<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 18, 1998
SECURITIES ACT FILE NO. 33-18720
INVESTMENT COMPANY ACT FILE NO. 811-5395
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [_]
[X]
POST-EFFECTIVE AMENDMENT NO. 13
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940 [X]
[X]
AMENDMENT NO. 14
(CHECK APPROPRIATE BOX OR BOXES)
----------------
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
----------------
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
----------------
(609) 282-2800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
----------------
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:
COUNSEL FOR THE FUND:
BROWN & WOOD LLP PHILIP L. KIRSTEIN, ESQ.
ONE WORLD TRADE CENTER MERRILL LYNCH ASSET MANAGEMENT
NEW YORK, NEW YORK 10048-0557 P.O. BOX 9011
ATTENTION: THOMAS R. SMITH, JR. PRINCETON, N. J. 08543-9011
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.
----------------
TITLE OF SECURITIES BEING REGISTERED: Shares of Common Stock, par value $.10
per share.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
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
------------- --------
PART A
<C> <S> <C>
1. Cover Page................ Cover Page
2. Synopsis.................. Fee Table
3. Condensed Financial
Information.............. Financial Highlights; Performance Data
4. General Description of Cover Page; Investment Objective and
Registrant............... 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 Cover Page; Merrill Lynch Select Pricing SM
Securities............... System; Additional Information
7. Purchase of Securities Cover Page; Merrill Lynch Select Pricing SM
Being Offered............ System; Fee Table; Reorganization of the
Fund; Purchase of Shares; Shareholder
Services; Additional Information; Inside
Back Cover Page
8. Redemption or Repurchase.. Merrill Lynch Select Pricing SM System; Fee
Table; Purchase of Shares; Redemption of
Shares
9. Pending Legal Proceedings. Not Applicable
PART B
10. Cover Page................ Cover Page
11. Table of Contents......... Back Cover Page
12. General Information and Reorganization of the Fund; General
History.................. 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 Management of the Fund; Additional
Securities............... Information
16. Investment Advisory and Management of the Fund; Purchase of Shares;
Other Services........... 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 Reorganization of the Fund; Purchase of
Being Offered............ 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
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Registration Statement.
<PAGE>
PROSPECTUS
FEBRUARY 18, 1998
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 12.
----------------
Due to a pending proposal to reorganize the Fund, the sale of new shares of
the Fund has been suspended as of the date of this Prospectus. If the
reorganization is not effected, the Fund may determine to recommence the
offering of its shares at any time. Shareholders may continue to redeem shares
of the Fund at any time. See "Reorganization of the Fund" on page 25.
Pursuant to the Merrill Lynch Select PricingSM 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 PricingSM 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 PricingSM 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
participants in certain fee-based programs the minimum initial purchase is
$500 and the minimum subsequent purchase is $50, and 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 $5.35) for
confirming purchases and repurchases. Purchases and redemptions made directly
through Merrill Lynch Financial Data Services, Inc. (the "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 COMMISSION PASSED UPON TH E 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 18, 1998 (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 Commission maintains a Web
site (http://www.sec.gov) that contains the Statement of Additional
Information, material incorporated by reference and other information
regarding the Fund. The Statement of Additional Information is hereby
incorporated by reference into this Prospectus.
----------------
MERRILL LYNCH ASSET MANAGEMENT--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to 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 4.0% during the first year,
proceeds, whichever is decreasing 1.0% annually to 1.0% for
lower)................ None(d) 0.0% after the fourth year(e) one year(f) None(d)
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:
Shareholder Servicing
Costs(i).............. 0.38% 0.43% 0.46% 0.38%
Other.................. 0.78% 0.79% 0.78% 0.81%
---- ---- ---- ----
Total Other Expenses... 1.16% 1.22% 1.24% 1.19%
---- ---- ---- ----
Total Fund Operating 1.81% 2.87% 2.89% 2.09%
Expenses.............. ==== ==== ==== ====
</TABLE>
- --------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and participants in certain
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 40.
(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 30.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of
Class A shares by certain retirement plans and participants in connection
with certain fee-based programs. Class A 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 that
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 40.
(e) The CDSC may be modified in connection with certain fee-based programs.
See "Shareholder Services--Fee-Based Programs"--page 40.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"--page 40.
(g) See "Management of the Fund--Management and Advisory Arrangements"--page
24.
(h) See "Purchase of Shares--Distribution Plans"--page 34.
(i) See "Management of the Fund--Transfer Agency Services"--page 25.
2
<PAGE>
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..................................... $70 $106 $145 $254
Class B..................................... $69 $109 $151 $302*
Class C..................................... $39 $ 89 $152 $321
Class D..................................... $73 $115 $159 $282
An investor would pay the following expenses
on the same $1,000 investment assuming no
redemption at the end of the period:
Class A..................................... $70 $106 $145 $254
Class B..................................... $29 $ 89 $151 $302*
Class C..................................... $29 $ 89 $152 $321
Class D..................................... $73 $115 $159 $282
</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
$5.35) for confirming purchases and repurchases. Purchases and redemptions
made directly through the Fund's Transfer Agent are not subject to the
processing fee. See "Purchase of Shares" and "Redemption of Shares."
MERRILL LYNCH SELECT 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."
3
<PAGE>
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The CDSCs, distribution 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 CDSCs 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 PricingSM 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 PricingSM System that the investor
believes is the most beneficial under his or her particular circumstances.
More detailed information as to each class of shares is set forth under
"Purchase of Shares."
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(/1/) FEE FEE FEATURE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 5.25% initial sales No No No
charge(/2/)(/3/)
- ---------------------------------------------------------------------------------------------
B CDSC for a period of four 0.25% 0.75% B shares convert to
years, D shares automatically
at a rate of 4.0% during the after approximately
first year, decreasing 1.0% eight years(/5/)
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 "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors."
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class
A shares by certain retirement plans and participants in connection with
certain fee-based programs. Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but
instead may be subject to a 1.0% CDSC if redeemed within one year. Such
CDSC may be waived in connection with certain fee-based programs. A 0.75%
sales charge for 401(k) purchases over $1,000,000 will apply. See "Class
A" and "Class D" below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans and fee-based programs
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>
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 of 5.25% 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 that takes
into account the investor's holdings of all classes of all MLAM-
advised mutual funds. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares."
Class B:
Class B shares do not incur a sales charge when they are
purchased, but they are subject to an ongoing account maintenance
fee of 0.25% and an ongoing distribution fee of 0.75% of the
Fund's average net assets attributable to 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
5
<PAGE>
Fund's average net assets attributable to the Class C shares.
Class C shares are also subject to a 1.0% 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 CDSC for only one 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 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 or
her particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class
A shares rather than Class D shares because there is an account maintenance
fee imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative
particularly attractive because similar sales charge reductions are not
available with respect to the deferred sales charges imposed in connection
with purchases of Class B or Class C shares. Investors not qualifying for
reduced initial sales charges who expect to maintain their investment for an
extended period of time also may elect to purchase Class A or Class D shares,
because over time the accumulated ongoing account maintenance and distribution
fees on Class B or Class C shares may exceed the initial sales charge and, in
the case of Class D shares, the 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 that 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.
6
<PAGE>
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the
benefit of putting all of the investor's dollars to work from the time the
investment is made. The deferred sales charge alternatives may be particularly
appealing to investors who do not qualify for a reduction in initial sales
charges. Both Class B and Class C shares are subject to ongoing account
maintenance fees and distribution fees; however, the ongoing account
maintenance and distribution fees potentially may be offset to the extent any
return is realized on the additional funds initially invested in Class B or
Class C shares. In addition, Class B shares will be converted into Class D
shares of the Fund after a conversion period of approximately eight years, and
thereafter investors will be subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend
to hold their shares for an extended period of time. Investors in Class B
shares should take into account whether they intend to redeem their shares
within the CDSC period and, if not, whether they intend to remain invested
until the end of the conversion period and thereby take advantage of the
reduction in ongoing fees resulting from the conversion into Class D shares.
Other investors, however, may elect to purchase Class C shares if they
determine that it is advantageous to have all their assets invested initially
and they are uncertain as to the length of time they intend to hold their
assets in MLAM-advised mutual funds. Although Class C shareholders are subject
to a shorter CDSC period at a lower rate, they forego the Class B conversion
feature, making their investment subject to account maintenance and
distribution fees for an indefinite period of time. In addition, while both
Class B and Class C distribution fees are subject to the limitations on asset-
based sales charges imposed by the NASD, the Class B distribution fees are
further limited under a voluntary waiver of asset-based sales charges. See
"Purchase of Shares--Limitations on the Payment of Deferred Sales Charges."
7
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in conjunction
with the annual audits of the financial statements of the Fund by Deloitte &
Touche LLP, independent auditors. Financial statements for the fiscal year
ended October 31, 1997 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,
----------------------------------------------------------------------
1997++ 1996++ 1995 1994 1993 1992 1991 1990 1989+
------ ------- ------- ------ ------ ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
PER SHARE OPERATING PER-
FORMANCE:
Net asset value, begin-
ning of period.......... $10.54 $ 10.71 $ 10.75 $11.08 $ 9.79 $ 9.39 $8.37 $ 9.95 $9.97
------ ------- ------- ------ ------ ------ ----- ------ -----
Investment income--net.. .33 .32 .42 .33 .23 .21 .25 .38 .39
Realized and unrealized
gain (loss) on invest-
ments and foreign cur-
rency transactions--net. 1.47 .62 .11 (.27) 1.45 .68 1.22 (1.11) .21
------ ------- ------- ------ ------ ------ ----- ------ -----
Total from investment
operations.............. 1.80 .94 .53 .06 1.68 .89 1.47 (.73) .60
------ ------- ------- ------ ------ ------ ----- ------ -----
Less dividends and dis-
tributions:
Investment income--net. (.24) (.48) (.46) (.30) (.23) (.25) (.37) (.42) (.45)
In excess of investment
income--net............ (.01) -- -- -- -- -- -- -- --
Realized gain on in-
vestments--net......... (.22) (.63) (.11) (.09) (.16) (.24) (.08) (.43) (.17)
------ ------- ------- ------ ------ ------ ----- ------ -----
Total dividends and dis-
tributions.............. (.47) (1.11) (.57) (.39) (.39) (.49) (.45) (.85) (.62)
------ ------- ------- ------ ------ ------ ----- ------ -----
Net asset value, end of
period.................. $11.87 $ 10.54 $ 10.71 $10.75 $11.08 $ 9.79 $9.39 $ 8.37 $9.95
====== ======= ======= ====== ====== ====== ===== ====== =====
TOTAL INVESTMENT RE-
TURN:**
Based on net asset value
per share............... 17.79% 9.34% 5.10% .61% 17.64% 10.00% 18.09% (7.86)% 6.29%#
====== ======= ======= ====== ====== ====== ===== ====== =====
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of reim-
bursement............... 1.81% 1.57% 1.38% 1.66% 2.22% 2.47% 2.47% 2.39% 1.77%*
====== ======= ======= ====== ====== ====== ===== ====== =====
Expenses................ 1.81% 1.57% 1.38% 1.66% 2.22% 2.86% 2.87% 2.39% 1.77%*
====== ======= ======= ====== ====== ====== ===== ====== =====
Investment income--net.. 3.01% 3.05% 4.03% 2.97% 2.36% 2.61% 3.16% 4.55% 5.62%*
====== ======= ======= ====== ====== ====== ===== ====== =====
SUPPLEMENTAL DATA:
Net assets, end of pe-
riod (in thousands)..... $3,466 $17,741 $23,634 $7,850 $4,557 $2,283 $ 448 $ 162 $ 194
====== ======= ======= ====== ====== ====== ===== ====== =====
Portfolio turnover...... 33.42% 14.72% 101.12% 38.04% 26.02% 4.91% 18.02% 22.76% 15.91%
====== ======= ======= ====== ====== ====== ===== ====== =====
Average Commission Rate
Paid##.................. $.0607 $ .0679 -- -- -- -- -- -- --
====== ======= ======= ====== ====== ====== ===== ====== =====
</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>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
CLASS B
----------------------------------------------------------------------------------------
FOR THE YEAR ENDED OCTOBER 31,
----------------------------------------------------------------------------------------
1997++ 1996++ 1995 1994 1993 1992 1991 1990 1989 1988+
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
PER SHARE OPERATING PER-
FORMANCE:
Net asset value, begin-
ning of period.......... $10.61 $ 10.77 $ 10.80 $ 11.13 $ 9.84 $ 9.44 $ 8.39 $ 9.95 $ 9.94 $ 10.00
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Investment income-net... .21 .21 .37 .21 .13 .12 .18 .29 .37 .27
Realized and unrealized
gain (loss) on invest-
ments and foreign cur-
rency transactions-net.. 1.49 .62 .05 (.25) 1.46 .67 1.20 (1.10) .17 (.10)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations.............. 1.70 .83 .42 (.04) 1.59 .79 1.38 (.81) .54 .17
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Less dividends and dis-
tributions:
Investment income--net. (.18) (.36) (.34) (.20) (.14) (.15) (.25) (.32) (.36) (.23)
In excess of investment
income--net............ (.01) -- -- -- -- -- -- -- -- --
Realized gain on in-
vestments-net.......... (.22) (.63) (.11) (.09) (.16) (.24) (.08) (.43) (.17) --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total dividends and dis-
tributions.............. (.41) (.99) (.45) (.29) (.30) (.39) (.33) (.75) (.53) (.23)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of
period.................. $11.90 $ 10.61 $ 10.77 $ 10.80 $ 11.13 $ 9.84 $ 9.44 $ 8.39 $ 9.95 $ 9.94
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL INVESTMENT RE-
TURN:**
Based on net asset value
per share............... 16.56% 8.13% 4.01% (.37)% 16.45% 8.77% 16.79% (8.68)% 5.58% 1.70%#
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ 2.87% 2.64% 2.37% 2.69% 3.26% 3.96% 3.88% 3.41% 2.97% 2.60%*
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Investment income-net... 1.92% 1.98% 2.95% 1.95% 1.32% 1.53% 2.25% 3.51% 3.62% 3.74%*
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, end of pe-
riod (in thousands)..... $17,730 $38,830 $58,660 $53,121 $29,831 $13,975 $14,973 $18,296 $30,813 $41,232
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Portfolio turnover...... 33.42% 14.72% 101.12% 38.04% 26.02% 4.91% 18.02% 22.76% 15.91% 20.24%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Average Commission Rate
Paid##.................. $.0607 $ .0679 -- -- -- -- -- -- -- --
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- ----
+ Class B shares commenced operations on February 26, 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.
9
<PAGE>
FINANCIAL HIGHLIGHTS (CONCLUDED)
<TABLE>
<CAPTION>
CLASS C CLASS D
-------------------------------- --------------------------------
FOR THE FOR THE
PERIOD PERIOD
FOR THE YEAR OCT. 21, FOR THE YEAR OCT. 21,
ENDED 1994+ ENDED 1994+
OCTOBER 31, TO OCTOBER 31, TO
---------------------- OCT. 31, ---------------------- OCT. 31,
1997++ 1996++ 1995 1994++ 1997++ 1996++ 1995 1994++
------ ------ ------ -------- ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
PER SHARE OPERATING PER-
FORMANCE:
Net asset value, begin-
ning of period.......... $10.59 $10.75 $10.81 $10.74 $10.55 $10.72 $10.76 $10.69
------ ------ ------ ------ ------ ------ ------ ------
Investment income-net... .21 .21 .36 -- .30 .31 .42 --
Realized and unrealized
gain on investments and
foreign currency trans-
actions-net............. 1.47 .62 .05 .07 1.47 .61 .09 .07
------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations.............. 1.68 .83 .41 .07 1.77 .92 .51 .07
------ ------ ------ ------ ------ ------ ------ ------
Less dividends and dis-
tributions:
Investment income--net. (.17) (.36) (.36) -- (.23) (.46) (.44) --
In excess of investment
income--net............ (.01) -- -- -- (.01) -- -- --
Realized gain on in-
vestments-net.......... (.22) (.63) (.11) -- (.22) (.63) (.11) --
------ ------ ------ ------ ------ ------ ------ ------
Total dividends and dis-
tributions.............. (.40) (.99) (.47) -- (.46) (1.09) (.55) --
------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of
period.................. $11.87 $10.59 $10.75 $10.81 $11.86 $10.55 $10.72 $10.76
====== ====== ====== ====== ====== ====== ====== ======
TOTAL INVESTMENT RE-
TURN:**
Based on net asset value
per share............... 16.40% 8.14% 3.89% .65%# 17.41% 9.07% 4.87% .65%#
====== ====== ====== ====== ====== ====== ====== ======
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ 2.89% 2.65% 2.41% 5.64%* 2.09% 1.77% 1.62% 5.13%*
====== ====== ====== ====== ====== ====== ====== ======
Investment income
(loss)-net.............. 1.91% 1.97% 2.99% (1.74)%* 2.69% 2.85% 3.79% (1.24)%*
====== ====== ====== ====== ====== ====== ====== ======
SUPPLEMENTAL DATA:
Net assets, end of pe-
riod (in thousands)..... $1,112 $4,123 $4,598 $ 203 $6,614 $8,585 $3,499 $ 179
====== ====== ====== ====== ====== ====== ====== ======
Portfolio turnover...... 33.42% 14.72% 101.12% 38.04% 33.42% 14.72% 101.12% 38.04%
====== ====== ====== ====== ====== ====== ====== ======
Average Commission Rate
Paid##.................. $.0607 $.0679 -- -- $.0607 $.0679 -- --
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
- ----
+ Commencement of operations.
