certain fee-based programs. See "Shareholder Services -- Fee-Based
Programs."
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over one year or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the one-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.
For the fiscal year ended October 31, 1996, the Distributor received CDSCs
of $2,756 with respect to redemptions of Class C Shares, all of which were paid
to Merrill Lynch.
Conversion of Class B Shares to Class D Shares. After approximately eight
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
"Conversion Date") on the basis of the relative net asset values of the shares
of the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class D
shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert approximately
ten years after initial purchase. If, during the Conversion Period, a
shareholder exchanges Class B shares with an eight-year Conversion Period for
Class B shares with a ten-year Conversion Period, or vice versa, the Conversion
Period applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans that qualified for a waiver of the CDSC
normally imposed on purchases of Class B shares ("Class B Retirement Plans").
When the first share of any MLAM-advised mutual fund purchased by a
32
<PAGE> 35
Class B Retirement Plan has been held for ten years (i.e., ten years from the
date the relationship between MLAM-advised mutual funds and the Class B
Retirement Plan was established), all Class B shares of all MLAM-advised mutual
funds held in that Class B Retirement Plan will be converted into Class D shares
of the appropriate funds. Subsequent to such conversion, that Class B Retirement
Plan will be sold Class D shares of the appropriate funds at net asset value.
The Conversion Period also may be modified for retirement plan investors
who participate in certain fee-based programs. See "Shareholder
Services -- Fee-Based Programs."
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or distribution
fees paid by the Fund to the Distributor with respect to such classes. The Class
B and Class C Distribution Plans provide for the payment of account maintenance
fees and distribution fees, and the Class D Distribution Plan provides for the
payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual rate
of 0.25% of the average daily net assets of the Fund attributable to shares of
the relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) in connection with account maintenance activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.75% of
the average daily net assets of the Fund attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services, and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C shares
through dealers without the assessment of an initial sales charge and at the
same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this regard, the
purpose and function of the ongoing distribution fees and the CDSC are the same
as those of the initial sales charge with respect to the Class A and Class D
shares of the Fund in that the deferred sales charges provide for the financing
of the distribution of the Fund's Class B and Class C shares.
For the fiscal year ended October 31, 1996, the Fund paid the Distributor
$436,795 pursuant to the Class B Distribution Plan (based on average net assets
subject to such Class B Distribution Plan of approximately $43.7 million), all
of which was paid to Merrill Lynch for providing account maintenance and
distribution-related activities and services in connection with Class B shares.
For the fiscal year ended October 31, 1996, the Fund paid the Distributor
$37,775 pursuant to the Class C Distribution Plan (based on average net assets
subject to such Class C Distribution Plan of approximately $3.8 million), all of
which was paid to Merrill Lynch for providing account maintenance and
distribution-related activities and services in connection with Class C shares.
For the fiscal year ended October 31, 1996, the Fund paid the Distributor
$16,646 pursuant to the Class D Distribution Plan (based on average net assets
subject to such Class D Distribution Plan of
33
<PAGE> 36
approximately $6.7 million), all of which was paid to Merrill Lynch for
providing account maintenance activities in connection with Class D shares.
The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred and, accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Directors for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information is presented annually as of December 31 of each year on
a "fully allocated accrual" basis and quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated accrual basis, revenues consist of
the account maintenance fees, distribution fees, the CDSCs and certain other
related revenues, and expenses consist of financial consultant compensation,
branch office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing expenses, corporate
overhead and interest expense. On the direct expense and revenue/cash basis,
revenues consist of the account maintenance fees, distribution fees and CDSCs
and the expenses consist of financial consultant compensation.
As of December 31, 1995, the last date at which fully allocated data is
available, the fully allocated accrual expenses incurred by the Distributor and
Merrill Lynch exceeded fully allocated accrual revenues for such period by
approximately $131,000 (.28% of Class B net assets at that date). As of October
31, 1996 direct cash revenues for the period since the commencement of
operations exceeded direct cash expenses by $2,614,878 (6.73% of Class B net
assets at that date). Similar fully allocated accrual data for Class C Shares is
not presented because such revenues and expenses for the period are de minimis.
As of October 31, 1996, for Class C shares, direct cash revenues for the period
since the commencement of operations exceeded direct cash expenses by $54,782
(1.33% of Class C net assets at that date).
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with the Class B, Class C and Class D shares, and there is no
assurance that the Directors of the Fund will approve the continuance of the
Distribution Plans from year to year. However, the Distributor intends to seek
annual continuation of the Distribution Plans. In their review of the
Distribution Plans, the Directors will be asked to take into consideration
expenses incurred in connection with the account maintenance and/or distribution
of each class of shares separately. The initial sales charges, the account
maintenance fee, the distribution fee and/or the CDSCs received with respect to
one class will not be used to subsidize the sale of shares of another class.
Payments of the distribution fee on Class B shares will terminate upon
conversion of those Class B shares into Class D shares as set forth under
"Deferred Sales Charge Alternatives -- Class B and Class C Shares -- Conversion
of Class B Shares to Class D Shares."
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the distribution fee and
the CDSC borne by the Class B and Class C shares but not the account maintenance
fee. The maximum sales charge rule is applied separately to each class. As
applicable to the Fund, the maximum sales charge rule limits the aggregate of
distribution fee payments and CDSCs payable by the Fund to (1) 6.25% of eligible
gross sales of Class B shares and Class C shares, computed separately (defined
to exclude shares issued pursuant to dividend reinvestments and exchanges) plus
(2) interest on the unpaid balance for the respective class, computed
separately, at the prime rate plus 1%
34
<PAGE> 37
(the unpaid balance being the maximum amount payable minus amounts received from
the payment of the distribution fee and the CDSC). In connection with the Class
B shares, the Distributor has voluntarily agreed to waive interest charges on
the unpaid balance in excess of 0.50% of eligible gross sales. Consequently, the
maximum amount payable to the Distributor (referred to as the "voluntary
maximum") in connection with the Class B shares is 6.75% of eligible gross
sales. The Distributor retains the right to stop waiving the interest charges at
any time. To the extent payments would exceed the voluntary maximum, the Fund
will not make further payments of the distribution fee with respect to Class B
shares, and any CDSCs will be paid to the Fund rather than to the Distributor;
however, the Fund will continue to make payments of the account maintenance fee.
In certain circumstances the amount payable pursuant to the voluntary maximum
may exceed the amount payable under the NASD formula. In such circumstances
payments in excess of the amount payable under the NASD formula will not be
made.
REDEMPTION OF SHARES
The Fund is required to redeem for cash all shares of the Fund on receipt
of a written request in proper form. The redemption price is the net asset value
per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC that may be applicable, there will be no charge
for redemption if the redemption request is sent directly to the Transfer Agent.
Shareholders liquidating their holdings will receive on redemption all dividends
declared through the date of redemption. The value of shares at the time of
redemption may be more or less than the shareholder's cost, depending on the
market value of the securities held by the Fund at such time.
REDEMPTION
A shareholder wishing to redeem shares may do so by tendering the shares
directly to the Fund's Transfer Agent, Merrill Lynch Financial Data Services,
Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption requests
delivered other than by mail should be delivered to Merrill Lynch Financial Data
Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Proper notice of redemption in the case of shares deposited with the Transfer
Agent may be accomplished by a written letter requesting redemption. Proper
notice of redemption in the case of shares for which certificates have been
issued may be accomplished by a written letter as noted above accompanied by
certificates for the shares to be redeemed. Redemption requests should not be
sent to the Fund. The redemption request requires the signature(s) of all
persons in whose name(s) the shares are registered, signed exactly as such
name(s) appear(s) on the Transfer Agent's register or on the certificate, as the
case may be. The signature(s) on the redemption request must be guaranteed by an
"eligible guarantor institution" as such term is defined in Rule 17Ad-15 under
the Securities Exchange Act of 1934, the existence and validity of which may be
verified by the Transfer Agent through the use of industry publications.
Notarized signatures are not sufficient. In certain instances, the Transfer
Agent may require additional documents such as, but not limited to, trust
instruments, death certificates, appointments as executor or administrator, or
certificates of corporate authority. For shareholders redeeming directly with
the Transfer Agent, payments will be mailed within seven days of receipt of a
proper notice of redemption.
At various times, the Fund may be requested to redeem shares for which it
has not yet received good payment. The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as it
35
<PAGE> 38
has assured itself that good payment (e.g., cash, or certified check drawn on a
United States bank) has been collected for the purchase of such shares.
Normally, this delay will not exceed 10 days.
REPURCHASE
The Fund also will repurchase shares through a shareholder's listed
securities dealer. The Fund will normally accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the request for
repurchase is received by the dealer prior to the regular close of business on
the NYSE (generally, 4:00 p.m., New York time) on the day received and is
received by the Fund from such dealer not later than 30 minutes after the close
of business on the NYSE on the same day. Dealers have the responsibility of
submitting such repurchase requests to the Fund not later than 30 minutes after
the close of business on the NYSE in order to obtain that day's closing price.
These repurchase arrangements are for the convenience of shareholders and
do not involve a charge by the Fund (other than any applicable CDSC). However,
securities firms which do not have selected dealer agreements with the
Distributor may impose a charge on the shareholder for transmitting the notice
of repurchase to the Fund. Merrill Lynch may charge its customers a processing
fee (presently $4.85) to confirm a repurchase of shares. Repurchases directly
through the Fund's Transfer Agent are not subject to the processing fee. The
Fund reserves the right to reject any order for repurchase, which right of
rejection might affect adversely shareholders seeking redemption through the
repurchase procedure. However, a shareholder whose order for repurchase is
rejected by the Fund may redeem shares as set forth above.
REINSTATEMENT PRIVILEGE -- CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a
privilege to reinstate their accounts by purchasing Class A or Class D shares,
as the case may be, of the Fund at net asset value without a sales charge up to
the dollar amount redeemed. The reinstatement privilege may be exercised by
sending a notice of exercise along with a check for the amount to be reinstated
to the Transfer Agent within 30 days after the date the request for redemption
was accepted by the Transfer Agent or the Distributor. Alternatively, the
reinstatement privilege may be exercised through the investor's Merrill Lynch
Financial Consultant within 30 days after the date the request was accepted by
the Transfer Agent or the Distributor. The reinstatement will be made at the net
asset value per share next determined after the notice of reinstatement is
received and cannot exceed the amount of the redemption proceeds.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designed to facilitate investment in shares of the Fund. Certain of such
services are not available to investors who place orders for the Fund through
the Merrill Lynch BlueprintSM Program. Full details as to each of such services
and instructions as to how to participate in the various plans and services, or
to change options with respect thereto, can be obtained from the Fund by calling
the telephone number on the cover page hereof or from the Distributor or Merrill
Lynch. Included in such services are the following:
36
<PAGE> 39
INVESTMENT ACCOUNT
Each shareholder whose account (an "Investment Account") is maintained at
the Transfer Agent has an Investment Account and will receive statements, at
least quarterly, from the Transfer Agent. These quarterly statements will serve
as transaction confirmations for automatic investment purchases and the
reinvestment of ordinary income dividends and long-term capital gain
distributions. These statements will also show any other activity in the account
since the preceding statement. Shareholders will receive separate transaction
confirmations for each purchase or sale transaction other than automatic
investment purchases and the reinvestment of ordinary income dividends and
long-term capital gains distributions. Shareholders may make additions to their
Investment Accounts at any time by mailing a check directly to the Transfer
Agent. Shareholders may also maintain their accounts through Merrill Lynch. Upon
the transfer of shares out of a Merrill Lynch brokerage account, an Investment
Account in the transferring shareholder's name may be opened automatically at
the Transfer Agent. Shareholders considering transferring their Class A or Class
D shares from Merrill Lynch to another brokerage firm or financial institution
should be aware that, if the firm to which the Class A or Class D shares are to
be transferred will not take delivery of shares of the Fund, a shareholder
either must redeem the Class A or Class D shares (paying any applicable CDSC) so
that the cash proceeds can be transferred to the account at the new firm or such
shareholder must continue to maintain an Investment Account at the Transfer
Agent for those Class A or Class D shares. Shareholders interested in
transferring their Class B or Class C shares from Merrill Lynch and who do not
wish to have an Investment Account maintained for such shares at the Transfer
Agent may request their new brokerage firm to maintain such shares in an account
registered in the name of the brokerage firm for the benefit of the shareholder
at the Transfer Agent. If the new brokerage firm is willing to accommodate the
shareholder in this manner, the shareholder must request that he or she be
issued certificates for his or her shares, and then must turn the certificates
over to the firm for re-registration as described in the preceding sentence.
Shareholders considering transferring a tax-deferred retirement account such as
an individual retirement account from Merrill Lynch to another brokerage firm or
financial institution should be aware that, if the firm to which the retirement
account is to be transferred will not take delivery of shares of the Fund, a
shareholder either must redeem the shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm, or such
shareholder must continue to maintain a retirement account at Merrill Lynch for
those shares.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund each have an exchange
privilege with certain other MLAM-advised mutual funds. There is currently no
limitation on the number of times a shareholder may exercise the exchange
privilege. The exchange privilege may be modified or terminated in accordance
with the rules of the Commission.
Under the Merrill Lynch Select PricingSM System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund in
the account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second MLAM-advised
mutual fund, and the shareholder does not hold Class A shares of the second fund
in his account at the time of the exchange and is not otherwise eligible to
acquire Class A shares of the second fund, the shareholder will receive Class D
shares of the second fund as a result of the exchange. Class D shares also may
be exchanged for Class A shares of a second MLAM-advised mutual
37
<PAGE> 40
fund at any time as long as, at the time of the exchange, the shareholder holds
Class A shares of the second fund in the account in which the exchange is made
or is otherwise eligible to purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the
same class of other MLAM-advised mutual funds.
Shares of the Fund that are subject to a CDSC are exchangeable on the basis
of relative net asset value per share without the payment of any CDSC that might
otherwise be due upon redemption of the shares of the Fund. For purposes of
computing the CDSC that may be payable upon a disposition of the shares acquired
in the exchange, the holding period for the previously owned shares of the Fund
is "tacked" to the holding period for the newly acquired shares of the other
fund.
Class A, Class B, Class C and Class D shares also are exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for reduction of any CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange privilege is treated as a sale of the exchanged
shares and a purchase of the acquired shares for Federal income tax purposes.
For further information, see "Shareholder Services -- Exchange Privilege" in the
Statement of Additional Information.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS.
All dividends and capital gains distributions are reinvested automatically
in full and fractional shares of the Fund, without a sales charge, at the net
asset value per share next determined on the ex-dividend date of such dividend
or distribution. A shareholder may at any time, by written notification or by
telephone (1-800-MER-FUND) to the Transfer Agent, elect to have subsequent
dividends or capital gains distributions, or both, paid in cash, rather than
reinvested, in which event payment will be mailed on or about the payment date.
Cash payments also can be directly deposited to the shareholder's bank account.
No CDSC will be imposed upon redemption of shares issued as a result of the
automatic reinvestment of dividends or capital gains distributions.
38
<PAGE> 41
SYSTEMATIC WITHDRAWAL PLANS.
A Class A or Class D shareholder may elect to receive systematic withdrawal
payments from his Investment Account through automatic payment by check or
through automatic payment by direct deposit to his bank account on either a
monthly or quarterly basis. Alternatively, Class A shareholder whose shares are
held within a CMA(R), CBA(R) or Retirement Account may elect to have shares
redeemed on a monthly, bimonthly, quarterly, semiannual or annual basis through
the Systematic Redemption Program, subject to certain conditions.
AUTOMATIC INVESTMENT PLANS.
Regular additions of shares may be made to an investor's Investment Account
by pre-arranged charges of $50 or more to his regular bank account. Investors
who maintain CMA(R) or CBA(R) accounts may arrange to have periodic investments
made in the Fund in their CMA(R) or CBA(R) accounts or in certain related
accounts in amounts of $100 or more ($1 for retirement accounts) through the
CMA(R) or CBA(R) Automated Investment Program.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives
for securities transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares that will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of shares
held therein or the automatic exchange thereof to another class at net asset
value, which may be shares of a money market fund. In addition, upon termination
of participation in a Program, shares that have been held for less than
specified periods within such Program may be subject to a fee based upon the
current value of such shares. These Programs also generally prohibit such shares
from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance fees)
in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from Merrill Lynch Investor
Services at (800) MER-FUND (637-3863).
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended (the "Code"). If it so qualifies, the Fund (but not its
shareholders) will not be subject to Federal income tax on the part of its net
ordinary income and net realized capital gains which it distributes to Class A,
Class B, Class C and Class D shareholders (together, the "shareholders"). The
Fund intends to distribute substantially all of such income.
39
<PAGE> 42
Dividends paid by the Fund from its ordinary income or from an excess of
net short-term capital gains over net long-term capital losses (together
referred to hereafter as "ordinary income dividends") are taxable to
shareholders as ordinary income. Distributions made from an excess of net
long-term capital gains over net short-term capital losses (including gains or
losses from certain transactions in warrants, futures and options) ("capital
gain dividends") are taxable to shareholders as long-term capital gains,
regardless of the length of time the shareholder has owned Fund shares. Any loss
upon the sale or exchange of Fund shares held for six months or less, however,
will be treated as long-term capital loss to the extent of any capital gain
dividends received by the shareholder. Distributions in excess of the Fund's
earnings and profits will first reduce the adjusted tax basis of a holder's
shares and, after such adjusted tax basis is reduced to zero, will constitute
capital gains to such holder (assuming the shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. A portion of the Fund's ordinary income dividends may be eligible for
the dividends received deduction allowed to corporations under the Code if
certain requirements are met. If the Fund pays a dividend in January which was
declared in the previous October, November or December to shareholders of record
on a specified date in one of such months, then such dividend will be treated
for tax purposes as being paid by the Fund and received by its shareholders on
December 31 of the year in which such dividend was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% U.S. withholding tax under existing
provisions of the Code applicable to foreign individuals and entities unless a
reduced rate of withholding or a withholding exemption is provided under
applicable treaty law. Nonresident shareholders are urged to consult their own
tax advisers concerning the applicability of the U.S. withholding tax.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes. Shareholders may be
able to claim U.S. foreign tax credits with respect to such taxes, subject to
certain conditions and limitations contained in the Code. For example, certain
retirement accounts cannot claim foreign tax credits on investments in foreign
securities held in the Fund. If more than 50% in value of the Fund's total
assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible, and intends, to file an election with
the Internal Revenue Service pursuant to which shareholders of the Fund will be
required to include their proportionate shares of such withholding taxes in
their U.S. income tax returns as gross income, treat such proportionate shares
as taxes paid by them, and deduct such proportionate shares in computing their
taxable incomes or, alternatively, use them as foreign tax credits against their
U.S. income taxes. No deductions for foreign taxes, however, may be claimed by
noncorporate shareholders who do not itemize deductions. A shareholder that is a
nonresident alien individual or a foreign corporation may be subject to U.S.
withholding tax on the income resulting from the Fund's election described in
this paragraph but may not be able to claim a credit or deduction against such
U.S. tax for the foreign taxes treated as having been paid by such shareholder.
The Fund will report annually to its shareholders the amount per share of such
withholding taxes.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer
40
<PAGE> 43
identification number is on file with the Fund or who, to the Fund's knowledge,
have furnished an incorrect number. When establishing an account, an investor
must certify under penalty of perjury that such number is correct and that such
investor is not otherwise subject to backup withholding.
Under Code Section 988, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that are not
"regulated futures contracts" and from unlisted options will generally be
treated as ordinary income or loss. Such Code Section 988 gains or losses will
generally increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company taxable
income during a taxable year, the Fund would not be able to make any ordinary
income dividend distributions, and all or a portion of distributions made before
the losses were realized but in the same taxable year would be recharacterized
as a return of capital to shareholders, thereby reducing the basis of each
shareholder's Fund shares and resulting in a capital gain for any shareholder
who received a distribution greater than the shareholder's tax basis in Fund
shares (assuming the shares were held as a capital asset).
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon the purchase of the new shares in the absence
of the exchange privilege. Instead, such sales charge will be treated as an
amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
that are derived from interest on U.S. Government obligations. State law varies
as to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
41
<PAGE> 44
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
yield for various specified time periods in advertisements or information
furnished to present or prospective shareholders. Average annual total return is
computed separately for Class A, Class B, Class C and Class D shares in
accordance with formulas specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including any CDSC that would be applicable to a
complete redemption of the investment at the end of the specified period such as
in the case of Class B and Class C shares and the maximum sales charge in the
case of Class A and Class D shares. Dividends paid by the Fund with respect to
all shares, to the extent any dividends are paid, will be calculated in the same
manner at the same time on the same day and will be in the same amount, except
that account maintenance and distribution charges and any incremental transfer
agency costs relating to each class of shares will be borne exclusively by that
class. The Fund will include performance data for all classes of shares of the
Fund in any advertisement or information including performance data of the Fund.
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return calculated
will not be average annual rates, but rather, actual annual, annualized or
aggregate rates of return and (2) the maximum applicable sales charges will not
be included with respect to annual or annualized rates of return calculations.
Aside from the impact on the performance data calculations of including or
excluding the maximum applicable sales charges, actual annual or annualized
total return data generally will be lower than average annual total return data
since the average annual rates of return reflect compounding; aggregate total
return data generally will be higher than average annual total return data since
the aggregate rates of return reflect compounding over a longer period of time.
In advertisements distributed to investors whose purchases are subject to waiver
of the CDSC in the case of Class B or Class C shares (such as investors in
certain retirement plans) or to reduced sales loads in the case of Class A and
Class D shares, the performance data may take into account the reduced, and not
the maximum, sales charge or may not take into account the CDSC and therefore
may reflect greater total return since, due to the reduced sales charges a lower
amount of expenses is deducted. See "Purchase of Shares." The Fund's total
return may be expressed either as a percentage or as a dollar amount in order to
illustrate such total return on a hypothetical $1,000 investment in the Fund at
the beginning of each specified period.
Yield quotations for each class will be computed based on a 30-day period
by dividing (a) the net income based on the yield of each security earned during
the period by (b) the average daily number of shares outstanding in each class
during the period that were entitled to receive dividends multiplied by the
maximum offering price/net asset value per share of that class on the last day
of the period. The yield for the 30-day period ended October 31, 1996 was 2.37%
for Class A shares, 1.45% for Class B shares, 1.42% for Class C shares and 2.14%
for Class D shares.
42
<PAGE> 45
Total return and yield figures are based on the Fund's historical
performance and are not intended to indicate future performance. The Fund's
total return will vary depending on market conditions, the securities comprising
the Fund's portfolio, the Fund's operating expenses and the amount of realized
and unrealized net capital gains or losses during the period. The value of an
investment in the Fund will fluctuate and an investor's shares, when redeemed,
may be worth more or less than their original cost.
On occasion, the Fund may compare its performance to that of the Standard &
Poor's 500 Index, the Dow Jones Industrial Average or performance data published
by Lipper Analytical Services, Inc. and Morningstar Publications, Inc.
("Morningstar"), Money Magazine, U.S. News & World Report, Business Week, CDA
Investment Technology, Inc., Forbes Magazine, Fortune Magazine or other industry
publications. From time to time, the Fund may include the Fund's Morningstar
risk-adjusted performance ratings in advertisements or supplemental sales
literature. As with other performance data, performance comparisons should not
be considered indicative of the Fund's relative performance for any future
period.
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all its net investment income.
Dividends from such net investment income are paid quarterly. All net realized
long- or short-term capital gains, if any, are distributed to the Fund's
shareholders at least annually. From time to time, the Fund may declare a
special distribution at or about the end of the calendar year in order to comply
with Federal tax requirements that certain percentages of its ordinary income
and capital gains be distributed during the calendar year. Gains or losses
attributable to certain foreign currency transactions may increase or decrease
the amount of the Fund's income available for distribution to shareholders. If
such losses exceed other income during a taxable year, (a) the Fund would not be
able to make any ordinary income dividend distributions, and (b) all or a
portion of distributions made before the losses were realized would be
recharacterized as a return of capital to shareholders, rather than as an
ordinary income dividend, thereby reducing each shareholder's tax basis in the
Fund shares for Federal income tax purposes. See "Taxes." If in any fiscal year,
the Fund has net income from certain foreign currency transactions, such income
will be distributed annually. Dividends may be reinvested automatically in
shares of the Fund at net asset value. Shareholders may elect in writing to
receive any such dividends or distributions, or both, in cash. Dividends and
distributions are taxable to shareholders as discussed under "Taxes" whether
they are reinvested in shares of the Fund or received in cash.
The per share dividends and distributions on each class of shares will be
reduced as a result of any account maintenance, distribution and transfer agency
fees applicable with respect to such class of shares. See "Additional
Information -- Determination of Net Asset Value."
DETERMINATION OF NET ASSET VALUE
The net asset value of shares of all classes of the Fund is determined by
the Manager once daily, 15 minutes after the close of business on the NYSE
(generally, 4:00 p.m. New York time), on each day during which the NYSE is open
for trading. Any assets or liabilities initially expressed in terms of non-U.S.
dollar currencies are translated into U.S. dollars at the prevailing market
rates as quoted by one or more banks or dealers on the day of valuation. The net
asset value per share is computed by dividing the value of the
43
<PAGE> 46
securities held by the Fund plus any cash or other assets (including interest
and dividends accrued but not yet received) minus all liabilities (including
accrued expenses) by the total number of shares outstanding at such time,
rounded to the nearest cent. Expenses, including the fees payable to the Manager
and the Distributor, are accrued daily.