++ 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.
10
<PAGE>
SPECIAL CONSIDERATIONS
As a global fund, the Fund may invest in United States and foreign
securities. Investments in securities of foreign entities and securities
denominated in foreign currencies involve risks not typically involved in
domestic 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 domestic 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.
11
<PAGE>
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 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
12
<PAGE>
characteristics include the potential for capital appreciation as the value of
the underlying common stock increases, the relatively high yield received from
dividend or interest payments as compared to common stock dividends and
decreased risks of decline in value relative to the underlying common stock
due to their fixed-income nature. As a result of the conversion feature,
however, the interest rate or dividend preference on a convertible security is
generally less than would be the case if the securities were issued in
nonconvertible form.
Although the Fund may invest in securities denominated in any currency that
are convertible into common stocks of companies located throughout the world,
it is expected that a majority of its assets will be invested in securities
denominated in United States dollars, currencies of Pacific Basin countries
(such as Japan, Australia, Hong Kong and Singapore), and currencies of Western
European countries (such as the United Kingdom, Germany, the Netherlands,
Switzerland, Sweden, France, Italy, Belgium, Norway, Denmark, Austria and
Spain) and 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
13
<PAGE>
various securities markets and to specific securities traded in those markets.
In evaluating markets, the Manager will consider such factors as the condition
and growth potential of various economies and securities markets, currency and
taxation factors (including the applicability and rate of withholding taxes)
and other pertinent financial, social, national and political factors. In
analyzing convertible securities, the Manager will consider both the yield on
the convertible security and the potential capital appreciation that is
offered by the underlying common stock. There can be no assurance that the
Fund will achieve its investment objective.
The table below shows the dollar-weighted market value, by Standard & Poor's
("S&P") rating category, of the convertible securities held by the Fund as of
October 31, 1997:
<TABLE>
<CAPTION>
% TOTAL
RATING ASSETS
------ -------
<S> <C>
AAA................................................................ 1.17%
AA................................................................. 6.66
A.................................................................. 18.25
BBB................................................................ 18.43
BB................................................................. 7.77
B.................................................................. 5.69
CCC................................................................ 3.22
Not Rated*......................................................... 6.02
Short-term & U.S. Gov't............................................ 25.48
-----
92.69%
=====
</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 2.39% are of comparable quality to obligations rated
A, 2.55% are of comparable quality to obligations rated BBB, and 1.08% are
of comparable quality to obligations rated B. 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 rating composition of the portfolio
of the Fund may vary over time.
CONVERTIBLE SECURITIES
Set forth below is additional information concerning traditional convertible
securities and "synthetic" convertible securities.
Convertible securities are issued and traded in a number of securities
markets. For the past several years, the principal markets have been the
United States, the Euromarket and Japan. Issuers during this period have
included major corporations domiciled in the United States, Japan, France,
Switzerland, Canada and the United Kingdom. Since the Fund will invest a
substantial portion of its assets in the United States market and the
Euromarket, where convertible bonds have been primarily denominated in the
United States dollar, it is expected that ordinarily a substantial portion of
the convertible securities held by the Fund will be denominated in United
States dollars. However, the underlying equity securities typically will be
quoted in the currency of the country where the issuer is domiciled. With
respect to convertible securities denominated in a currency different from
that of the underlying equity securities, the conversion price may be based on
a fixed exchange rate established
14
<PAGE>
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 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
15
<PAGE>
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. See "Taxes."
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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 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
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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 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.
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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 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
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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 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,
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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 Commission has taken the position that purchased OTC
options and the assets used as cover for written OTC options are illiquid
securities. Therefore, the Fund has adopted an investment policy pursuant to
which it will not purchase or sell OTC options (including OTC options on
futures contracts) if, as a result of such transactions, the sum of the market
value of OTC options currently outstanding that are held by the Fund, the
market value of the underlying securities covered by OTC call options
currently outstanding that were sold by the Fund and margin deposits on the
Fund's existing OTC options on futures contracts exceed 10% of the net assets
of the Fund, taken at market value, together with all other assets of the Fund
that are illiquid or are not otherwise readily marketable. However, if the OTC
option is sold by the Fund to a primary U.S. Government securities dealer
recognized by the Federal Reserve Bank of New York and the Fund has the
unconditional contractual right to repurchase such OTC option from the dealer
at a predetermined price, then the Fund will treat as illiquid such amount of
the underlying securities as is equal to the repurchase price less the amount
by which the option is "in-the-money" (i.e., current market value of the
underlying security minus the option's strike price). The repurchase price
with the primary dealers is typically a formula price which is generally based
on a multiple of the premium received for the option, plus the amount by which
the option is "in-the-money." This policy as to OTC options is not a
fundamental policy of the Fund and may be amended by the Directors of the Fund
without the approval of the Fund's shareholders. However, the Fund will not
change or modify this policy prior to the change or modification by the
Commission staff of its position.
Risk Factors in Options and Futures Transactions. Utilization of options and
futures transactions to hedge the portfolio involves the risk of imperfect
correlation in movements in the price of options and futures and movements in
the price of the securities, interest rates or currencies that are the subject
of the hedge. If the price of the options or futures moves more or less than
the price of the subject of the hedge, the Fund will experience a gain or loss
which will not be completely offset by movements in the price of the subject
of the hedge. The successful use of options and futures also depends on the
Manager's ability to predict correctly price movements in the market involved
in a particular options or futures transaction.
The Fund intends to enter into options and futures transactions on an
exchange or in the over-the-counter market, only if there appears to be a
liquid secondary market for such options or futures or, in the case of over-
the-counter transactions, the Manager believes the Fund can receive on each
business day at least two independent bids or offers. However, there can be no
assurance that a liquid secondary market will exist at any specific time.
Thus, it may not be possible to close an options or futures position. The
inability to close options and futures positions also could have an adverse
impact on the Fund's ability to hedge effectively its portfolio. There is also
the risk of loss by the Fund of margin deposits or collateral in the event of
bankruptcy of a broker with whom the Fund has an open position in an option, a
futures contract or related option.
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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. 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
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<PAGE>
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.
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 of the Fund are:
Arthur Zeikel*--Chairman of the Manager and its affiliate, FAM; Chairman and
Director of Princeton Services, Inc.; Executive Vice President of ML & Co.
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.
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Robert R. Martin--Former Chairman, Kinnard Investments, Inc.
Joseph L. May--Attorney in private practice.
Andre F. Perold--Professor, Harvard Business School.
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*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 to more than 140 registered investment companies. The
Manager also offers portfolio management services to individuals and
institutions. As of January 31, 1998, the Manager and FAM had a total of
approximately $287.0 billion in investment company and other portfolio assets
under management, including accounts of certain affiliates of the Manager.
The Fund's management agreement with the Manager (the "Management Agreement")
provides that, subject to the supervision 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.
Daniel A. Luchansky is primarily responsible for the day to day management of
the Fund's investment portfolio. Mr. Luchansky has been the Portfolio Manager
of the Fund since 1997 and has been a Vice President of the Manager since 1991.
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,
1997, the fee paid by the Fund to the Manager was $301,179 (based upon average
net assets of approximately $46.3 million). Of this amount, none was reimbursed
by the Manager to the Fund pursuant to certain operating expense limitations.
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.
Pursuant to the Management Agreement, the Fund pays 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 agency fees, accounting costs, the costs of issuing and
redeeming shares and certain of the costs of printing proxies, shareholder
reports, prospectuses and statements of additional information 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, 1997, the Fund reimbursed the Manager
$69,859 for accounting services. For the fiscal year ended October 31, 1997,
the ratio of total expenses to average net assets was 1.81% for Class A shares,
2.87% for Class B shares, 2.89% for Class C shares and 2.09% for Class D
shares.
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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 that 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 that at the time is
being purchased or sold (as the case may be), or to the knowledge of the
employee is being considered for purchase or sale, by any fund advised by the
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
The Transfer Agent, a subsidiary of ML & Co., acts as the Fund's Transfer
Agent pursuant to a Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement (the "Transfer Agency Agreement"). Pursuant to the
Transfer Agency Agreement, the Transfer Agent is responsible for the issuance,
transfer and redemption of shares and the opening and maintenance of
shareholder accounts. Pursuant to the Transfer Agency Agreement, the Transfer
Agent receives an annual fee of up to $11.00 per Class A or Class D account and
up to $14.00 per Class B or Class C account and is entitled to reimbursement
for certain transaction charges and out-of-pocket expenses incurred by the
Transfer Agent under the Transfer Agency Agreement. Additionally, a $.20
monthly closed account charge will be assessed on all accounts that close
during the calendar year. Application of this fee will commence the month
following the month the account is closed. At the end of the calendar year, no
further fees will be due. For the purposes of the Transfer Agency Agreement,
the term "account" includes a shareholder account maintained directly by the
Transfer Agent and any other account representing the beneficial interest of a
person in the relevant share class on a recordkeeping system, provided the
recordkeeping system is maintained by a subsidiary of ML & Co. For the fiscal
year ended October 31, 1997, the total fee paid by the Fund to the Transfer
Agent was $190,998 pursuant to the Transfer Agency Agreement.
REORGANIZATION OF THE FUND
On November 6, 1997, the Board of Directors of the Fund approved an Agreement
and Plan of Reorganization (the "Reorganization Agreement") between the Fund
and Merrill Lynch Convertible Fund, Inc. ("Convertible Fund") pursuant to which
the Fund would transfer substantially all of its assets and substantially all
of its liabilities to Convertible Fund in exchange for newly issued shares of
Convertible Fund and thereafter deregister as an investment company under the
Investment Company Act and dissolve in accordance with the laws of the State of
Maryland (the "Reorganization").
25
<PAGE>
The Reorganization is conditioned upon: (i) approval by the Fund's
shareholders of the Reorganization at a special meeting of shareholders (the
"Special Meeting") and (ii) the receipt of a favorable private letter ruling
from the Internal Revenue Service concerning the tax consequences of the
Reorganization. The required vote was not obtained at the Special Meeting held
on February 11, 1998, which has been adjourned to March 11, 1998.
If the Reorganization takes place, Fund shareholders will receive shares of
that class of shares of Convertible Fund having the same letter designation
(i.e., Class A, Class B, Class C or Class D) and the same distribution fees,
account maintenance fees and sales charges (including contingent deferred
shares charges), if any ("Corresponding Shares"), as the shares of the Fund
held by them immediately prior to the Reorganization. The aggregate net asset
value of the Corresponding Shares of Convertible Fund to be received by each
shareholder of the Fund will equal the aggregate net asset value of the Fund
shares owned by such shareholder immediately prior to the Reorganization.
The sale of new shares of the Fund has been suspended as of the date of this
Prospectus. If the Reorganization is not effected, the Fund may determine to
recommence the offering of its shares at any time. Shareholders may continue
to redeem shares of the Fund at any time.
PURCHASE OF SHARES
The Distributor, an affiliate of each 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 that for participants in certain fee-based programs,
the minimum initial purchase is $500 and the minimum subsequent purchase is
$50 and for retirement plans, the minimum initial purchase is $100 and the
minimum subsequent purchase is $1. Different minimums may apply to purchases
made through the Merrill Lynch Blueprint SM Program. See "Purchase of Shares--
Merrill Lynch Blueprint SM 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
Pricing SM 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 on that day, such orders shall be deemed
received on the next business day. The Fund or the Distributor may suspend
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
26
<PAGE>
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 $5.35) 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 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. The proceeds from the account
maintenance fees are used to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing continuing account maintenance
activities. 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 CDSCs and distribution fees with respect to Class B and Class C shares
in that the sales charges and distribution fees applicable to each class
provide for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
Investors are advised that only Class A and Class D shares may be available for
purchase through securities dealers, other than Merrill Lynch, that are
eligible to sell shares.
27
<PAGE>
The following table sets forth a summary of the distribution arrangements for
each class of shares under the Merrill Lynch Select PricingSM System.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(/1/) FEE FEE CONVERSION FEATURE
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 5.25% initial sales No No No
charge(/2/)(/3/)
- --------------------------------------------------------------------------------------------
B CDSC for a period of 4 0.25% 0.75% B shares convert
years, at a rate of 4.0% during to D shares automatically
the first year, decreasing 1.0% after approximately
annually to 0.0%(/4/) eight years(/5/)
- --------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(/6/) 0.25% 0.75% No
- --------------------------------------------------------------------------------------------
D Maximum 5.25% initial sales 0.25% No No
charge(/3/)
- --------------------------------------------------------------------------------------------
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs are imposed if the redemption occurs within
the applicable CDSC time period. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the shares
being redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives--Class A and Class D Shares--Eligible Class A Investors."
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class
A shares by certain retirement plans and participants in connection with
certain fee-based programs. Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but,
instead, may be subject to a 1.0% CDSC if shares are redeemed within one
year. Such CDSC may be waived in connection with certain fee-based
programs. A 0.75% sales charge for 401(k) purchases over $1,000,000 will
apply.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and 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.
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.
28
<PAGE>
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>
DISCOUNT TO
SALES CHARGE AS SELECTED DEALERS
SALES CHARGE AS PERCENTAGE* OF AS PERCENTAGE OF
PERCENTAGE OF THE NET AMOUNT THE OFFERING
AMOUNT OF PURCHASE OFFERING PRICE INVESTED PRICE
- ------------------ --------------- --------------- ----------------
<S> <C> <C> <C>
Less than $25,000............. 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 by certain retirement plan
investors and participants in certain fee-based programs. If the sales
charge is waived in connection with a purchase of $1,000,000 or more, such
purchases may be subject to a 1.0% CDSC if the shares are redeemed within
one year after purchase. Such CDSC may be waived in connection with certain
fee-based programs. 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. 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, 1997, the Fund sold 1,031,544 Class A
shares for aggregate net proceeds of $11,066,318. The gross sales charges for
the sale of Class A shares of the Fund for that year were $561, of which $42
and $519 were received by the Distributor and Merril Lynch, respectively. For
the fiscal year ended October 31, 1997, 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, 1997, the Fund sold 40,916 Class D shares for aggregate net
proceeds of $459,749. The gross sales charges for the sale of Class D shares of
the Fund for that year were $6,175, of which $395 and $5,780 were received by
the Distributor and Merrill Lynch, respectively. During the fiscal year ended
October 31, 1997, the Distributor received no CDSCs with respect to redemptions
within one year after purchase of Class D shares purchased subject to a front-
end sales charge waiver.
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 and U.S. branches of foreign banking institutions provided that
the program or branch has $3 million or more initially invested in MLAM-advised
mutual funds. Also eligible to purchase Class A shares at net asset value are
participants in certain investment programs including TMASM Managed Trusts to
which
29
<PAGE>
Merrill Lynch Trust Company provides discretionary trustee services,
collective investment trusts for which Merrill Lynch Trust Company serves as
trustee and purchases made in connection with certain fee-based programs. In
addition, Class A shares 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."
Provided applicable threshold requirements are met, either Class A or Class
D shares are offered at net asset value to Employee AccessSM Accounts
available through authorized employers. Class A shares are offered at net
asset value to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.,
and, subject to certain conditions, Class A and Class D shares are offered at
net asset value to shareholders of Merrill Lynch Municipal Strategy Fund, Inc.
and Merrill Lynch High Income Municipal Bond Fund, Inc., 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.
30
<PAGE>
DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four year CDSC,
which declines each year, while Class C shares are subject only to a one year
1.0% CDSC. On the other hand, approximately 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. 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.
31
<PAGE>
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>
For the fiscal year ended October 31, 1997, the Distributor received CDSCs of
$79,400 with respect to redemptions of Class B shares. Additional CDSCs payable
to the Distributor may have been waived or converted to a contingent obligation
in connection with a shareholder's participation in certain fee-based programs.
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 Blueprint SM 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 AccountSM available through employers providing eligible 401(k)
plans. The Class B CDSC also is waived for any Class B shares that are
purchased by a Merrill Lynch rollover IRA that was funded by a rollover from a
terminated 401(k) plan managed by the MLAM Private Portfolio Group and held in
such account at the time of redemption. The Class B CDSC also is waived for any
Class B shares that are purchased within qualifying Employee AccessSM Accounts.
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."
32
<PAGE>
Contingent Deferred Sales Charges--Class C Shares. Class C shares that are
redeemed within one year after purchase may be subject to a 1.0% CDSC charged
as a percentage of the dollar amount subject thereto. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed
on increases in net asset value above the initial purchase price. In addition,
no Class C CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions. The Class C CDSC may be waived in
connection with certain fee-based programs. See "Shareholder Services--Fee-
Based Programs." For the fiscal year ended October 31, 1997, the Distributor
received CDSCs of $1,308 with respect to redemptions of Class C shares, all of
which were paid to Merrill Lynch. Additional CDSCs, payable to the Distributor
may have been waived or converted to a contingent obligation in connection with
a shareholder's participation in certain 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.
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.
33
<PAGE>
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 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 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, 1997, the Fund paid the Distributor
$267,689 pursuant to the Class B Distribution Plan (based on average daily net
assets subject to such Class B Distribution Plan of approximately $26.8
million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class B shares. For the fiscal year ended October 31, 1997, the Fund paid the
Distributor $24,342 pursuant to the Class C Distribution Plan (based on average
daily net assets subject to such Class C Distribution Plan of approximately
$2.4 million), all of which was paid to Merrill Lynch for
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providing account maintenance and distribution-related activities and services
in connection with Class C shares. For the fiscal year ended October 31, 1997,
the Fund paid the Distributor $18,545 pursuant to the Class D Distribution
Plan (based on average daily net assets subject to such Class D Distribution
Plan of approximately $7.4 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, 1996, the last date for which fully allocated data is
available, the fully allocated accrual revenues received by the Distributor
and Merrill Lynch for the period since the commencement of operations of Class
B shares exceeded fully allocated accrual expenses by approximately $158,000
(.43% of Class B net assets at that date). As of October 31, 1997 direct cash
revenues for the period since the commencement of operations of Class B shares
exceeded direct cash expenses by $3,043,737 (17.17% of Class B net assets at
that date). As of December 31, 1996, the fully allocated accrual expenses
incurred by the Distributor and Merrill Lynch for the period since the
commencement of operations of Class C shares, exceeded fully allocated
revenues for such period by approximately $54,000 (1.34% of Class C net assets
at that date). As of October 31, 1997, for Class C shares, direct cash
revenues for the period since the commencement of operations of Class C shares
exceeded direct cash expenses by $74,002 (6.65% 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."
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LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the distribution fee
and the CDSC borne by the Class B and Class C shares but not the account
maintenance fee. The maximum sales charge rule is applied separately to each
class. As applicable to the Fund, the maximum sales charge rule limits the
aggregate of distribution fee payments and CDSCs payable by the Fund to (1)
6.25% of eligible gross sales of Class B shares and Class C shares, computed
separately (defined to exclude shares issued pursuant to dividend
reinvestments and exchanges) plus (2) interest on the unpaid balance for the
respective class, computed separately, at the prime rate plus 1% (the unpaid
balance being the maximum amount payable minus amounts received from the
payment of the distribution fee and the CDSC). In connection with the Class B
shares, the Distributor has voluntarily agreed to waive interest charges on
the unpaid balance in excess of 0.50% of eligible gross sales. Consequently,
the 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 in either event requires the
signature(s) of all persons in whose name(s) the shares are registered, signed
exactly as such name(s) appear(s) on the Transfer Agent's register or on the
certificate, as the case may be. The signature(s) on the redemption request
must be guaranteed by an "eligible guarantor institution" as such term is
defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, the
existence and validity of which may be verified by the Transfer Agent through
the use of industry publications. Notarized signatures are not sufficient. In
certain instances, the Transfer Agent may require
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additional documents such as, but not limited to, trust instruments, death
certificates, appointments as executor or administrator, or certificates of
corporate authority. For shareholders redeeming directly with the Transfer
Agent, payments will be mailed within seven days of receipt of a proper notice
of redemption.
At various times, the Fund may be requested to redeem shares for which it
has not yet received good payment. The Fund may delay or cause to be delayed
the mailing of a redemption check until such time as it has assured itself
that good payment (e.g., cash, or certified check drawn on a 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 that 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 $5.35) to confirm a repurchase of shares. Repurchases made
directly through the Fund's Transfer Agent are not subject to the processing
fee. The Fund reserves the right to reject any order for repurchase, which
right of rejection might 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
If the Fund recommences the offering of its shares, shareholders who redeem
their Class A or Class D shares will 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 that 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
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from the Fund by calling the telephone number on the cover page hereof or from
the Distributor or Merrill Lynch. Included in such services are the following:
INVESTMENT ACCOUNT
Each shareholder whose account (an "Investment Account") is maintained at the
Transfer Agent has an Investment Account and will receive statements, at least
quarterly, from the Transfer Agent. These quarterly statements will serve as
transaction confirmations for automatic investment purchases and the
reinvestment of ordinary income dividends and long-term capital gain
distributions. These statements will also show any other activity in the
account since the preceding statement. Shareholders will receive separate
transaction confirmations for each purchase or sale transaction other than
automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gains distributions. Shareholders may make
additions to their Investment Accounts at any time by mailing a check directly
to the Transfer Agent. Shareholders may also maintain their accounts through
Merrill Lynch. Upon the transfer of shares out of a Merrill Lynch brokerage
account, an Investment Account in the transferring shareholder's name may be
opened 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 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 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. Shares of the Fund may
be exchanged pursuant to this exchange privilege while the sale of Fund shares
is suspended, but shares of the Fund may not be acquired pursuant to the
exchange privilege during such period. 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
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eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second MLAM-
advised mutual fund, and the shareholder does not hold Class A shares of the
second fund in his account at the time of the exchange and is not otherwise
eligible to acquire Class A shares of the second fund, the shareholder will
receive Class D shares of the second fund as a result of the exchange. Class D
shares also may be exchanged for Class A shares of a second MLAM-advised mutual
fund at any time as long as, at the time of the exchange, the shareholder holds
Class A shares of the second fund in the account in which the exchange is made
or is otherwise eligible to purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the relative
net asset values per Class A or Class D share, respectively, plus an amount
equal to the difference, if any, between the sales charge previously paid on
the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the same
class of other MLAM-advised mutual funds.
Shares of the Fund 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 to
Merrill Lynch if the shareholder's account is maintained with Merrill Lynch, or
by written notification or telephone (1-800-MER-FUND) to the Transfer Agent if
the shareholder's account is maintained with the Transfer Agent, elect to have
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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. The Fund is not responsible for any failure of delivery to the
shareholder's address of record and no interest will accrue on amounts
represented by uncashed distribution or redemption checks. 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. Automatic
reinvestment of dividends and capital gains distributions will continue while
the sale of shares of the Fund is suspended.
SYSTEMATIC WITHDRAWAL PLANS
A shareholder may elect to receive systematic withdrawal payments from his
Investment Account through automatic payment by check or through automatic
payment by direct deposit to his bank account on either a monthly or quarterly
basis. Alternatively, a shareholder whose shares are held within a CMA(R),
CBA(R) or Retirement Account may elect to have shares redeemed on a monthly,
bimonthly, quarterly, semiannual or annual basis through the CMA(R) or CBA(R)
Systematic Redemption Program, subject to certain conditions. With respect to
redemptions of Class B and Class C shares pursuant to a systematic withdrawal
plan, the maximum number of Class B or Class C shares that can be redeemed from
an account annually shall not exceed 10% of the value of shares of such class
in that account at the time the election to join the systematic withdrawal plan
was made. Any CDSC that otherwise might be due on such redemption of Class B or
Class C shares will be waived. Shares redeemed pursuant to a systematic
withdrawal plan will be redeemed in the same order as Class B or Class C shares
are otherwise redeemed. See "Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares--Contingent Deferred Sales Charges--
Class B Shares" and "--Contingent Deferred Sales Charges--Class C Shares."
Where the systematic withdrawal plan is applied to Class B shares, upon
conversion of the last Class B shares in an account to Class D shares, the
systematic withdrawal plan will automatically be applied thereafter to Class D
shares. See "Purchase of Shares--Deferred Sales Charge Alternatives--Class B
and Class C Shares--Conversion of Class B Shares to Class D Shares."
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. No shares may be acquired
through the Fund's Automatic Investment Plan or through a CMA(R) or CBA(R)
Automated Investment Program while the sale of shares of the Fund is suspended.
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
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of participation in a Program, shares that have been held for less than
specified periods within such Program may be subject to a fee based upon the
current value of such shares. These Programs also generally prohibit such
shares from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance
fees) in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from the Transfer Agent at
(800) MER-FUND or (800) 637-3863.
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (the "Code"). As long as it so qualifies, the Fund
(but not its shareholders) will not be subject to Federal income tax on the
part of its net ordinary income and net realized capital gains which it
distributes to Class A, Class B, Class C and Class D shareholders (together,
the "shareholders"). The Fund intends to distribute substantially all of such
income.
Dividends paid by the Fund from its ordinary income or from an excess of net
short-term capital gains over net long-term capital losses (together referred
to hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from an excess of net long-term capital
gains over net short-term capital losses (including gains or losses from
certain transactions in 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 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). Recent legislation
creates additional categories of capital gains taxable at different rates.
Generally 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, as well as the amount
of capital gain dividends in the different categories of capital gain referred
to above.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. 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
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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. In addition, recent legislation permits a foreign
tax credit to be claimed with respect to withholding tax on a dividend only if
the shareholder meets certain holding period requirements. 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. In the case of
foreign taxes passed through by a RIC, the holding period requirements referred
to above must be met by both the shareholder and the RIC. 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 and other
information needed to claim the foreign tax credit.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
Under Code Section 988, foreign currency gains or losses from certain debt
instruments, 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.
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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.
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
43
<PAGE>
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, 1997 was 2.95%
for Class A shares, 2.07% for Class B shares, 2.04% for Class C shares and
2.70% for Class D shares.
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.
44
<PAGE>
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all its net investment income.
Dividends from such net investment income are paid quarterly. All net realized
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 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. The NYSE is not open on New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Any assets or liabilities initially
expressed in terms of non-U.S. dollar currencies are translated into U.S.
dollars at the prevailing market rates as quoted by one or more banks or
dealers on the day of valuation. The net asset value per share is computed by
dividing the value of the securities held by the Fund plus any cash or other
assets (including interest and dividends accrued but not yet received) minus
all liabilities (including accrued expenses) by the total number of shares
outstanding at such time, rounded to the nearest cent. Expenses, including the
fees payable to the Manager and the Distributor, are accrued daily.
The per share net asset value of Class A shares generally will be higher than
the per share net asset value of shares of other classes, reflecting the daily
expense accruals of the account maintenance, distribution and higher transfer
agency fees applicable with respect to the Class B and Class C shares and the
daily expense accruals of the account maintenance fees applicable with respect
to Class D shares; moreover, the per share net asset value
45
<PAGE>
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 for long positions and
at the last available ask price for short positions. 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.
Long positions in 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. Short positions in securities traded in the OTC market are valued at
the last available ask 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, are 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, 1997, the Fund paid $59 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 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.
46
<PAGE>
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.
47
<PAGE>
(THIS PAGE IS INTENTIONALLY LEFT BLANK)
48
<PAGE>
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.--AUTHORIZATION FORM (PART 1)
- -------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINT SM PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINT SM
PROGRAM APPLICATION BY CALLING TOLL FREE (800) 637-3766.
- -------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, BEING OF LEGAL AGE, WISH TO PURCHASE: (CHOOSE ONE)
[_] Class A shares [_] Class B shares [_] Class
C shares [_] Class D shares
of Merrill Lynch Global Convertible Fund, Inc. and establish an Investment
Account as described in the Prospectus. In the event that I am not eligible to
purchase Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $............ payable to 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)
Occupation........................... Name and Address of Employer ........
.....................................
.....................................
..................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
(In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- -------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
Ordinary Income Dividends Long-Term Capital Gains
Select [_] Reinvest Select [_] Reinvest
One: [_] Cash One: [_] Cash
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.
- -------------------------------------------------------------------------------
49
<PAGE>
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.
..................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
- -------------------------------------------------------------------------------
4. LETTER OF INTENTION--CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
..................., 19......
Date of initial purchase
Dear Sir/Madam:
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Global Convertible Fund, Inc. or any other investment company with an
initial sales charge or deferred sales charge for which Merrill Lynch Funds
Distributor, Inc. acts as distributor over the next 13 month period which will
equal or exceed:
[_] $25,000 [_] $50,000 [_] $100,000 [_] $250,000 [_] $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch Global Convertible
Fund, Inc. Prospectus.
I agree to the terms and conditions of this Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc. my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Global Convertible Fund, Inc. held as security.
By:.................................. .....................................
Signature of Owner Signature of Co-Owner
If registered in joint parties, both must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name............................. (2) Name.............................
Account Number.......................
Account Number.......................
- -------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp We hereby authorize Merrill Lynch
Funds Distributor, Inc. to act as
our agent in connection with
transactions under this
- - - authorization form and agree to
notify the Distributor of any
purchases or sales made under a
Letter of Intention, Automatic
Investment Plan or Systematic
Withdrawal Plan. We guarantee the
- - - shareholder's signature.
This form when completed should be .....................................
mailed to: Dealer Name and Address
Merrill Lynch Global Convertible
Fund, Inc.
c/o Merrill Lynch Financial By ..................................
Data Services, Inc. Authorized Signature of Dealer
P.O. Box 45289
Jacksonville, FL 32232-5289
----------- ----------
----------- ---------- ...............
Branch-Code F/C No. F/C Last Name
----------- ----------
----------- ----------
Dealer's Customer Account No.
50
<PAGE>
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 [ ]
(Please Print) Social Security No. or
Taxpayer Identification No.
Name of Owner.................................................
First Name Initial Last Name
Name of Co-Owner (if any).....................................
First Name Initial Last Name
Address.................................. Account Number ....................
(if existing account)
.........................................
(Zip Code)
- -------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN--(SEE TERMS AND CONDITIONS IN THE STATEMENT OF
ADDITIONAL INFORMATION)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of [_] Class A, [_] Class B*, [_] Class C* 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 withdrawals in
. . . . . . . . . ., or as soon as possible thereafter.
(month)
SPECIFY THE AMOUNT OF THE WITHDRAWAL YOU WOULD LIKE PAID TO YOU: $ of
------
(check one): [_] Class A, [_] Class B*, [_] Class C* or [_] Class D shares in
the account.
SPECIFY WITHDRAWAL METHOD: [_] check or [_] direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a)I hereby authorize payment by check
[_] as indicated in Item 1.
[_] to the order of..........................................................
Mail to (check one)
[_] the address indicated in Item 1.
[_] Name (please print)......................................................
Address .......................................................................
...............................................................................
Signature of Owner..................................... Date..................
Signature of Co-Owner (if any).................................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING
OR TERMINATING THIS SERVICE.
Specify type of account (check one): [_] checking [_] savings
Name on your account...........................................................
Bank Name......................................................................
Bank Number........................ Account Number............................
Bank Address...................................................................
...............................................................................
Signature of Depositor................................. Date..................
Signature of Depositor.........................................................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID"
OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS APPLICATION.
- -------
* Annual withdrawal cannot exceed 10% of the value of shares of such class
held in the account at the time the election to join the Systematic Withdrawal
Plan is made.
51
<PAGE>
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.
AUTHORIZATION TO HONOR ACH DEBITS
MERRILL LYNCH FINANCIAL DATA DRAWN BY MERRILL LYNCH FINANCIAL
SERVICES, INC. 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 To...............................Bank
$................................. (Investor's Bank)
Bank Address.........................
Account Number ...................
City....... State....... Zip .......
Please date and invest ACH debits on
the 20th of each month beginning
..... or as soon thereafter
(month) as possible.
I agree that you are preparing these As a convenience to me, I hereby
ACH debits voluntarily at my request request and authorize you to pay and
and that you shall not be liable for charge to my account ACH debits
any loss arising from any delay in drawn on my account by and payable
preparing or failure to prepare any to Merrill Lynch Financial Data
such debit. If I change banks or Services, Inc. I agree that your
desire to terminate or suspend this rights in respect to each such debit
program, I agree to notify you shall be the same as if it were a
promptly in writing. I hereby check drawn on you and signed
authorize you to take any action to personally by me. This authority is
correct erroneous ACH debits of my to remain in effect until revoked by
bank account or purchases of Fund me in writing. Until you receive
shares including liquidating shares such notice, you shall be fully
of the Fund and credit any bank protected in honoring any such
account. I further agree that if a debit. I further agree that if any
debit is not honored upon such debit be dishonored, whether
presentation, Merrill Lynch Financial with or without cause and whether
Data Services, Inc. is authorized to intentionally or inadvertently, you
discontinue immediately the Automatic shall be under no liability.
Investment Plan and to liquidate
sufficient shares held in my account
to offset the purchase made with the
dishonored debit.
............ ..................... ............ .....................
Date Signature of Date Signature of
Depositor Depositor
...................... ............ .....................
Signature of Depositor Bank Signature of Depositor
(If joint account, Account (If joint account,
both must sign) Number both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" SHOULD ACCOMPANY THIS APPLICATION.