The per share net asset value of Class A shares generally will be higher
than the per share net asset value of shares of other classes, reflecting the
daily expense accruals of the account maintenance, distribution and higher
transfer agency fees applicable with respect to the Class B and Class C shares
and the daily expense accruals of the account maintenance fees applicable with
respect to Class D shares; moreover, the per share net asset value of Class D
shares generally will be higher than the per share net asset value of Class B
and Class C shares, reflecting the daily expense accruals of the distribution
and higher transfer agency fees applicable with respect to Class B and Class C
shares. It is expected, however, that the per share net asset value of the four
classes will tend to converge (although not necessarily meet) immediately after
the payment of dividends or distributions, which will differ by approximately
the amount of the expense accrual differential between the classes.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Directors as the
primary market. Securities traded in the over-the-counter ("OTC") market are
valued at the last available bid price in the OTC market prior to the time of
valuation. Portfolio securities that are traded on both the OTC market and on a
stock exchange are valued according to the broadest and most representative
market. Other investments, including futures contracts and related options,
shall be stated at market value. Securities and assets for which market
quotations are not readily available are valued at fair value as determined in
good faith by or under the direction of the Directors of the Fund. The Fund
employs Merrill Lynch Securities Pricing Service ("MLSPS"), an affiliate of the
Manager, to provide securities prices for the Fund. During the fiscal year ended
October 31, 1996, the Fund made no payments to MLSPS for such service.
ORGANIZATION OF THE FUND
The Fund was incorporated under Maryland law on October 22, 1987. It has an
authorized capital of 400,000,000 shares of Common Stock, par value $0.10 per
share, divided into four classes, designated Class A, Class B, Class C and Class
D Common Stock, each of which consists of 100,000,000 shares. Shares of Class A,
Class B, Class C and Class D Common Stock represent an interest in the same
assets of the Fund and are identical in all respects except that Class B, Class
C and Class D shares bear certain expenses related to the account maintenance
associated with such shares, and Class B and Class C shares bear certain
expenses related to distribution of such shares. Each class has exclusive voting
rights with respect to matters relating to account maintenance and distribution
expenditures, as applicable. See "Purchase of Shares." The Directors of the Fund
may classify and reclassify the shares of the Fund into additional classes of
Common Stock at a future date.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matter submitted to a shareholder vote. The Fund does not intend to
hold meetings of shareholders in any year in which the Investment Company Act of
1940 does not require shareholders to act upon any of the following matters: (i)
election of Directors; (ii) approval of an
44
<PAGE> 47
investment advisory agreement; (iii) approval of a distribution agreement; and
(iv) ratification of selection of independent accountants. Also, the by-laws of
the Fund require that a special meeting of shareholders be held upon the written
request of at least 10% of the outstanding shares of the Fund entitled to vote
at such meeting. Voting rights for Directors are not cumulative. Shares issued
are fully paid and non-assessable and have no preemptive rights. Shares have the
conversion rights described in this Prospectus. Each share of Common Stock is
entitled to participate equally in dividends and distributions declared by the
Fund and in the net assets of the Fund upon liquidation or dissolution after
satisfaction of outstanding liabilities except, as noted above, the Class B,
Class C and Class D shares bear certain additional expenses.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts the shareholder should notify in writing:
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
P.O. BOX 45289
JACKSONVILLE, FLORIDA 32232-5289
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this
please call your Merrill Lynch Financial Consultant or Merrill Lynch Financial
Data Services, Inc. at 800-637-3863.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
45
<PAGE> 48
[THIS PAGE IS INTENTIONALLY LEFT BLANK]
46
<PAGE> 49
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC. -- AUTHORIZATION FORM (PART 1)
- --------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINTSM PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINTSM PROGRAM
APPLICATION BY CALLING TOLL FREE (800) 637-3766.
- --------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
[ ] Class A shares [ ] Class B shares [ ]
Class C shares [ ] Class D shares
of Merrill Lynch Global Convertible Fund, Inc. and establish an Investment
Account as described in the Prospectus. In the event that I am not eligible to
purchase Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $.......... payable to Merrill Lynch Financial
Data Services, Inc., as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price next to
be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of paper
if necessary.)
1. .......................................................... 4.
..........................................................
2. .......................................................... 5.
..........................................................
3. .......................................................... 6.
..........................................................
Name............................................................................
First Name Initial Last Name
Name of Co-Owner (if any).......................................................
First Name Initial Last Name
Address.........................................................................
(Zip Code)
<TABLE>
<S> <C>
Occupation .........................................
...................................................
Signature of Owner
<CAPTION>
Occupation ......................................... Name and Address of Employer.................................................
<S> <C>
.............................................................................
.............................................................................
................................................... .............................................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
(In the case of co-owner, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- --------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
<TABLE>
<S> <C> <C> <C> <C> <C>
Ordinary Income Dividends Long-Term Capital Gains
--------------------------------- ---------------------------------
SELECT [ ] Reinvest SELECT [ ] Reinvest
ONE: [ ] Cash ONE: [ ] Cash
--------------------------------- ---------------------------------
</TABLE>
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: [ ] Check
or [ ] Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch Global Convertible Fund, Inc. Authorization Form.
Specify type of account (check one): [ ] checking [ ] savings
Name on your Account............................................................
Bank Name.......................................................................
Bank Number ................................................... Account
Number..........................................................................
Bank Address....................................................................
I agree that this authorization will remain in effect until I provide written
notification to Merrill Lynch Financial Data Services, Inc. amending or
terminating this service.
Signature of Depositor..........................................................
Signature of Depositor ......................................................
Date............................................................................
(if joint account, both must sign)
NOTE: If direct deposit to bank account is selected, your blank, unsigned check
marked "VOID" or a deposit slip from your savings account should accompany this
application.
47
<PAGE> 50
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC. -- AUTHORIZATION FORM (PART
1) -- (CONTINUED)
- --------------------------------------------------------------------------------
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is my
correct Social Security Number or Taxpayer Identification Number and (2) that I
am not subject to backup withholding (as discussed in the Prospectus under
"Taxes") either because I have not been notified that I am subject thereto as a
result of a failure to report all interest or dividends, or the Internal Revenue
Service ("IRS") has notified me that I am no longer subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDERREPORTING AND IF
YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO
OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
<TABLE>
<S> <C>
............................................................. ............................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
- --------------------------------------------------------------------------------
4. LETTER OF INTENTION -- CLASS A AND D SHARES ONLY (See terms and conditions in
the Statement of Additional Information)
<TABLE>
<S> <C>
......................,
19 . . . .
Dear Sir/Madam: Date of initial purchase
</TABLE>
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Global Convertible Fund, Inc. or any other investment company with an
initial sales charge or deferred sales charge for which Merrill Lynch Funds
Distributor, Inc. acts as distributor over the next 13 month period which will
equal or exceed:
[ ] $25,000 [ ] $50,000 [ ] $100,000 [ ] $250,000 [ ]
$1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch Global Convertible
Fund, Inc. Prospectus.
I agree to the terms and conditions of this Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Global Convertible Fund, Inc. held as security.
<TABLE>
<S> <C>
By:.............................................................. ...............................................................
Signature of Owner Signature of Co-Owner
(If registered in joint parties, both must sign)
</TABLE>
In making purchases under this letter, the following are the related accounts
on which reduced offering prices are to apply:
<TABLE>
<S> <C>
(1) Name ................................................... (2) Name....................................................
Account Number ............................................ Account Number..............................................
</TABLE>
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
- --- Branch Office, Address, Stamp
- ---
=
=
===
This form when completed should be mailed to:
Merrill Lynch Global Convertible Fund, Inc.
c/o Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289
We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our agent in
connection with transactions under this authorization form and agree to notify
the Distributor of any purchases or sales made under a Letter of Intention,
Automatic Investment Plan or Systematic Withdrawal Plan. We guarantee the
shareholder's signature.
...............................................................
Dealer Name and Address
By .............................................................................
Authorized Signature of Dealer
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- --------- ------------
..............................
- --------- ------------
Branch-Code F/C No. F/C Last Name
- --------- ---------------
- --------- ---------------
Dealer's Customer Account No.
</TABLE>
48
<PAGE> 51
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC. -- AUTHORIZATION FORM (PART 2)
- --------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR AUTOMATIC
INVESTMENT PLANS ONLY.
- --------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
(PLEASE PRINT) ------------------------------------
Name of Owner.......................................................................
------------------------------------
Social Security No.
First Name Initial Last Name or Taxpayer Identification No.
Name of Co-Owner (if any)...........................................................
First Name Initial Last Name
Address.............................................................................
.................................................................................... Account Number...........................
(Zip Code) (if existing account)
<CAPTION>
(PLEASE PRINT)
<S> <C> <C> <C>
Name of Owner.......................................................................
First Name Initial Last Name
Name of Co-Owner (if any)...........................................................
First Name Initial Last Name
Address.............................................................................
....................................................................................
(Zip Code)
</TABLE>
- --------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN -- CLASS A AND D SHARES ONLY (See terms and
conditions in the Statement of Additional Information)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of [ ] Class A or [ ] Class D shares in Merrill Lynch Global
Convertible Fund, Inc. at cost or current offering price. Withdrawals to be made
either (check one) [ ] Monthly on the 24th day of each month, or [ ] Quarterly
on the 24th day of March, June, September and December. If the 24th falls on a
weekend or holiday, the next succeeding business day will be utilized. Begin
systematic withdrawal on ________________ (month), or as soon as possible
thereafter.
SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE): [ ]
$________ or [ ] ____% of the current value of [ ] Class A or [ ] Class D shares
in the account.
SPECIFY WITHDRAWAL METHOD: [ ] check or [ ] direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a) I hereby authorize payment by check
[ ] as indicated in Item 1.
[ ] to the order of..........................................................
Mail to (check one)
[ ] the address indicated in Item 1.
[ ] Name (please print)......................................................
Address.........................................................................
...........................................................................
Signature of Owner
..............................................................................
Date............................................................................
Signature of Co-Owner (if any)..................................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO MY BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Specify type of account (check one): [ ] checking [ ] savings
Name on your account............................................................
Bank Name.......................................................................
Bank Number .............................................................
Account Number..................................................................
Bank Address....................................................................
......................................................................
Signature of Depositor
..............................................................................
Date............................................................................
Signature of Depositor..........................................................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID" OR
A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHALL ACCOMPANY THIS APPLICATION.
49
<PAGE> 52
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC. -- AUTHORIZATION FORM (PART
2) -- (CONTINUED)
- --------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account as described below
each month to purchase: (choose one)
[ ] Class A shares [ ] Class B shares [ ] Class C
shares [ ] Class D shares
of Merrill Lynch Global Convertible Fund, Inc., subject to the terms set forth
below. In the event that I am not eligible to purchase Class A shares, I
understand that Class D shares will be purchased.
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw an ACH debit each month on my bank account for
investment in Merrill Lynch Global Convertible Fund, Inc. as indicated below:
Amount of each check or ACH debit $..........................................
Account Number...............................................................
Please date and invest ACH debits on the 20th of each month
beginning ________________ or as soon thereafter as possible.
(month)
I agree that you are preparing these ACH debits voluntarily at my request and
that you shall not be liable for any loss arising from any delay in preparing or
failure to prepare any such debit. If I change banks or desire to terminate or
suspend this program, I agree to notify you promptly in writing. I hereby
authorize you to take any action to correct erroneous ACH debits of my bank
account or purchases of Fund shares including liquidating shares of the Fund and
credit my bank account. I further agree that if a debit is not honored upon
presentation, Merrill Lynch Financial Data Services, Inc. is authorized to
discontinue immediately the Automatic Investment Plan and to liquidate
sufficient shares held in my account to offset the purchase made with the
dishonored debit.
................. .......................................
Date Signature of Depositor
.......................................
Signature of Depositor
(If joint account, both must sign)
AUTHORIZATION TO HONOR ACH DEBITS DRAWN BY
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
To..........................................................................Bank
(Investor's Bank)
Bank Address....................................................................
City............................................ State .......... Zip ..........
As a convenience to me, I hereby request and authorize you to pay and charge
to my account ACH debits drawn on my account by and payable to Merrill Lynch
Financial Data Services, Inc. I agree that your rights in respect to each such
debit shall be the same as if it were a check drawn on you and signed personally
by me. This authority is to remain in effect until revoked by me in writing.
Until you receive such notice, you shall be fully protected in honoring any such
debit. I further agree that if any such debit be dishonored, whether with or
without cause and whether intentionally or inadvertently, you shall be under no
liability.
................. .......................................
Date Signature of Depositor
................. .......................................
Bank Account Signature of Depositor
Number (If joint account, both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED
"VOID" SHOULD ACCOMPANY THIS APPLICATION.
50
<PAGE> 53
MANAGER
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08536-9081
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 351
Boston, Massachusetts 02101
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
COUNSEL
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
<PAGE> 54
- ------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table................................. 2
Merrill Lynch Select Pricing(SM) System... 3
Financial Highlights...................... 8
Special Considerations.................... 10
Investment Objective and Policies......... 11
Convertible Securities.................. 13
Other Factors........................... 15
Portfolio Strategies Involving Options
and Futures........................... 16
Other Investment Policies and
Practices............................. 21
Investment Restrictions................. 22
Management of the Fund.................... 23
Directors............................... 23
Management and Advisory Arrangements.... 23
Code of Ethics.......................... 24
Transfer Agency Services................ 24
Purchase of Shares........................ 25
Initial Sales Charge
Alternatives -- Class A and Class D
Shares................................ 28
Deferred Sales Charge Alternatives --
Class B and Class C Shares............ 29
Distribution Plans...................... 33
Limitations on the Payment of Deferred
Sales Charges......................... 34
Redemption of Shares...................... 35
Redemption.............................. 35
Repurchase.............................. 36
Reinstatement Privilege -- Class A and
Class D Shares........................ 36
Shareholder Services...................... 36
Investment Account...................... 37
Exchange Privilege...................... 37
Automatic Reinvestment of Dividends and
Capital Gains Distributions........... 38
Systematic Withdrawal Plans............. 39
Automatic Investment Plans.............. 39
Taxes..................................... 39
Performance Data.......................... 42
Additional Information.................... 43
Dividends and Distributions............. 43
Determination of Net Asset Value........ 43
Organization of the Fund................ 44
Shareholder Reports..................... 45
Shareholder Inquiries................... 45
Authorization Form........................ 47
Code # 10665-0297
</TABLE>
[Merrill Lynch Logo]
MERRILL LYNCH
GLOBAL CONVERTIBLE
FUND, INC.
PROSPECTUS [Merrill Lynch Compass]
February 24, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE> 55
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
Merrill Lynch Global Convertible Fund, Inc. (the "Fund") is a mutual fund
that seeks to provide shareholders with high total return by investing primarily
in an internationally diversified portfolio of convertible debt securities,
convertible preferred stocks and "synthetic" convertible securities consisting
of a combination of debt securities or preferred stock and warrants or options.
The investment philosophy of the Fund is based on the belief that the
characteristics of convertible securities make them appropriate investments for
an investment company seeking a high total return from capital appreciation and
investment income. There can be no assurance that the investment objective of
the Fund will be realized.
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares and other relevant circumstances.
-------------------------
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the prospectus of the Fund, dated
February 24, 1997 (the "Prospectus"), which has been filed with the Securities
and Exchange Commission (the "Commission") and can be obtained, without charge,
by calling or by writing the Fund at the above telephone number or address. This
Statement of Additional Information has been incorporated by reference into the
Prospectus.
-------------------------
MERRILL LYNCH ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
-------------------------
The date of this Statement of Additional Information is February 24, 1997.
<PAGE> 56
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek high total return from a
combination of capital appreciation and investment income. The Fund will seek to
achieve its objective by investing primarily in an internationally diversified
portfolio of convertible debt securities, convertible preferred stocks and
"synthetic" convertible securities consisting of a combination of debt
securities or preferred stock and warrants or options. Reference is made to
"Investment Objective and Policies" in the Prospectus for a discussion of the
investment objective and policies of the Fund.
Generally, the Fund does not purchase securities for short-term trading
profits. However, the Fund may dispose of securities without regard to the time
they have been held when such action, for defensive or other reasons, appears
advisable to the Manager. As a result of the investment policies described in
the Prospectus, under certain market conditions the Fund's portfolio turnover
may be higher than that of other investment companies; however, it is extremely
difficult to predict portfolio turnover rates with any degree of accuracy.
Higher portfolio turnover may contribute to higher transactional costs and
negative tax consequences, such as an increase in capital gain dividends or in
ordinary income dividends of accrued market discount, as well as greater
difficulty meeting the requirement for qualification as a regulated investment
company that less than 30% of its gross income be derived from the sale or other
disposition of securities held for less than three months. See "Dividends,
Distributions and Taxes."
PORTFOLIO STRATEGIES INVOLVING OPTIONS AND FUTURES
Reference is made to the discussion under the caption "Investment Objective
and Policies -- Portfolio Strategies Involving Options and Futures" in the
Prospectus for information with respect to various portfolio strategies
involving options and futures. The following is further information relating to
portfolio strategies involving options and futures the Fund may utilize.
Writing Covered Call Options. The writer of a covered call option has no
control over when he may be required to sell his securities since he may be
assigned an exercise notice at any time prior to the termination of his
obligation as a writer. If an option expires unexercised, the writer realizes a
gain in the amount of the premium. Such a gain, of course, may be offset by a
decline in the market value of the underlying security during the option period.
If a call option is exercised, the writer realizes a gain or loss from the sale
of the underlying security.
Options referred to herein and in the Fund's Prospectus may be options
issued by The Options Clearing Corporation (the "Clearing Corporation"), which
are currently traded on the Chicago Board Options Exchange, American Stock
Exchange, Philadelphia Stock Exchange, Pacific Stock Exchange or New York Stock
Exchange. Options referred to herein and in the Fund's Prospectus may also be
options traded on foreign securities exchanges such as the London Stock Exchange
and the Amsterdam Stock Exchange. An option position may be closed out only on
an exchange that provides a secondary market for an option of the same series.
If a secondary market does not exist, it might not be possible to effect closing
transactions in particular options, with the result, in the case of a covered
call option, that the Fund will not be able to sell the underlying security
until the option expires or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect
2
<PAGE> 57
to particular classes or series of options or underlying securities; (iv)
unusual or unforeseen circumstances may interrupt normal operations on an
exchange; (v) the facilities of an exchange or the Clearing Corporation may not
at all times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that exchange that had been issued by the Clearing Corporation as a
result of trades on that exchange would continue to be exercisable in accordance
with their terms.
The Fund may also enter into over-the-counter call option transactions
("OTC options"), which are two party contracts with price and terms negotiated
between the buyer and seller. The Fund will only enter into over-the-counter
option transactions with respect to portfolio securities for which management
believes the Fund can receive on each business day at least two independent bids
or offers (one of which will be from an entity other than a party to the
option).
Stock Index Options and Futures and Financial Futures. As described in the
Prospectus, the Fund is authorized to engage in transactions in stock index
options and futures and financial futures, and related options on such futures.
Set forth below is further information concerning futures transactions.
A futures contract is an agreement between two parties to buy and sell a
security or, in the case of an index-based futures contract, to make and accept
a cash settlement for a set price on a future date. A majority of transactions
in futures contracts, however, do not result in the actual delivery of the
underlying instrument or cash settlement, but are settled through liquidation,
i.e., by entering into an offsetting transaction. Futures contracts and options
on futures contracts are traded on boards of trade which have been designated
"contracts markets" for the trading thereof by the Commodity Futures Trading
Commission ("CFTC").
The purchase or sale of a futures contract differs from the purchase or
sale of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker and the relevant contract
market, which varies, but is generally about 5% of the contract amount, must be
deposited with the broker. This amount is known as "initial margin" and
represents a "good faith" deposit assuring the performance of both the purchaser
and seller under the futures contract. Subsequent payments to and from the
broker, called "variation margin," are required to be made on a daily basis as
the price of the futures contract fluctuates, making the long and short
positions in the futures contract more or less valuable, a process known as
"mark to the market". At any time prior to the settlement date of the futures
contract, the position may be closed out by taking an opposite position which
will operate to terminate the position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the broker and the purchaser realizes a loss or gain.
In addition, a nominal commission is paid on each completed sale transaction.
An order has been obtained from the Commission exempting the Fund from the
provisions of Section 17(f) and Section 18(f) of the Investment Company Act of
1940, as amended (the "Investment Company Act") in connection with its strategy
of investing in futures contracts. Section 17(f) relates to the custody of
securities and other assets of an investment company and may be deemed to
prohibit certain arrangements between the Fund and commodities brokers with
respect to initial and variation margin. Section 18(f) of the Investment Company
Act prohibits an open-end investment company such as the Fund from issuing a
"senior security" other than a borrowing from a bank. The staff of the
Commission has in the past indicated that a futures contract may be a "senior
security" under the Investment Company Act.
3
<PAGE> 58
Foreign Currency Hedging. Generally, the foreign exchange transactions of
the Fund will be conducted on a spot, i.e., cash, basis at the spot rate for
purchasing or selling currency prevailing in the foreign exchange market. This
rate under normal market conditions differs from the prevailing exchange rate in
an amount generally less than 0.15 of one percent due to the costs of converting
from one currency to another. However, the Fund has authority to deal in foreign
exchange among currencies of the different countries in which it will invest as
a hedge against possible variations in the foreign exchange rate among these
currencies. The Fund may not position hedge with respect to the currency of a
particular country to an extent greater than the aggregate market value (at the
time of making such sale) of the securities held in its portfolio denominated or
quoted in that particular foreign currency. If the Fund enters into a position
hedging transaction, its custodian bank will place cash or liquid securities in
a separate account of the Fund in an amount equal to the value of the Fund's
total assets committed to the consummation of such forward contract. If the
value of the securities placed in the separate account declines, additional cash
or securities will be placed in the account so that the value of the account
will equal the amount of the Fund's commitment with respect to such contracts.
The Fund will not attempt to hedge all of its foreign portfolio positions and
will enter into such transactions only to the extent, if any, deemed appropriate
by the Manager. The Fund will not enter into a position hedging commitment if,
as a result thereof, the Fund would have more than 15% of the value of its total
assets committed to such contracts. The Fund will not enter into a forward
contract with a term of more than one year.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates. The cost to the Fund of
engaging in foreign currency transactions varies with such factors as the
currencies involved, the length of the contract period and the market conditions
then prevailing. Since transactions in foreign currency exchange usually are
conducted on a principal basis, no fees or commissions are involved.
Risk Factors in Options and Futures Transactions. Prior to exercise or
expiration, an exchange-traded option position can only be terminated by
entering into a closing purchase or sale transaction. This requires a secondary
market on an exchange for call or put options of the same series. The Fund will
enter into an option or futures transaction on an exchange only if there appears
to be a liquid secondary market for such options or futures. However, there can
be no assurance that a liquid secondary market will exist for any particular
call or put option or futures contract at any specified time. Thus, it may not
be possible to close an option or futures position. The Fund will acquire only
over-the-counter options for which management believes the Fund can receive on
each business day at least two independent bids or offers (one of which will be
from an entity other than a party to the option). In the case of a futures
position or an option on a futures position written by the Fund in the event of
adverse price movements, the Fund would continue to be required to make daily
cash payments of variation margin. In such situations, if the Fund has
insufficient cash, it may have to sell portfolio securities to meet daily
variation margin requirements at a time when it may be disadvantageous to do so.
In addition, the Fund may be required to take or make delivery of the security
underlying futures contracts it holds. The inability to close options and
futures positions also could have an adverse impact on the Fund's ability to
hedge effectively its portfolio. There is also the risk of loss by the Fund of
margin deposits in the event of bankruptcy of a broker with whom the Fund has an
open position in a futures contract or related option.
4
<PAGE> 59
The exchanges on which the Fund intends to conduct options transactions
have generally established limitations governing the maximum number of call or
put options on the same underlying security or currency (whether or not covered)
which may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through
one or more brokers). "Trading limits" are imposed on the maximum number of
contracts which any person may trade on a particular trading day. An exchange
may order the liquidation of positions found to be in violation of these limits
and it may impose other sanctions or restrictions. The Manager does not believe
that these trading and position limits will have any adverse impact on the
portfolio strategies for hedging the Fund's portfolio.
OTHER INVESTMENT POLICIES AND PRACTICES
Lending of Portfolio Securities. The Fund may lend securities from its
portfolio to approved borrowers and receive therefor collateral in cash or
securities issued or guaranteed by the United States Government. Such collateral
will be maintained at all times in an amount equal to at least 100% of the
current market value of the loaned securities. The purpose of such loans is to
permit the borrower to use such securities for delivery to purchasers when such
borrower has sold short. If cash collateral is received by the Fund, it is
invested in short-term money market securities, and a portion of the yield
received in respect of such investment is retained by the Fund. Alternatively,
if securities are delivered to the Fund as collateral, the Fund and the borrower
negotiate a rate for the loaned premium to be received by the Fund for lending
its portfolio securities. In either event, the total yield on the Fund's
portfolio is increased by loans of its portfolio securities. The Fund will have
the right to regain record ownership of loaned securities to exercise beneficial
rights such as voting rights, subscription rights and rights to dividends,
interest or other distributions. Such loans are terminable at any time. The Fund
may pay reasonable finder's, administrative and custodial fees in connection
with such loans.