52
<PAGE>
(THIS PAGE IS INTENTIONALLY LEFT BLANK)
<PAGE>
(THIS PAGE IS INTENTIONALLY LEFT BLANK)
<PAGE>
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>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH
THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER IN-
FORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTI-
TUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table.................................................................. 2
Merrill Lynch Select PricingSM System...................................... 3
Financial Highlights....................................................... 8
Special Considerations..................................................... 11
Investment Objective and Policies.......................................... 12
Convertible Securities.................................................... 14
Other Factors............................................................. 16
Portfolio Strategies Involving Options and Futures........................ 17
Other Investment Policies and Practices................................... 22
Investment Restrictions................................................... 23
Management of the Fund..................................................... 23
Directors................................................................. 23
Management and Advisory Arrangements...................................... 24
Code of Ethics............................................................ 25
Transfer Agency Services.................................................. 25
Reorganization of the Fund................................................. 25
Purchase of Shares......................................................... 26
Initial Sales Charge Alternatives--
Class A and Class D Shares.............................................. 28
Deferred Sales Charge Alternatives--
Class B and Class C Shares.............................................. 31
Distribution Plans........................................................ 34
Limitations on the Payment of Deferred Sales Charges...................... 36
Redemption of Shares....................................................... 36
Redemption................................................................ 36
Repurchase................................................................ 37
Reinstatement Privilege--
Class A and Class D Shares.............................................. 37
Shareholder Services....................................................... 37
Investment Account........................................................ 38
Exchange Privilege........................................................ 38
Automatic Reinvestment of Dividends and Capital Gains Distributions....... 39
Systematic Withdrawal Plans............................................... 40
Automatic Investment Plans................................................ 40
Fee-Based Programs........................................................ 40
Taxes...................................................................... 41
Performance Data........................................................... 43
Additional Information..................................................... 45
Dividends and Distributions............................................... 45
Determination of Net Asset Value.......................................... 45
Organization of the Fund.................................................. 46
Shareholder Reports....................................................... 47
Shareholder Inquiries..................................................... 47
Authorization Form......................................................... 49
</TABLE>
Code #10665-0298
[LOGO] MERRILL LYNCH
Merrill Lynch
Global Convertible
Fund, Inc.
[ART]
PROSPECTUS
February 18, 1998
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
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.
----------------
Due to a pending proposal to reorganize the Fund, the sale of new shares of
the Fund has been suspended as of the date of this Statement of Additional
Information. If the reorganization is not effected, the Fund may determine to
recommence the offering of its shares at any time. Shareholders may continue
to redeem shares of the Fund at any time. See "Reorganization of the Fund" on
page 11.
Pursuant to the Merrill Lynch Select PricingSM 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 PricingSM 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
18, 1998 (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 18, 1998.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek high total return from a
combination of capital appreciation and investment income. The Fund will seek
to achieve its objective by investing primarily in an internationally
diversified portfolio of convertible debt securities, convertible preferred
stocks and "synthetic" convertible securities consisting of a combination of
debt securities or preferred stock and warrants or options. Reference is made
to "Investment Objective and Policies" in the Prospectus for a discussion of
the investment objective and policies of the Fund.
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. The portfolio turnover rate is calculated by dividing
the lesser of the Fund's annual sales or purchases of portfolio securities
(exclusive of purchases or sales of all securities whose maturities at the
time of acquisition were one year or less) by the monthly average value of the
securities in the portfolio during the year. For the fiscal years ended
October 31, 1996 and 1997, the portfolio turnover rates were 14.72% and
33.42%, respectively.
PORTFOLIO STRATEGIES INVOLVING OPTIONS AND FUTURES
Reference is made to the discussion under the caption "Investment Objective
and Policies--Portfolio Strategies Involving Options and Futures" in the
Prospectus for information with respect to various portfolio strategies
involving options and futures. The 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 (the "NYSE"). 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
2
<PAGE>
or both; (iii) trading halts, suspensions or other restrictions may be imposed
with respect to particular classes or series of options or underlying
securities; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Clearing
Corporation may not at all times be adequate to handle current trading volume;
or (vi) one or more exchanges could, for economic or other reasons, decide or
be compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that exchange (or in that class or series of options) would cease to exist,
although outstanding options on that exchange that had been issued by the
Clearing Corporation as a result of trades on that exchange would continue to
be exercisable in accordance with their terms.
The Fund may also enter into over-the-counter call option transactions ("OTC
options"), which are two party contracts with price and terms negotiated
between the buyer and seller. The Fund will only enter into over-the-counter
option transactions with respect to portfolio securities for which management
believes the Fund can receive on each business day at least two independent
bids or offers (one of which will be from an entity other than a party to the
option).
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 "marking 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"
3
<PAGE>
other than a borrowing from a bank. The staff of the Commission has in the
past indicated that a futures contract may be a "senior security" under the
Investment Company Act.
Foreign Currency Hedging. Generally, the foreign exchange transactions of
the Fund will be conducted on a spot, i.e., cash, basis at the spot rate for
purchasing or selling currency prevailing in the foreign exchange market. This
rate under normal market conditions differs from the prevailing exchange rate
in an amount generally less than 0.15 of one percent due to the costs of
converting from one currency to another. However, the Fund has authority to
deal in 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
4
<PAGE>
hedge effectively its portfolio. There is also the risk of loss by the Fund of
margin deposits in the event of bankruptcy of a broker with whom the Fund has
an open position in a futures contract or related option.
The exchanges on which the Fund intends to conduct options transactions have
generally established limitations governing the maximum number of call or put
options on the same underlying security or currency (whether or not covered)
which may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through
one or more brokers). "Trading limits" are imposed on the maximum number of
contracts which any person may trade on a particular trading day. An exchange
may order the liquidation of positions found to be in violation of these
limits and it may impose other sanctions or restrictions. The Manager does not
believe that these trading and position limits will have any adverse impact on
the portfolio strategies for hedging the Fund's portfolio.
OTHER INVESTMENT POLICIES AND PRACTICES
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 ("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
5
<PAGE>
greater for the holders of high yield securities because such securities may
be unsecured and may be subordinated to other credits of the issuer.
High yield securities frequently have call or redemption features that would
permit an issuer to repurchase the security from the Fund. If a call were
exercised by the issuer during a period of declining interest rates, the Fund
likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Fund and dividends
to shareholders.
The Fund may have difficulty disposing of certain high yield securities
because there may be a thin trading market for such securities. Because not
all dealers maintain markets in all high yield securities, the secondary
trading market for high yield securities is generally not as liquid as the
secondary market for higher rated securities. Reduced secondary market
liquidity may have an adverse impact on market price and the Fund's ability to
dispose of particular issues when necessary to meet the Fund's liquidity needs
or in response to a specific economic event such as a deterioration in the
creditworthiness of the issuer.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high yield
securities, particularly in a thinly traded market. Factors adversely
affecting the market value of high yield securities are likely to adversely
affect the Fund's net asset value. In addition, the Fund may incur additional
expenses to the extent it is required to seek recovery upon a default on a
portion holding or participate in the restructuring of the obligation.
INVESTMENT RESTRICTIONS
The Fund has adopted a number of fundamental and non-fundamental
restrictions and policies relating to the investment of its assets and its
activities. The fundamental policies set forth below may not be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities (which for this purpose and under the Investment Company Act
means the lesser of (i) 67% of the Fund's shares represented at a meeting at
which more than 50% of the outstanding shares of the Fund are represented or
(ii) more than 50% of the Fund's outstanding shares). The Fund may not:
1. Make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act.
2. Invest more than 25% of its assets, taken at market value 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,
6
<PAGE>
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. 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, which may be changed by
the Board of Directors without shareholder approval, the Fund may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law. As a matter of
policy, however, the Fund will not purchase shares of any registered open-
end investment company or registered unit investment trust, in reliance on
Section 12(d)(1)(F) or (G) (the "fund of funds" provision) of the
Investment Company Act at any time the Fund's shares are owned by another
investment company that is part of the same group of investment companies
as the Fund.
b. Make short sales of securities or maintain a short position, except to
the extent permitted by applicable law. The Fund currently does not intend
to engage in short sales, except short sales "against the box."
c. Invest in securities which cannot be readily resold because of legal
or contractual restrictions or which cannot otherwise be marketed, redeemed
or put to the issuer or a third party, if at the time of acquisition more
than 15% of its total assets would be invested in such securities. This
restriction shall not apply to securities which mature within seven days or
securities which the Board of 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 Manager, 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
7
<PAGE>
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.
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 the portfolio manager and of each executive officer and Director is P.O.
Box 9011, Princeton, New Jersey 08543-9011.
Arthur Zeikel (65)--President and Director(1)(2)--Chairman of the Manager
(which term as used herein includes its corporate predecessors) and of Fund
Asset Management, L.P. ("FAM") (which term as used herein includes its
corporate predecessors) since 1997; President of the Manager and FAM from 1977
to 1997; Chairman of Princeton Services, Inc. ("Princeton Services") since
1997, Director thereof since 1993 and President thereof from 1993 to 1997;
Executive Vice President of Merrill Lynch & Co., Inc. ("ML & Co.") since 1990.
James H. Bodurtha (54)--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 (58)--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 1976 to 1993; Distinguished Fellow, Herman Kahn Chair, Hudson
Institute from 1984 to 1985; Trustee, Hudson Institute since 1980 and
President since 1997; Director, Damon Corporation from 1991 to 1995; Overseer,
Center for Naval Analyses from 1983 to 1993; Limited Partner, Hypertech L.P.
in 1996.
Robert R. Martin (70)--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 (68)--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 (45)--Director(2)--Morgan Hall, Soldiers Field, Boston,
Massachusetts 02163. Professor, Harvard Business School since 1989 and
Associate Professor from 1983 to 1989; Trustee, The Common Fund, since 1989;
Director, Quantec Limited since 1991 and TIBCO from 1994 to 1996.
8
<PAGE>
Terry K. Glenn (57)--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 Merrill Lynch Funds
Distributor, Inc. ("MLFD" or the "Distributor") since 1986 and Director
thereof since 1991; President of Princeton Administrators, L.P. since 1988.
Joseph T. Monagle, Jr. (49)--Senior Vice President(1)(2)--Senior Vice
President and Department Head of the Global Fixed Income Division of the
Manager and FAM since 1990; Vice President of the Manager from 1978 to 1990;
Senior Vice President of Princeton Services since 1993.
Daniel A. Luchansky (38)--Vice President and Portfolio Manager(1)--Vice
President of the Manager since 1991.
Donald C. Burke (37)--Vice President(1)(2)--First Vice President of the
Manager since 1997; Vice President of the Manager from 1990 to 1997; Director
of Taxation of the Manager since 1990.
Gerald M. Richard (48)--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.
Lawrence A. Rogers (51)--Secretary(1)(2)--Director (Legal Advisory) of the
Manager since 1997; Attorney in private practice prior thereto.
- --------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a trustee, director or officer of certain
other investment companies for which the Manager or FAM acts as investment
adviser or manager.
At February 2, 1998, the officers and Directors of the Fund as a group (12
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Director and officer of the Fund, and the
other officers of the Fund, owned less than 1% of the outstanding shares of
common stock of ML & Co.
COMPENSATION OF 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 (each a "non-affiliated Director") 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 non-affiliated Director for his out-of-
pocket expenses relating to attendance at Board and Committee meetings. For
the fiscal year ended October 31, 1997, fees and expenses paid to the non-
affiliated Directors aggregated $45,388.
9
<PAGE>
The following table sets forth for the fiscal year ended October 31, 1997,
compensation paid by the Fund to the non-affiliated Directors and, for the
calendar year ended December 31, 1997, 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.
<TABLE>
<CAPTION>
PENSION OR AGGREGATE COMPENSATION
RETIREMENT BENEFITS FROM FUND AND
NAME OF COMPENSATION ACCRUED AS PART MLAM/FAM ADVISED FUNDS
DIRECTOR FROM FUND OF FUND EXPENSE PAID TO 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 (22 registered investment companies consisting of 46
portfolios); Mr. London (22 registered investment companies consisting of
46 portfolios); Mr. Martin (22 registered investment companies consisting
of 46 portfolios); Mr. May (22 registered investment companies consisting
of 46 portfolios); and Mr. Perold (22 registered investment companies
consisting of 46 portfolios).
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Fund--Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities 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, 1995, 1996 and 1997, the fees paid by the Fund to the Manager
aggregated $779,627, $463,001 and $301,179, respectively.
As described in the Prospectus, the Manager has 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
10
<PAGE>
Fund who are affiliated persons of ML & Co. or any of its affiliates. The Fund
pays all other expenses incurred in the operation of the Fund, including,
among other things, taxes, expenses for legal and auditing services, costs of
printing proxies, stock certificates, shareholder reports and prospectuses and
statements of additional information (except to the extent paid by the
Distributor), charges of the custodian, any sub-custodian and transfer agent,
expenses of redemption of shares, Commission fees, expenses of registering the
shares under Federal, state or foreign laws, fees and expenses of non-
affiliated 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. Similarly, the following entities
may be considered "controlling persons" of MLAM U.K.: Merrill Lynch Europe
Limited (MLAM U.K.'s parent), a subsidiary of ML International Holdings, a
subsidiary of Merrill Lynch International, Inc., a subsidiary of ML & Co.
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.
REORGANIZATION OF THE FUND
On November 6, 1997, the Board of Directors of the Fund approved an
Agreement and Plan of Reorganization (the "Reorganization Agreement") between
the Fund and Merrill Lynch Convertible Fund, Inc. ("Convertible Fund")
pursuant to which the Fund would transfer substantially all of its assets and
substantially all of its liabilities to Convertible Fund in exchange for newly
issued shares of Convertible Fund and thereafter deregister as an investment
company under the Investment Company Act and dissolve in accordance with the
laws of the State of Maryland (the "Reorganization").
The Reorganization is conditioned upon: (i) approval by the Fund's
shareholders of the Reorganization at a special meeting of shareholders (the
"Special Meeting") and (ii) the receipt of a favorable private letter ruling
from the Internal Revenue Service concerning the tax consequences of the
Reorganization. The required vote was not obtained at the Special Meeting held
on February 11, 1998, which has been adjourned to March 11, 1998.
If the Reorganization takes place, Fund shareholders will receive shares of
that class of shares of Convertible Fund having the same letter designation
(i.e., Class A, Class B, Class C or Class D) and the same distribution fees,
account maintenance fees and sales charges (including contingent deferred
sales charges), if
11
<PAGE>
any ("Corresponding Shares"), as the shares of the Fund held by them
immediately prior to the Reorganization. The aggregate net asset value of the
Corresponding Shares of Convertible Fund to be received by each shareholder of
the Fund will equal the aggregate net asset value of the Fund shares owned by
such shareholder immediately prior to the Reorganization.
The sale of new shares of the Fund was suspended as of the date of this
Statement of Additional Information. If the Reorganization is not effected,
the Fund may determine to recommence the offering of its shares at any time.
Shareholders may continue to redeem shares of the Fund at any time.
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 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 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 the sale of Class A shares for the fiscal year ended
October 31, 1997 were $561, of which the Distributor received $42 and Merrill
Lynch received
12
<PAGE>
$519. 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 gross sales charges for the sale of Class D shares for the fiscal
year ended October 31, 1997 were $6,175, of which the Distributor received
$395 and Merrill Lynch received $5,780. For the fiscal years ended October 31,
1995, 1996 and 1997, 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 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, all of which was paid to Merrill Lynch. For the fiscal years
ended October 31, 1995 and 1997 the Distributor received no CDSCs with respect
to redemptions within one year after purchase of Class D shares purchased
subject to a front-end sales charge waiver.
The 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
date the Merrill Lynch Select PricingSM System commenced operations) and wish
to reinvest the net proceeds from a sale of their closed-end fund shares of
common stock in Eligible Class A Shares, 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
13
<PAGE>
through Merrill Lynch and the net proceeds therefrom must be immediately
reinvested in Eligible Class A or Eligible 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 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
14
<PAGE>
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 BlueprintSM Program. 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 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.
15
<PAGE>
Employee AccessSM Accounts. Provided applicable threshold requirements are
met, either Class A or Class D shares are offered at net asset value to
Employee AccessSM Accounts available through authorized employers. The initial
minimum for such accounts is $500, except that the initial minimum for shares
purchased for such accounts pursuant to the Automatic Investment Program is
$50.
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 a
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund sponsored by
a non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("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.
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
16
<PAGE>
possible adverse tax consequences to the Fund that might result from an
acquisition of assets having net unrealized appreciation that is
disproportionately higher at the time of acquisition than the realized or
unrealized appreciation of the Fund. The issuance of Class D shares for
consideration other than cash is limited to bona fide reorganizations,
statutory mergers or other acquisitions of portfolio securities that (i) meet
the investment 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 "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
17
<PAGE>
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. (the "NASD") imposes a limitation on
certain asset-based sales charges such as the distribution fee and the CDSC
borne by the Class B and Class C shares but not the account maintenance fee.