High Yield Securities. The Fund has established no rating criteria for
debt securities in which it may invest. Therefore, the Fund may invest in
convertible and, to a limited extent, non-convertible debt securities either (a)
which are rated BBB or better by Standard & Poor's Ratings Service ("S&P") or
Baa or better by Moody's Investors Service, Inc. ("Moody's") or which, in the
Manager's judgment, possess similar credit characteristics ("investment grade
securities") or (b) which are rated BB or lower by S&P or Ba or lower by Moody's
or which, in the Manager's judgment, possess similar credit characteristics
("high yield securities," also commonly referred to as "junk bonds"). The
Manager considers the ratings assigned by S&P or Moody's as one of several
factors in its independent credit analysis of issuers.
Issuers of high yield securities may be highly leveraged and may not have
available to them more traditional methods of financing. Therefore, the risks
associated with acquiring the securities of such issuers generally are greater
than is the case with higher rated securities. For example, during an economic
downturn or a sustained period of rising interest rates, issuers of high yield
securities may be more likely to experience financial stress, especially if such
issuers are highly leveraged. During such periods, such issuers may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service its debt obligations also may be adversely affected by
specific issuer developments, or the issuer's inability to meet specific
projected business forecasts, or the unavailability of additional financing. The
risk of loss due to default by the issuer is significantly greater for the
holders of high yield securities because such securities may be unsecured and
may be subordinated to other credits of the issuer.
5
<PAGE> 60
High yield securities frequently have call or redemption features that
would permit an issuer to repurchase the security from the Fund. If a call were
exercised by the issuer during a period of declining interest rates, the Fund
likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Fund and dividends to
shareholders.
The Fund may have difficulty disposing of certain high yield securities
because there may be a thin trading market for such securities. Because not all
dealers maintain markets in all high yield securities, the secondary trading
market for high yield securities is generally not as liquid as the secondary
market for higher rated securities. Reduced secondary market liquidity may have
an adverse impact on market price and the Fund's ability to dispose of
particular issues when necessary to meet the Fund's liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the issuer.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high yield
securities, particularly in a thinly traded market. Factors adversely affecting
the market value of high yield securities are likely to adversely affect the
Fund's net asset value. In addition, the Fund may incur additional expenses to
the extent it is required to seek recovery upon a default on a portion holding
or participate in the restructuring of the obligation.
INVESTMENT RESTRICTIONS
The Fund has adopted a number of fundamental and non-fundamental
restrictions and policies relating to the investment of its assets and its
activities. The fundamental policies set forth below may not be changed without
the approval of the holders of a majority of the Fund's outstanding voting
securities (which for this purpose and under the Investment Company Act means
the lesser of (i) 67% of the Fund's shares represented at a meeting at which
more than 50% of the outstanding shares of the Fund are represented or (ii) more
than 50% of the Fund's outstanding shares). The Fund may not:
1. Make any investment inconsistent with the Fund's classification as
a diversified company under the Investment Company Act.
2. Invest more than 25% of its assets, taken at market value at the
time of each investment, in the securities of issuers in any particular
industry (excluding the U.S. Government and its agencies and
instrumentalities). For purposes of this restriction, states,
municipalities and their political subdivisions are not considered part of
any industry.
3. Make investments for the purpose of exercising control or
management.
4. Purchase or sell real estate, except that, to the extent permitted
by applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interest therein or issued by companies which
invest in real estate or interests therein.
5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers' acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
this Statement of Additional Information, as they may be amended from time
to time.
6
<PAGE> 61
6. Issue senior securities to the extent such issuance would violate
applicable law.
7. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may borrow up
to an additional 5% of its total assets for temporary purposes, (iii) the
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) the Fund
may purchase securities on margin to the extent permitted by applicable
law. The Fund may not pledge its assets other than to secure such
borrowings or, to the extent permitted by the Fund's investment policies as
set forth in its Prospectus and Statement of Additional Information, as
they may be amended from time to time, in connection with hedging
transactions, short sales, when-issued and forward commitment transactions
and similar investment strategies.
8. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the "Securities Act"), in selling portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
Under the non-fundamental investment restrictions, the Fund may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law.
b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. The Fund currently does not
intend to engage in short sales, except short sales "against the box".
c. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Directors of the Fund
has otherwise determined to be liquid pursuant to applicable law.
d. Notwithstanding fundamental investment restriction (7) above,
borrow amounts in excess of 20% of its total assets, taken at market value
(including the amount borrowed), and then only from banks as a temporary
measure for extraordinary or emergency purposes.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Fund, the Fund is prohibited from
engaging in certain transactions involving such firm or its affiliates except
for brokerage transactions permitted under the Investment Company Act involving
only usual and customary commissions or transactions permitted pursuant to an
exemptive order under the Investment Company Act. See "Portfolio Transactions
and Brokerage". Without such an exemptive order, the Fund is prohibited from
engaging in portfolio transactions with Merrill Lynch or its affiliates acting
as principal and from purchasing securities in public offerings that are not
registered under the Securities Act in which such firms or any of its affiliates
participate as an underwriter or dealer.
7
<PAGE> 62
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
Information about the Directors, executive officers and portfolio manager
of the Fund, including their ages and their principal occupations for at least
the last five years, is set forth below. Unless otherwise noted, the address of
each executive officer and Director is P.O. Box 9011, Princeton, New Jersey
08543-9011.
ARTHUR ZEIKEL (64) -- President and Director(1)(2) -- President of the
Manager (which term as used herein includes its corporate predecessors) since
1977; President of Fund Asset Management, L.P. ("FAM") (which term as used
herein includes its corporate predecessors) since 1977; President and Director
of Princeton Services, Inc. ("Princeton Services") since 1993; Executive Vice
President of Merrill Lynch & Co., Inc. ("ML & Co.") since 1990; Director of
Merrill Lynch Funds Distributor, Inc. ("MLFD" or the "Distributor").
JAMES H. BODURTHA (53) -- Director(2) -- 36 Popponesset Road, Cotuit,
Massachusetts 02635. Director and Executive Vice President, The China Business
Group, Inc. since 1996. Chairman and Chief Executive Officer, China Enterprise
Management Corporation from 1993 to 1996; Chairman, Berkshire Corporation since
1980; Partner, Squire, Sanders & Dempsey from 1980 to 1993.
HERBERT I. LONDON (57) -- Director(2) -- 113-115 University Place, New
York, New York 10003. John M. Olin Professor of Humanities, New York University
since 1993 and Professor thereof since 1980; Dean, Gallatin Division of New York
University from 1978 to 1993; Distinguished Fellow, Herman Kahn Chair, Hudson
Institute from 1984 to 1985; Trustee, Hudson Institute since 1980; Director,
Danion Corporation since 1991; Overseer, Center for Naval Analyses from 1983 to
1993; Limited Partner, Hypertech L.P. since 1996.
ROBERT R. MARTIN (69) -- Director(2) -- 513 Grand Hill, St. Paul, Minnesota
55102. Chairman and Chief Executive Officer, Kinnard Investments, Inc. from 1990
to 1993; Executive Vice President, Dain Bosworth from 1974 to 1989; Director,
Carnegie Capital Management from 1977 to 1985 and Chairman thereof in 1979;
Director, Securities Industry Association from 1981 to 1982 and Public
Securities Association from 1979 to 1980; Chairman of the Board, WTC Industries
Inc. in 1994; Trustee, Northland College since 1992.
JOSEPH L. MAY (67) -- Director(2) -- 424 Church Street, Suite 2000,
Nashville, Tennessee 37219. Attorney in private practice since 1984; President,
May and Athens Hosiery Mills Division, Wayne-Gossard Corporation from 1954 to
1983; Vice President, Wayne-Gossard Corporation from 1972 to 1983; Chairman, The
May Corporation (personal holding company) from 1972 to 1983; Director, Signal
Apparel Co. from 1972 to 1989.
ANDRE F. PEROLD (44) -- Director(2) -- Morgan Hall, Soldiers Field, Boston,
Massachusetts 02163. Professor, Harvard Business School since 1989 and Associate
Professor from 1983 to 1989; Trustee, The Common Fund, since 1989; Director,
Quantec Limited since 1991.
TERRY K. GLENN (56) -- Executive Vice President(1)(2) -- Executive Vice
President of the Manager and FAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of the Distributor since
1986 and Director thereof since 1991; President of Princeton Administrators,
L.P. since 1988.
8
<PAGE> 63
JOSEPH T. MONAGLE, JR. (47) -- Senior Vice President(1)(2) -- Senior Vice
President of the Manager and FAM since 1983; Vice President of the Manager from
1978 to 1990; Senior Vice President of Princeton Services since 1993.
HARRY E. DEWDNEY (68) -- Vice President and Portfolio Manager(1) -- Vice
President and Portfolio Manager of the Manager since 1986; Senior Vice President
of the International Trading and Foreign Exchange Department of Prescott, Ball &
Turben, Inc. from 1978 to 1986.
DONALD C. BURKE (36) -- Vice President(1)(2) -- Vice President and Director
of Taxation of the Manager since 1990; Employee of Deloitte & Touche LLP from
1981 to 1990.
GERALD M. RICHARD (47) -- Treasurer(1)(2) -- Senior Vice President and
Treasurer of the Manager and FAM since 1984; Vice President of the Distributor
since 1981 and Treasurer thereof since 1984; Senior Vice President and Treasurer
of Princeton Services since 1993.
MARK B. GOLDFUS (50) -- Secretary(1)(2) -- Vice President of the Manager
since 1985.
- ---------------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a trustee, director or officer of certain other
investment companies for which the Manager or FAM acts as investment adviser
or manager.
At January 31, 1997, the officers and Directors of the Fund as a group (12
persons) owned an aggregate of less than 1% of the outstanding shares of common
stock of ML & Co., and owned an aggregate of less than 1% of the outstanding
shares of the Fund.
COMPENSATION OF DIRECTORS
Pursuant to the terms of the management agreement with the Fund, the
Manager pays all compensation of officers and employees of the Fund as well as
the fees of all Directors who are affiliated persons of ML & Co. or its
subsidiaries. The Fund pays each Director not affiliated with ML & Co. or its
affiliates an annual fee of $5,000 plus $500 for each meeting of the Board
attended. The Fund also pays each member of the Audit and Nominating Committee
(the "Committee"), which consists of the non-affiliated Directors, an annual fee
of $1,000 plus $250 for each meeting attended. The Fund reimburses each
unaffiliated Director for his out-of-pocket expenses relating to attendance at
Board and Committee meetings. For the fiscal year ended October 31, 1996, fees
and expenses paid to the non-affiliated Directors aggregated $45,497.
The following table sets forth for the fiscal year ended October 31, 1996,
compensation paid by the Fund to the non-affiliated Directors and, for the
calendar year ended December 31, 1996, the aggregate compensation paid by all
investment companies (including the Fund) advised by MLAM and its affiliate, FAM
("MLAM/FAM Advised Funds"), to the non-affiliated Directors.
9
<PAGE> 64
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
PENSION OR FROM FUND AND
AGGREGATE RETIREMENT BENEFITS MLAM/FAM ADVISED
NAME OF COMPENSATION ACCRUED AS PART FUNDS PAID TO
DIRECTOR FROM FUND OF FUND EXPENSE DIRECTORS(1)
- ------------------------------------------- ------------ ------------------- ----------------
<S> <C> <C> <C>
James H. Bodurtha.......................... $9,000 None $148,500
Herbert I. London.......................... 9,000 None 148,500
Robert R. Martin........................... 9,000 None 148,500
Joseph L. May.............................. 9,000 None 148,500
Andre F. Perold............................ 9,000 None 148,500
</TABLE>
- ---------------
(1) The Directors serve on the boards of MLAM/FAM Advised Funds as follows: Mr.
Bodurtha (23 registered investment companies consisting of 46 portfolios);
Mr. London (23 registered investment companies consisting of 46 portfolios);
Mr. Martin (23 registered investment companies consisting of 46 portfolios);
Mr. May (23 registered investment companies consisting of 46 portfolios);
and Mr. Perold (23 registered investment companies consisting of 46
portfolios). For purposes of this table, each series of a series investment
company is treated as a separate fund.
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Fund -- Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities may be held by, or be appropriate investments for, the Fund as
well as other funds or investment advisory clients for which the Manager or its
affiliates act as an adviser. Because of different objectives or other factors,
a particular security may be bought for one or more clients when one or more
clients are selling the same security. If purchases or sales of securities by
the Manager for the Fund or other funds for which it acts as investment adviser
or for its advisory clients arise for consideration at or about the same time,
transactions in such securities will be made, insofar as feasible, for the
respective funds and clients in a manner deemed equitable to all. To the extent
that transactions on behalf of more than one client of the Manager or its
affiliates during the same period may increase the demand for securities being
purchased or the supply of securities being sold, there may be an adverse effect
on price.
The Fund has entered into a management agreement with the Manager (the
"Management Agreement"). As discussed in the Prospectus, the Manager receives
for its services to the Fund monthly compensation at the annual rate of 0.65% of
the average daily net assets of the Fund. For the fiscal years ended October 31,
1994, 1995 and 1996, the fees paid by the Fund to the Manager aggregated
$285,526, $779,627 and $463,001, respectively.
As described in the Prospectus, in 1996 the Manager also entered into a
sub-advisory agreement with Merrill Lynch Asset Management U.K. Limited ("MLAM
U.K.") pursuant to which MLAM U.K. provides investment advisory services to the
Manager with respect to the Fund.
The Management Agreement obligates the Manager to provide investment
advisory services and to pay all compensation of and furnish office space for
officers and employees of the Fund connected with investment and economic
research, trading and investment management of the Fund, as well as the fees of
all Directors of the Fund who are affiliated persons of ML & Co. or any of its
affiliates. The Fund pays all other expenses incurred in the operation of the
Fund, including, among other things, taxes, expenses for legal and auditing
services, costs of printing proxies, stock certificates, shareholder reports and
prospectuses and statements of
10
<PAGE> 65
additional information (except to the extent paid by the Distributor), charges
of the custodian, any sub-custodian and transfer agent, expenses of redemption
of shares, Commission fees, expenses of registering the shares under Federal,
state or foreign laws, fees and expenses of nonaffiliated Directors, accounting
and pricing costs (including the daily calculation of net asset value),
insurance, interest, brokerage costs, litigation and other extraordinary or
nonrecurring expenses, and other expenses properly payable by the Fund. As
required by the Fund's Distribution Agreement, the Distributor will pay the
promotional expenses of the Fund incurred in connection with the offering of
shares of the Fund. Certain expenses in connection with the account maintenance
and distribution of Class B and Class C shares will be financed by the Fund
pursuant to a Distribution Plan in compliance with Rule 12b-1 under the
Investment Company Act. See "Purchase of Shares -- Deferred Sales Charge
Alternatives -- Class B and Class C Shares -- Distribution Plans."
The Manager is a limited partnership, the partners of which are ML & Co.
and Princeton Services. ML & Co. and Princeton Services are "controlling
persons" of the Manager as defined under the Investment Company Act because of
their ownership of its voting securities or their power to exercise a
controlling influence over its management or policies.
Duration and Termination. Unless earlier terminated as described herein,
the Management Agreement will remain in effect from year to year if approved
annually (a) by the Board of Directors or by a majority of the outstanding
shares of the Fund and (b) by a majority of the Directors who are not parties to
such contract or interested persons (as defined in the Investment Company Act)
of any such party. Such contracts are not assignable and may be terminated
without penalty on 60 days' written notice at the option of either party thereto
or by the vote of the shareholders of the Fund.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
The Fund issues four classes of shares under the Merrill Lynch Select
PricingSM System; shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B and Class C are
sold to investors choosing the deferred sales charge alternatives. Each Class A,
Class B, Class C and Class D share of the Fund represents an identical interest
in the investment portfolio of the Fund and has the same rights except that
Class B, Class C and Class D shares bear the expenses of the ongoing account
maintenance fees, and Class B and Class C shares bear the expenses of the
ongoing distribution fees and the additional incremental transfer agency costs
resulting from the deferred sales charge arrangements. Class B, Class C and
Class D shares each have exclusive voting rights with respect to the Rule 12b-1
distribution plan adopted with respect to such class pursuant to which account
maintenance and/or distribution fees are paid (except that Class B shareholders
may vote upon any material changes to expenses charged under the Class D
Distribution Plan). Each class has different exchange privileges. See
"Shareholder Services -- Exchange Privilege."
The Merrill Lynch Select PricingSM System is used by more than 50
registered investment companies advised by the Manager or its affiliate, FAM.
Funds advised by the Manager or FAM that utilize the Merrill Lynch Select
PricingSM System are referred to herein as "MLAM-advised mutual funds."
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offering of each class of shares
of the Fund (the "Distribution Agreements"). The Distribution
11
<PAGE> 66
Agreements obligate the Distributor to pay certain expenses in connection with
the offering of each class of shares of the Fund. After the prospectuses,
statements of additional information and periodic reports have been prepared,
set in type and mailed to shareholders, the Distributor pays for the printing
and distribution of copies thereof used in connection with the offering to
dealers and prospective investors. The Distributor also pays for other
supplementary sales literature and advertising costs. The Distribution
Agreements are subject to the same renewal requirements and termination
provisions as the Management Agreement described above.
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
The gross sales charges for the sale of Class A shares for the year ended
October 31, 1994 were $24,608, of which the Distributor received $2,045 and
Merrill Lynch received $22,563. The gross sales charges for the sale of Class A
shares for the fiscal year ended October 31, 1995 were $19,530, of which the
Distributor received $1,587 and Merrill Lynch received $17,943. The gross sales
charges for the sale of Class A shares for the fiscal year ended October 31,
1996 were $1,648, of which the Distributor received $117 and Merrill Lynch
received $1,531. The gross sales charges for Class D shares for the period from
October 21, 1994 (commencement of operations) to October 31, 1994 were $4,122,
of which the Distributor received $325 and Merrill Lynch received $3,797. The
gross sales charges for the sale of Class D shares for the fiscal year ended
October 31, 1995 were $62,513, of which the Distributor received $4,666 and
Merrill Lynch received $57,847. The gross sales charges for the sale of Class D
Shares for the fiscal year ended October 31, 1996 were $25,194, of which the
Distributor received $1,818 and Merrill Lynch received $23,376.
The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts by an individual, his or her spouse and their children under
the age of 21 years purchasing shares for his or her own account and single
purchases by a trustee or other fiduciary purchasing shares for a single trust
estate or single fiduciary account (including a pension, profit-sharing or other
employee benefit trust created pursuant to a plan qualified under Section 401 of
the Internal Revenue Code, as amended (the "Code")) although more than one
beneficiary is involved. The term "purchase" also includes purchases by any
"company", as that term is defined in the Investment Company Act, but does not
include purchases by any such company which has not been in existence for at
least six months or which has no purpose other than the purchase of shares of
the Fund or shares of other registered investment companies at a discount;
provided, however, that it shall not include purchases by any group of
individuals whose sole organizational nexus is that the participants therein are
credit cardholders of a company, policyholders of an insurance company,
customers of either a bank or broker-dealer or clients or an investment advisor.
The term "purchase" also includes purchases by employee benefit plans not
qualified under Section 401 of the Code, including purchases by employees or by
employers on behalf of employees, by means of a payroll deduction plan or
otherwise, of shares of the Fund. Purchases by such a company or non-qualified
employee benefit plan will qualify for the quantity discounts discussed above
only if the Fund and the Distributor are able to realize economies of scale in
sales effort and sales related expense by means of the company, employer or plan
making the Fund's Prospectus available to individual investors or employees and
forwarding investments by such persons to the Fund and by any such employer or
plan bearing the expense of any payroll deduction plan.
Closed-End Fund Investment Option. Class A shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class A Shares") are offered at net asset
value to shareholders of certain closed-end funds advised by the Manager or FAM
who purchased such closed-end fund shares prior to October 21, 1994 (the
12
<PAGE> 67
date the Merrill Lynch Select Pricing System commenced operations) and wish to
reinvest the net proceeds of a sale of their closed-end fund shares of common
stock in Eligible Class A shares, if the conditions set forth below are
satisfied. Alternatively, closed-end fund shareholders who purchased such shares
on or after October 21, 1994 and wish to reinvest the net proceeds from a sale
of their closed-end fund shares are offered Class A shares (if eligible to buy
Class A shares) or Class D shares of the Fund and other MLAM-advised mutual
funds ("Eligible Class D shares"), if the following conditions are met. First,
the sale of closed-end fund shares must be made through Merrill Lynch and the
net proceeds therefrom must be immediately reinvested in Eligible Class A or
Class D shares. Second, the closed-end fund shares must either have been
acquired in the initial public offering or be shares representing dividends from
shares of common stock acquired in such offering. Third, the closed-end fund
shares must have been continuously maintained in a Merrill Lynch securities
account. Fourth, there must be a minimum purchase of $250 to be eligible for the
investment option.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund,
Inc. will receive Class D shares of the Fund, except that shareholders already
owning Class A shares of the Fund will be eligible to purchase additional Class
A shares pursuant to this option, if such additional Class A shares will be held
in the same account as the existing Class A shares and other requirements
pertaining to the reinvestment privilege are met. In order to exercise this
investment option, a shareholder of one of the above-referenced continuously
offered closed-end funds (an "eligible fund") must sell his or her shares of
common stock of the eligible fund (the "eligible shares") back to the eligible
fund in connection with a tender offer conducted by the eligible fund and
reinvest the proceeds immediately in the designated class of shares of the Fund.
This investment option is available only with respect to eligible shares as to
which no Early Withdrawal Charge or CDSC (each as defined in the eligible fund's
prospectus) is applicable. Purchase orders from eligible fund shareholders
wishing to exercise this investment option will be accepted only on the day that
the related tender offer terminates and will be effected at the net asset value
of the designated class of the Fund on such day.
REDUCED INITIAL SALES CHARGE
Right of Accumulation. Reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
shares of the Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the shares then
being purchased plus (b) an amount equal to the then current net asset value or
cost, whichever is higher, of the purchaser's combined holdings of all classes
of shares of the Fund and of other MLAM-advised mutual funds. For any such right
of accumulation to be made available, the Distributor must be provided at the
time of purchase, by the purchaser or the purchaser's securities dealer, with
sufficient information to permit confirmation of qualification. Acceptance of
the purchase order is subject to such confirmation. The right of accumulation
may be amended or terminated at any time. Shares held in the name of a nominee
or custodian under pension, profit-sharing, or other employee benefit plans may
not be combined with other shares to qualify for the right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A or Class D shares of the Fund or of
any other MLAM-advised mutual funds made within a 13-month period starting with
the first purchase pursuant to a Letter of Intention in the form provided in the
13
<PAGE> 68
Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at the Fund's transfer agent. The Letter of Intention is
not available to employee benefit plans for which Merrill Lynch provides plan
participant recordkeeping services. The Letter of Intention is not a binding
obligation to purchase any amount of Class A or Class D shares; however, its
execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intention may be included under a subsequent Letter of Intention
executed within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of Class A and Class
D shares of the Fund and of other MLAM-advised mutual funds presently held, at
cost or maximum offering price (whichever is higher), on the date of the first
purchase under the Letter of Intention, may be included as a credit toward the
completion of such Letter. If the total amount of shares purchased does not
equal the amount stated in the Letter of Intention (minimum of $25,000), the
investor will be notified and must pay, within 20 days of the expiration of such
Letter, the difference between the sales charge on the Class A or Class D shares
purchased at the reduced rate and the sales charge applicable to the sales
actually purchased through the Letter. Class A or Class D shares equal to at
least five percent of the intended amount will be held in escrow during the
13-month period (while remaining registered in the name of the purchaser) for
this purpose. The first purchase under the Letter of Intention must be at least
five percent of the dollar amount of such Letter. If during the term of such
Letter, a purchase brings the total amount invested to an amount equal to or in
excess of the amount indicated in the Letter, the purchaser will be entitled on
that purchase and subsequent purchases to the reduced percentage sales charge
which would be applicable to a single purchase equal to the total dollar value
of the Class A shares then being purchased under such Letter, but there will be
no retroactive reduction of the sales charges on any previous purchase. The
value of any shares redeemed or otherwise disposed of by the purchaser prior to
termination or completion of the Letter of Intention will be deducted from the
total purchases made under such Letter. An exchange from a MLAM-advised money
market fund into the Fund that creates a sales charge will count toward
completing a new or existing Letter of Intention from the Fund.
Merrill Lynch Blueprint SMProgram. Class A and Class D shares of the Fund
are offered to participants in the Merrill Lynch BlueprintSM Program
("Blueprint"). Blueprint is directed to small investors, group IRAs and
participants in certain affinity groups such as credit unions, trade
associations and benefit plans. Investors placing orders to purchase Class A or
Class D shares of the Fund through Blueprint will acquire the Class A or Class D
shares at net asset value plus a sales charge calculated in accordance with the
Blueprint sales charge schedule (i.e., up to $300 at 4.25%, from $300.01 to
$5,000 at 3.25% plus $3.00 and $5,000.01 or more at the standard sales charge
rates disclosed in the Prospectus). Class A and Class D shares of the Fund are
being offered at net asset value plus a sales charge of .50% for corporate or
group IRA programs placing orders to purchase their Class A or Class D shares
through Blueprint. Services available to investors placing orders for Class A or
Class D shares through Blueprint, including exchange privileges, may differ from
those available to other investors in Class A or Class D shares.
Class A and Class D shares are offered at net asset value to Blueprint
participants through the Merrill Lynch Directed IRA Rollover Program ("IRA
Rollover Program") available from Merrill Lynch Business Financial Services, a
business unit of Merrill Lynch. The IRA Rollover Program is available to
custodian rollover assets from Employer Sponsored Retirement and Savings Plans
(as defined below) whose Trustee and/or Plan Sponsor has entered into the
Merrill Lynch Directed IRA Rollover Program Service Agreement.