The maximum sales charge rule is applied separately to each class. As
applicable to the Fund, the maximum sales charge rule limits the aggregate of
distribution fee payments and CDSCs payable by the Fund to (1) 6.25% of
eligible gross sales of Class B shares and Class C shares, computed separately
(defined to exclude shares issued pursuant to dividend reinvestments and
exchanges), plus (2) interest on the unpaid balance for the respective class,
computed separately, at the prime rate plus 1% (the unpaid balance being the
maximum amount payable minus amounts received from the payment of the
distribution fee and the CDSC). In connection with the Class B shares, the
Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any
time. To the extent payments would exceed the voluntary maximum, the Fund will
not make further payments of the distribution fee with respect to Class B
shares and any CDSCs will be paid to the Fund rather than to the Distributor;
however, the Fund will continue to make payments of the account maintenance
fee. In certain circumstances the amount payable pursuant to the voluntary
maximum may exceed the amount payable under the NASD formula. In such
circumstances payment in excess of the amount payable under the NASD formula
will not be made.
18
<PAGE>
The following table sets forth comparative information as of October 31,
1997 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.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF OCTOBER 31, 1997
------------------------------------------------------------------------------
(IN THOUSANDS)
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)
-------- --------- ----------- ------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES
Under NASD Rule as
Adopted................ $104,566 $6,535 $3,124 $9,659 $3,883 $5,776 $133
Under Distributor's
Voluntary Waiver....... $104,566 $6,535 $ 523 $7,058 $3,883 $3,175 $133
CLASS C SHARES
Under NASD Rule as
Adopted................ $ 10,570 $ 661 $ 148 $ 809 $ 95 $ 714 $ 8
</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. This figure may include CDSCs that were deferred
when a shareholder redeemed shares prior to the expiration of the
applicable CDSC period and invested the proceeds, without the imposition
of a sales charge, in Class A shares in conjunction with the shareholder's
participation in the Merrill Lynch Mutual Fund Advisor (Merrill Lynch
MFA SM) Program (the "MFA Program"). The CDSC is booked as a contingent
obligation that may be payable if the shareholder terminates participation
in the MFA Program.
(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 for more than seven days 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 cost, depending in part on the market value of the securities
held by the Fund at any such time.
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DEFERRED SALES CHARGES--CLASS B AND CLASS C SHARES
As discussed in the Prospectus under "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares," while Class B shares
redeemed within four years of purchase are subject to a CDSC under most
circumstances, the charge is waived on redemptions of Class B shares in
certain instances, including in connection with certain post-retirement
withdrawals from an 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 in the case of
such withdrawals are: (a) any partial or complete redemption in connection
with a distribution following retirement under a tax-deferred retirement plan
or attaining age 59 1/2 in the case of an IRA or other retirement plan, or
part of a series of equal periodic payments (not less frequently than
annually) made for the life (or life expectancy) or any redemption resulting
from the tax-free return of an excess contribution to an IRA; or (b) any
partial or complete redemption following the death or disability (as defined
in the Code) of a Class B shareholder (including one who owns the Class B
shares as joint tenant with his or her spouse), provided the redemption is
requested within one year of the death or initial determination of disability.
For the fiscal years ended October 31, 1995, 1996 and 1997, the Distributor
received CDSCs of $329,050, $110,201 and $79,400 respectively, with respect to
redemptions of Class B shares, all of which were paid to Merrill Lynch.
Additional CDSCs payable to the Distributor during the fiscal year ended
October 31, 1997 may have been waived or converted to a contingent obligation
in connection with a shareholder's participation in certain fee-based
programs. For the fiscal years ended October 31, 1995, 1996 and 1997, the
Distributor received CDSCs of $3,929, $2,756 and $1,308 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 BlueprintSM Program. 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.
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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.
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
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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, 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 years ended October 31, 1996 and 1997,
the Fund paid aggregate brokerage commissions of $31,793 and $55,184,
respectively, 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.
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.
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
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 for long positions and
at the last available ask price for short positions. 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. Long positions in 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. Short positions in securities traded in the OTC market
are valued at the last available ask 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, are 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
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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 years
ended October 31, 1995 and October 31, 1996 the Fund made no payments to MLSPS
for such service. During the fiscal year ended October 31, 1997, the Fund paid
$59 to MLSPS for such service.
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" that are designed to facilitate
investment in its shares. Certain of such services are not available to
investors who place orders for the Fund's shares through the Merrill Lynch
BlueprintSM 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.
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
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<PAGE>
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 by purchasing
Class A shares (if he or she is an eligible Class A investor as described in
the Prospectus) 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. No shares
may be acquired through the Fund's Automatic Investment Plan or through a
CMA(R) or CBA(R) Automated Investment Program while the sale of shares of the
Fund is suspended.
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. Automatic reinvestment of
dividends and capital gains distributions will continue while the sale of
shares of the Fund is suspended.
Shareholders may, at any time, notify Merrill Lynch in writing if the
shareholder's account is maintained with Merrill Lynch or notify the Transfer
Agent in writing or by telephone (1-800-MER-FUND) if their account is
maintained with the Transfer Agent 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. The Fund is not
responsible for any failure of delivery to the shareholder's address of record
and no interest will accrue on amounts represented by uncashed distribution or
redemption checks.
SYSTEMATIC WITHDRAWAL PLANS
A shareholder may elect to make systematic withdrawals from an Investment
Account of Class A, Class B, Class C or Class D shares in the form of payments
by check or through automatic payment by direct deposit on either a monthly or
quarterly basis as provided below. Quarterly withdrawals are available for
shareholders who have acquired shares of the Fund having a value, based on
cost or the current offering price, of $5,000 or more and monthly withdrawals
are available for shareholders with shares having a value of $10,000 or more.
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<PAGE>
At the time of each withdrawal payment, sufficient 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 the dollar
amount and class of shares to be redeemed. Redemptions will be made at net
asset value as determined 15 minutes after the close of business on the NYSE
(generally, 4:00 p.m., New York time) on the 24th day of each month or the
24th day of the last month of each quarter, whichever is applicable. If the
NYSE is not open for business on such date, the 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 shares in
the Investment Account are reinvested automatically in shares of the Fund. A
shareholder's Systematic Withdrawal Plan may be terminated at any time,
without charge or penalty, by the shareholder, the Fund, the 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 shares concurrent with
withdrawals are ordinarily disadvantageous to the shareholder because of sales
charges and tax liabilities. The Fund will not knowingly accept purchase
orders for shares of the Fund from investors who maintain a Systematic
Withdrawal Plan unless such purchase is equal to at least one year's scheduled
withdrawals or $1,200, whichever is greater. Periodic investments may not be
made into an Investment Account 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
$50. The proceeds of systematic redemptions will be posted to the
shareholder's account five business days after the date the shares are
redeemed. All redemptions are made at net asset value. A shareholder may elect
to have his or her shares redeemed on the first, second, third or fourth
Monday of each month, in the case of monthly redemptions, or of every other
month, in the case of bimonthly redemptions. For quarterly, semiannual or
annual redemptions, the shareholder may select the month in which the shares
are to be redeemed and may designate whether the redemption is to be made on
the first, second, third or fourth Monday of the month. If the Monday selected
is not a business day, the redemption will be processed at net asset value on
the next business day. The Systematic Redemption Program is not available if
Fund shares are being purchased within the account pursuant to the Automatic
Investment Plan or an Automated Investment Program. For more information on
the CMA(R) or CBA(R) Systematic Redemption Program, eligible shareholders
should contact their Merrill Lynch Financial Consultant.
With respect to redemptions of Class B and Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares
that can be redeemed from an account annually shall not exceed 10% of the
value of shares of such class in that account at the time the election to join
the systematic withdrawal plan was made. Any CDSC that otherwise might be due
on such redemption of Class B or Class C shares will be waived. Shares
redeemed pursuant to a systematic withdrawal plan will be redeemed in the same
order as Class B or Class C shares are otherwise redeemed. See "Purchase of
Shares--Deferred Sales Charge Alternatives--Class B and Class C Shares--
Contingent Deferred Sales Charges--Class B Shares" and "--Contingent Deferred
Sales Charges--Class C Shares" in the Prospectus. Where the systematic
withdrawal plan is applied to Class B shares, upon conversion of the last
Class B shares in an account to Class D shares, the systematic withdrawal plan
will automatically be applied thereafter to Class D shares. See "Purchase of
Shares--
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Deferred Sales Charge Alternatives--Class B and Class C Shares--Conversion of
Class B Shares to Class D Shares" in the Prospectus; if an investor wishes to
change the amount being withdrawn in a systematic withdrawal plan, the
investor should contact his or her 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 purchase to initially
establish any such plan is $250, and the minimum subsequent purchase is $1
(except that for the Blueprint SM Program the minimum initial purchase is $100
and the minimum subsequent purchase is $50).
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
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds. Shares of the Fund
remain eligible to be exchanged while the sale of shares of the Fund is
suspended, but shares of the Fund may not be acquired by exchange during such
period. 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, but does not hold Class A shares of the second fund
in his or her account at the time of the exchange and is not otherwise
eligible to acquire Class A shares of the second fund, the shareholder will
receive Class D shares of the second fund as a result of the exchange. Class D
shares also may be exchanged for Class A shares of a second 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 at
least 15 days. It is contemplated that the exchange privilege may be
applicable to other new mutual funds whose shares may be distributed by the
Distributor.
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Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount
equal to the difference, if any, between the sales charge previously paid on
the outstanding Class A or Class D shares and the sales charge payable at the
time of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have
taken place, the "sales charge previously paid" shall include the aggregate of
the sales charges paid with respect to such Class A or Class D shares in the
initial purchase and any subsequent exchange. Class A or Class D shares issued
pursuant to dividend reinvestment are sold on a no-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 with a reduced sales charge
or without a sales charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively, 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
Special Value Fund Class B shares for more than five years.
Shareholders also may exchange shares of the Fund into shares of certain
money market funds advised by the 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 that were
acquired as a result of an exchange for Class B or Class C shares of the Fund
may, in turn, be exchanged back into Class B or Class C shares, respectively,
of any fund offering such shares, in which event the holding period for Class
B or Class C shares of the newly acquired fund will be aggregated with
previous holding periods for purposes of reducing the CDSC. Thus, for example,
an investor may exchange Class B shares of the Fund for shares of Merrill
Lynch Institutional Fund ("Institutional Fund") after having held the
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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 payable. If,
instead of such redemption, the shareholder exchanged such shares for Class B
shares of a fund that the shareholder continued to hold for an additional two
and a half years, any subsequent redemption would not incur a CDSC.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, 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 MLAM-advised funds
with shares for which certificates have not been issued, may exercise the
exchange privilege by wire through their securities dealers. The Fund reserves
the right to require a properly completed Exchange Application. This exchange
privilege may be modified or terminated in accordance with the rules of the
Commission. The Fund reserves the right to limit the number of times an
investor may exercise the exchange privilege. Certain funds may suspend the
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 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 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. As long as it
so qualifies, the Fund (but not its shareholders) will not be subject to
Federal income tax on the part of its net ordinary income and net realized
capital gains 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.
28
<PAGE>
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 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). Recent legislation
creates additional categories of capital gains taxable at different rates.
Generally 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.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. 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 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. In addition,
recent legislation permits a foreign tax credit to be claimed with respect to
withholding tax on a dividend only if the shareholder meets
29
<PAGE>
certain holding period requirements. 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 to, and intends to, file an
election with the Internal Revenue Service pursuant to which shareholders of
the Fund will be required to include their proportionate shares of such
withholding taxes in their United States income tax returns as gross income,
treat such proportionate shares as taxes paid by them and deduct such
proportionate shares in computing their taxable incomes or, alternatively, use
them as foreign tax credits against their United States income taxes. In the
case of foreign taxes passed through by a RIC, the holding period requirements
referred to above must be met by both the shareholder and the RIC. 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 and other information needed to claim the
foreign tax credit. 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 statistical 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
30
<PAGE>
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 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.
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
31
<PAGE>
gains or losses will increase or decrease the amount of the Fund's investment
company taxable income available to be distributed to shareholders as ordinary
income. Additionally, if Code Section 988 losses exceed other investment
company taxable income during a taxable year, the Fund would not be able to
make any ordinary income dividend distributions and all or a portion of
distributions made before the losses were realized but in the same taxable
year would be recharacterized as a return of capital to shareholders, thereby
reducing the basis of each shareholder's Fund shares and resulting in a
capital gain for any shareholder who received a distribution greater than 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
32
<PAGE>
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.
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 OF A EXPRESSED AS A REDEEMABLE VALUE OF A
PERCENTAGE BASED HYPOTHETICAL PERCENTAGE BASED 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, 1997............... 11.60% $1,116.00 12.56% $1,125.60
Five Years Ended October
31, 1997............... 8.70% $1,517.90 8.75% $1,520.90
Inception (February 26,
1988) to October 31,
1997................... -- -- 6.82% $1,894.50
Inception (November 4,
1988) to October 31,
1997................... 7.59% $1,930.90 -- --
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Year Ended October 31,
1997................... 17.79% $1,177.90 16.56% $1,165.60
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,
1997................... -- -- 89.45% $1,894.50
Inception (November 4,
1988) to October 31,
1997................... 93.09% $1,930.90 -- --
<CAPTION>
YIELD
<S> <C> <C> <C> <C>
30 days ended October
31, 1997............... 2.95% -- 2.07% --
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
CLASS C SHARES CLASS D SHARES
--------------------------------------- ---------------------------------------
EXPRESSED AS A REDEEMABLE VALUE OF A EXPRESSED AS A REDEEMABLE VALUE OF A
PERCENTAGE BASED HYPOTHETICAL PERCENTAGE BASED 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, 1997............... 15.40% $1,154.00 11.25% $1,112.50
Inception (October 21,
1994) to October 31,
1997................... 9.50% $1,316.20 8.52% $1,280.80
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Year Ended October 31,
1997................... 16.40% $1,164.00 17.41% $1,174.10
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
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (October 21,
1994) to October 31,
1997................... 31.62% $1,316.20 28.08% $1,280.80
<CAPTION>
YIELD
<S> <C> <C> <C> <C>
30 days ended October
31, 1997............... 2.04% -- 2.70% --
</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 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.
34
<PAGE>
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 of 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, 1997, is calculated as
set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Net Assets........................ $3,465,875 $17,730,531 $1,112,046 $6,613,835
========== =========== ========== ==========
Number of Shares Outstanding...... 291,989 1,490,162 93,671 557,641
========== =========== ========== ==========
Net Asset Value Per Share (net
assets divided by number of
shares outstanding).............. $ 11.87 $ 11.90 $ 11.87 $ 11.86
Shares Charge (for Class A and
Class D shares: 5.25% of offering
price (5.54% of net asset value
per share))*..................... 0.66 ** ** 0.66
---------- ----------- ---------- ----------
Offering Price.................... $ 12.53 $ 11.90 $ 11.87 $ 12.52
========== =========== ========== ==========
</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 selection of
independent auditors is subject to approval by the non-affiliated Directors of
the Fund. The independent auditors are responsible for auditing the annual
financial statements of the Fund.
35
<PAGE>
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 351, Boston, Massachusetts
02101, 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 February 2, 1998.
36
<PAGE>
APPENDIX
RATINGS OF DEBT SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") LONG-TERM DEBT
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 edged." 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 risk 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 some time 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 thereby 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 the desirable
investment. 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 applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a
ranking in the lower end of that generic rating category.
37
<PAGE>
DESCRIPTION OF MOODY'S SHORT-TERM DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated
issuers:
PRIME 1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
--Leading market positions in well-established industries.
--High rates of return on funds employed.
--Conservative capitalization structure 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.
PRIME 2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt 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, may be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
PRIME 3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations. The
effect 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 may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime
rating categories.
If an issuer represents to Moody's that its short-term debt 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.
Moody's ratings are opinions, not recommendations to buy or sell, and their
accuracy is not guaranteed. A rating should be weighed solely as one factor in
an investment decision and you should make your own study and evaluation of
any issuer whose securities or debt obligations you consider buying or
selling.
38
<PAGE>
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS
Because of the fundamental differences between preferred stocks and bonds, a
variation of Moody's bond rating symbols is used in the quality ranking of
preferred stock. The symbols, presented below, are designed to avoid
comparison with bond quality in absolute terms. It should always be borne in
mind that preferred stock occupies a junior position to bonds within a
particular capital structure and that these securities are rated within the
universe of preferred stocks.
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 a 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 a medium-grade
preferred stock, 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 applies numerical modifiers 1, 2 and 3 in each rating
classification: 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 ISSUE CREDIT RATINGS:
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial
obligation, a specific class of financial obligations, or a specific program
(including ratings on medium term note programs and commercial paper
programs). It takes into consideration the creditworthiness of guarantors,
insurers or other forms of credit enhancement on the obligation and takes into
39
<PAGE>
account the currency in which the obligation is denominated. The issue credit
rating is not a recommendation to purchase, sell or hold a financial
obligation, inasmuch as it does not comment as to market price or suitability
for a particular investor.
Issue credit ratings are based on current information furnished by the
obligors 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. Credit
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
Issue credit ratings can be either long-term or short-term. Short-term
ratings are generally assigned to those obligations considered short-term in
the relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days including commercial paper. Short-
term ratings are also used to indicate the creditworthiness of an obligor with
respect to put features on long-term obligations. The result is a dual rating,
in which the short-term rating addresses the put feature, in addition to the
usual long-term rating. Medium-term notes are assigned long-term ratings.
Long-Term Issue Credit Ratings
Issue credit ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of payment-capacity and willingness of the obligor to
meet its financial commitment on an obligation in accordance with
the terms of the obligation;
2. Nature of and provisions of the obligation;
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.
The issue rating definitions are expressed in terms of default risk. As
such, they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority
in bankruptcy, as noted above. (Such differentiation applies when an entity
has both senior and subordinated obligations, secured and unsecured
obligations, or operating company and holding company obligations.)
Accordingly, in the case of junior debt, the rating may not conform exactly
with the category definition.
AAA An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA An obligation rated AA differs from the higher rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity
to meet its financial commitment on the obligation is still strong.
BBB An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
40
<PAGE>
Obligations rated BB, B, CCC, CC and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation and
C the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties or
major exposures to adverse conditions.
BB An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated B is more vulnerable to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial or
economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation.
CCC An obligation rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial and economic conditions for
the obligor to meet its financial commitment on the obligation. In the
event of adverse business, financial or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on
the obligation.
CC An obligation rated CC is currently highly vulnerable to nonpayment.
C The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken but payments on
this obligation are being continued.
D An obligation rated D is in payment default. The D rating category is
used when payments on an obligation 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 or the
taking of similar action if payments on an obligation 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 within the major
ratings categories.
r This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples
include: obligations linked or indexed to equities, currencies, or
commodities; obligations exposed to severe prepayment risk such as
interest-only or principal-only mortgage securities; and obligations
with unusually risky interest terms, such as inverse floaters.
Short-Term Issue Credit Ratings
A-1 A short-term obligation rated A-1 is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is strong. Within this category, certain
obligations are designated with a plus sign (+). This indicates that the
obligor's capacity to meet its financial commitment on these obligations
is extremely strong.
A-2 A short-term obligation rated A-2 is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity
to meet its financial commitment on the obligation is satisfactory.
41
<PAGE>
A-3 A short-term obligation rated A-3 exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligations.
B A short-term obligation rated B is regarded as having significant
speculative characteristics. The obligor currently has the capacity to
meet its financial commitment on the obligation; however, it faces major
ongoing uncertainties which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation.
C A short-term obligation rated C is currently vulnerable to nonpayment
and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the
obligation.
D A short-term obligation rated D is in payment default. The D rating
category is used when payments on an obligation 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 or the taking of a similar action if payments on an obligation
are jeopardized.
Local Currency and Foreign Currency Risks
Country risk considerations are a standard part of Standard & Poor's
analysis for credit ratings on any issuer or issue. Currency of repayment is a
key factor in this analysis. An obligor's capacity to repay foreign currency
obligations may be lower than its capacity to repay obligations in its local
currency due to the sovereign government's own relatively lower capacity to
repay external versus domestic debt. These sovereign risk considerations are
incorporated in the debt ratings assigned to specific issues. Foreign currency
issuer ratings are also distinguished from local currency issuer ratings to
identify those instances where sovereign risks make them different for the
same issuer.
DESCRIPTION OF STANDARD & POOR'S RATING OUTLOOK AND CREDITWATCH
A Standard & Poor's Rating Outlook assesses the potential direction of an
issuer's long-term debt rating over the intermediate to longer term. In
determining a Rating Outlook, consideration is given to any changes in the
economic and/or fundamental business conditions. An Outlook is not necessarily
a precursor of a rating change or future CreditWatch action. Ratings appear on
CreditWatch when an event or deviation from an expected trend has occurred or
is expected and additional information is necessary to take a rating action.
For example, an issue is placed under such special surveillance as the result
of mergers, recapitalizations, regulatory actions, or unanticipated operating
developments. Such rating reviews normally are completed within 90 days,
unless the outcome of a specific event is pending. CreditWatch designations
and Rating Outlooks may be:
"Positive" indicates that ratings may be raised.
"Negative" means ratings may be lowered.
"Stable" indicates that ratings are not likely to change.
"Developing" means ratings may be raised or lowered.
"N.M." means not meaningful.
42
<PAGE>
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 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 debt rating symbol assigned to, or that would be assigned
to, the senior debt of the same issuer.
Preferred stock ratings are based on the following considerations:
1. 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;
2. Nature of, and provisions of, the issue;
3. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangement under the laws of bankruptcy
and other laws affecting creditors' rights.
AAA This is the highest rating that may be assigned by Standard & Poor's to
a preferred stock issue and indicates an extremely strong capacity to
pay the preferred stock obligations.
AA A preferred stock issue rated AA also qualifies as a high-quality,
fixed-income security. The capacity to pay preferred stock obligations
is very strong, although not as overwhelming as for issues rated AAA.
A An issue rated A is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.
BBB An issue rated BBB is regarded as backed by an adequate capacity to pay
the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to make
payments for a preferred stock in this category than for issues in the
A category.
BB, B, Preferred stock rated BB, B, and CCC are regarded, on balance, as
CCC 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. 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.
N.R. This 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, 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.
43
<PAGE>
A preferred stock 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 to Standard & Poor's by the issuer, and 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 based on other circumstances.
DESCRIPTION OF STANDARD & POOR'S DUAL RATINGS
Standard & Poor's assigns "dual" ratings to all debt issues that have a put
option or demand feature as part of their structure. The first rating
addresses the likelihood of repayment of principal and interest as due, and
the second rating addresses only the demand feature. The long-term debt rating
symbols are used for bonds to denote the long-term maturity and the short-term
issue credit rating symbols for the put option (for example, "AAA/A-1+"). With
short-term demand debt, Standard & Poor's note rating symbols are used with
the short-term issue credit rating symbols (for example, "SP-1+/A-1+").
44
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Global Convertible Fund, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Merrill Lynch Global Convertible
Fund, Inc. as of October 31, 1997, 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, 1997, by correspondence with the custodian and brokers.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Global Convertible Fund, Inc. as of October 31, 1997, 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 5, 1997
45
<PAGE>
Merrill Lynch Global Convertible Fund, Inc., October 31, 1997
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in US dollars)
NORTH Shares Value Percent of
AMERICA Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
United States Food/Beverage/ 20,000 ConAgra Inc. $ 309,079 $ 602,500 2.08%
Tobacco & Household
Pharmaceuticals 1,091 ++Crescendo Pharmaceuticals Corp. 12,547 12,274 0.04
Retail Stores 22,500 Home Depot, Inc. 707,041 1,251,562 4.33
Total Investments in
United States Common Stocks 1,028,667 1,866,336 6.45
Convertible Preferred Stocks
United States Insurance 10,000 American General Corp., Pfd. 523,200 665,000 2.30
15,000 St. Paul Companies, Inc., Pfd. 784,736 1,050,000 3.63
------------ ------------ -------
1,307,936 1,715,000 5.93
Oil & Gas Producers 7,000 Lomak Petroleum, Inc., $5.75 Pfd. 350,000 353,500 1.22
10,000 Occidental Petroleum Corp.,
Pfd., Series A 580,600 940,000 3.25
------------ ------------ -------
930,600 1,293,500 4.47
Real Estate 20,000 Merry Land & Investment
Investment Company, Inc., Pfd. 509,462 552,500 1.91
Trust
Steel 30,000 USX Capital Trust I, Pfd. 1,387,500 1,425,000 4.93
20,000 WHX Corp., Pfd., Series B 993,700 985,000 3.40
------------ ------------ -------
2,381,200 2,410,000 8.33
Total Investments in
United States Convertible
Preferred Stocks 5,129,198 5,971,000 20.64
Face
Amount Convertible Bonds
Canada Metals & US$ 700,000 Inco, Limited, 5.75% due
Mining 7/01/2004 765,625 712,250 2.46
Total Investments in Canadian
Convertible Bonds 765,625 712,250 2.46
United States Assisted Living 300,000 Assisted Living Concepts, Inc.,
6% due 11/01/2002 300,000 330,000 1.14
Automobile Parts 1,500,000 The Pep Boys--Manny, Moe & Jack,
4% due 9/01/1999 1,461,250 1,481,250 5.12
Health Services 1,500,000 PhyCor, Inc., 4.50% due 2/15/2003 1,395,000 1,387,500 4.80
Medical Equipment 800,000 ThermoTrex Corp., 3.25% due
11/01/2007 800,000 802,000 2.77
Pharmaceuticals 1,500,000 Alza Corp., 5% due 5/01/2006 1,531,250 1,462,500 5.06
Retail Stores 500,000 Home Depot, Inc., 3.25% due
10/01/2001 509,375 627,500 2.17
Transportation 600,000 Alaska Air Group, Inc., 6.50% due
6/15/2005 625,500 951,000 3.29
Total Investments in
United States Convertible Bonds 6,622,375 7,041,750 24.35
Total Investments in
North American Securities 13,545,865 15,591,336 53.90
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
PACIFIC Shares
BASIN Held Common Stocks
<S> <C> <C> <C> <C> <C> <C>
Hong Kong Utilities--Electric 50,000 Shandong Huaneng Power Company
Ltd. (ADR) (a) 503,000 371,875 1.29
Total Investments in
Hong Kong Common Stocks 503,000 371,875 1.29
Face
Amount Convertible Bonds
Japan Auto & YEN 25,000,000 No. 2 Toyota Motor Corp.,
Truck 1.20% due 1/28/1998 286,365 359,371 1.24
Chemicals 50,000,000 No. 6 Sumitomo Bakelite Co.,
Ltd., 1.20% due 9/29/2006 521,478 499,958 1.73
Electronics 50,000,000 No. 5 Matsushita Electric
Industrial Co., 1.30% due
3/29/2002 513,387 532,402 1.84
30,000,000 No. 3 Sony Corp., 1.40% due
9/30/2003 361,653 454,704 1.57
30,000,000 No. 2 Tokyo Electron Ltd.,
0.90% due 9/30/2003 343,548 488,146 1.69
------------ ------------ -------
1,218,588 1,475,252 5.10
Food & Beverage 14,000,000 No. 1 Sanyo Coca-Cola Bottling,
Inc., 0.90% due 6/30/2003 146,267 110,873 0.38
Total Investments in Japanese
Convertible Bonds 2,172,698 2,445,454 8.45
Total Investments in
Pacific Basin Securities 2,675,698 2,817,329 9.74
WESTERN
EUROPE
France Leisure Frf 4,200,000 Euro Disney SCA, 6.75% due
10/01/2001 686,298 780,572 2.70
Pharmaceuticals 7,000 Sanofi S.A., 4% due 1/01/2000
(Units) 498,434 730,963 2.53
Total Investments in French
Convertible Bonds 1,184,732 1,511,535 5.23
Netherlands Insurance US$ 500,000 Aegon N.V., 4.75% due 11/01/2004 626,250 1,387,500 4.80
Total Investments in the
Netherlands Convertible Bonds 626,250 1,387,500 4.80
United Kingdom Food & Pound 500,000 Allied-Lyons PLC, 6.75% due 858,247 842,994 2.91
Beverage Sterling 7/07/2008
US$ 500,000 Grand Metropolitan PLC,
6.50% due 1/31/2000 552,500 647,500 2.24
Total Investments in
United Kingdom Convertible Bonds 1,410,747 1,490,494 5.15
Total Investments in
Western European Securities 3,221,729 4,389,529 15.18
</TABLE>
47
<PAGE>
Merrill Lynch Global Convertible Fund, Inc., October 31, 1997
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
SHORT-TERM Face Value Percent of
SECURITIES Amount Issue Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C>
Commercial US$ 865,000 General Motors Acceptance
Paper* Corp., 5.75% due 11/03/1997 $ 864,724 $ 864,724 2.99%
US Government US Treasury Bills:
Obligations* 750,000 4.62% due 11/06/1997 749,519 749,519 2.59
750,000 4.83% due 11/13/1997 748,793 748,793 2.59
1,400,000 4.85% due 11/13/1997 1,397,737 1,397,737 4.83
800,000 4.80% due 11/20/1997 797,973 797,973 2.76
2,500,000 4.85% due 12/04/1997 2,488,885 2,488,885 8.61
750,000 4.85% due 12/11/1997 745,958 745,958 2.58
------------ ------------ -------
6,928,865 6,928,865 23.96
Total Investments in
Short-Term Securities 7,793,589 7,793,589 26.95
Total Investments $ 27,236,881 30,591,783 105.77
============
Liabilities in Excess of Other Assets (1,669,496) (5.77)
------------ -------
Net Assets $ 28,922,287 100.00%
============ =======
<FN>
(a)American Depositary Receipts (ADR).
++Non-income producing security .
*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.
See Notes to Financial Statements.
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
As of October 31, 1997
<S> <C> <C>
Assets: Investments, at value (identified cost--$27,236,881) (Note 1a) $ 30,591,783
Cash 840,687
Foreign cash (Note 1b) 241,801
Receivables:
Securities sold $ 760,125
Interest 144,790
Capital shares sold 16,375
Dividends 1,489 922,779
------------
Prepaid expenses (Note 1f) 40,417
------------
Total assets 32,637,467
------------
Liabilities: Payables:
Securities purchased 2,209,812
Capital shares redeemed 129,346
Distributor (Note 2) 18,024
Investment adviser (Note 2) 16,446 2,373,628
------------
Accrued expenses and other liabilities 1,341,552
------------
Total liabilities 3,715,180
------------
Net Assets: Net assets $ 28,922,287
============
Net Assets Class A Shares of Common Stock, $0.10 par value,
Consist of: 100,000,000 shares authorized $ 29,199
Class B Shares of Common Stock, $0.10 par value,
100,000,000 shares authorized 149,016
Class C Shares of Common Stock, $0.10 par value,
100,000,000 shares authorized 9,367
Class D Shares of Common Stock, $0.10 par value,
100,000,000 shares authorized 55,764
Paid-in capital in excess of par 21,584,498
Accumulated distributions in excess of investment
loss--net (Note 1g) (572,021)
Undistributed realized capital gains on investments and
foreign currency transactions--net 4,312,039
Unrealized appreciation on investments and foreign
currency transactions--net 3,354,425
------------
Net assets $ 28,922,287
============
Net Asset Class A--Based on net assets of $3,465,875 and 291,989
Value: shares outstanding $ 11.87
============
Class B--Based on net assets of $17,730,531 and 1,490,162
shares outstanding $ 11.90
============
Class C--Based on net assets of $1,112,046 and 93,671
shares outstanding $ 11.87
============
Class D--Based on net assets of $6,613,835 and 557,641
shares outstanding $ 11.86
============
See Notes to Financial Statements.
</TABLE>
49
<PAGE>
Merrill Lynch Global Convertible Fund, Inc., October 31, 1997
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
For the Year Ended October 31, 1997
<S> <C> <C>
Investment Interest and discount earned (net of $6,762
Income foreign withholding tax) $ 1,585,213
(Notes 1d & 1e): Dividends (net of $963 foreign withholding tax) 637,281
------------
Total income 2,222,494
------------
Expenses: Investment advisory fees (Note 2) $ 301,179
Account maintenance and distribution fees--Class B (Note 2) 267,689
Transfer agent fees--Class B (Note 2) 114,858
Printing and shareholder reports 90,433
Accounting services (Note 2) 69,859
Registration fees (Note 1f) 67,344
Professional fees 65,021
Directors' fees and expenses 45,388
Transfer agent fees--Class A (Note 2) 36,491
Transfer agent fees--Class D (Note 2) 28,456
Account maintenance and distribution fees--Class C (Note 2) 24,342
Account maintenance fees--Class D (Note 2) 18,545
Custodian fees 15,132
Transfer agent fees--Class C (Note 2) 11,193
Pricing fees 9,942
Other 4,519
------------
Total expenses 1,170,391
------------
Investment income--net 1,052,103
------------
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net 4,313,181
(Loss) on Foreign currency transactions--net (961,097) 3,352,084
Investments & ------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net 3,226,474
(Notes 1b, 1c, Foreign currency transactions--net (63,442) 3,163,032
1e & 3): ------------ ------------
Net realized and unrealized gain on investments and
foreign currency transactions 6,515,116
------------
Net Increase in Net Assets Resulting from Operations $ 7,567,219
============
See Notes to Financial Statements.