Orders for purchases and redemptions of Class A or Class D shares of the
Fund may be grouped for execution purposes which, in some circumstances, may
involve the execution of such orders two business days
14
<PAGE> 69
following the day such orders are placed. The minimum initial purchase price is
$100, with a $50 minimum for subsequent purchases through Blueprint. There are
no minimum initial or subsequent purchase requirements for participants who are
part of an automatic investment plan. Additional information concerning
purchases through Blueprint, including any annual fees and transaction charges,
is available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The
BlueprintSM Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
Employee Access Accounts SM. Class A or Class D shares are offered at net
asset value to Employee Access AccountsSM available through qualified employers
that provide employer-sponsored retirement or savings plans that are eligible to
purchase such shares at net asset value. The initial minimum for such accounts
is $500, except that the initial minimum for shares purchased for such accounts
pursuant to the Automatic Investment Program is $50.
Purchase Privilege of Certain Persons. Directors of the Fund, members of
the Boards of other MLAM-advised investment companies, directors and employees
of ML & Co. and its subsidiaries (the term "subsidiaries", when used herein with
respect to ML & Co., includes FAM, the Manager and certain other entities
directly or indirectly wholly owned and controlled by ML & Co.) and their
directors and employees, and any trust, pension, profit-sharing or other benefit
plan for such persons, may purchase Class A shares of the Fund at net asset
value.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a Financial
Consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from a redemption of a
mutual fund that was sponsored by the financial consultant's previous firm and
was subject to a sales charge either at the time of purchase or on a deferred
basis; and second, the investor also must establish that such redemption had
been made within 60 days prior to the investment in the Fund, and the proceeds
from the redemption had been maintained in the interim in cash or a money market
fund.
Class D shares of the Fund are also offered at net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice"), if the following conditions are
satisfied: first, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and the shares of
such other fund were subject to a sales charge either at the time of purchase or
on a deferred basis; and second, such purchase of Class D shares must be made
within 90 days after such notice.
Class D shares of the Fund are also offered at net asset value, without a
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund for which
Merrill Lynch has not served as a selected dealer if the following conditions
are satisfied: first, the investor must advise Merrill Lynch that it will
purchase Class D shares of the Fund with proceeds from the redemption of shares
of such other mutual fund and that such shares have been outstanding for a
period of no less than six months; and second, such purchase of Class D shares
must be made within 60 days after the redemption and the proceeds from the
redemption must be maintained in the interim in cash or a money market fund.
15
<PAGE> 70
TMASM Managed Trusts. Class A shares are offered to TMASM Managed Trusts
to which Merrill Lynch Trust Company provides discretionary trustee services at
net asset value.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares of the Fund may be reduced to the net asset value per Class D
share in connection with the acquisition of the assets of or merger or
consolidation with a personal holding company or a public or private investment
company. The value of the assets or company acquired in a tax-free transaction
may be adjusted in appropriate cases to reduce possible adverse tax consequences
to the Fund which might result from an acquisition of assets having net
unrealized appreciation which is disproportionately higher at the time of
acquisition than the realized or unrealized appreciation of the Fund. The
issuance of Class D shares for consideration other than cash is limited to bona
fide reorganizations, statutory mergers or other acquisitions of portfolio
securities which (i) meet the investment objective and policies of the Fund;
(ii) are acquired for investment and not for resale (subject to the
understanding that the disposition of the Fund's portfolio securities shall at
all times remain within its control); and (iii) are liquid securities, the value
of which is readily ascertainable, which are not restricted as to transfer
either by law or liquidity of market (except that the Fund may acquire through
such transactions restricted or illiquid securities to the extent the Fund does
not exceed the applicable limits on acquisition of such securities set forth
under "Investment Objective and Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
in obtaining such investments.
EMPLOYER-SPONSORED RETIREMENT OR SAVINGS PLANS AND CERTAIN OTHER ARRANGEMENTS
Certain employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class A or Class D shares at net asset value, based on
the number of employees eligible to participate in the plan, the aggregate
amount invested by the plan in specified investments and/or the services
provided by Merrill Lynch to the plan. Certain other plans may purchase Class B
shares with a waiver of the contingent deferred sales charge ("CDSC") upon
redemption, based on similar criteria. Such Class B shares will convert into
Class D shares approximately ten years after the plan purchases the first share
of any MLAM-advised mutual fund. Minimum purchase requirements may be waived or
varied for such plans. Additional information regarding purchases by
employer-sponsored retirement or savings plans and certain other arrangements is
available toll-free from Merrill Lynch Business Financial Services at (800)
237-7777.
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares -- Distribution Plan" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan") with respect to the account
maintenance and/or distribution fees paid by the Fund to the Distributor with
respect to such classes.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act. Among
other things, each Distribution Plan provides that the Distributor shall provide
and the Directors shall review quarterly reports of the disbursement of the
account maintenance fees and/or distribution fees paid to the Distributor. In
their consideration of each Distribution Plan, the Directors must consider all
factors they deem relevant, including information as to the benefits of the
Distribution Plan to the Fund and its related class of shareholders. Each
Distribution Plan further provides that so long as the Distribution Plan remains
in effect, the selection and nomination of Directors who are not
16
<PAGE> 71
"interested persons" of the Fund, as defined in the Investment Company Act (the
"Independent Directors"), shall be committed to the discretion of the
Independent Directors then in office. In approving each Distribution Plan in
accordance with Rule 12b-1, the Independent Directors concluded that there is a
reasonable likelihood that such Distribution Plan will benefit the Fund and its
related class of shareholders. The Distribution Plan can be terminated at any
time, without penalty, by the vote of a majority of the Independent Directors or
by the vote of the holders of a majority of the outstanding related class of
voting securities of the Fund. A Distribution Plan cannot be amended to increase
materially the amount to be spent by the Fund without the approval of the
related class of shareholders, and all material amendments are required to be
approved by the vote of Directors, including a majority of the Independent
Directors who have no direct or indirect financial interest in such Distribution
Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further
requires that the Fund preserve copies of each Distribution Plan and any report
made pursuant to such plan for a period of not less than six years from the date
of such Distribution Plan or such report, the first two years in an easily
accessible place.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on certain
asset-based sales charges such as the distribution fee and the CDSC borne by the
Class B and Class C shares but not the account maintenance fee. The maximum
sales charge rule is applied separately to each class. As applicable to the
Fund, the maximum sales charge rule limits the aggregate of distribution fee
payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of
Class B shares and Class C shares, computed separately (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges), plus (2)
interest on the unpaid balance for the respective class, computed separately, at
the prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from the payment of the distribution fee and the CDSC).
In connection with the Class B shares, the Distributor has voluntarily agreed to
waive interest charges on the unpaid balance in excess of 0.50% of eligible
gross sales. Consequently, the maximum amount payable to the Distributor
(referred to as the "voluntary maximum") in connection with the Class B shares
is 6.75% of eligible gross sales. The Distributor retains the right to stop
waiving the interest charges at any time. To the extent payments would exceed
the voluntary maximum, the Fund will not make further payments of the
distribution fee with respect to Class B shares, and any CDSCs will be paid to
the Fund rather than to the Distributor; however, the Fund will continue to make
payments of the account maintenance fee. In certain circumstances the amount
payable pursuant to the voluntary maximum may exceed the amount payable under
the NASD formula. In such circumstances payment in excess of the amount payable
under the NASD formula will not be made.
The following table sets forth comparative information as of October 31,
1996 with respect to the Class B shares and Class C shares of the Fund
indicating the maximum allowable payments that can be made under the NASD
maximum sales charge rule and, with respect to the Class B shares, the
Distributor's voluntary maximum.
17
<PAGE> 72
<TABLE>
<CAPTION>
DATA CALCULATED AS OF OCTOBER 31, 1996
-------------------------------------------------------------------------------------------
ANNUAL
ALLOWABLE ALLOWABLE AMOUNTS DISTRIBUTION
ELIGIBLE AGGREGATE INTEREST ON MAXIMUM PREVIOUSLY AGGREGATE FEE AT CURRENT
GROSS SALES UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
-------- ---------- ----------- ------- -------------- --------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Class B Shares
Under NASD Rule as Adopted...... $102,827 $6,427 $ 2,598 $9,025 $3,472 $ 5,553 $291
Under Distributor's Voluntary
Waiver........................ $102,827 $6,427 $ 514 $6,941 $3,472 $ 3,469 $291
Class C Shares
Under NASD Rule as Adopted...... $ 10,164 $ 635 $ 84 $ 719 $ 76 $ 643 $ 31
</TABLE>
- ---------------
(1) Purchase price of all eligible Class B shares sold since February 26, 1988
(commencement of operations) and of all eligible Class C shares sold since
October 21, 1994 (commencement of operations) other than shares acquired
through dividend reinvestment and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0% as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. Of the
distribution fee payments for Class B shares made prior to July 6, 1993
under a prior plan at the 0.75% rate, 0.50% of average daily net assets has
been treated as a distribution fee and 0.25% of average daily net assets has
been deemed to have been a service fee and not subject to the NASD maximum
sales charge rule. See "Purchase of Shares -- Distribution Plans" in the
Prospectus.
(4) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any CDSC payments) is amortizing the unpaid
balance. No assurance can be given that payments of the distribution fee
will reach either the NASD maximum or, with respect to the Class B shares,
the voluntary maximum.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended only for periods during which trading on the NYSE is
restricted as determined by the Commission or such exchange is closed (other
than customary weekend and holiday closings), for any period during which an
emergency exists, as defined by the Commission, as a result of which disposal of
portfolio securities or determination of the net asset value of the Fund is not
reasonably practicable, and for such other periods as the Commission may by
order permit for the protection of shareholders of the Fund.
The value of shares at the time of redemption may be more or less than the
shareholder's costs, depending on the market value of the securities held by the
Fund at such time.
DEFERRED SALES CHARGES -- CLASS B AND CLASS C SHARES
As discussed in the Prospectus under "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares," while Class B shares
redeemed within four years of purchase are subject to a CDSC under most
circumstances, the charge is waived on redemptions of Class B shares in
connection with certain post-retirement withdrawals from an Individual
Retirement Account ("IRA") or other retirement plan or on redemption of Class B
shares following the death or disability of a Class B shareholder. Redemptions
for which the waiver applies are: (a) any partial or complete redemption in
connection with a distribution following retirement under a tax-deferred
retirement plan or attaining age 59 1/2 in the case of an IRA or other
retirement plan, or part of a series of equal periodic payments (not less
frequently than annually)
18
<PAGE> 73
made for the life (or life expectancy) or any redemption resulting from the
tax-free return of an excess contribution to an IRA; or (b) any partial or
complete redemption following the death or disability (as defined in the Code)
of a Class B shareholder (including one who owns the Class B shares as joint
tenant with his or her spouse), provided the redemption is requested within one
year of the death or initial determination of disability. For the fiscal years
ended October 31, 1994, 1995 and 1996, the Distributor received CDSCs of
$55,082, $329,050 and $110,201, respectively, with respect to redemptions of
Class B shares, all of which were paid to Merrill Lynch. For the period October
21, 1994 (commencement of operations for Class C shares) to October 31, 1994,
the Distributor received no CDSCs with respect to the redemption of Class C
shares. For the fiscal years ended October 31, 1995 and 1996, the Distributor
received CDSCs of $3,929 and $2,756, respectively, with respect to redemptions
of Class C shares, all of which were paid to Merrill Lynch.
The CDSC is also waived for any Class B shares that were acquired and held
at the time of redemption by Employee Access Accounts available through
employers that provide Eligible 401(k) Plans. The initial minimum for such
accounts of $500, except that the initial minimum for shares purchased for such
accounts pursuant to the Automatic Investment Program is $50.
Merrill Lynch Blueprint SMProgram. Class B shares are offered to certain
participants in the BlueprintSM Program. Blueprint is directed to small
investors group IRAs and participants in certain affinity groups such as trade
associations, credit unions and benefit plans. Class B shares of the Fund are
offered through Blueprint only to members of certain affinity groups. The CDSC
is waived in connection with purchase orders placed through Blueprint by members
of such affinity groups. Services, including the exchange privilege, available
to Class B investors through Blueprint, however, may differ from those available
to other Class B investors. Orders for purchases and redemptions of Class B
shares of the Fund may be grouped for execution purposes which, in some
circumstances, may involve the execution of such orders two business days
following the day such orders are placed. The minimum initial purchase price is
$100, with a $50 minimum for subsequent purchases through Blueprint. There is no
minimum initial or subsequent purchase requirement for investors who are part of
a Blueprint automatic investment plan. Additional information concerning these
Blueprint programs, including any annual fees or transaction charges, is
available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The
BlueprintSM Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for making the Fund's portfolio decisions,
placing the Fund's brokerage business, evaluating the reasonableness of
brokerage commissions and negotiating the amount of any commissions paid,
subject to a policy established by the Fund's Directors and officers. The Fund
has no obligation to deal with any broker or group of brokers in the execution
of transactions in portfolio securities. Orders for transactions in portfolio
securities are placed for the Fund with a number of brokers and dealers,
including Merrill Lynch. In placing orders, it is the policy of the Fund to
obtain the most favorable net results, taking into account various factors,
including price, commissions, if any, size of the transaction and difficulty of
execution. Where practicable, the Manager surveys a number of brokers and
dealers in connection with proposed portfolio transactions and selects the
broker or dealer that offers the Fund best price and execution or other services
which are of benefit to the Fund. Securities firms also may receive brokerage
commissions on transactions including covered call options written by the Fund
and the sale of underlying securities upon the exercise of such options. In
addition, consistent with the Conduct Rules of the National Association of
Securities Dealers, Inc. and policies established by the Directors of the Fund,
the Manager may consider sales of shares of the Fund as a factor in the
selection of brokers or dealers to execute portfolio transactions for the Fund.
19
<PAGE> 74
The Fund does not use any particular broker or dealer, and brokers who
provide supplemental investment research to the Manager may receive orders for
transactions by the Fund. Such supplemental research services ordinarily consist
of assessments and analyses of the business or prospects of a company, industry
or economic sector. Information so received will be in addition to and not in
lieu of the services required to be performed by the Manager under the
Management Agreement. If in the judgment of the Manager the Fund will benefit
from supplemental research services, the Manager is authorized to pay brokerage
commissions to a broker furnishing such services that are in excess of
commissions that another broker may have charged for effecting the same
transaction. The expenses of the Manager will not necessarily be reduced as a
result of the receipt of such supplemental information, and the Manager may use
such information in servicing its other accounts. Whether or not a particular
broker-dealer sells shares of the Fund neither qualifies nor disqualifies such
broker-dealer to execute transactions for the Fund.
The Fund anticipates that its brokerage transactions involving securities
of companies domiciled in countries other than the United States will be
conducted primarily on the principal stock exchanges of such countries.
Brokerage commissions and other transaction costs on foreign stock exchange
transactions are generally higher than in the United States, although the Fund
will endeavor to achieve the best net results in effecting its portfolio
transactions. There is generally less governmental supervision and regulation of
foreign stock exchanges and brokers than in the United States.
Foreign equity securities may be held by the Fund in the form of American
Depositary Receipts (ADRs) or European Depositary Receipts (EDRs) or other
securities convertible into foreign equity securities. ADRs and EDRs may be
listed on stock exchanges, or traded in over-the-counter markets in the United
States or Europe, as the case may be. ADRs, like other securities traded in the
United States, will be subject to negotiated commission rates.
The Fund invests in certain securities traded in the over-the-counter
market and, where possible, deals directly with the dealers who make a market in
the securities involved, except in those circumstances in which better prices
and execution are available elsewhere. Under the Investment Company Act, persons
affiliated with the Fund are prohibited from dealing with the Fund as principal
in the purchase and sale of securities. Since transactions in the
over-the-counter market usually involve transactions with dealers acting as
principal for their own accounts, affiliated persons of the Fund, including
Merrill Lynch, will not serve as the Fund's dealer in such transactions.
However, an affiliated person of the Fund may serve as its broker in over-the-
counter transactions conducted on an agency basis. For the fiscal year ended
October 31, 1994, the Fund paid aggregate commissions of $62,415, $1,968 or 3.2%
of which was paid to Merrill Lynch for effecting 5.2% of the aggregate amount of
transactions in which the Fund paid brokerage commissions. For the fiscal year
ended October 31, 1995, the Fund paid aggregate commissions of $181,779, $4,200
or 2.31% of which was paid to Merrill Lynch for effecting 1.05% of the aggregate
dollar amount of transactions in which the Fund paid brokerage commissions. For
the fiscal year ended October 31, 1996, the Fund paid $31,793, none of which was
paid to Merrill Lynch.
The Fund's ability and decisions to purchase or sell portfolio securities
may be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are redeemable on a daily
basis in United States dollars, the Fund intends to manage its portfolio so as
to give reasonable assurance that it will be able to obtain United States
dollars to the extent necessary to meet anticipated redemptions. Under present
conditions, it is not believed that these considerations will have any
significant effect on its portfolio strategy.
20
<PAGE> 75
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the United States national securities exchanges from
executing transactions for their affiliates and institutional accounts which
they manage unless the member (i) has obtained prior express authorization from
the account to effect such transactions, (ii) at least annually furnishes the
account with a statement of the aggregate compensation received by the member in
effecting such transactions, and (iii) complies with any rules the Commission
has prescribed with respect to the requirements of clauses (i) and (ii). To the
extent Section 11(a) would apply to Merrill Lynch acting as a broker for the
Fund in any of its portfolio transactions executed on any such securities
exchange of which it is a member, appropriate consents have been obtained from
the Fund and annual statements as to aggregate compensation will be provided to
the Fund.
For the fiscal year ended October 31, 1995, Merrill Lynch effected one
portfolio transaction pursuant to such contract aggregating $704,200. For the
fiscal year ended October 31, 1996, Merrill Lynch effected no portfolio
transactions pursuant to such contract.
The Directors of the Fund have considered the possibility of recapturing
for the benefit of the Fund brokerage commissions, dealer spreads and other
expenses of possible portfolio transactions, such as underwriting commissions,
by conducting such portfolio transactions through affiliated entities, including
Merrill Lynch. For example, brokerage commissions received by Merrill Lynch
could be offset against the management fee paid by the Fund to the Manager.
After considering all factors deemed relevant, the Directors made a
determination not to seek such recapture. The Directors will reconsider this
matter from time to time.
DETERMINATION OF NET ASSET VALUE
Reference is made to "Additional Information -- Determination of Net Asset
Value" in the Prospectus concerning the determination of net asset value.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below and in the
Prospectus under "Shareholder Services" which are designated to facilitate
investment in its shares. Certain of such services are not available to
investors who place orders for the Company's shares through the Merrill Lynch
Blueprint(sm) Program. Full details as to each of such services and copies of
the various plans described below and instructions as to how to participate in
the various services or plans, or how to change options with respect thereto,
can be obtained from the Fund, the Distributor or Merrill Lynch.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
"Investment Account" and will receive, at least quarterly, statements from the
Transfer Agent. The statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of income dividends. The
statements also will show any other activity in the account since the preceding
statement. Shareholders will receive separate transaction confirmations for each
purchase or sale transaction other than automatic investment purchases and the
reinvestment of income dividends.
21
<PAGE> 76
Share certificates are issued only for full shares and only upon the
specific request of the shareholder who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by shareholders directly from the Transfer Agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the Class A or Class D shares are to be transferred
will not take delivery of shares of the Fund, a shareholder either must redeem
the Class A or Class D shares so that the cash proceeds can be transferred to
the account at the new firm or such shareholder must continue to maintain an
Investment Account at the Transfer Agent for those Class A or Class D shares.
Shareholders interested in transferring their Class B or Class C shares from
Merrill Lynch and who do not wish to have an Investment Account maintained for
such shares at the Transfer Agent may request their new brokerage firm to
maintain such shares in an account registered in the name of the brokerage firm
for the benefit of the shareholder. If the new brokerage firm is willing to
accommodate the shareholder in this manner, the shareholder must request that he
or she be issued certificates for the shares and then must turn the certificates
over to the new firm for re-registration as described in the preceding sentence.
Shareholders considering transferring a tax-deferred retirement account such as
an individual retirement account from Merrill Lynch to another brokerage firm or
financial institution should be aware that, if the firm to which the retirement
account is to be transferred will not take delivery of shares of the Fund, a
shareholder must either redeem the shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm, or such
shareholder must continue to maintain a retirement account at Merrill Lynch for
those shares. A shareholder may make additions to his or her Investment Account
at any time by mailing a check directly to the Transfer Agent.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor as
described in the Prospectus) or Class B, Class C or Class D shares at the
applicable public offering price either through the shareholder's securities
dealer, or by mail directly to the Transfer Agent, acting as agent for such
securities dealer. Voluntary accumulation also can be made through a service
known as the Fund's Automatic Investment Plan whereby the Fund is authorized
through pre-authorized checks or automated clearing house debits of $50 or more
to charge the regular bank account of the shareholder on a regular basis to
provide systematic additions to the Investment Account of such shareholder.
Alternatively, investors who maintain CMA(R) or CBA(R) accounts may arrange to
have periodic investments made in the Fund, in their CMA(R) or CBA(R) accounts
or in certain related accounts in amounts of $100 or more ($1 for retirement
accounts) through the CMA(R) or CBA(R) Automated Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
automatically reinvested in additional shares of the Fund. Such reinvestment
will be at the net asset value of shares of the Fund as of the close of business
on the payment date of the dividend or distribution. Shareholders may elect in
writing to receive either their dividends or capital gains distributions, or
both, in cash, in which event payment will be mailed or direct deposited on or
about the payment date.
22
<PAGE> 77
Shareholders may, at any time, notify the Transfer Agent in writing or by
telephone (1-800-MER-FUND) that they no longer wish to have their dividends
and/or capital gains distributions reinvested in shares of the Fund or vice
versa and, commencing ten days after the receipt by the Transfer Agent of such
notice, those instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS -- CLASS A AND CLASS D SHARES
A Class A or Class D shareholder may elect to make systematic withdrawals
from an Investment Account in either a monthly or quarterly basis as provided
below. Quarterly withdrawals are available for shareholders who have acquired
Class A or Class D shares of the Fund having a value, based on cost or the
current offering price, of $5,000 or more, and monthly withdrawals are available
for shareholders with Class A or Class D shares with such a value of $10,000 or
more.
At the time of each withdrawal payment, sufficient Class A or Class D
shares are redeemed from those on deposit in the shareholder's account to
provide the withdrawal payment specified by the shareholder. The shareholder may
specify either a dollar amount or a percentage of the value of his Class A or
Class D shares. Redemptions will be made at net asset value as determined 15
minutes after the close of business on the New York Stock Exchange (generally,
4:00 p.m., New York time) on the 24th day of each month or the 24th day of the
last month of each quarter, whichever is applicable. If the NYSE is not open for
business on such date, the Class A or Class D shares will be redeemed at the
close of business on the following business day. The check for the withdrawal
payment will be mailed, or the direct deposit for the withdrawal payment will be
made, on the next business day following redemption. When a shareholder is
making systematic withdrawals, dividends and distributions on all Class A or
Class D shares in the Investment Account are reinvested automatically in the
Class A or Class D shares. A shareholder's Systematic Withdrawal Plan may be
terminated at any time, without charge or penalty, by the shareholder, the Fund,
the Fund's transfer agent or the Distributor. Withdrawal payments should not be
considered as dividends, yield or income. Each withdrawal is a taxable event. If
periodic withdrawals continuously exceed reinvested dividends, the shareholder's
original investment may be reduced correspondingly. Purchases of additional
Class A or Class D shares concurrent with withdrawals are ordinarily
disadvantageous to the shareholder because of sales charges and tax liabilities.
The Fund will not knowingly accept purchase orders for Class A or Class D shares
of the Fund from investors who maintain a Systematic Withdrawal Plan unless such
purchase is equal to at least one year's scheduled withdrawals or $1,200,
whichever is greater. Periodic investments may not be made into an Investment
Account in which the shareholder has elected to make systematic withdrawals.
Alternatively, a Class A or Class D shareholder whose shares are held
within a CMA(R), CBA(R) or Retirement Account may elect to have shares redeemed
on a monthly, bimonthly, quarterly, semiannual or annual basis through the
Systematic Redemption Program. The minimum fixed dollar amount redeemable is
$25. The proceeds of systematic redemptions will be posted to the shareholder's
account five business days after the date the shares are redeemed. Monthly
systematic redemptions will be made at net asset value on the first Monday of
each month, bimonthly systematic redemptions will be made at net asset value on
the first Monday of every other month, and quarterly, semiannual or annual
redemptions are made at net asset value on the first Monday of months selected
at the shareholder's option. If the first Monday of the month is a holiday, the
redemption will be processed at net asset value on the next business day. The
Systematic Redemption Program is not available if Fund shares are being
purchased within the account pursuant to the Automatic
23
<PAGE> 78
Investment Plan, Automatic Investment Program. For more information on the
CMA(R) or CBA(R) Systematic Redemption Program, eligible shareholders should
contact their Merrill Lynch Financial Consultant.
RETIREMENT PLANS
Self-directed IRAs and other retirement plans are available from Merrill
Lynch. Under these plans, investments may be made in the Fund and in certain of
the other mutual funds sponsored by Merrill Lynch as well as in other
securities. Merrill Lynch charges an initial establishment fee and an annual
custodial fee for each account. Information with respect to these plans is
available upon request from Merrill Lynch. The minimum initial purchase to
establish any such plan is $250, and the minimum subsequent purchase is $1.
(except that the minimum initial purchase through Blueprint is $100).
Capital gains and income received in each of the plans referred to above
are exempt from Federal taxation until distributed from the plans. Investors
considering participation in any such plan should review specific tax laws
relating thereto and should consult their attorneys or tax advisers with respect
to the establishment and maintenance of any such plan.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds. Under the Merrill Lynch Select
Pricing(SM) System, Class A shareholders may exchange Class A shares of the Fund
for Class A shares of a second MLAM-advised mutual fund if the shareholder holds
any Class A shares of the second fund in the account in which the exchange is
made at the time of the exchange or is otherwise eligible to purchase Class A
shares of the second fund. If the Class A shareholder wants to exchange Class A
shares for shares of a second MLAM-advised mutual fund, but does not hold Class
A shares of the second fund in his account at the time of the exchange and is
not otherwise eligible to acquire Class A shares of the second fund, the
shareholder will receive Class D shares of the second fund as a result of the
exchange. Class D shares also may be exchanged for Class A shares of a second
MLAM-advised mutual fund at any time as long as, at the time of the exchange,
the shareholder holds Class A shares of the second fund in the account in which
the exchange is made or is otherwise eligible to purchase Class A shares of the
second fund. Class B, Class C and Class D shares are exchangeable with shares of
the same class of other MLAM-advised mutual funds. For purposes of computing the
CDSC that may be payable upon a disposition of the shares acquired in the
exchange, the holding period for the previously owned shares of the Fund is
"tacked" to the holding period of the newly acquired shares of the other fund as
more fully described below. Class A, Class B, Class C and Class D shares also
are exchangeable for shares of certain MLAM-advised money market funds as
follows: Class A shares may be exchanged for shares of Merrill Lynch Ready
Assets Trust, Merrill Lynch Retirement Reserves Money Fund (available only for
exchanges within certain retirement plans), Merrill Lynch U.S.A. Government
Reserves and Merrill Lynch U.S. Treasury Money Fund; Class B, Class C and Class
D shares may be exchanged for shares of Merrill Lynch Government Fund, Merrill
Lynch Institutional Fund, Merrill Lynch Institutional Tax-Exempt Fund and
Merrill Lynch Treasury Fund. Shares with a net asset value of at least $100 are
required to qualify for the exchange privilege, and any shares utilized in an
exchange must have been held by the shareholder for 15 days. It is contemplated
that the exchange privilege may be applicable to other new mutual funds whose
shares may be distributed by the Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are
24
<PAGE> 79
transacted on the basis of relative net asset value per Class A or Class D
share, respectively, plus an amount equal to the difference, if any, between the
sales charge previously paid on the outstanding Class A or Class D shares and
the sales charge payable at the time of the exchange on the new Class A or Class
D shares. With respect to outstanding Class A or Class D shares as to which
previous exchanges have taken place, the "sales charge previously paid" shall
include the aggregate of the sales charges paid with respect to such Class A or
Class D shares in the initial purchase and any subsequent exchange. Class A or
Class D shares issued pursuant to dividend reinvestment are sold on a no-load
basis in each of the funds offering Class A or Class D shares. For purposes of
the exchange privilege, Class A and Class D shares acquired through dividend
reinvestment shall be deemed to have been sold with a sales charge equal to the
sales charge previously paid on the Class A or Class D shares on which the
dividend was paid. Based on this formula, Class A and Class D shares of the Fund
generally will be exchanged into the Class A or Class D shares of the other
funds or into shares of certain money market funds without a sales charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively, of another
MLAM-advised mutual fund ("new Class B or Class C shares") on the basis of
relative net asset value per Class B or Class C share, without the payment of
any CDSC that might otherwise be due on redemption of the outstanding shares.
Class B shareholders of the Fund exercising the exchange privilege will continue
to be subject to the Fund's CDSC schedule if such schedule is higher than the
CDSC schedule relating to the new Class B shares acquired through use of the
exchange privilege. In addition, Class B shares of the Fund acquired through use
of the exchange privilege will be subject to the Fund's CDSC schedule if such
schedule is higher than the CDSC schedule relating to the Class B or Class C
shares of the fund from which the exchange has been made. For purposes of
computing the sales load that may be payable on a disposition of the new Class B
or Class C shares, the holding period for the outstanding Class B or Class C
shares is "tacked" to the holding period of the new Class B or Class C shares.
For example, an investor may exchange Class B or Class C shares of the Fund for
those of Merrill Lynch Special Value Fund, Inc. ("Special Value Fund") after
having held the Fund's Class B shares for two and a half years. The 2% CDSC that
generally would apply to redemption would not apply to the exchange. Three years
later the investor may decide to redeem the Class B shares of Special Value Fund
and receive cash. There will be no CDSC due on this redemption, since by
"tacking" the two and a half year holding period of the Fund's Class B shares to
the three year holding period for the Special Value Fund Class B shares, the
investor will be deemed to have held the new Class B shares for more than five
years.
Shareholders also may exchange shares of the Fund into shares of certain
money market funds advised by the Manager or its affiliates, but the period of
time that Class B or Class C shares are held in a money market fund will not
count towards satisfaction of the holding period requirement for purposes of
reducing the CDSC or, with respect to Class B shares, towards satisfaction of
the conversion period. However, shares of a money market fund which were
acquired as a result of an exchange for Class B or Class C shares of the Fund
may, in turn, be exchanged back into Class B or Class C shares, respectively, of
any fund offering such shares, in which event the holding period for Class B or
Class C shares of the newly acquired fund will be aggregated with previous
holding periods for purposes of reducing the CDSC. Thus, for example, an
investor may exchange Class B shares of the Fund for shares of Merrill Lynch
Institutional Fund ("Institutional Fund") after having held the Fund Class B
shares for two and a half years and three years later decide to redeem the
shares for cash. At the time of this redemption, the 2% CDSC that would have
been due had the Class B shares of the Fund been redeemed for cash rather than
exchanged for shares of Institutional Fund will be
25
<PAGE> 80
payable. If, instead of such redemption the shareholder exchanged such shares
for Class B shares of a fund which the shareholder continued to hold for an
additional two and a half years, any subsequent redemption would not incur a
CDSC.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, a shareholder should contact their
Merrill Lynch Financial Consultant, who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other funds described above
with shares for which certificates have not been issued, may exercise the
exchange privilege by wire through their securities dealers. The Fund reserves
the right to require a properly completed Exchange Application. This exchange
privilege may be modified or terminated in accordance with the rules of the
Commission. The Fund reserves the right to limit the number of times an investor
may exercise the exchange privilege. Certain funds may suspend the offering of
their shares to the general public at any time and thereafter may resume such
offering from time to time. The exchange privilege is available only to U.S.
shareholders in states where the exchange legally may be made.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute all its net investment income, if any.
Dividends from such net investment income will be paid quarterly. All net
realized long- or short-term capital gains, if any, will be distributed to the
Fund's shareholders annually. From time to time, the Fund may declare a special
distribution at or about the end of the calendar year in order to comply with
Federal tax requirements that certain percentages of its ordinary income and
capital gains be distributed during the calendar year. If in any fiscal year,
the Fund has net income from certain foreign currency transactions, such income
will be distributed at least annually.
See "Shareholder Services -- Automatic Reinvestment of Dividends and
Capital Gains Distributions" for information concerning the manner in which
dividends and distributions may be reinvested automatically in shares of the
Fund. Shareholders may elect in writing to receive any such dividends or
distributions, or both, in cash. Dividends and distributions are taxable to
shareholders, as discussed below, whether they are reinvested in shares of the
Fund or received in cash. The per share dividends on each class of shares will
be reduced as a result of any account maintenance, distribution and transfer
agency fees applicable with respect to such class of shares. See "Determination
of Net Asset Value."
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. If it so
qualifies, the Fund (but not its shareholders) will not be subject to Federal
income tax on the part of its net ordinary income and net realized capital gains
that it distributes to Class A, Class B, Class C and Class D shareholders
(together, the "shareholders"). The Fund intends to distribute substantially all
of such income.
Dividends paid by the Fund from its ordinary income or from an excess of
net short-term capital gains over net long-term capital losses (together
referred to hereafter as "ordinary income dividends") are taxable to
26
<PAGE> 81
shareholders as ordinary income. Distributions made from an excess of net
long-term capital gains over net short-term capital losses (including gains or
losses from certain transactions in futures and options) ("capital gain
dividends") are taxable to shareholders as long-term capital gains, regardless
of the length of time the shareholder has owned Fund shares. Any loss upon the
sale or exchange of Fund shares held for six months or less, however, will be
treated as long-term capital loss to the extent of any capital gain dividends
received by the shareholder. Distributions in excess of the Fund's earnings and
profits will first reduce the adjusted tax basis of a holder's shares and, after
such adjusted tax basis is reduced to zero, will constitute capital gains to
such holder (assuming the shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. A portion of the Fund's ordinary income dividends may be eligible for
the dividends received deduction allowed to corporations under the Code, if
certain requirements are met. For this purpose, the Fund will allocate dividends
eligible for the dividends received deduction among the Class A, Class B, Class
C and Class D shareholders according to a method (which it believes is
consistent with the Securities and Exchange Commission rule permitting the
issuance and sale of multiple classes of stock) that is based on the gross
income allocable to Class A, Class B, Class C and Class D shareholders during
the taxable year, or such other method as the Internal Revenue Service may
prescribe. If the Fund pays a dividend in January that was declared in the
previous October, November or December to shareholders of record on a specified
date in one of such months, then such dividend will be treated for tax purposes
as being paid by the Fund and received by its shareholders on December 31 of the
year in which such dividend was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% U.S. withholding tax under existing
provisions of the Code applicable to foreign individuals and entities unless a
reduced rate of withholding or a withholding exemption is provided under
applicable treaty law. Nonresident shareholders are urged to consult their own
tax advisers concerning the applicability of the U.S. withholding tax.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes. Shareholders
may be able to claim United States foreign tax credits with respect to such
taxes, subject to certain conditions and limitations contained in the Code. For
example, certain retirement accounts cannot claim foreign tax credits on
investments in foreign securities held in the Fund. If more than 50% in value of
the Fund's total assets at the close of its taxable year consists of securities
of foreign corporations, the Fund will be eligible, and intends, to file an
election with the Internal Revenue Service pursuant to which shareholders of the
Fund will be required to include their proportionate shares of such withholding
taxes in their United States income tax returns as gross income, treat such
proportionate shares as taxes paid by them, and deduct such proportionate shares
in computing their taxable incomes or, alternatively, use them as foreign
27
<PAGE> 82
tax credits against their United States income taxes. No deductions for foreign
taxes, however, may be claimed by noncorporate shareholders who do not itemize
deductions. A shareholder that is a nonresident alien individual or a foreign
corporation may be subject to U.S. withholding tax on the income resulting from
the Fund's election described in this paragraph but may not be able to claim a
credit or deduction against such U.S. tax for the foreign taxes treated as
having been paid by such shareholder. The Fund will report annually to its
shareholders the amount per share of such withholding taxes. For this purpose,
the Fund will allocate foreign taxes and foreign source income among the Class
A, Class B, Class C and Class D shareholders according to a method similar to
that described above for the allocation of dividends eligible for the dividends
received deduction.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon the purchase of the new shares in the absence
of the exchange privilege. Instead, such sales charge will be treated as an
amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income and
capital gains in the manner necessary to minimize imposition of the 4% excise
tax, there can be no assurance that sufficient amounts of the Fund's taxable
income and capital gains will be distributed to avoid entirely the imposition of
the tax. In such event, the Fund will be liable for the tax only on the amount
by which it does not meet the foregoing distribution requirements.
The Fund may invest in securities rated in the medium to lower rating
categories of nationally recognized rating organizations, and in unrated
securities ("high yield securities"), as previously described. Some of these
high yield securities may be purchased at a discount and may therefore cause the
Fund to accrue and distribute income before amounts due under the obligations
are paid. In addition, a portion of the interest payments on such high yield
securities may be treated as dividends for Federal income tax purposes; in such
case, if the issuer of such high yield securities is a domestic corporation,
dividend payments by the Fund will be eligible for the dividends received
deduction allowed to domestic corporations under the Code.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Fund may write (i.e., sell), purchase or sell options, futures and
forward foreign exchange contracts. Options and futures contracts that are
"Section 1256 contracts" will be "marked to market" for Federal
28
<PAGE> 83
income tax purposes at the end of each taxable year, i.e., each such option or
futures contract will be treated as sold for its fair market value on the last
day of the taxable year. Unless such contract is a forward foreign exchange
contract, or is a non-equity option or a regulated futures contract for a
non-U.S. currency for which the Fund elects to have gain or loss treated as
ordinary gain or loss under Code Section 988 (as described below), gain or loss
from Section 1256 contracts will be 60% long-term and 40% short-term capital
gain or loss. Application of these rules to Section 1256 contracts held by the
Fund may alter the timing and character of distributions to shareholders. The
mark-to-market rules outlined above, however, will not apply to certain
transactions entered into by the Fund solely to reduce the risk of changes in
price or interest or currency exchange rates with respect to its investments.
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The Fund
may, nonetheless, elect to treat the gain or loss from certain forward foreign
exchange contracts as capital. In this case, gain or loss realized in connection
with a forward foreign exchange contract that is a Section 1256 contract will be
characterized as 60% long-term and 40% short-term capital gain or loss.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in options, futures
and forward foreign exchange contracts. Under Section 1092, the Fund may be
required to postpone recognition for tax purposes of losses incurred in certain
sales of securities and certain closing transactions in options, futures and
forward foreign exchange contracts.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income be derived from gains from the sale or other disposition
of securities held for less than three months. Accordingly, the Fund may be
restricted in effecting closing transactions within three months after entering
into an option or futures contract.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stocks, securities or foreign currencies will be
qualifying income for purposes of determining whether the Fund qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options, futures, or forward
foreign exchange contracts will be valued for purposes of the RIC
diversification requirements applicable to the Fund.
Under Code Section 988, special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency (i.e.,
unless certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains or losses from certain debt instruments, from
certain forward contracts, from futures contracts that are not "regulated
futures contracts" and from unlisted options will be treated as ordinary income
or loss under Code Section 988. In certain circumstances, the Fund may elect
capital gain or loss treatment for such transactions. Regulated futures
contracts, as described above, will be taxed under Code Section 1256 unless
application of Section 988 is elected by the Fund. In general, however, Code
Section 988 gains or losses will increase or decrease the amount of the Fund's
investment company taxable income available to be distributed to shareholders as
ordinary income. Additionally, if Code Section 988 losses exceed other
investment company taxable income during a taxable year, the Fund would not be
able to make any ordinary income dividend distributions, and all or a portion of
distributions made before the losses were realized but in the same taxable year
would be recharacterized as a return of capital to shareholders,
29
<PAGE> 84
thereby reducing the basis of each shareholder's Fund shares and resulting in a
capital gain for any shareholder who received a distribution greater than such
shareholder's basis in Fund shares (assuming the shares were held as a capital
asset). These rules and the mark-to-market rules described above, however, will
not apply to certain transactions entered into by the Fund solely to reduce the
risk of currency fluctuations with respect to its investments.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on U.S. Government obligations. State law varies
as to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data, as well as yield, in advertisements or information
furnished to present or prospective shareholders. From time to time, the Fund
may include the Fund's Morningstar risk-adjusted performance ratings in
advertisements or supplemental sales literature. Total return figures are based
on the Fund's historical performance and are not intended to indicate future
performance. Average annual total return is determined separately for Class A,
Class B, Class C and Class D shares in accordance with formulas specified by the
Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A and Class D
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of Class B and Class C
shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (1) the rates of return calculated will not be average annual rates,
but rather, actual annual, annualized or aggregate rates and (2) the maximum
applicable sales charges will not be included with respect to annual or
annualized rates of return calculations. Aside from the impact on the
performance data calculations of including or excluding the maximum applicable
sales charges, actual annual or annualized total return data generally will be
lower than average annual total return data since the average rates of return
reflect compounding of return; aggregate total return data generally will be
higher than average annual total return data since the aggregate rates of return
reflect compounding over a longer period of time.
30
<PAGE> 85
Set forth in the tables below is total return information for the Class A,
Class B, Class C and Class D shares of the Fund for the periods indicated.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
------------------------------------------ ------------------------------------------
EXPRESSED AS A REDEEMABLE VALUE EXPRESSED AS A REDEEMABLE VALUE
PERCENTAGE BASED OF A HYPOTHETICAL PERCENTAGE BASED OF A HYPOTHETICAL
ON A HYPOTHETICAL $1,000 INVESTMENT AT ON A HYPOTHETICAL $1,000 INVESTMENT AT
PERIOD $1,000 INVESTMENT THE END OF THE PERIOD $1,000 INVESTMENT THE END OF THE PERIOD
- ---------------------------- ----------------- --------------------- ----------------- ---------------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended
October 31, 1996.......... 3.60% $1,036.00 4.17% $1,041.70
Five Years Ended
October 31, 1996.......... 7.23% $1,417.50 7.25% $1,419.30
Inception (February 26,
1988) to October 31,
1996...................... 5.76% $1,625.40
Inception (November 4, 1988)
to October 31, 1996....... 6.38% $1,639.30
</TABLE>
<TABLE>
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Year Ended October 31,
1996...................... 9.34% $1,093.40 8.13% $1,081.30
1995...................... 5.10% $1,051.00 4.01% $1,040.10
1994...................... 0.61% $1,006.10 (0.37)% $ 996.30
1993...................... 17.64% $1,176.40 16.45% $1,164.50
1992...................... 10.00% $1,100.00 8.77% $1,087.70
1991...................... 18.09% $1,180.90 16.79% $1,167.90
1990...................... (7.86)% $ 921.40 (8.68)% $ 913.20
1989...................... 5.58% $1,055.80
Inception (February 26,
1988)
to October 31, 1988....... 1.70% $1,017.00
Inception (November 4, 1988)
to October 31, 1989....... 6.29% $1,062.90
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (February 26,
1988) to October 31,
1996...................... 62.54% $1,625.40
Inception (November 4, 1988)
to October 31, 1996....... 63.93% $1,639.30
<CAPTION>
YIELD
<S> <C> <C> <C> <C>
30 days ended
October 31, 1996.......... 2.37% 1.45%
</TABLE>
31
<PAGE> 86
<TABLE>
<CAPTION>
CLASS C SHARES CLASS D SHARES
------------------------------------------ ------------------------------------------
EXPRESSED AS A REDEEMABLE VALUE EXPRESSED AS A REDEEMABLE VALUE
PERCENTAGE BASED OF A HYPOTHETICAL PERCENTAGE BASED OF A HYPOTHETICAL
ON A HYPOTHETICAL $1,000 INVESTMENT AT ON A HYPOTHETICAL $1,000 INVESTMENT AT
PERIOD $1,000 INVESTMENT THE END OF THE PERIOD $1,000 INVESTMENT THE END OF THE PERIOD
- ---------------------------- ----------------- --------------------- ----------------- ---------------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended October 31,
1996...................... 7.15% $1,071.50 3.35% $1,033.50
Inception (October 21, 1994)
to October 31, 1996....... 6.25% $1,130.80 4.38% $1,090.90
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended October 31,
1996...................... 8.14% $1,081.40 9.07% $1,090.70
1995...................... 3.89% $1,038.90 4.87% $1,048.70
Inception (October 21, 1994)
to October 31, 1994....... 0.65% $1,006.50 0.65% $1,006.50
</TABLE>
<TABLE>
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (October 21, 1994)
to October 31, 1996....... 13.08% $1,130.80 9.09% $1,090.90
<CAPTION>
YIELD
<S> <C> <C> <C> <C>
30 days ended
October 31, 1996.......... 1.42% 2.14%
</TABLE>
In order to reflect the reduced sales charges in the case of Class A or
Class D shares or the waiver of the CDSC in the case of Class B or Class C
shares applicable to certain investors, as described under "Purchase of Shares"
and "Redemption of Shares," respectively, the total return data quoted by the
Fund in advertisements directed to such investors may take into account the
reduced, and not the maximum, sales charge or may take into account the waiver
of the CDSC and therefore may reflect greater total return since, due to the
reduced sales charges or the waiver of sales charges, a lower amount of expenses
is deducted.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund was incorporated under Maryland law on October 22, 1987. It has an
authorized capital of 400,000,000 shares of Common Stock, par value $0.10 per
share, divided into four classes, designated Class A, Class B, Class C and Class
D Common Stock, each of which consists of 100,000,000 shares. Class A, Class B,
Class C and Class D Common Stock represent an interest in the same assets of the
Fund and are identical in all respects except that the Class B, Class C and
Class D shares bear certain expenses related to the account maintenance and/or
distribution of such shares and have exclusive voting rights with respect to
matters
32
<PAGE> 87
relating to such expenditures. The Board of Directors of the Fund may classify
and reclassify the shares of the Fund into additional classes of Common Stock at
a future date.
Shareholders are entitled to one vote for each full share held and
fractional votes for fractional shares held and will vote on the election of
Directors and any other matter submitted to a shareholder vote. The Fund does
not intend to hold meetings of shareholders in any year in which the Investment
Company Act does not require shareholders to act upon any of the following
matters: (i) election of Directors; (ii) approval of an investment advisory
agreement; (iii) approval of a distribution agreement; and (iv) ratification of
selection of independent accountants. Generally, under Maryland law, a meeting
of shareholders may be called for any purpose on the written request of the
holders of at least 25% of the outstanding shares of the Fund. Voting rights for
Directors are not cumulative. Shares issued are fully paid and non-assessable
and have no preemptive rights. Redemption and conversion rights are discussed
elsewhere herein and in the Prospectus. Each share of Class B, Class C and Class
D Common Stock is entitled to participate equally in dividends and distributions
declared by the Fund and in the net assets of the Fund upon liquidation or
dissolution after satisfaction of outstanding liabilities. Stock certificates
will be issued by the Transfer Agent only on specific request. Certificates for
fractional shares are not issued in any case.
The Manager provided the initial capital for the Fund by purchasing 10,000
shares for $100,000. Such shares were acquired for investment and can only be
disposed by redemption.
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class A, Class
B, Class C and Class D shares of the Fund based on the value of the Fund's net
assets and number of shares outstanding on October 31, 1996, is calculated as
set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Net Assets.............................. $17,741,239 $38,830,004 $4,122,419 $8,585,261
========== ========== ========= =========
Number of Shares Outstanding............ 1,683,579 3,658,695 389,247 813,909
========== ========== ========= =========
Net Asset Value Per Share (net assets
divided by number of shares
outstanding).......................... $10.54 $10.61 $10.59 $10.55
Shares Charge (for Class A and Class D
shares: 5.25% of offering price (5.54%
of net asset value per share))*....... 0.58 ** ** 0.58
---- ---- ---- ----
Offering Price.......................... $11.12 $10.61 $10.59 $11.13
====== ====== ====== ======
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge
is applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption of shares. See "Purchase of
Shares -- Deferred Sales Charge Alternatives -- Class B and Class C Shares"
in the Prospectus and "Redemption of Shares -- Deferred Sales
Charges -- Class B and Class C Shares" herein.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540-6400,
has been selected as the independent auditors of the Fund. The independent
auditors are responsible for auditing the annual financial statements of the
Fund.
33
<PAGE> 88
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 351, Boston, Massachusetts
02101, acts as the Custodian of the Fund's assets. The Custodian is responsible
for safeguarding and controlling the Fund's cash and securities, handling the
receipt and delivery of securities and collecting interest and dividends on the
Fund's investments.
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, acts as the Fund's Transfer Agent. The
Transfer Agent is responsible for the issuance, transfer and redemption of
shares and the opening, maintenance and servicing of shareholder accounts. See
"Management of the Fund -- Transfer Agency Services" in the Prospectus.
LEGAL COUNSEL
Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on October 31 of each year. The Fund sends
to its shareholders at least semi-annually reports showing the Fund's portfolio
and other information. An annual report, containing financial statements audited
by independent auditors, is sent to shareholders each year. After the end of
each year, shareholders will receive Federal income tax information regarding
dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act of 1933 and the
Investment Company Act, to which reference is hereby made.
------------------
Under a separate agreement, Merrill Lynch & Co., Inc. has granted the Fund
the right to use the "Merrill Lynch" name and has reserved the right to withdraw
its consent to the use of such name by the Fund at any time or to grant the use
of such name to any other company, and the Fund has granted Merrill Lynch & Co.,
Inc., under certain conditions, the use of any other name it might assume in the
future, with respect to any corporation organized by Merrill Lynch & Co., Inc.
To the knowledge of the Fund, no person owned beneficially 5% or more of
the Fund's shares on January 16, 1997.
34
<PAGE> 89
APPENDIX
RATINGS OF DEBT SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") CORPORATE RATINGS
Aaa Bonds which are rated AAA are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa Bonds which are rated AA are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
Baa Bonds which are rated BAA are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba Bonds which are rated BA are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and therefore not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa Bonds which are rated CAA are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated CA represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each generic
rating classification from AA through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
35
<PAGE> 90
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
The term "commercial paper" as used by Moody's means promissory obligations
not having an original maturity in excess of nine months. Moody's makes no
representations as to whether such commercial paper is by any other definition
"commercial paper" or is exempt from registration under the Securities Act of
1933, as amended.
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations are
exempt from registration under the Securities Act of 1933, nor does it represent
that any specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
Issuers rated PRIME-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. PRIME-1 repayment
capacity will normally be evidenced by the following characteristics:
-- Leading market positions in well established industries
-- High rates of return on funds employed
-- Conservative capitalization structures with moderate reliance on debt
and ample asset protection
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation
-- Well established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated PRIME-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated PRIME-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
Issuers rated NOT PRIME do not fall within any of the Prime rating
categories.