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended
October 31,
Increase (Decrease) in Net Assets: 1997 1996
<S> <C> <C>
Operations: Investment income--net $ 1,052,103 $ 1,655,902
Realized gain on investments and foreign
currency transactions--net 3,352,084 1,834,024
Change in unrealized appreciation/depreciation on investments
and foreign currency transactions--net 3,163,032 2,580,476
------------ ------------
Net increase in net assets resulting from operations 7,567,219 6,070,402
------------ ------------
Dividends & Investment income--net:
Distributions to Class A (339,437) (694,324)
Shareholders Class B (569,149) (1,473,613)
(Note 1g): Class C (57,198) (112,375)
Class D (168,936) (224,218)
In excess of investment income--net:
Class A (14,383) --
Class B (24,118) --
Class C (2,424) --
Class D (7,159) --
Realized gain on investments--net:
Class A (371,547) (820,273)
Class B (771,279) (2,671,664)
Class C (84,137) (180,592)
Class D (171,039) (171,093)
------------ ------------
Net decrease in net assets resulting from dividends
and distributions to shareholders (2,580,806) (6,348,152)
------------ ------------
Capital Share Net decrease in net assets derived from capital
Transactions share transactions (45,343,049) (20,834,705)
(Note 4): ------------ ------------
Net Assets: Total decrease in net assets (40,356,636) (21,112,455)
Beginning of year 69,278,923 90,391,378
------------ ------------
End of year* $ 28,922,287 $ 69,278,923
============ ============
<FN>
*Undistributed (accumulated distributions in excess of)
investment income--net (Note 1h) $ (572,021) $ 82,617
============ ============
See Notes to Financial Statements.
</TABLE>
51
<PAGE>
Merrill Lynch Global Convertible Fund, Inc., October 31, 1997
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
The following per share data and ratios Class A
have been derived from information provided
in the financial statements. For the Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1997++++ 1996++++ 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 10.54 $ 10.71 $ 10.75 $ 11.08 $ 9.79
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .33 .32 .42 .33 .23
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net 1.47 .62 .11 (.27) 1.45
-------- -------- -------- -------- --------
Total from investment operations 1.80 .94 .53 .06 1.68
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.24) (.48) (.46) (.30) (.23)
In excess of investment income--net (.01) -- -- -- --
Realized gain on investments--net (.22) (.63) (.11) (.09) (.16)
-------- -------- -------- -------- --------
Total dividends and distributions (.47) (1.11) (.57) (.39) (.39)
-------- -------- -------- -------- --------
Net asset value, end of year $ 11.87 $ 10.54 $ 10.71 $ 10.75 $ 11.08
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 17.79% 9.34% 5.10% .61% 17.64%
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses 1.81% 1.57% 1.38% 1.66% 2.22%
Net Assets: ======== ======== ======== ======== ========
Investment income--net 3.01% 3.05% 4.03% 2.97% 2.36%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $ 3,466 $ 17,741 $ 23,634 $ 7,850 $ 4,557
Data: ======== ======== ======== ======== ========
Portfolio turnover 33.42% 14.72% 101.12% 38.04% 26.02%
======== ======== ======== ======== ========
Average commission rate paid++++++ $ .0607 $ .0679 -- -- --
======== ======== ======== ======== ========
<CAPTION>
The following per share data and ratios Class B
have been derived from information provided
in the financial statements. For the Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1997++++ 1996++++ 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 10.61 $ 10.77 $ 10.80 $ 11.13 $ 9.84
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .21 .21 .37 .21 .13
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net 1.49 .62 .05 (.25) 1.46
-------- -------- -------- -------- --------
Total from investment operations 1.70 .83 .42 (.04) 1.59
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.18) (.36) (.34) (.20) (.14)
In excess of investment income--net (.01) -- -- -- --
Realized gain on investments--net (.22) (.63) (.11) (.09) (.16)
-------- -------- -------- -------- --------
Total dividends and distributions (.41) (.99) (.45) (.29) (.30)
</TABLE>
52
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
-------- -------- -------- -------- --------
Net asset value, end of year $ 11.90 $ 10.61 $ 10.77 $ 10.80 $ 11.13
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 16.56% 8.13% 4.01% (.37%) 16.45%
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses 2.87% 2.64% 2.37% 2.69% 3.26%
Net Assets: ======== ======== ======== ======== ========
Investment income--net 1.92% 1.98% 2.95% 1.95% 1.32%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $ 17,730 $ 38,830 $ 58,660 $ 53,121 $ 29,831
Data: ======== ======== ======== ======== ========
Portfolio turnover 33.42% 14.72% 101.12% 38.04% 26.02%
======== ======== ======== ======== ========
Average commission rate paid++++++ $ .0607 $ .0679 -- -- --
======== ======== ======== ======== ========
<CAPTION>
Class C
For the
Period
The following per share data and ratios have been derived Oct. 21,
from information provided in the financial statements. For the Year Ended 1994++ to
October 31, Oct. 31,
Increase (Decrease) in Net Asset Value: 1997++++ 1996++++ 1995 1994++++
<S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.59 $ 10.75 $ 10.81 $ 10.74
Operating -------- -------- -------- --------
Performance: Investment income--net .21 .21 .36 --
Realized and unrealized gain on investments
and foreign currency transactions--net 1.47 .62 .05 .07
-------- -------- -------- --------
Total from investment operations 1.68 .83 .41 .07
-------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.17) (.36) (.36) --
In excess of investment income--net (.01) -- -- --
Realized gain on investments--net (.22) (.63) (.11) --
-------- -------- -------- --------
Total dividends and distributions (.40) (.99) (.47) --
-------- -------- -------- --------
Net asset value, end of period $ 11.87 $ 10.59 $ 10.75 $ 10.81
======== ======== ======== ========
Total Investment Based on net asset value per share 16.40% 8.14% 3.89% .65%+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses 2.89% 2.65% 2.41% 5.64%*
Net Assets: ======== ======== ======== ========
Investment income (loss)--net 1.91% 1.97% 2.99% (1.74%)*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 1,112 $ 4,123 $ 4,598 $ 203
Data: ======== ======== ======== ========
Portfolio turnover 33.42% 14.72% 101.12% 38.04%
======== ======== ======== ========
Average commission rate paid++++++ $ .0607 $ .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 significantly affect the rate shown.
See Notes to Financial Statements.
</TABLE>
53
<PAGE>
Merrill Lynch Global Convertible Fund, Inc., October 31, 1997
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (concluded)
Class D
For the
Period
The following per share data and ratios have been derived Oct. 21,
from information provided in the financial statements. For the Year Ended 1994++ to
October 31, Oct. 31,
Increase (Decrease) in Net Asset Value: 1997++++ 1996++++ 1995 1994++++
<S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.55 $ 10.72 $ 10.76 $ 10.69
Operating -------- -------- -------- --------
Performance: Investment income--net .30 .31 .42 --
Realized and unrealized gain on investments
and foreign currency transactions--net 1.47 .61 .09 .07
-------- -------- -------- --------
Total from investment operations 1.77 .92 .51 .07
-------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.23) (.46) (.44) --
In excess of investment income--net (.01) -- -- --
Realized gain on investments--net (.22) (.63) (.11) --
-------- -------- -------- --------
Total dividends and distributions (.46) (1.09) (.55) --
-------- -------- -------- --------
Net asset value, end of period $ 11.86 $ 10.55 $ 10.72 $ 10.76
======== ======== ======== ========
Total Investment Based on net asset value per share 17.41% 9.07% 4.87% .65%+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses 2.09% 1.77% 1.62% 5.13%*
Net Assets: ======== ======== ======== ========
Investment income (loss)--net 2.69% 2.85% 3.79% (1.24%)*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 6,614 $ 8,585 $ 3,499 $ 179
Data: ======== ======== ======== ========
Portfolio turnover 33.42% 14.72% 101.12% 38.04%
======== ======== ======== ========
Average commission rate paid++++++ $ .0607 $ .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 significantly affect the rate shown.
See Notes to Financial Statements.
</TABLE>
54
<PAGE>
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
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
broadest 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
contract or if the counterparty does not perform under the contract.
Forward foreign exchange contracts--The Fund is authorized to enter
into forward foreign exchange contracts as a hedge against either
specific transactions or portfolio positions. Such contracts are not
entered on the Fund's records. However, the effect on operations is
recorded from the date the Fund enters into such contracts. Premium
or discount is amortized over the life of the contracts.
* Forward foreign exchange contracts--The Fund is authorized to enter into
forward foreign exchange contracts as a hedge against either specific
transactions or portfolio positions. Such contracts are not entered on the
Fund's records. However, the effect on operations is recorded from the date the
Fund enters into such contracts. Premium or discount is amortized over the life
of the contracts.
* Foreign currency options and futures--The Fund may also purchase
or sell listed or over-the-counter foreign currency options, foreign
currency futures and related options on foreign currency futures as
a short or long hedge against possible variations in foreign
exchange rates. Such transactions may be effected with respect to
hedges on non-US dollar denominated securities owned by the Fund,
sold by the Fund but not yet delivered, or committed or anticipated
to be purchased by the Fund.
* Financial futures contracts--The Fund may purchase or sell
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 contracts 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.
55
<PAGE>
Merrill Lynch Global Convertible Fund, Inc., October 31, 1997
NOTES TO FINANCIAL STATEMENTS (continued)
Pursuant to the contract, the Fund agrees to receive from or pay to the broker
an amount of cash equal to the daily fluctuation in value of the contract. Such
receipts or payments are known as variation margin and are recorded by the Fund
as unrealized gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed.
* Options--The Fund is authorized to write covered call options and
purchase put options. When the Fund writes an option, an amount
equal to the premium received by the Fund is reflected as an asset
and an equivalent liability. The amount of the liability is
subsequently marked to market to reflect the current market value of
the option written. 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
transactions are recorded on the dates the transactions are entered
into (the trade dates). Dividend income is recorded on the ex-
dividend dates. Dividends from foreign securities where the ex-
dividend date may have passed are subsequently recorded when the
Fund has determined the ex-dividend date. Interest income (including
amortization of discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on
the identified cost basis.
(f) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.
(g) Dividends and distributions--Dividends and distributions paid by
the Fund are recorded on the ex-dividend dates. Distributions in
excess of net investment income are due primarily to differing tax
treatments for foreign currency transactions.
(h) Reclassification--Generally accepted accounting principles
require that certain components of net assets be adjusted to reflect
permanent differences between financial and tax reporting.
Accordingly, current year's permanent book/tax differences of
$523,937 have been reclassified between undistributed net realized
capital gains and accumulated distributions in excess of net
investment income. These reclassifications have no effect on net
assets or net asset values per share.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). The general partner
of MLAM is Princeton Services, Inc. ("PSI"), an indirect wholly-
owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is
the limited partner. The Fund has also entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at the annual rate of 0.65% of
the average daily value of the Fund's net assets.
Pursuant to 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.
56
<PAGE>
For the year ended October 31, 1997, 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 $ 42 $ 519
Class D $395 $5,780
For the year ended October 31, 1997, MLPF&S received contingent
deferred sales charges of $209,470 and $1,308 relating to
transactions in Class B and Class C Shares, respectively.
During the year ended October 31, 1997, the Fund paid Merrill Lynch
Security Pricing Service, an affiliate of MLPF&S, $59 for security
price quotations to compute the net asset value of the Fund.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, PSI, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended October 31, 1997 were $14,422,368 and
$60,395,126, respectively.
Net realized and unrealized gains (losses) as of October 31, 1997
were as follows:
Realized Unrealized
Gains (Losses) Gains (Losses)
Long-term investments $ 4,313,459 $ 3,354,902
Short-term investments (278) --
Foreign currency transactions (982,156) (477)
Forward foreign exchange contracts 21,059 --
------------ -------------
Total $ 3,352,084 $ 3,354,425
============ =============
As of October 31, 1997, net unrealized appreciation for Federal
income tax purposes aggregated $3,345,402, of which $3,696,792
related to appreciated securities and $351,390 related to
depreciated securities. At October 31,1997, the aggregate cost of
investments for Federal income tax purposes was $27,246,381.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions
were $45,343,049 and $20,834,705 for the years ended October 31,
1997 and October 31, 1996, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Year Dollar
Ended October 31, 1997 Shares Amount
Shares sold 1,031,544 $ 11,066,318
Shares issued to shareholders in
reinvestment of dividends
and distributions 59,638 620,254
------------ -------------
Total issued 1,091,182 11,686,572
Shares redeemed (2,482,772) (26,937,299)
------------ -------------
Net decrease (1,391,590) $ (15,250,727)
============ =============
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 B Shares for the Year Dollar
Ended October 31, 1997 Shares Amount
Shares sold 314,434 $ 3,542,687
Shares issued to shareholders in
reinvestment of dividends
and distributions 99,185 1,040,450
------------ -------------
Total issued 413,619 4,583,137
Automatic conversion of shares (28,947) (322,485)
Shares redeemed (2,553,205) (28,269,334)
------------ -------------
Net decrease (2,168,533) $ (24,008,682)
============ =============
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)
============ =============
57
<PAGE>
Merrill Lynch Global Convertible Fund, Inc., October 31, 1997
NOTES TO FINANCIAL STATEMENTS (concluded)
Class C Shares for the Year Dollar
Ended October 31, 1997 Shares Amount
Shares sold 45,903 $ 515,280
Shares issued to shareholders in
reinvestment of dividends
and distributions 11,375 118,943
------------ -------------
Total issued 57,278 634,223
Shares redeemed (352,854) (3,888,088)
------------ -------------
Net decrease (295,576) $ (3,253,865)
============ =============
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 D Shares for the Year Dollar
Ended October 31, 1997 Shares Amount
Shares sold 40,916 $ 459,749
Automatic conversion of shares 29,028 322,485
Shares issued to shareholders in
reinvestment of dividends
and distributions 23,285 243,244
------------ -------------
Total issued 93,229 1,025,478
Shares redeemed (349,497) (3,855,253)
------------ -------------
Net decrease (256,268) $ (2,829,775)
============ =============
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
============ =============
58
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
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
Reorganization of the Fund................................................ 11
Purchase of Shares........................................................ 12
Initial Sales Charge Alternatives--Class A and Class D Shares............ 12
Reduced Initial Sales Charge............................................. 14
Employer-Sponsored Retirement or Savings Plans and Certain Other Arrange-
ments.................................................................. 17
Distribution Plans....................................................... 17
Limitations on the Payment of Deferred Sales Charges..................... 18
Redemption of Shares...................................................... 19
Deferred Sales Charges--Class B and Class C Shares....................... 20
Portfolio Transactions and Brokerage...................................... 21
Determination of Net Asset Value.......................................... 22
Shareholder Services...................................................... 23
Investment Account....................................................... 23
Automatic Investment Plans............................................... 24
Automatic Reinvestment of Dividends and Capital Gains Distributions...... 24
Systematic Withdrawal Plans.............................................. 24
Retirement Plans......................................................... 26
Exchange Privilege....................................................... 26
Dividends, Distributions and Taxes........................................ 28
Dividends and Distributions.............................................. 28
Taxes.................................................................... 28
Tax Treatment of Options and Futures Transactions........................ 31
Special Rules for Certain Foreign Currency Transactions.................. 31
Performance Data.......................................................... 32
General Information....................................................... 34
Description of Shares.................................................... 34
Computation of Offering Price Per Share.................................. 35
Independent Auditors..................................................... 35
Custodian................................................................ 36
Transfer Agent........................................................... 36
Legal Counsel............................................................ 36
Reports to Shareholders.................................................. 36
Additional Information................................................... 36
Appendix.................................................................. 37
Independent Auditors' Report.............................................. 45
Financial Statements...................................................... 46
</TABLE>
Code #10666-0298
[LOGO] MERRILL LYNCH
Merrill Lynch
Global Convertible
Fund, Inc.
[ART]
STATEMENT OF
ADDITIONAL
INFORMATION
February 18, 1998
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS
Contained in Part A:
Financial Highlights for each of the years in the nine-year period
ended October 31, 1997, 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, 1997.
Statement of Assets and Liabilities as of October 31, 1997.
Statement of Operations for the year ended October 31, 1997.
Statements of Changes in Net Assets for each of the years in the two-
year period ended October 31, 1997.
Financial Highlights for each of the years in the five-year period
ended October 31, 1997.
(B) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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.(g)
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.
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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)
(c) --Form of Agreement and Plan of Reorganization between the Registrant
and Merrill Lynch Convertible Fund, Inc.(h)
10 --None.
11 --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
12 --None.
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 Registration Statement.
(d) Filed on October 13, 1994 as an Exhibit to Post-Effective Amendment No. 9
to the Registration Statement.
(e) Filed on February 24, 1995 as an Exhibit to Post-Effective Amendment No.
10 to the Registration Statement.
C-2
<PAGE>
(f) Incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A under the Securities Act of
1933, as amended, filed on January 25, 1996, relating to shares of Merrill
Lynch New York Municipal Bond Fund series of Merrill Lynch Multi-State
Municipal Series Trust (File No. 2-99473).
(g) Filed on February 24, 1997 as an Exhibit to Post-Effective Amendment No.
12 to the Registration Statement.