If an issuer represents to Moody's that its Commercial Paper obligations
are supported by the credit of another entity or entities, then the name or
names of such supporting entity or entities are listed within parentheses
beneath the name of the issuer, or there is a footnote referring the reader to
another page for the name or names of the supporting entity or entities. In
assigning ratings to such issuers, Moody's evaluates the financial strength of
the indicated affiliated corporations, commercial banks, insurance companies,
foreign governments or other entities, but only as one factor in the total
rating assessment. Moody's makes no representation and gives no opinion on the
legal validity or enforceability of any support arrangement. You are cautioned
to review with your counsel any questions regarding particular support
arrangements.
36
<PAGE> 91
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS
Because of the fundamental differences between preferred stocks and bonds,
a variation of the bond rating symbols is being used in the quality ranking of
preferred stocks. The symbols, presented below, are designed to avoid comparison
with bond quality in absolute terms. It should always be borne in mind that
preferred stocks occupy a junior position to bonds within a particular capital
structure and that these securities are rated within the universe of preferred
stocks.
Preferred stock rating symbols and their definitions are as follows:
aaa An issue which is rated "AAA" is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.
aa An issue which is rated "AA" is considered a high-grade preferred stock.
This rating indicates that there is reasonable assurance that earnings
and asset protection will remain relatively well maintained in the
foreseeable future.
a An issue which is rated "A" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in
the "aaa" and "aa" classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
baa An issue which is rated "BAA" is considered to be medium grade, neither
highly protected nor poorly secured. Earnings and asset protection appear
adequate at present but may be questionable over any great length of
time.
ba An issue which is rated "BA" is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse
periods. Uncertainty of position characterizes preferred stocks in this
class.
b An issue which is rated "B" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be small.
caa An issue which is rated "CAA" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future
status of payments.
ca An issue which is rated "CA" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payment.
c This is the lowest rated class of preferred or preference stock. Issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each rating
classification from "AA" through "B" in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
DESCRIPTION OF STANDARD & POOR'S RATINGS SERVICE ("STANDARD & POOR'S") CORPORATE
DEBT RATINGS
A Standard & Poor's corporate or municipal rating is a current assessment
of the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
37
<PAGE> 92
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable. Standard
& Poor's does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in, or unavailability of, such
information, or for other reasons.
The ratings are based, in varying degrees, on the following considerations:
(1) likelihood of default-capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation; (2) nature of and provisions of the obligation; and (3)
protection afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
AAA Debt rated AAA has the highest rating assigned by Standard and Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher
rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than for debt in higher rated
categories.
Debt rated BB, B, CCC, CC and C is regarded, on balance, as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which
could lead to inadequate capacity to meet timely interest and principal
payments. The BB rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied BBB- rating.
B Debt rated B has a greater vulnerability to default but presently has the
capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions would likely impair capacity
or willingness to pay interest and repay principal.
The B rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied BB or BB- rating.
CCC Debt rated CCC has a current identifiable vulnerability to default, and
is dependent upon favorable business, financial and economic conditions
to meet timely payments of interest and repayment of
38
<PAGE> 93
principal. In the event of adverse business, financial or economic
conditions, it is not likely to have the capacity to pay interest and
repay principal.
The CCC rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied B or B- rating.
CC The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed
but debt service payments are continued.
CI The rating CI is reserved for income bonds on which no interest is being
paid.
D Debt rated D is in payment default. The D rating category is also used
when interest payments or principal repayments are not made on the date
due even if the applicable grace period has not expired, unless Standard
& Poor's believes that such payments will be made during such grace
period. The D rating also will be used upon the filing of a bankruptcy
petition if debt service payments are jeopardized.
PLUS (+) or MINUS (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing with the major
ratings categories.
Provisional ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood or risk of default upon failure of such completion. The investor
should exercise judgment with respect to such likelihood and risk.
L The letter "L" indicates that the rating pertains to the principal amount
of those bonds to the extent that the underlying deposit collateral is
insured by the Federal Savings & Loan Insurance Corp. or the Federal
Deposit Insurance Corp. and interest is adequately collateralized.
* Continuance of the rating is contingent upon Standard & Poor's receipt of
an executed copy of the escrow agreement or closing documentation confirming
investments and cash flows.
NR Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy.
Debt Obligations of Issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories ("AAA", "AA", "A", "BBB", commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments may impose certain
ratings or other standards for obligations eligible for investment by savings
banks, trust companies, insurance companies and fiduciaries generally.
39
<PAGE> 94
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into four categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus (+) sign
designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated "A-1."
A-3 Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due, even if the applicable grace period has not expired, unless Standard
& Poor's believes that such payments will be made during such grace
period.
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information.
DESCRIPTION OF STANDARD & POOR'S PREFERRED STOCK RATINGS
A Standard & Poor's preferred stock rating is an assessment of the capacity
and willingness of an issuer to pay preferred stock dividends and any applicable
sinking fund obligations. A preferred stock rating differs from a bond rating
inasmuch as it is assigned to an equity issue, which issue is intrinsically
different from, and subordinated to, a debt issue. Therefore, to reflect this
difference, the preferred stock rating symbol will normally not be higher than
the bond rating symbol assigned to, or that would be assigned to, the senior
debt of the same issuer.
The preferred stock ratings are based on the following considerations:
I. Likelihood of payment-capacity and willingness of the issuer to meet
the timely payment of preferred stock dividends and any applicable sinking
fund requirements in accordance with the terms of the obligation.
II. Nature of, and provisions of, the issue.
III. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangements affecting creditors' rights.
AAA This is the highest rating that may be assigned by Standard & Poor's to a
preferred stock issue and indicates an extremely strong capacity to pay
the preferred stock obligations.
40
<PAGE> 95
AA A preferred stock issue rated "AA" also qualifies as a high-quality fixed
income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated "AAA."
A An issue rated "A" is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.
BBB An issue rated "BBB" is regarded as backed by an adequate capacity to pay
the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to make
payments for a preferred stock in this category than for issues in the
"A" category.
BB B
CCC Preferred stock rated "BB," "B," and "CCC" are regarded, on balance, as
predominately speculative with respect to the issuer's capacity to pay
preferred stock obligations. "BB" indicates the lowest degree of
speculation and "CCC" the highest degree of speculation. While such
issues will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to
adverse conditions.
CC The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C A preferred stock rated "C" is a non-paying issue.
D A preferred stock rated "D" is a non-paying issue with the issuer in
default on debt instruments.
NR indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
PLUS (+) or MINUS (-): To provide more detailed indications of preferred
stock quality, the ratings from "AA" to "CCC" may be modified by the addition of
a plus or minus sign to show relative standing within the major rating
categories.
The preferred stock ratings are not a recommendation to purchase or sell a
security, inasmuch as market price is not considered in arriving at the rating.
Preferred stock ratings are wholly unrelated to Standard & Poor's earnings and
dividend rankings for common stocks.
The ratings are based on current information furnished to Standard & Poor's
by the issuer, and obtained by Standard & Poor's from other sources it considers
reliable. The ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of, such information.
41
<PAGE> 96
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Global Convertible Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Global Convertible Fund, Inc. as
of October 31, 1996, the related statements of operations for the year then
ended and changes in net assets for each of the years in the two-year period
then ended, and the financial highlights for each of the years in the five-year
period then ended. These financial statements and the financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at October
31, 1996, by correspondence with the custodian and broker. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch Global
Convertible Fund, Inc. as of October 31, 1996, the results of its operations,
the changes in its net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
December 4, 1996
42
<PAGE> 97
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
LATIN Shares Value Percent of
AMERICA Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
Mexico Utilities--Communications 20,000 Telefonos de Mexico, S.A. de C.V.
(TELMEX) (ADR) (a) $ 756,200 $ 610,000 0.88%
Total Investments in Latin American
Securities 756,200 610,000 0.88
NORTH
AMERICA
United States Food/Beverage/ 20,531 ConAgra Inc. 653,326 1,023,984 1.48
Tobacco & Household
Metals & Mining 10,000 ++WHX Corp. 179,350 83,750 0.12
Retail Stores 20,000 Home Depot, Inc. 944,247 1,095,000 1.58
Total Investments in United States
Common Stocks 1,776,923 2,202,734 3.18
Convertible Preferred Stocks
Canada Oil & Gas Producers 25,000 Occidental Petroleum Corp., Pfd.,
Series A 1,371,600 1,606,250 2.32
Total Investments in Canadian
Convertible Preferred Stocks 1,371,600 1,606,250 2.32
United States Data Processing 20,000 UNISYS Corp., $3.75 Pfd., Series A 1,233,875 605,000 0.87
Insurance 25,000 American General Corp., Pfd. 1,306,729 1,306,250 1.89
25,000 St. Paul Companies, Inc., Pfd. 1,307,892 1,312,500 1.89
----------- ----------- -------
2,614,621 2,618,750 3.78
</TABLE>
43
<PAGE> 98
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
NORTH AMERICA Shares Value Percent of
(concluded) Industries Held Convertible Preferred Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
United States Metals & Mining 50,000 USX Corp., $3.25 Pfd. $ 2,413,750 $ 2,106,250 3.04%
(concluded) 35,500 WHX Corp., Pfd. 1,630,980 1,375,625 1.99
20,000 WHX Corp., Pfd., Series B 1,000,150 790,000 1.14
----------- ----------- -------
5,044,880 4,271,875 6.17
Real Estate 50,000 Merry Land & Investment Company,
Investment Trust Inc., Pfd. 1,261,637 1,312,500 1.89
Total Investments in United States
Convertible Preferred Stocks 10,155,013 8,808,125 12.71
Face
Amount Convertible Bonds
United Automobile Parts US$ 2,000,000 The Pep Boys--Manny, Moe & Jack,
States 4% due 9/01/1999 1,931,875 2,080,000 3.00
Building &
Construction 2,000,000 Masco Corp., 5.25% due 2/15/2012 1,765,500 1,930,000 2.79
Chemicals 1,400,000 Ashland Oil Inc., 6.75% due 7/01/2014 1,379,000 1,429,750 2.06
Computer Services 500,000 Cray Research, Inc., 6.125% due
2/01/2011 510,000 380,625 0.55
Industrial 2,000,000 Rouse Co., 5.75% due 7/23/2002 1,699,000 2,000,000 2.89
Insurance 2,000,000 Aegon N.V., 4.75% due 11/01/2004 2,420,250 3,640,000 5.25
Machine Diversified 1,500,000 Cooper Industries, Inc.,
7.05% due 1/01/2015 1,538,750 1,590,000 2.30
Metals & Mining 1,000,000 USX Corp., 7% due 6/15/2017 913,500 960,000 1.39
Natural Gas 3,200,000 Consolidated Natural Gas Co.,
7.25% due 12/15/2015 3,243,250 3,440,000 4.97
Oil & Related 2,000,000 Pennzoil Co., 4.75% due 10/01/2003 1,904,250 2,330,000 3.36
Pharmaceuticals 1,500,000 Alza Corp., 5% due 5/01/2006 1,503,750 1,438,125 2.08
Retail Stores 3,200,000 Home Depot, Inc., 3.25% due 10/01/2001 3,284,375 3,196,000 4.61
Transportation 1,200,000 Alaska Air Group, Inc.,
6.50% due 6/15/2005 1,247,250 1,360,500 1.96
Total Investments in United States
Convertible Bonds 23,340,750 25,775,000 37.21
Total Investments in
North American Securities 36,644,286 38,392,109 55.42
PACIFIC Shares
BASIN Held Common Stocks
Hong Kong Utilities--Electric 70,000 Shandong Huaneng Power Company Ltd.
(ADR) (a) 704,200 638,750 0.92
Total Investments in Hong Kong
Common Stocks 704,200 638,750 0.92
Japan Financial Services 10,000 Daiwa Securities Co., Ltd. 109,055 108,132 0.16
10,000 Nikko Securities Co., Ltd. 91,790 95,824 0.14
10,000 Yamaichi Securities Co., Ltd. 94,000 55,736 0.08
----------- ----------- -------
294,850 259,692 0.38
Machinery 20,000 Shimadzu Corp. 156,900 117,802 0.17
</TABLE>
44
<PAGE> 99
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Trading 50,000 Marubeni Corp. 241,883 231,648 0.33
Total Investments in Japanese
Common Stocks 693,633 609,142 0.88
Face
Amount Convertible Bonds
Hong Kong Food & Beverage US$ 2,000,000 Dairy Farms International Holdings Ltd.,
6.50% due 5/10/2049 1,977,000 1,355,000 1.95
Real Estate 2,500,000 Wharf Capital Ltd.,
5% due 7/15/2000 2,655,000 3,142,500 4.54
Total Investments in Hong Kong
Convertible Bonds 4,632,000 4,497,500 6.49
Japan Auto & Truck YEN 50,000,000 No. 2 Toyota Motor Corp., 1.20%
due 1/28/1998 572,731 611,429 0.88
Chemicals 100,000,000 No. 6 Sumitomo Bakelite Co., Ltd.,
1.20% due 9/29/2006 1,042,946 927,473 1.34
Electronics 40,000,000 No. 2 Kokusai Electric Co.,
1.30% due 9/30/2002 452,059 374,505 0.54
50,000,000 No. 5 Matsushita Electric Industrial Co.,
1.30% due 3/29/2002 513,387 511,209 0.74
37,000,000 No. 6 Sanyo Electric Co., Ltd.,
1.70% due 11/29/2002 391,721 340,888 0.49
50,000,000 No. 11 Sharp Corp., 1.50% due 9/30/1998 551,096 505,494 0.73
50,000,000 No. 2 Tokyo Electron Ltd., 0.90%
due 9/30/2003 572,581 442,198 0.64
----------- ----------- -------
2,480,844 2,174,294 3.14
Food & Beverage 100,000,000 No. 9 Asahi Breweries, Ltd., 0.95%
due 12/26/2002 1,114,675 915,165 1.32
50,000,000 No. 1 Sanyo Coca-Cola Bottling, Inc.,
0.90% due 6/30/2003 522,384 441,758 0.64
50,000,000 No. 3 Sapporo Breweries, Ltd.,
1.20% due 12/18/2009 525,379 441,319 0.64
----------- ----------- -------
2,162,438 1,798,242 2.60
Industrial 70,000,000 No. 3 Sony Corp., 1.40% due 9/30/2003 832,971 782,769 1.13
50,000,000 No. 5 Sony Corp., 0.15% due 3/30/2001 498,392 469,451 0.68
----------- ----------- -------
1,331,363 1,252,220 1.81
Leisure 50,000,000 No. 5 Canon Co., 1% due 12/20/2002 639,008 646,154 0.93
Machinery 100,000,000 No. 8 Matsushita Electric Works, Ltd.,
2.70% due 5/31/2002 1,228,409 1,054,945 1.52
25,000,000 No. 8 NEC Corp., 1.70% due 3/31/1999 315,788 280,220 0.41
30,000,000 No. 2 Nippondenso Co., Ltd., 1.20%
due 12/26/1997 337,449 337,582 0.49
----------- ----------- -------
1,881,646 1,672,747 2.42
Retail Stores 50,000,000 No. 1 Taiyo Company Ltd., 2.50%
due 2/28/2002 594,601 446,154 0.64
Transportation 50,000,000 No. 6 Keihan Electric Railway Co., Ltd.,
1% due 3/31/2003 539,009 404,396 0.58
50,000,000 No. 1 Nankai Electric Railway Co., Ltd.,
2.70% due 3/30/2001 593,306 463,736 0.67
50,000,000 No. 6 Yamato Transport Co., Ltd.,
1.70% due 9/30/2002 539,151 490,110 0.71
----------- ----------- -------
1,671,466 1,358,242 1.96
Total Investments in Japanese
Convertible Bonds 12,377,043 10,886,955 15.72
Total Investments in Pacific
Basin Securities 18,406,876 16,632,347 24.01
</TABLE>
45
<PAGE> 100
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<CAPTION>
WESTERN Shares Value Percent of
EUROPE Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
United Kingdom Business Services 71,944 ++Cordiant PLC (Ordinary) $ 170,504 $ 118,194 0.17%
Total Investments in United Kingdom
Common Stocks 170,504 118,194 0.17
Face
Amount Convertible Bonds
France Leisure Frf 4,200,000 Euro Disney SCA, 6.75% due 10/01/2001 686,298 854,575 1.23
Pharmaceuticals 7,000 Sanofi S.A., 4% due 1/01/2000 (Units) 498,434 703,042 1.02
Total Investments in French
Convertible Bonds 1,184,732 1,557,617 2.25
Italy Foreign Government US$ 1,500,000 Republic of Italy, 5% due 6/28/2001 1,526,250 1,500,000 2.16
Obligations
Total Investments in Italian
Convertible Bonds 1,526,250 1,500,000 2.16
United Kingdom Food & Pound 500,000 Allied-Lyons PLC, 6.75% due 7/07/2008 858,247 799,067 1.15
Beverage Sterling
US$ 1,500,000 Grand Metropolitan PLC,
6.50% due 1/31/2000 1,612,500 1,750,500 2.53
Pound 550,000 Northern Foods PLC, 6.75% due 8/08/2008 867,775 796,221 1.15
Sterling
Total Investments in United Kingdom
Convertible Bonds 3,338,522 3,345,788 4.83
Total Investments in Western
European Securities 6,220,008 6,521,599 9.41
Short-Term Securities
United States Commercial Paper* US$ 3,358,000 General Electric Capital Corp.,
5.56% due 11/01/1996 3,358,000 3,358,000 4.85
US Government US Treasury Bills:
Obligations* 500,000 4.84% due 11/14/1996 499,126 499,126 0.72
1,500,000 4.85% due 11/14/1996 1,497,373 1,497,373 2.16
1,393,000 4.84% due 1/02/1997 1,381,389 1,381,132 1.99
----------- ----------- -------
3,377,888 3,377,631 4.87
Total Investments in
Short-Term Securities 6,735,888 6,735,631 9.72
Total Investments $68,763,258 68,891,686 99.44
===========
Unrealized Appreciation on Forward Foreign Exchange Contracts** 62,673 0.09
Other Assets Less Liabilities 324,564 0.47
----------- -------
Net Assets $69,278,923 100.00%
=========== =======
<FN>
++Non-income producing security.
(a)American Depositary Receipts (ADR).
*Commercial Paper and certain US Government Obligations are traded on a
discount basis; the interest rates shown are the discount rates paid at the
time of purchase by the Fund.
**Forward foreign exchange contracts as of October 31, 1996 were as follows:
</FN>
<CAPTION>
Unrealized
Appreciation
Foreign Currency Sold Expiration Date (Note 1c)
<S> <C> <C>
YEN 300,000,000 December 1996 $62,673
Unrealized Appreciation on Forward Foreign
Exchange Contracts (US$ Commitment--$2,714,932) $62,673
=======
See Notes to Financial Statements.
</TABLE>
46
<PAGE> 101
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of October 31, 1996
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$68,763,258) (Note 1a) $68,891,686
Unrealized appreciation on forward foreign exchange contracts (Note 1c) 62,673
Cash 2,245
Receivables:
Interest $ 555,904
Capital shares sold 79,979
Dividends 7,089 642,972
-----------
Prepaid expenses (Note 1f) 80,879
-----------
Total assets 69,680,450
-----------
Liabilities: Payables:
Capital shares redeemed 160,746
Distributor (Note 2) 38,585
Investment adviser (Note 2) 38,508 237,839
-----------
Accrued expenses and other liabilities 163,693
-----------
Total liabilities 401,532
-----------
Net Assets: Net assets $69,278,923
===========
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000 shares authorized $ 168,358
Consist of: Class B Shares of Common Stock, $0.10 par value, 100,000,000 shares authorized 365,869
Class C Shares of Common Stock, $0.10 par value, 100,000,000 shares authorized 38,925
Class D Shares of Common Stock, $0.10 par value, 100,000,000 shares authorized 81,391
Paid-in capital in excess of par 66,516,350
Undistributed investment income--net 82,617
Undistributed realized capital gains on investments and foreign currency transactions--net 1,834,020
Unrealized appreciation on investments and foreign currency transactions--net 191,393
-----------
Net assets $69,278,923
===========
Net Asset Class A--Based on net assets of $17,741,239 and 1,683,579 shares outstanding $ 10.54
Value: ===========
Class B--Based on net assets of $38,830,004 and 3,658,695 shares outstanding $ 10.61
===========
Class C--Based on net assets of $4,122,419 and 389,247 shares outstanding $ 10.59
===========
Class D--Based on net assets of $8,585,261 and 813,909 shares outstanding $ 10.55
===========
See Notes to Financial Statements.
</TABLE>
47
<PAGE> 102
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended October 31, 1996
<S> <C> <C> <C>
Investment Interest and discount earned (net of $13,671 foreign withholding tax) $ 2,420,356
Income Dividends (net of $850 foreign withholding tax) 882,162
(Notes 1d & 1e): -----------
Total income 3,302,518
-----------
Expenses: Investment advisory fees (Note 2) $ 463,001
Account maintenance and distribution fees--Class B (Note 2) 436,795
Transfer agent fees--Class B (Note 2) 185,100
Printing and shareholder reports 116,876
Accounting services (Note 2) 79,047
Professional fees 72,610
Registration fees (Note 1f) 63,434
Transfer agent fees--Class A (Note 2) 61,964
Directors' fees and expenses 45,497
Account maintenance & distribution fees--Class C (Note 2) 37,775
Transfer agent fees--Class D (Note 2) 22,690
Custodian fees 18,882
Transfer agent fees--Class C (Note 2) 16,778
Account maintenance fees--Class D (Note 2) 16,646
Pricing fees 4,691
Other 4,830
-----------
Total expenses 1,646,616
-----------
Investment income--net 1,655,902
-----------
Realized & Realized gain from:
Unrealized Gain Investments--net 1,396,864
(Loss) on Foreign currency transactions--net 437,160 1,834,024
Investments & Change in unrealized appreciation/depreciation on: -----------
Foreign Currency Investments--net 2,709,718
Transactions--Net Foreign currency transactions--net (129,242) 2,580,476
(Notes 1b, 1c, ----------- -----------
1e & 3): Net realized and unrealized gain on investments and foreign currency transactions 4,414,500
-----------
Net Increase in Net Assets Resulting from Operations $ 6,070,402
===========
See Notes to Financial Statements.
</TABLE>
48
<PAGE> 103
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended,
October 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <C> <C> <C>
Operations: Investment income--net $ 1,655,902 $ 3,817,569
Realized gain on investments and foreign currency transactions--net 1,834,024 4,600,356
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net 2,580,476 (1,186,046)
----------- -----------
Net increase in net assets resulting from operations 6,070,402 7,231,879
----------- -----------
Dividends & Investment income--net:
Distributions Class A (694,324) (983,944)
to Shareholders Class B (1,473,613) (2,414,489)
(Note 1g): Class C (112,375) (162,116)
Class D (224,218) (132,498)
Realized gain on investments--net:
Class A (820,273) (133,107)
Class B (2,671,664) (832,533)
Class C (180,592) (20,618)
Class D (171,093) (14,017)
----------- -----------
Net decrease in net assets resulting from dividends and distributions
to shareholders (6,348,152) (4,693,322)
----------- -----------
Capital Share Net increase (decrease) in net assets derived from capital share transactions (20,834,705) 26,499,640
Transactions ----------- -----------
(Note 4):
Net Assets: Total increase (decrease) in net assets (21,112,455) 29,038,197
Beginning of year 90,391,378 61,353,181
----------- -----------
End of year* $69,278,923 $90,391,378
=========== ===========
<FN>
*Undistributed investment income--net $ 82,617 $ 931,245
=========== ===========
</FN>
See Notes to Financial Statements.