(h) Incorporated by reference to Exhibit I to the Proxy Statement Prospectus
contained in Pre-Effective Amendment No. 1 to the Registration Statement
on Form N-14 under the Securities Act of 1933, as amended, of Merrill
Lynch Convertible Fund, Inc. (File No. 333-28619) filed on January 7,
1998.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE REGISTRANT
The Registrant is not controlled by or under common control with any person.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
<CAPTION>
NUMBER OF
RECORD HOLDERS
TITLE OF CLASS AT JANUARY 31, 1998
-------------- -------------------
<S> <C>
Class A shares of Common
Stock, par value $0.10
per share.............. 379
Class B shares of Common
Stock, par value $0.10
per share.............. 1,611
Class C shares of Common
Stock, par value $0.10
per share.............. 164
Class D shares of Common
Stock, par value $0.10
per share.............. 760
</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 By-laws, 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
C-3
<PAGE>
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 registered investment companies:
Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas
Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch
Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch
Capital Fund, Inc., Merrill Lynch Convertible Fund, Inc., Merrill Lynch
Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc.,
Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill
Lynch Fund For Tomorrow, Inc., Merrill Lynch Global Allocation Fund, Inc.,
Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill Lynch
Global Convertible Fund, Inc., Merrill Lynch Global Growth 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 Real Estate Fund, Inc., 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., Merrill
Lynch Variable Series Funds, Inc. and Hotchkis and Wiley Funds (advised by
Hotchkis and Wiley, a division of MLAM); and the following closed-end
registered investment companies: Merrill Lynch High Income Municipal Bond
Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc. MLAM also acts as
sub-advisor to Merrill Lynch World Strategy Portfolio and Merrill Lynch Basic
Value Equity Portfolio, two investment portfolios of EQ Advisors Trust.
Fund Asset Management, L.P. ("FAM"), an affiliate of the Manager, acts as
the investment adviser for the following open-end registered 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
C-4
<PAGE>
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 registered investment
companies: Apex Municipal Fund, Inc., Corporate High Yield Fund, Inc.,
Corporate High Yield Fund II, Inc., Corporate High Yield Fund III, Inc., Debt
Strategies Fund, Inc., Income Opportunities Fund 1999, Inc., Income
Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund, Inc.,
MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniHoldings Fund, Inc.,
MuniHoldings California Insured Fund, Inc., MuniHoldings Florida Insured Fund,
MuniHoldings New York Insured 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., and Worldwide DollarVest Fund, Inc.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series and Merrill Lynch Intermediate Government Bond
Fund is One Financial Center, 23rd Floor, Boston, Massachusetts 02111-2646.
The address of the Manager, FAM, Princeton Services, Inc. ("Princeton
Services") and Princeton Administrators, L.P. is also P.O. Box 9011,
Princeton, New Jersey 08543-9011. The address of Merrill Lynch Funds
Distributor, Inc. ("MLFD") is P.O. Box 9081, Princeton, New Jersey 08543-9081.
The address of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") and Merrill Lynch & Co., Inc. ("ML & Co.") is World Financial Center,
North Tower, 250 Vesey Street, New York, New York 10281. The address of the
Fund's transfer agent, Merrill Lynch Financial Data Services, Inc. ("MLFDS"),
is 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and partner of the
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, 1995 for his, her or its own account or in the capacity of
director, officer, partner or trustee. In addition, Mr. Zeikel is President,
Mr. Richard is Treasurer and Mr. Glenn is Executive Vice President of
substantially all of the investment companies 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-5
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
---- ------------- ----------------------------------
<S> <C> <C>
Arthur Zeikel........... Chairman Chairman of FAM; President of MLAM and
FAM from 1977 to 1997; Chairman and
Director of Princeton Services;
President of Princeton Services from
1993 to 1997; Executive Vice President
of ML & Co.
Jeffrey M. Peek......... President President of FAM; President and Director
of Princeton Services; Executive Vice
President of ML & Co.
Terry K. Glenn.......... Executive Vice Executive Vice President of FAM;
President Executive Vice President and Director
of Princeton Services; President and
Director of MLFD; Director of MLFDS;
President of Princeton Administrators,
L.P.
Linda L. Federici....... Senior Vice Senior Vice President of FAM; Senior
President Vice President of Princeton Services
Vincent R. Giordano..... Senior Vice Senior Vice President of FAM; Senior
President Vice President of Princeton Services
Elizabeth A. Griffin.... Senior Vice Senior Vice President of FAM; Senior
President Vice President of Princeton Services
Norman R. Harvey........ Senior Vice Senior Vice President of FAM; Senior
President Vice President of Princeton Services
Michael J. Hennewinkel.. Senior Vice Senior Vice President of FAM; Senior
President Vice President of Princeton Services
Philip L. Kirstein...... Senior Vice Senior Vice President, General Counsel
President, and Secretary of FAM; Senior Vice
General Counsel and President, General Counsel, Director
Secretary and Secretary of Princeton Services
Ronald M. Kloss......... Senior Vice Senior Vice President of FAM; Senior
President Vice President of Princeton Services
Debra W. Landsman-Yaros. Senior Vice Senior Vice President of FAM; Senior
President Vice President of Princeton Services;
Vice President of MLFD
Stephen M.M. Miller..... Senior Vice Executive Vice President of Princeton
President Administrators, L.P.; Senior Vice
President of Princeton Services
Joseph T. Monagle, Jr. . Senior Vice Senior Vice President of FAM; Senior
President Vice President of Princeton Services
Michael L. Quinn........ Senior Vice Senior Vice President of FAM; Senior
President Vice President of Princeton Services;
Managing Director and First Vice
President of Merrill Lynch from 1989 to
1995
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
---- ------------- ----------------------------------
<S> <C> <C>
Richard L. Reller....... Senior Vice Senior Vice President of FAM; Senior
President Vice President of Princeton Services;
Director of MLFD
Gerald M. Richard....... Senior Vice Senior Vice President and Treasurer of
President FAM; Senior Vice President and
and Treasurer Treasurer of Princeton Services; Vice
President and Treasurer of MLFD
Gregory D. Upah......... Senior Vice Senior Vice President of FAM; Senior
President Vice President of Princeton Services
Ronald L. Welburn....... Senior Vice Senior Vice President of FAM; Senior
President Vice President of Princeton Services
</TABLE>
Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as sub-
adviser for the following registered investment companies: Corporate High
Yield Fund, Inc., Corporate High Yield Fund II, Inc., Income Opportunities
Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Americas
Income Fund Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch
Basic Value Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch
Consults International Portfolio, Merrill Lynch Convertible 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 Growth 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 Growth Fund, Merrill Lynch Healthcare Fund, Inc.,
Merrill Lynch International Equity Fund, Merrill Lynch Latin America Fund,
Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch Pacific Fund,
Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Real Estate Fund, Inc.,
Merrill Lynch Series 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, 1995, for his or her own account or in the capacity of director, officer,
partner or trustee. In addition, Messrs. Zeikel, Albert and Richard are
officers of one or more of the registered investment companies listed in the
first two paragraphs of this Item 28.
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
---- ---------------- ----------------------------------
<S> <C> <C>
Arthur Zeikel.... Director and Chairman of MLAM and FAM; President of
Chairman MLAM and FAM from 1977 to 1997;
Chairman and Director of Princeton
Services; President of Princeton
Services from 1993 to 1997; Executive
Vice President of
ML & Co.
</TABLE>
C-7
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
---- ---------------- ----------------------------------
<S> <C> <C>
Alan J. Albert.......... Senior Managing Vice President of MLAM
Director
Nicholas C. D. Hall..... Director Director of Merrill Lynch Europe PLC;
General Counsel of Merrill Lynch
International Private Banking Group
Gerald M. Richard....... Senior Vice Senior Vice President and Treasurer of
President MLAM and FAM; Senior Vice President and
Treasurer of Princeton Services; Vice
President and Treasurer of MLFD
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 and for each
of the open-end investment companies referred to in the first two paragraphs
of Item 28 except CBA Money Fund, CMA Government Securities Fund, CMA Money
Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA
Treasury Fund, The Corporate Fund Accumulation Program, Inc., 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, 23rd Floor,
Boston, Massachusetts 02111-2665.
<TABLE>
<CAPTION>
POSITIONS AND OFFICES POSITION(S) AND OFFICE(S)
NAME WITH MLFD WITH REGISTRANT
---- --------------------- -------------------------
<S> <C> <C>
Terry K. Glenn............. President and Director Executive Vice President
Richard L. Reller.......... Director None
Thomas J. Verage........... Director None
William E. Aldrich......... Senior Vice President None
Robert W. Crook............ Senior Vice President None
Michael J. Brady........... Vice President None
William M. Breen........... Vice President None
Michael G. Clark........... Vice President None
James T. Fatseas........... Vice President None
Debra W. Landsman-Yaros.... Vice President None
Michelle T. Lau............ Vice President None
</TABLE>
C-8
<PAGE>
<TABLE>
<CAPTION>
POSITIONS AND OFFICES POSITION(S) AND OFFICE(S)
NAME WITH MLFD WITH REGISTRANT
---- --------------------- -------------------------
<S> <C> <C>
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 MLFDS, 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484.
ITEM 31. MANAGEMENT SERVICES
Other than as set forth under the caption "Management of the Fund--
Management and Advisory Arrangements" in the Prospectus constituting Part A of
the Registration Statement and under "Management of the Fund--Management and
Advisory Arrangements" in the Statement of Additional Information constituting
Part B of the Registration Statement, the Registrant is not a party to any
management-related service contract.
ITEM 32. UNDERTAKINGS
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish each person to whom a Prospectus is
delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
C-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of
1933 and has duly caused this Post-Effective Amendment to its Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Plainsboro and State of New Jersey, on the 17th day
of February, 1998.
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
(Registrant)
/s/ Arthur Zeikel
By: ________________________________________
(ARTHUR ZEIKEL, PRESIDENT AND DIRECTOR)
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to its Registration Statement has been signed below by the
following persons in the capacities and on the date indicated.
TITLE DATE
SIGNATURE
President and
/s/ Arthur Zeikel Director (Principal February 17,
- ------------------------------------- Executive Officer) 1998
(ARTHUR ZEIKEL)
Treasurer (Principal
Gerald M. Richard* Financial and
- ------------------------------------- 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)
/s/ Arthur Zeikel February 17,
*By: ________________________________ 1998
(ARTHUR ZEIKEL, ATTORNEY-IN-FACT)
C-10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission file due to ASCII-incompatibility and cross-
references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC - CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 27236881
<INVESTMENTS-AT-VALUE> 30591783
<RECEIVABLES> 922779
<ASSETS-OTHER> 1122905
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 32637467
<PAYABLE-FOR-SECURITIES> 2209812
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1505368
<TOTAL-LIABILITIES> 3715180
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 21827844
<SHARES-COMMON-STOCK> 291989
<SHARES-COMMON-PRIOR> 1683579
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (572021)
<ACCUMULATED-NET-GAINS> 4312039
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3354425
<NET-ASSETS> 3465875
<DIVIDEND-INCOME> 637281
<INTEREST-INCOME> 1585213
<OTHER-INCOME> 0
<EXPENSES-NET> (1170391)
<NET-INVESTMENT-INCOME> 1052103
<REALIZED-GAINS-CURRENT> 3352084
<APPREC-INCREASE-CURRENT> 3163032
<NET-CHANGE-FROM-OPS> 7567219
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (353820)
<DISTRIBUTIONS-OF-GAINS> (371547)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1031544
<NUMBER-OF-SHARES-REDEEMED> (2482772)
<SHARES-REINVESTED> 59638
<NET-CHANGE-IN-ASSETS> (40356636)
<ACCUMULATED-NII-PRIOR> 82617
<ACCUMULATED-GAINS-PRIOR> 1834020
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 301179
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1170391
<AVERAGE-NET-ASSETS> 9714177
<PER-SHARE-NAV-BEGIN> 10.54
<PER-SHARE-NII> .33
<PER-SHARE-GAIN-APPREC> 1.47
<PER-SHARE-DIVIDEND> (.25)
<PER-SHARE-DISTRIBUTIONS> (.22)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.87
<EXPENSE-RATIO> 1.81
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC. - CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 27236881
<INVESTMENTS-AT-VALUE> 30591783
<RECEIVABLES> 922779
<ASSETS-OTHER> 1122905
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 32637467
<PAYABLE-FOR-SECURITIES> 2209812
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1505368
<TOTAL-LIABILITIES> 3715180
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 21827844
<SHARES-COMMON-STOCK> 1490162
<SHARES-COMMON-PRIOR> 3658695
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (572021)
<ACCUMULATED-NET-GAINS> 4312039
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3354425
<NET-ASSETS> 17730531
<DIVIDEND-INCOME> 637281
<INTEREST-INCOME> 1585213
<OTHER-INCOME> 0
<EXPENSES-NET> (1170391)
<NET-INVESTMENT-INCOME> 1052103
<REALIZED-GAINS-CURRENT> 3352084
<APPREC-INCREASE-CURRENT> 3163032
<NET-CHANGE-FROM-OPS> 7567219
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (593267)
<DISTRIBUTIONS-OF-GAINS> (771279)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 314434
<NUMBER-OF-SHARES-REDEEMED> (2582152)
<SHARES-REINVESTED> 99185
<NET-CHANGE-IN-ASSETS> (40356636)
<ACCUMULATED-NII-PRIOR> 82617
<ACCUMULATED-GAINS-PRIOR> 1834020
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 301179
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1170391
<AVERAGE-NET-ASSETS> 26768917
<PER-SHARE-NAV-BEGIN> 10.61
<PER-SHARE-NII> .21
<PER-SHARE-GAIN-APPREC> 1.49
<PER-SHARE-DIVIDEND> (.19)
<PER-SHARE-DISTRIBUTIONS> (.22)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.90
<EXPENSE-RATIO> 2.87
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC. - CLASS C
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 27236881
<INVESTMENTS-AT-VALUE> 30591783
<RECEIVABLES> 922779
<ASSETS-OTHER> 1122905
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 32637467
<PAYABLE-FOR-SECURITIES> 2209812
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1505368
<TOTAL-LIABILITIES> 3715180
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 21827844
<SHARES-COMMON-STOCK> 93671
<SHARES-COMMON-PRIOR> 389247
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (572021)
<ACCUMULATED-NET-GAINS> 4312039
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3354425
<NET-ASSETS> 1112046
<DIVIDEND-INCOME> 637281
<INTEREST-INCOME> 1585213
<OTHER-INCOME> 0
<EXPENSES-NET> (1170391)
<NET-INVESTMENT-INCOME> 1052103
<REALIZED-GAINS-CURRENT> 3352084
<APPREC-INCREASE-CURRENT> 3163032
<NET-CHANGE-FROM-OPS> 7567219
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (59622)
<DISTRIBUTIONS-OF-GAINS> (84137)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 45903
<NUMBER-OF-SHARES-REDEEMED> (352854)
<SHARES-REINVESTED> 11375
<NET-CHANGE-IN-ASSETS> (40356636)
<ACCUMULATED-NII-PRIOR> 82617
<ACCUMULATED-GAINS-PRIOR> 1834020
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 301179
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1170391
<AVERAGE-NET-ASSETS> 2434171
<PER-SHARE-NAV-BEGIN> 10.59
<PER-SHARE-NII> .21
<PER-SHARE-GAIN-APPREC> 1.47
<PER-SHARE-DIVIDEND> (.18)
<PER-SHARE-DISTRIBUTIONS> (.22)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.87
<EXPENSE-RATIO> 2.89
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 004
<NAME> MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC. - CLASS D
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 27236881
<INVESTMENTS-AT-VALUE> 30591783
<RECEIVABLES> 922779
<ASSETS-OTHER> 1122905
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 32637467
<PAYABLE-FOR-SECURITIES> 2209812
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1505368
<TOTAL-LIABILITIES> 3715180
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 21827844
<SHARES-COMMON-STOCK> 557641
<SHARES-COMMON-PRIOR> 813909
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (572021)
<ACCUMULATED-NET-GAINS> 4312039
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3354425
<NET-ASSETS> 6613835
<DIVIDEND-INCOME> 637281
<INTEREST-INCOME> 1585213
<OTHER-INCOME> 0
<EXPENSES-NET> (1170391)
<NET-INVESTMENT-INCOME> 1052103
<REALIZED-GAINS-CURRENT> 3352084
<APPREC-INCREASE-CURRENT> 3163032
<NET-CHANGE-FROM-OPS> 7567219
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (176095)
<DISTRIBUTIONS-OF-GAINS> (171039)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 69944
<NUMBER-OF-SHARES-REDEEMED> (349497)
<SHARES-REINVESTED> 23285
<NET-CHANGE-IN-ASSETS> (40356636)
<ACCUMULATED-NII-PRIOR> 82617
<ACCUMULATED-GAINS-PRIOR> 1834020
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 301179
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1170391
<AVERAGE-NET-ASSETS> 7417940
<PER-SHARE-NAV-BEGIN> 10.55
<PER-SHARE-NII> .30
<PER-SHARE-GAIN-APPREC> 1.47
<PER-SHARE-DIVIDEND> (.24)
<PER-SHARE-DISTRIBUTIONS> (.22)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.86
<EXPENSE-RATIO> 2.09
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
EXHIBIT 99.11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Global Convertible Fund, Inc.:
We consent to the use in Post-Effective Amendment No. 13 to Registration
Statement No. 33-18720 of our report dated December 5, 1997 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
/s/Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
February 17, 1998