</TABLE>
49
<PAGE> 104
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have been derived Class A
from information provided in the financial statements. For the Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1996++++ 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 10.71 $ 10.75 $ 11.08 $ 9.79 $ 9.39
Operating -------- -------- -------- -------- -------
Performance: Investment income--net .32 .42 .33 .23 .21
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net .62 .11 (.27) 1.45 .68
-------- -------- -------- -------- -------
Total from investment operations .94 .53 .06 1.68 .89
-------- -------- -------- -------- -------
Less dividends and distributions:
Investment income--net (.48) (.46) (.30) (.23) (.25)
Realized gain on investments--net (.63) (.11) (.09) (.16) (.24)
-------- -------- -------- -------- -------
Total dividends and distributions (1.11) (.57) (.39) (.39) (.49)
-------- -------- -------- -------- -------
Net asset value, end of year $ 10.54 $ 10.71 $ 10.75 $ 11.08 $ 9.79
======== ======== ======== ======== =======
Total Investment Based on net asset value per share 9.34% 5.10% .61% 17.64% 10.00%
Return:** ======== ======== ======== ======== =======
Ratios to Average Expenses, net of reimbursement 1.57% 1.38% 1.66% 2.22% 2.47%
Net Assets: ======== ======== ======== ======== =======
Expenses 1.57% 1.38% 1.66% 2.22% 2.86%
======== ======== ======== ======== =======
Investment income--net 3.05% 4.03% 2.97% 2.36% 2.61%
======== ======== ======== ======== =======
Supplemental Net assets, end of year (in thousands) $ 17,741 $ 23,634 $ 7,850 $ 4,557 $ 2,283
Data: ======== ======== ======== ======== =======
Portfolio turnover 14.72% 101.12% 38.04% 26.02% 4.91%
======== ======== ======== ======== =======
Average commission rate paid++++++ $ .0679 -- -- -- --
======== ======== ======== ======== =======
<CAPTION>
The following per share data and ratios have been derived Class B
from information provided in the financial statements. For the Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1996++++ 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 10.77 $ 10.80 $ 11.13 $ 9.84 $ 9.44
Operating -------- -------- -------- -------- -------
Performance: Investment income--net .21 .37 .21 .13 .12
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net .62 .05 (.25) 1.46 .67
-------- -------- -------- -------- -------
Total from investment operations .83 .42 (.04) 1.59 .79
-------- -------- -------- -------- -------
Less dividends and distributions:
Investment income--net (.36) (.34) (.20) (.14) (.15)
Realized gain on investments--net (.63) (.11) (.09) (.16) (.24)
-------- -------- -------- -------- -------
Total dividends and distributions (.99) (.45) (.29) (.30) (.39)
-------- -------- -------- -------- -------
Net asset value, end of year $ 10.61 $ 10.77 $ 10.80 $ 11.13 $ 9.84
======== ======== ======== ======== =======
Total Investment Based on net asset value per share 8.13% 4.01% (.37%) 16.45% 8.77%
Return:** ======== ======== ======== ======== =======
Ratios to Average Expenses, net of reimbursement 2.64% 2.37% 2.69% 3.26% 3.49%
Net Assets: ======== ======== ======== ======== =======
</TABLE>
50
<PAGE> 105
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Expenses 2.64% 2.37% 2.69% 3.26% 3.96%
======== ======== ======== ======== =======
Investment income--net 1.98% 2.95% 1.95% 1.32% 1.53%
======== ======== ======== ======== =======
Supplemental Net assets, end of year (in thousands) $ 38,830 $ 58,660 $ 53,121 $ 29,831 $13,975
Data: ======== ======== ======== ======== =======
Portfolio turnover 14.72% 101.12% 38.04% 26.02% 4.91%
======== ======== ======== ======== =======
Average commission rate paid++++++ $ .0679 -- -- -- --
======== ======== ======== ======== =======
<CAPTION>
Class C Class D
For the For the
The following per share data and ratios Period Period
have been derived from information Oct. 21, Oct. 21,
provided in the financial statements. For the Year Ended 1994++ to For the Year Ended 1994++ to
October 31, Oct. 31, October 31, Oct. 31,
Increase (Decrease) in Net Asset Value: 1996++++ 1995 1994++++ 1996++++ 1995 1994++++
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.75 $ 10.81 $ 10.74 $ 10.72 $ 10.76 $ 10.69
Operating ------- -------- -------- -------- -------- -------
Performance: Investment income--net .21 .36 -- .31 .42 --
Realized and unrealized gain on investments
and foreign currency transactions--net .62 .05 .07 .61 .09 .07
------- -------- -------- -------- -------- -------
Total from investment operations .83 .41 .07 .92 .51 .07
------- -------- -------- -------- -------- -------
Less dividends and distributions:
Investment income--net (.36) (.36) -- (.46) (.44) --
Realized gain on investments--net (.63) (.11) -- (.63) (.11) --
------- -------- -------- -------- -------- -------
Total dividends and distributions (.99) (.47) -- (1.09) (.55) --
------- -------- -------- -------- -------- -------
Net asset value, end of period $ 10.59 $ 10.75 $ 10.81 $ 10.55 $ 10.72 $ 10.76
======= ======== ======== ======== ======== =======
Total Investment Based on net asset value per share 8.14% 3.89% .65%+++ 9.07% 4.87% .65%+++
Return:** ======= ======== ======== ======== ======== =======
Ratios to Average Expenses 2.65% 2.41% 5.64%* 1.77% 1.62% 5.13%*
Net Assets: ======= ======== ======== ======== ======== =======
Investment income (loss)--net 1.97% 2.99% (1.74%)* 2.85% 3.79% (1.24%)*
======= ======== ======== ======== ======== =======
Supplemental Net assets, end of period (in thousands) $ 4,123 $ 4,598 $ 203 $ 8,585 $ 3,499 $ 179
Data: ======= ======== ======== ======== ======== =======
Portfolio turnover 14.72% 101.12% 38.04% 14.72% 101.12% 38.04%
======= ======== ======== ======== ======== =======
Average commission rate paid++++++ $ .0679 -- -- $ .0679 -- --
======= ======== ======== ======== ======== =======
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
+++Aggregate total investment return.
++Commencement of Operations.
++++Based on average shares outstanding during the period.
++++++For fiscal years beginning on or after September 1, 1995, the Fund is required
to disclose its average commission rate per share for purchases and sales of
equity securities. The "Average Commission Rate Paid" includes commissions
paid in foreign currencies, which have been converted into US dollars using
the prevailing exchange rate on the date of the transaction. Such conversions
may materially affect the rate shown.
</FN>
See Notes to Financial Statements.
</TABLE>
51
<PAGE> 106
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Global Convertible Fund, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 as a non-diversified,
open-end management investment company. The Fund offers four
classes of shares under the Merrill Lynch Select Pricing SM System.
Shares of Class A and Class D are sold with a front-end sales charge.
Shares of Class B and Class C may be subject to a contingent deferred
sales charge. All classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions,
except that Class B, Class C and Class D Shares bear certain
expenses related to the account maintenance of such shares, and
Class B and Class C Shares also bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights
with respect to matters relating to its account maintenance and
distribution expenditures. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on
the day the securities are being valued or, lacking any sales, at the
last available bid price. Securities traded in the over-the-counter
market are valued at the last available bid price prior to the time of
valuation. In cases where securities are traded on more than one
exchange, the securities are valued on the exchange designated
by or under the authority of the Board of Directors as the primary
market. Securities which are traded both in the over-the-counter
market and on a stock exchange are valued according to the broad-
est and most representative market. Options written are valued
at the last sale price in the case of exchange-traded options or,
in the case of options traded in the over-the-counter market, the
last asked price. Options purchased are valued at the last sale price
in the case of exchange-traded options or, in the case of options
traded in the over-the-counter market, the last bid price. Short-
term securities are valued at amortized cost, which approximates
market value. Other investments, including futures contracts and
related options, are stated at market value. Securities and assets
for which market value quotations are not available are valued at
their fair value as determined in good faith by or under the direction
of the Fund's Board of Directors.
(b) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing
when recognized. Assets and liabilities denominated in foreign
currencies are valued at the exchange rate at the end of the period.
Foreign currency transactions are the result of settling (realized)
or valuing (unrealized) assets or liabilities expressed in foreign
currencies into US dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on
investments.
(c) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the equity, debt and currency
markets. Losses may arise due to changes in the value of the con-
tract or if the counterparty does not perform under the contract.
* Forward foreign exchange contracts--The Fund is authorized to
enter into forward foreign exchange contracts as a hedge against
either specific transactions or portfolio positions. Such contracts
are not entered on the Fund's records. However, the effect on opera-
tions is recorded from the date the Fund enters into such contracts.
Premium or discount is amortized over the life of the contracts.
* Foreign currency options and futures--The Fund may also purchase
or sell listed or over-the-counter foreign currency options, foreign
currency futures and related options on foreign currency futures as
a short or long hedge against possible variations in foreign exchange
rates. Such transactions may be effected with respect to hedges on
non-US dollar denominated securities owned by the Fund, sold by
the Fund but not yet delivered, or committed or anticipated to be
purchased by the Fund.
* Financial futures contracts--The Fund may purchase or sell
interest rate futures contracts and options on such futures contracts
for the purpose of hedging the market risk on existing securities
or the intended purchase of securities. Futures contracts are con-
tracts for delayed delivery of securities at a specific future date and
at a specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required
by the exchange on which the transaction is effected. Pursuant
to the contract, the Fund agrees to receive from or pay to the broker
an amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin
and are recorded by the Fund as unrealized gains or losses. When
the contract is closed, the Fund records a realized gain or loss
equal to the difference between the value of the contract at the
time it was opened and the value at the time it was closed.
* Options--The Fund is authorized to write covered call options and
purchase put options. When the Fund writes an option, an amount
equal to the premium received by the Fund is reflected as an asset
and an equivalent liability. The amount of the liability is subsequently
52
<PAGE> 107
marked to market to reflect the current market value of the option
written. When a security is purchased or sold through an exercise of
an option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted
from (or added to) the proceeds of the security sold. When an
option expires (or the Fund enters into a closing transaction), the
Fund realizes a gain or loss on the option to the extent of the
premiums received or paid (or gain or loss to the extent the cost
of the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing
investments.
(d) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income
tax provision is required. Under the applicable foreign tax law, a
withholding tax may be imposed on interest, dividends, and capital
gains at various rates.
(e) Security transactions and investment income--Security trans-
actions are recorded on the dates the transactions are entered into
(the trade dates). Dividend income is recorded on the ex-dividend
date, except that if the ex-dividend date has passed, certain divi-
dends from foreign securities are recorded as soon as the Fund is
informed of the ex-dividend date. Interest income (including amor-
tization of discount) is recognized on the accrual basis. Realized
gains and losses on security transactions are determined on the
identified cost basis.
(f) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.
(g) Dividends and distributions--Dividends and distributions paid
by the Fund are recorded on the ex-dividend dates.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). The general
partner of MLAM is Princeton Services, Inc. ("PSI"), an indirect
wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."),
which is the limited partner. The Fund has also entered into a
Distribution Agreement and Distribution Plans with Merrill Lynch
Funds Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio
and provides the necessary personnel, facilities, equipment and
certain other services necessary to the operations of the Fund. For
such services, the Fund pays a monthly fee at the annual rate of 0.65%
of the average daily value of the Fund's net assets.
Pursuant to the distribution plans (the "Distribution Plans") adopted
by the Fund in accordance with Rule 12b-1 under the Investment
Company Act of 1940, the Fund pays the Distributor ongoing account
maintenance and distribution fees. The fees are accrued daily and
paid monthly at annual rates based upon the average daily net
assets of the shares as follows:
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to
the Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance
services to Class B, Class C and Class D shareholders. The ongoing
distribution fee compensates the Distributor and MLPF&S for
providing shareholder and distribution-related services to Class B
and Class C shareholders.
For the year ended October 31, 1996, MLFD earned underwriting
discounts and MLPF&S earned dealer concessions on sales of the
Fund's Class A and Class D Shares as follows:
MLFD MLPF&S
Class A $ 117 $ 1,531
Class D $ 1,818 $23,376
For the year ended October 31, 1996, MLPF&S received contingent
deferred sales charges of $110,201 and $2,756 relating to transactions
in Class B and Class C Shares, respectively. Furthermore, MLPF&S
received contingent deferred sales charges of $497 relating to
transactions subject to front-end sales charges waivers in Class D
Shares.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, PSI, MLPF&S, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended October 31, 1996 were $9,589,917 and
$32,752,174, respectively.
53
<PAGE> 108
NOTES TO FINANCIAL STATEMENTS (concluded)
Net realized and unrealized gains (losses) as of October 31, 1996 were
as follows:
Realized Unrealized
Gains (Losses) Gains (Losses)
Long-term investments $ 1,397,590 $ 128,685
Short-term investments (726) (257)
Foreign currency transactions (26,974) 292
Forward foreign exchange contracts 464,134 62,673
------------ -------------
Total $ 1,834,024 $ 191,393
============ =============
As of October 31, 1996, net unrealized appreciation for Federal
income tax purposes aggregated $128,428, of which $4,577,553
related to appreciated securities and $4,449,125 related to depreci-
ated securities. At October 31, 1996, the aggregate cost of invest-
ments for Federal income tax purposes was $68,763,258.
4. Capital Share Transactions:
Net increase (decrease) in net assets derived from capital share
transactions were $(20,834,705) and $26,499,640 for the years ended
October 31, 1996 and October 31, 1995, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Year Dollar
Ended October 31, 1996 Shares Amount
Shares sold 685,844 $ 7,246,703
Shares issued to shareholders in
reinvestment of dividends
and distributions 135,086 1,380,166
------------ -------------
Total issued 820,930 8,626,869
Shares redeemed (1,343,548) (14,564,322)
------------ -------------
Net decrease (522,618) $ (5,937,453)
============ =============
Class A Shares for the Year Dollar
Ended October 31, 1995 Shares Amount
Shares sold 4,429,386 $ 47,904,765
Shares issued to shareholders in
reinvestment of dividends
and distributions 91,827 983,674
------------ -------------
Total issued 4,521,213 48,888,439
Shares redeemed (3,044,979) (33,329,139)
------------ -------------
Net increase 1,476,234 $ 15,559,300
============ =============
Class B Shares for the Year Dollar
Ended October 31, 1996 Shares Amount
Shares sold 958,130 $ 10,188,233
Shares issued to shareholders in
reinvestment of dividends
and distributions 295,014 3,025,724
------------ -------------
Total issued 1,253,144 13,213,957
Automatic conversion of shares (559,618) (5,864,176)
Shares redeemed (2,481,068) (26,810,294)
------------ -------------
Net decrease (1,787,542) $ (19,460,513)
============ =============
Class B Shares for the Year Dollar
Ended October 31, 1995 Shares Amount
Shares sold 7,306,514 $ 77,802,488
Shares issued to shareholders in
reinvestment of dividends
and distributions 244,737 2,595,029
------------ -------------
Total issued 7,551,251 80,397,517
Automatic conversion of shares (159,520) (1,700,100)
Shares redeemed (6,861,967) (75,080,334)
------------ -------------
Net increase 529,764 $ 3,617,083
============ =============
54
<PAGE> 109
Class C Shares for the Year Dollar
Ended October 31, 1996 Shares Amount
Shares sold 234,669 $ 2,490,027
Shares issued to shareholders in
reinvestment of dividends
and distributions 21,832 223,912
------------ -------------
Total issued 256,501 2,713,939
Shares redeemed (294,992) (3,188,951)
------------ -------------
Net decrease (38,491) $ (475,012)
============ =============
Class C Shares for the Year Dollar
Ended October 31, 1995 Shares Amount
Shares sold 1,012,755 $ 10,768,784
Shares issued to shareholders in
reinvestment of dividends
and distributions 13,905 149,071
------------ -------------
Total issued 1,026,660 10,917,855
Shares redeemed (617,701) (6,780,755)
------------ -------------
Net increase 408,959 $ 4,137,100
============ =============
Class D Shares for the Year Dollar
Ended October 31, 1996 Shares Amount
Shares sold 225,183 $ 2,423,111
Automatic conversion of shares 562,293 5,864,176
Shares issued to shareholders in
reinvestment of dividends
and distributions 27,215 280,369
------------ -------------
Total issued 814,691 8,567,656
Shares redeemed (327,147) (3,529,383)
------------ -------------
Net increase 487,544 $ 5,038,273
============ =============
Class D Shares for the Year Dollar
Ended October 31, 1995 Shares Amount
Shares sold 593,147 $ 6,348,782
Automatic conversion of shares 160,026 1,700,100
Shares issued to shareholders in
reinvestment of dividends
and distributions 10,076 107,975
------------ -------------
Total issued 763,249 8,156,857
Shares redeemed (453,469) (4,970,700)
------------ -------------
Net increase 309,780 $ 3,186,157
============ =============
55
<PAGE> 110
- ------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies... 2
Portfolio Strategies Involving
Options and Futures............ 2
Other Investment Policies and
Practices...................... 5
Investment Restrictions........... 6
Management of the Fund.............. 8
Directors and Officers............ 8
Compensation of Directors......... 9
Management and Advisory
Arrangements................... 10
Purchase of Shares.................. 11
Redemption of Shares................ 18
Portfolio Transactions and
Brokerage......................... 19
Determination of Net Asset Value.... 21
Shareholder Services................ 22
Dividends, Distributions and
Taxes............................. 26
Performance Data.................... 30
General Information................. 32
Description of Shares............. 32
Computation of Offering Price Per
Share.......................... 33
Independent Auditors.............. 33
Custodian......................... 34
Transfer Agent.................... 34
Legal Counsel..................... 34
Reports to Shareholders........... 34
Additional Information............ 34
Appendix............................ 35
Independent Auditors' Report........ 42
Financial Statements................ 43
Code #10666-0297
</TABLE>
[Merrill Lynch Logo]
MERRILL LYNCH
GLOBAL CONVERTIBLE
FUND, INC.
STATEMENT OF [Merrill Lynch Compass]
ADDITIONAL
INFORMATION
February 24, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE> 111
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission File due to ASCII-incompatibility and
cross-references this material to the location of each occurrence in the text.
<TABLE>
<CAPTION>
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
<S> <C>
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull.
</TABLE>
<PAGE> 112
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS
Contained in Part A:
Financial Highlights for each of the years in the eight-year period
ended October 31, 1996, and for the period February 26, 1988 (commencement
of operations) to October 31, 1988.
Contained in Part B:
Schedule of Investments as of October 31, 1996.
Statement of Assets and Liabilities as of October 31, 1996.
Statement of Operations for the year ended October 31, 1996.
Statements of Changes in Net Assets for each of the years in the
two-year period ended October 31, 1996.
Financial Highlights for each of the years in the five-year period
ended October 31, 1996.
(B) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------------- ----------------------------------------------------------------------------------
<S> <C> <C>
1 (a) -- Articles of Incorporation of the Registrant.(e)
(b) -- Amendment to Articles of Incorporation, dated November 16, 1987.(e)
(c) -- Amendment to Articles of Incorporation, dated October 19, 1994.(e)
(d) -- Articles Supplementary to Articles of Incorporation, dated October 19, 1994.(e)
2 -- By-Laws of the Registrant.(a)
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.(b)
5 (a) -- Management Agreement between the Registrant and Merrill Lynch Asset Management,
L.P.(a)
(b) -- Supplement to Management Agreement between the Registrant and Merrill Lynch Asset
Management, L.P.(d)
(c) -- Form of Sub-Advisory Agreement between Merrill Lynch Asset Management, L.P. and
Merrill Lynch Asset Management U.K. Limited.
6 (a) -- Form of Revised Class A Shares Distribution Agreement between the Registrant and
Merrill Lynch Funds Distributor, Inc. (including Form of Selected Dealers
Agreement).(d)
(b) -- Class B Distribution Agreement between the Registrant and Merrill Lynch Funds
Distributor, Inc. (including Selected Dealers Agreement).(a)
(c) -- Form of Class C Shares Distribution Agreement between the Registrant and Merrill
Lynch Funds Distributor, Inc. (including Form of Selected Dealers Agreement).(d)
(d) -- Form of Class D Shares Distribution Agreement between the Registrant and Merrill
Lynch Funds Distributor, Inc. (including Form of Selected Dealers Agreement).(d)
(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.(c)
7 -- None.
8 -- Custody Agreement between Registrant and State Street Bank and Trust Company.(a)
9 (a) -- Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement between Registrant and Merrill Lynch Financial Data Services, Inc.(a)
(b) -- Agreement between Merrill Lynch & Co., Inc. and the Registrant relating to use by
Registrant of Merrill Lynch name.(a)
10 -- Opinion of Brown & Wood LLP, counsel for the Registrant.
11 -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
12 -- None.
</TABLE>
C-1
<PAGE> 113
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------------- ----------------------------------------------------------------------------------
<S> <C> <C>
13 -- Certificate of Merrill Lynch Asset Management, L.P.(a)
14 -- None.
15 (a) -- Amended and Restated Class B Distribution Plan of the Registrant and Amended and
Restated Class B Shares Distribution Plan Sub-Agreement.(c)
(b) -- Form of Class C Shares Distribution Plan and Class C Shares Distribution Plan
Sub-Agreement of the Registrant.(d)
(c) -- Form of Class D Shares Distribution Plan and Class D Shares Distribution Plan
Sub-Agreement of the Registrant.(d)
16 (a) -- Schedule for computation of each performance quotation for Class A shares provided
in the Registration Statement in response to Item 22.(a)
(b) -- Schedule for computation of each performance quotation for Class B shares provided
in the Registration Statement in response to Item 22.(a)
(c) -- Schedule for computation of each performance quotation for Class C shares provided
in the Registration Statement in response to Item 22.(e)
(d) -- Schedule for computation of each performance quotation for Class D shares provided
in the Registration Statement in response to Item 22.(e)
17 (a) -- Financial Data Schedule for Class A shares.
(b) -- Financial Data Schedule for Class B shares.
(c) -- Financial Data Schedule for Class C shares.
(d) -- Financial Data Schedule for Class D shares.
18 -- Merrill Lynch Select PricingSM System Plan Pursuant to Rule 18f-3.(f)
</TABLE>
- ---------------
(a) Filed on February 27, 1996 as an Exhibit to Post-Effective Amendment No. 11
to Registrant's Registration Statement on Form N-1A under the Securities Act
of 1933, as amended (the "1933 Act"), relating to shares of the Fund (File
No. 33-18720) (the "Registration Statement").
(b) Reference is made to Article V, Article VI (Section 3), Article VII, Article
VIII and Article X of the Registrant's Articles of Incorporation, as
amended, filed as Exhibit 1 with Post-Effective Amendment No. 10 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, filed as Exhibit 2 with Post-Effective Amendment No.
11 to the Registration Statement.
(c) 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.
(d) 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.
(e) Filed on February 24, 1995 as an Exhibit to Post-Effective Amendment No. 10
to the Registrant's Registration Statement under the Securities Act of 1933.
(f) Incorporated by reference to Post-Effective Amendment No. 13 to the
Registration Statement on Form N-1A of Merrill Lynch New York Municipal Bond
Fund of Merrill Lynch Multi-State Municipal Series Trust filed on January
25, 1996.
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.
C-2
<PAGE> 114
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
<CAPTION>
NUMBER OF
RECORD HOLDERS
TITLE OF CLASS AT JANUARY 31, 1997
- ------------------------------------------------------------------------ ------------------------
<S> <C>
Class A shares of Common Stock, par value $0.10 per share............... 4,928
Class B shares of Common Stock, par value $0.10 per share............... 6,249
Class C shares of Common Stock, par value $0.10 per share............... 1,118
Class D shares of Common Stock, par value $0.10 per share............... 1,152
</TABLE>
- ---------------
* The number of holders includes holders of record plus beneficial owners, whose
shares are held of record by Merrill Lynch, Pierce, Fenner & Smith
Incorporated.
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 1933 Act, against certain types of civil
liabilities arising in connection with the Registration Statement or Prospectus
and Statement of Additional Information.
Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to Directors, officers and controlling persons of the Registrant
and the principal underwriter pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the 1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Director, officer, or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Director, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF MANAGER
Merrill Lynch Asset Management, L.P. ("MLAM" or the "Manager") acts as the
investment adviser for the following open-end companies: Merrill Lynch
Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income Fund, Inc.,
Merrill Lynch Asset Builder Program, Inc., Merrill Lynch Asset Growth Fund,
Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Capital Fund, Inc.,
Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund,
Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc.,
Merrill Lynch Fund For Tomorrow, Inc., Merrill Lynch Global Allocation
C-3
<PAGE> 115
Fund, Inc., Merrill Lynch Global Bond Fund for Investment and Retirement,
Merrill Lynch Global Convertible Fund, Inc., Merrill Lynch Global Holdings,
Inc., Merrill Lynch Global Resources Trust, Merrill Lynch Global SmallCap Fund,
Inc., Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Global Value Fund,
Inc., Merrill Lynch Growth Fund, Inc., Merrill Lynch Healthcare Fund, Inc.,
Merrill Lynch Intermediate Government Bond Fund, Merrill Lynch International
Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle
East/Africa Fund, Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch
Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement
Series Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global
Income Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch
Technology Fund, Inc., Merrill Lynch U.S.A. Government Reserves, Merrill Lynch
U.S. Treasury Money Fund, Merrill Lynch Utility Income Fund, Inc., and Merrill
Lynch Variable Series Funds, Inc. and the following closed-end investment
companies: Convertible Holdings, Inc., Merrill Lynch High Income Municipal Bond
Fund, Inc., Merrill Lynch Senior Floating Rate Fund, Inc. and Merrill Lynch
Municipal Strategy Fund.
Fund Asset Management, L.P. ("FAM"), an affiliate of the Manager, acts as
the investment adviser for the following open-end investment companies: CBA
Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State
Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate
Fund Accumulation Program, Inc., Financial Institutions Series Trust, Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Emerging Tigers Fund,
Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for
Institutions Series, Merrill Lynch Multi-State Limited Maturity Municipal Series
Trust, Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch Municipal
Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value
Fund, Inc., Merrill Lynch World Income Fund, Inc. and The Municipal Fund
Accumulation Program, Inc.; and the following closed-end investment companies:
Apex Municipal Fund, Inc., Corporate High Yield Fund, Inc., Corporate High Yield
Fund II, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities Fund
2000, Inc., Merrill Lynch Municipal Strategy Fund, Inc., MuniAssets Fund, Inc.,
MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest
Fund II, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc.,
MuniVest New Jersey Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield
Arizona Fund, Inc., MuniYield California Fund, Inc., MuniYield California
Insured Fund, Inc., MuniYield California Insured Fund II, Inc., MuniYield
Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield
Insured Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan Insured
Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured Fund,
Inc., MuniYield New York Insured Fund, Inc., MuniYield New York Insured Fund II,
Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield
Quality Fund II, Inc., Senior High Income Portfolio, Inc., Taurus MuniCalifornia
Holdings, Inc., Taurus MuniNewYork Holdings, Inc. and Worldwide DollarVest Fund,
Inc.
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
November 1, 1994 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 first two paragraphs of this Item and
Messrs. Giordano, Harvey, Kirstein and Monagle 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;
Limited Partner of FAM
Princeton Services............. General Partner General Partner of FAM
</TABLE>
C-4
<PAGE> 116
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------------- ------------------------- -----------------------------------
<S> <C> <C>
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 MLFDS; President of
Princeton Administrators, L.P.
Vincent R. Giordano............ Senior Vice President Senior Vice President of FAM;
Senior Vice President of Princeton
Services
Elizabeth Griffin.............. Senior Vice President Senior Vice President of FAM
Norman R. Harvey............... Senior Vice President Senior Vice President of FAM;
Senior Vice President of Princeton
Services
Michael J. Hennewinkel......... Senior Vice President Senior Vice President of MLAM;
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
Joseph T. Monagle, Jr.......... Senior Vice President Senior Vice President of FAM;
Senior Vice President of Princeton
Services
Michael L. Quinn............... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services; Managing
Director and First Vice President
of Merrill Lynch from 1989 to
1995
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 FAM;
Senior Vice President of Princeton
Services
</TABLE>
(b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as
sub-adviser for the following registered investment companies: Corporate High
Yield Fund, Inc., Corporate High Yield Fund II,
C-5
<PAGE> 117
Inc., Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000,
Inc., Merrill Lynch Americas Income Fund Inc., Merrill Lynch Asset Builder
Program, Inc., Merrill Lynch Basic Value Fund, Inc., Merrill Lynch Capital Fund,
Inc., Merrill Lynch Developing Capital Markets, Inc., Merrill Lynch Dragon Fund,
Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch EuroFund, Merrill
Lynch Fundamental Growth Fund Inc., Merrill Lynch Global Allocation Fund, Inc.,
Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill Lynch
Global Convertible Fund, Inc., Merrill Lynch Global Holdings, Inc., Merrill
Lynch Global Resources Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill
Lynch Global Value Fund, Inc., Merrill Lynch Healthcare Fund, Inc., Merrill
Lynch International Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill
Lynch Middle East/Africa Fund, Inc., Merrill Lynch Pacific Fund, Inc., Merrill
Lynch Phoenix Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc.,
Merrill Lynch Special Value Fund, Inc., Merrill Lynch Technology Fund, Inc.,
Merrill Lynch World Income Fund, Inc., and Worldwide DollarVest Fund, Inc. The
address of each of these investment companies is P.O. Box 9011, Princeton, New
Jersey 08543-9011. The address of MLAM U.K. is Milton Gate, 1 Moor Lane, London
EC2Y 9HA, England.
Set forth below is a list of each executive officer and director of MLAM
U.K. indicating each business, profession, vocation or employment of a
substantial nature in which each such person has been engaged since November 1,
1994, for his or her own account or in the capacity of director, officer,
partner or trustee. In addition, Messrs. Zeikel, Albert, Bascand, Glenn, Richard
and Yardley are officers of one or more of the registered investment companies
listed in the first two paragraphs of this Item 28.
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
POSITION(S) WITH PROFESSION,
NAME MLAM U.K. VOCATION OR EMPLOYMENT
- ---------------------------- ------------------------- --------------------------------------
<S> <C> <C>
Arthur Zeikel............... Director and Chairman President of the Manager and FAM;
President and Director of Princeton
Services, Director of MLFD;
Executive Vice President of ML&Co.
Alan J. Albert.............. Senior Managing Director Vice President of the Manager
Terry K. Glenn.............. Director Executive Vice President of the
Manager and FAM; Executive Vice
President and Director of Princeton
Service; President and Director of
MLFD; Director of MLFDS; President
of Princeton Administrators, L.P.
Adrian Holmes............... Managing Director Director of Merrill Lynch Global Asset
Management
Andrew John Bascand......... Director Director of Merrill Lynch Global Asset
Management
Edward Gobora............... Director Director of Merrill Lynch Global Asset
Management
Richard Kilbride............ Director Managing Director of Merrill Lynch
Global Asset Management
Robert M. Ryan.............. Director Vice President, Institutional
Marketing, Debt and Equity Group,
Merrill Lynch Capital Markets from
1989 to 1994
Gerald M. Richard........... Senior Vice President Senior Vice President and Treasurer of
the Manager and FAM; Senior Vice
President and Treasurer of Princeton
Services; Vice President and
Treasurer of MLFD
Stephen J. Yardley.......... Director Director of Merrill Lynch Global Asset
Management
</TABLE>
C-6
<PAGE> 118
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
POSITION(S) WITH PROFESSION,
NAME MLAM U.K. VOCATION OR EMPLOYMENT
- ---------------------------- ------------------------- --------------------------------------
<S> <C> <C>
Carol Ann Langham........... Company Secretary None
Debra Anne Searle........... Assistant Company None
Secretary
</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 open-end investment companies referred
to in the first two paragraphs of Item 28 except CBA Money Fund, CMA Government
Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series Trust, CMA
Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund Accumulation Program,
Inc., MuniAssets Fund, Inc. and The Municipal Fund Accumulation Program, Inc.,
and MLFD also acts as the principal underwriter for the following closed-end
investment companies: Merrill Lynch High Income Municipal Bond Fund, Inc.,
Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch Senior Floating
Rate Fund, Inc.
(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. Aldrich,
Brady, Breen, Crook, Fatseas, and Wasel is One Financial Center, Boston,
Massachusetts 02111-2646.
<TABLE>
<CAPTION>
(3)
(2) POSITION(S) AND
(1) POSITIONS AND OFFICES OFFICE(S)
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
Michael G. Clark........................... Vice President None
Mark A. DeSario............................ Vice President None
James T. Fatseas........................... Vice President None
Debra W. Landsman-Yaros.................... Vice President None
Michelle T. Lau............................ Vice President None
Gerald M. Richard.......................... Vice President and Treasurer
Treasurer
Salvatore Venezia.......................... Vice President None
William Wasel.............................. Vice President None
Robert Harris.............................. Secretary None
</TABLE>
(c) Not Applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the rules
thereunder will be maintained at the offices of the Registrant, 800 Scudders
Mill Road, Plainsboro, New Jersey 08536, and Merrill Lynch Financial Data
Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
ITEM 31. MANAGEMENT SERVICES
Other than as set forth under the caption "Management of the
Fund -- Management and Advisory Arrangements" in the Prospectus constituting
Part A of the Registration Statement and under "Management
C-7
<PAGE> 119
of the Fund -- Management and Advisory Arrangements" in the Statement of
Additional Information constituting Part B of the Registration Statement, the
Registrant is not a party to any management-related service contract.
ITEM 32. UNDERTAKINGS
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish each person to whom a Prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders,
upon request and without charge.
C-8
<PAGE> 120
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Amendment to its 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 21st day of February, 1997.
MERRILL LYNCH GLOBAL CONVERTIBLE
FUND, INC. (Registrant)
By: /s/ GERALD M. RICHARD
------------------------------------
(Gerald M. Richard, Treasurer)
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>
ARTHUR ZEIKEL* President and Director (Principal
- ----------------------------------- Executive Officer)
(Arthur Zeikel)
/s/ GERALD M. RICHARD Treasurer (Principal Financial and February 21, 1997
- ----------------------------------- Accounting Officer)
(Gerald M. Richard)
JAMES H. BODURTHA* Director
- -----------------------------------
(James H. Bodurtha)
HERBERT I. LONDON* Director
- -----------------------------------
(Herbert I. London)
ROBERT R. MARTIN* Director
- -----------------------------------
(Robert R. Martin)
JOSEPH L. MAY* Director
- -----------------------------------
(Joseph L. May)
ANDRE F. PEROLD* Director
- -----------------------------------
(Andre F. Perold)
*By: /s/ GERALD M. RICHARD February 21, 1997
------------------------------
(Gerald M. Richard,
Attorney-in-Fact)
</TABLE>
C-9
<PAGE> 121
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
---- ----------------------------------------------------------------------------
<S> <C> <C>
5 (c) -- Form of Sub-Advisory Agreement between Merrill Lynch Asset Management, L.P.
and Merrill Lynch Asset Management U.K. Limited.
10 -- Opinion of Brown & Wood LLP, Counsel for the Registrant.
11 -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
17 (a) -- Financial Data Schedule for Class A shares.
(b) -- Financial Data Schedule for Class B shares.
(c) -- Financial Data Schedule for Class C shares.
(d) -- Financial Data Schedule for Class D shares.
</TABLE>
<PAGE> 1
Exhibit 5(c)
SUB-ADVISORY AGREEMENT
AGREEMENT made as of the day of , 199 , by and between
MERRILL LYNCH ASSET MANAGEMENT, L.P., a Delaware limited partnership
(hereinafter referred to as "MLAM"), and MERRILL LYNCH ASSET MANAGEMENT U.K.
LIMITED, a corporation organized under the laws of England and Wales
(hereinafter referred to as "MLAM U.K.").
W I T N E S S E T H:
WHEREAS, MERRILL LYNCH GLOBAL CONVERTIBLE, INC. (the "Fund") is a
Maryland corporation engaged in business as a diversified, open-end investment
company registered under the Investment Company Act of 1940, as amended
(hereinafter referred to as the "Investment Company Act"); and
WHEREAS, MLAM and MLAM U.K. are engaged principally in rendering
investment advisory services and are registered as investment advisers under the
Investment Advisers Act of 1940, as amended; and
WHEREAS, MLAM U.K. is a member of the Investment Management Regulatory
Organization, a self-regulating organization recognized under the Financial
Services Act of 1986 of the United Kingdom (hereinafter referred to as "IMRO"),
and the conduct of its investment business is regulated by IMRO; and
WHEREAS, MLAM has entered into a management agreement (the "Management
Agreement") dated January 18, 1988, pursuant to which MLAM provides management
and investment and advisory services to the Fund; and
<PAGE> 2
WHEREAS, MLAM U.K. is willing to provide investment advisory services
to MLAM in connection with the Fund's operations on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, MLAM U.K. and MLAM hereby agree as follows:
ARTICLE I
Duties of MLAM U.K.
MLAM hereby employs MLAM U.K. to act as investment adviser to MLAM and
to furnish, or arrange for affiliates to furnish, the investment advisory
services described below, subject to the broad supervision of MLAM and the Fund,
for the period and on the terms and conditions set forth in this Agreement. MLAM
U.K. hereby accepts such employment and agrees during such period, at its own
expense, to render, or arrange for the rendering of, such services and to assume
the obligations herein set forth for the compensation provided for herein. MLAM
and its affiliates shall for all purposes herein be deemed a Professional
Investor as defined under the rules promulgated by IMRO (hereinafter referred to
as the "IMRO Rules"). MLAM U.K. and its affiliates shall for all purposes herein
be deemed to be an independent contractor and shall, unless otherwise expressly
provided or authorized, have no authority to act for or represent the Fund in
any way or otherwise be deemed an agent of the Fund.
MLAM U.K. shall have the right to make unsolicited calls on
MLAM and shall provide MLAM with such investment research, advice
2
<PAGE> 3
and supervision as the latter may from time to time consider necessary for the
proper supervision of the assets of the Fund; shall furnish continuously an
investment program for the Fund and shall make recommendations from time to time
as to which securities shall be purchased, sold or exchanged and what portion of
the assets of the Fund shall be held in the various securities in which the Fund
invests, options, futures, options on futures or cash; all of the foregoing
subject always to the restrictions of the Articles of Incorporation and By-Laws
of the Fund, as they may be amended and/or restated from time to time, the
provisions of the Investment Company Act and the statements relating to the
Fund's investment objective, investment policies and investment restrictions as
the same are set forth in the currently effective prospectus and statement of
additional information relating to the shares of the Fund under the Securities
Act of 1933, as amended (the "Prospectus" and "Statement of Additional
Information", respectively). MLAM U.K. shall make recommendations and effect
transactions with respect to foreign currency matters, including foreign
exchange contracts, foreign currency options, foreign currency futures and
related options on foreign currency futures and forward foreign currency
transactions. MLAM U.K. shall also make recommendations or take action as to the
manner in which voting rights, rights to consent to corporate action and any
other rights pertaining to the portfolio securities of the Fund shall be
exercised.
3
<PAGE> 4
MLAM U.K. will not hold money on behalf of MLAM or the Fund, nor will
MLAM U.K. be the registered holder of the registered investments of MLAM or the
Fund or be the custodian of documents or other evidence of title.
ARTICLE II
Allocation of Charges and Expenses
MLAM U.K. assumes and shall pay for maintaining the staff and personnel
necessary to perform its obligations under this Agreement and shall at its own
expense provide the office space, equipment and facilities which it is obligated
to provide under Article I hereof and shall pay all compensation of officers of
the Fund and all Directors of the Fund who are affiliated persons of MLAM U.K.
ARTICLE III
Compensation of MLAM U.K.
For the services rendered, the facilities furnished and expenses
assumed by MLAM U.K., MLAM shall pay to MLAM U.K. a fee in an amount to be
determined from time to time by MLAM and MLAM U.K. but in no event in excess of
the amount that MLAM actually receives for providing services to the Fund
pursuant to the Management Agreement.
ARTICLE IV
Limitation of Liability of MLAM U.K.
MLAM U.K. shall not be liable for any error of judgment or mistake of
law or for any loss arising out of any investment or for any act or omission in
the performance of sub-advisory
4
<PAGE> 5
services rendered with respect to the Fund, except for willful misfeasance, bad
faith or gross negligence in the performance of its duties, or by reason of
reckless disregard of its obligations and duties hereunder. As used in this
Article IV, MLAM U.K. shall include any affiliates of MLAM U.K. performing
services for MLAM contemplated hereby and directors, officers and employees of
MLAM U.K. and such affiliates.
ARTICLE V
Activities of MLAM U.K.
The services of MLAM U.K. to the Fund are not to be deemed to be
exclusive, MLAM U.K. and any person controlled by or under common control with
MLAM U.K. (for purposes of this Article V referred to as "affiliates") being
free to render services to others. It is understood that directors, officers,
employees and shareholders of the Fund are or may become interested in MLAM U.K.
and its affiliates, as directors, officers, employees and shareholders or
otherwise and that directors, officers, employees and shareholders of MLAM U.K.
and its affiliates are or may become similarly interested in the Fund, and that
MLAM U.K. and directors, officers, employees, partners and shareholders of its
affiliates may become interested in the Fund as shareholders or otherwise.
ARTICLE VI
MLAM U.K. Statements Pursuant to IMRO Rules
Any complaints concerning MLAM U.K. should be in writing addressed to
the attention of the Managing Director of MLAM U.K.
5
<PAGE> 6
MLAM has the right to obtain from MLAM U.K. a copy of the IMRO complaints
procedure and to approach IMRO directly.
MLAM U.K. may make recommendations, subject to the investment
restrictions referred to in Article I herein, regarding Investments Not Readily
Realisable (as that term is used in the IMRO Rules) or investments denominated
in a currency other than British pound sterling. There can be no certainty that
market makers will be prepared to deal in unlisted or thinly traded securities
and an accurate valuation may be hard to obtain. The value of investments
recommended by MLAM U.K. may be subject to exchange rate fluctuations which may
have favorable or unfavorable effects on investments.
MLAM U.K. may make recommendations, subject to the investment
restrictions referred to in Article I herein, regarding options, futures or
contracts for differences. Markets can be highly volatile and such investments
carry a high degree of risk of loss exceeding the original investment and any
margin on deposit.
ARTICLE VII
Duration and Termination of this Agreement
This Agreement shall become effective as of the date first above
written and shall remain in force until the date of termination of the
Management Agreement (but not later than two years after the date hereof) and
thereafter, but only so long as such continuance is specifically approved at
least annually by (i) the Directors of the Fund or by the vote of a majority of
the
6
<PAGE> 7
outstanding voting securities of the Fund and (ii) a majority of those Directors
who are not parties to this Agreement or interested persons of any such party
cast in person at a meeting called for the purpose of voting on such approval.
This Agreement may be terminated at any time, without the payment of
any penalty, by MLAM or by vote of a majority of the outstanding voting
securities of the Fund, or by MLAM U.K., on sixty days' written notice to the
other party. This Agreement shall automatically terminate in the event of its
assignment or in the event of the termination of the Management Agreement. Any
termination shall be without prejudice to the completion of transactions already
initiated.
ARTICLE VIII
Amendments of this Agreement
This Agreement may be amended by the parties only if such amendment is
specifically approved by (i) the Directors of the Fund or by the vote of a
majority of outstanding voting securities of the Fund and (ii) a majority of
those Directors who are not parties to this Agreement or interested persons of
any such party cast in person at a meeting called for the purpose of voting on
such approval.
ARTICLE IX
Definitions of Certain Terms
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective
7
<PAGE> 8
meanings specified in the Investment Company Act and the rules and regulations
thereunder, subject, however, to such exemptions as may be granted by the
Securities and Exchange Commission under said Act.
ARTICLE X
Governing Law
This Agreement shall be construed in accordance with the laws of the
State of New York and the applicable provisions of the Investment Company Act.
To the extent that the applicable laws of the State of New York, or any of the
provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
8
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
MERRILL LYNCH ASSET MANAGEMENT, L.P.
By
-------------------------------
Title: President
MERRILL LYNCH ASSET MANAGEMENT U.K. LIMITED
By
--------------------------------
Title: Chairman
9
<PAGE> 1
BROWN & WOOD LLP
ONE WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
TELEPHONE: (212) 839-5300
FACSIMILE: (212) 839-5599
February 24, 1997
Merrill Lynch Global Convertible Fund, Inc.
P.O. Box 9011
Princeton, New Jersey 08543-9011
Ladies and Gentlemen:
This opinion is furnished in connection with the registration by
Merrill Lynch Global Convertible Fund, Inc., a Maryland corporation (the
"Fund"), of shares of common stock, par value $0.10 per share, of the Fund (the
"Shares"), under the Securities Act of 1933, as amended, pursuant to the Fund's
registration statement on Form N-1A (File No. 33-18720), as amended (the
"Registration Statement"), in the amount set forth under "Amount Being
Registered" on the facing page of the Registration Statement.
As counsel for the Fund, we are familiar with the proceedings taken by
it in connection with the authorization, issuance and sale of the Shares. In
addition, we have examined and are familiar with the Articles of Incorporation
of the Fund, as amended, the By-Laws of the Fund and such other documents as we
have deemed relevant to the matters referred to in this opinion.
Based upon the foregoing, we are of the opinion that the Shares, upon
issuance and sale in the manner referred to in the Registration Statement for
consideration not less than the par
<PAGE> 2
value thereof, will be legally issued, fully paid and non-assessable shares of
common stock.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Prospectus and
Statement of Additional Information constituting parts thereof.
Very truly yours,
/s/ Brown & Wood LLP
2
<PAGE> 1
EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.:
We consent to the use in Post-Effective Amendment No. 12 to Registration
Statement No. 33-18720 of our report dated December 4, 1996 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
Deloitte & Touche LLP
Princeton, New Jersey
February 21, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000825306
<NAME> MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
<SERIES>
<NUMBER> 001
<NAME> CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 68763258
<INVESTMENTS-AT-VALUE> 68891686
<RECEIVABLES> 642972
<ASSETS-OTHER> 145797
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 69680455
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 401532
<TOTAL-LIABILITIES> 401532
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 67170893
<SHARES-COMMON-STOCK> 1683579
<SHARES-COMMON-PRIOR> 2206197
<ACCUMULATED-NII-CURRENT> 82617
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1834020
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 191393
<NET-ASSETS> 17741239
<DIVIDEND-INCOME> 882162
<INTEREST-INCOME> 2420356
<OTHER-INCOME> 0
<EXPENSES-NET> (1646616)
<NET-INVESTMENT-INCOME> 1655902
<REALIZED-GAINS-CURRENT> 1834024
<APPREC-INCREASE-CURRENT> 2580476
<NET-CHANGE-FROM-OPS> 6070402
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (694324)
<DISTRIBUTIONS-OF-GAINS> (820273)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 685844
<NUMBER-OF-SHARES-REDEEMED> (1343548)
<SHARES-REINVESTED> 135086
<NET-CHANGE-IN-ASSETS> (21112455)
<ACCUMULATED-NII-PRIOR> 931245
<ACCUMULATED-GAINS-PRIOR> 3843618
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 463001
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1646616
<AVERAGE-NET-ASSETS> 17123118
<PER-SHARE-NAV-BEGIN> 10.71
<PER-SHARE-NII> .32
<PER-SHARE-GAIN-APPREC> .62
<PER-SHARE-DIVIDEND> (.48)
<PER-SHARE-DISTRIBUTIONS> (.63)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.54
<EXPENSE-RATIO> 1.57
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000825306
<NAME> MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
<SERIES>
<NUMBER> 002
<NAME> CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 68763258
<INVESTMENTS-AT-VALUE> 68891686
<RECEIVABLES> 642972
<ASSETS-OTHER> 145797
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 69680455
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 401532
<TOTAL-LIABILITIES> 401532
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 67170893
<SHARES-COMMON-STOCK> 3658695
<SHARES-COMMON-PRIOR> 5446237
<ACCUMULATED-NII-CURRENT> 82617
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1834020
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 191393
<NET-ASSETS> 38830004
<DIVIDEND-INCOME> 882162
<INTEREST-INCOME> 2420356
<OTHER-INCOME> 0
<EXPENSES-NET> (1646616)
<NET-INVESTMENT-INCOME> 1655902
<REALIZED-GAINS-CURRENT> 1834024
<APPREC-INCREASE-CURRENT> 2580476
<NET-CHANGE-FROM-OPS> 6070402
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1473613)
<DISTRIBUTIONS-OF-GAINS> (2671664)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 958130
<NUMBER-OF-SHARES-REDEEMED> (3040686)
<SHARES-REINVESTED> 295014
<NET-CHANGE-IN-ASSETS> (21112455)
<ACCUMULATED-NII-PRIOR> 931245
<ACCUMULATED-GAINS-PRIOR> 3843618
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 463001
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1646616
<AVERAGE-NET-ASSETS> 43679453
<PER-SHARE-NAV-BEGIN> 10.77
<PER-SHARE-NII> .21
<PER-SHARE-GAIN-APPREC> .62
<PER-SHARE-DIVIDEND> (.36)
<PER-SHARE-DISTRIBUTIONS> (.63)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.61
<EXPENSE-RATIO> 2.64
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000825306
<NAME> MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
<SERIES>
<NUMBER> 003
<NAME> CLASS C
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 68763258
<INVESTMENTS-AT-VALUE> 68891686
<RECEIVABLES> 642972
<ASSETS-OTHER> 145797
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 69680455
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 401532
<TOTAL-LIABILITIES> 401532
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 67170893
<SHARES-COMMON-STOCK> 389247
<SHARES-COMMON-PRIOR> 427738
<ACCUMULATED-NII-CURRENT> 82617
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1834020
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 191393
<NET-ASSETS> 4122419
<DIVIDEND-INCOME> 882162
<INTEREST-INCOME> 2420356
<OTHER-INCOME> 0
<EXPENSES-NET> (1646616)
<NET-INVESTMENT-INCOME> 1655902
<REALIZED-GAINS-CURRENT> 1834024
<APPREC-INCREASE-CURRENT> 2580476
<NET-CHANGE-FROM-OPS> 6070402
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (112375)
<DISTRIBUTIONS-OF-GAINS> (180592)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 234669
<NUMBER-OF-SHARES-REDEEMED> (294992)
<SHARES-REINVESTED> 21832
<NET-CHANGE-IN-ASSETS> (21112455)
<ACCUMULATED-NII-PRIOR> 931245
<ACCUMULATED-GAINS-PRIOR> 3843618
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 463001
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1646616
<AVERAGE-NET-ASSETS> 3777555
<PER-SHARE-NAV-BEGIN> 10.75
<PER-SHARE-NII> .21
<PER-SHARE-GAIN-APPREC> .62
<PER-SHARE-DIVIDEND> (.36)
<PER-SHARE-DISTRIBUTIONS> (.63)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.59
<EXPENSE-RATIO> 2.65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000825306
<NAME> MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
<SERIES>
<NUMBER> 004
<NAME> CLASS D
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 68763258
<INVESTMENTS-AT-VALUE> 68891686
<RECEIVABLES> 642972
<ASSETS-OTHER> 145797
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 69680455
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 401532
<TOTAL-LIABILITIES> 401532
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 67170893
<SHARES-COMMON-STOCK> 813909
<SHARES-COMMON-PRIOR> 326365
<ACCUMULATED-NII-CURRENT> 82617
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1834020
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 191393
<NET-ASSETS> 8585261
<DIVIDEND-INCOME> 882162
<INTEREST-INCOME> 2420356
<OTHER-INCOME> 0
<EXPENSES-NET> (1646616)
<NET-INVESTMENT-INCOME> 1655902
<REALIZED-GAINS-CURRENT> 1834024
<APPREC-INCREASE-CURRENT> 2580476
<NET-CHANGE-FROM-OPS> 6070402
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (224218)
<DISTRIBUTIONS-OF-GAINS> (171093)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 787476
<NUMBER-OF-SHARES-REDEEMED> (327147)
<SHARES-REINVESTED> 27215
<NET-CHANGE-IN-ASSETS> (21112455)
<ACCUMULATED-NII-PRIOR> 931245
<ACCUMULATED-GAINS-PRIOR> 3843618
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 463001
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1646616
<AVERAGE-NET-ASSETS> 6550861
<PER-SHARE-NAV-BEGIN> 10.72
<PER-SHARE-NII> .31
<PER-SHARE-GAIN-APPREC> .61
<PER-SHARE-DIVIDEND> (.46)
<PER-SHARE-DISTRIBUTIONS> (.63)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.55
<EXPENSE-RATIO> 1.77
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
