<PAGE>
PROSPECTUS
- ----------
OCTOBER 21, 1994
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
Merrill Lynch Global Allocation Fund, Inc. (the "Fund") is a non-diversified
mutual fund seeking high total investment return, consistent with prudent
risk, through a fully-managed investment policy utilizing United States and
foreign equity, debt and money market securities, the combination of which
will be varied from time to time both with respect to types of securities and
markets in response to changing market and economic trends. Total investment
return is the aggregate of capital value changes and income. There can be no
assurance that the Fund's investment objective will be achieved. The Fund may
employ a variety of instruments and techniques to enhance income and to hedge
against market and currency risk. Investments on an international basis
involve special considerations. See "Special Considerations".
----------------
Pursuant to the Merrill Lynch Select Pricing SM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select Pricing SM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances. See
"Merrill Lynch Select Pricing SM System on page 3.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9011, Princeton, New Jersey 08543-9011 [(609)
282-2800], or from securities dealers which have entered into selected dealers
agreements with the Distributor, including Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000,
and the minimum subsequent purchase is $50, except that for retirement plans
the minimum initial purchase is $100, and the minimum subsequent purchase is
$1. Merrill Lynch may charge its customers a processing fee (presently $4.85)
for confirming purchases and repurchases. Purchases and redemptions directly
through the Fund's transfer agent are not subject to the processing fee. See
"Purchase of Shares" and "Redemption of Shares".
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURI-
TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated October 21, 1994 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission and
is available, without charge, by calling or by writing the Fund at the above
telephone number or address. The Statement of Additional Information is hereby
incorporated by reference into this Prospectus.
----------------
MERRILL LYNCH ASSET MANAGEMENT--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C(c) CLASS D(c)
---------- ------------------------ ---------- ----------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES:
Maximum Sales Charge
Imposed on Purchases
(as a percentage of
offering price)....... 5.25%(d) None None 5.25%(d)
Sales Charge Imposed
on Dividend
Reinvestments......... None None None None
Deferred Sales Charge
(as a percentage of
original purchase None(e) 4.0% during the first 1% for one None(e)
price or redemption year, year
proceeds, whichever decreasing 1.0% annually
is lower)............. thereafter
to 0.0% after the fourth
year
Exchange Fee........... None None None None
ANNUAL FUND OPERATING
EXPENSES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)(F):
Investment Advisory
Fees(g)............... 0.74% 0.74% 0.74% 0.74%
12b-1 Fees(h):
Account Maintenance
Fees................ None 0.25% 0.25% 0.25%
Distribution Fees.... None 0.75% 0.75% None
(Class B shares convert
to Class D shares
automatically after
approximately eight
years and cease being
subject to distribution
fees)
Other Expenses:
Custodial Fees....... 0.04% 0.04% 0.04% 0.04%
Shareholder Servicing
Costs(i)............ 0.08% 0.10% 0.10% 0.08%
Other................ 0.07% 0.07% 0.07% 0.07%
---- ---- ---- ----
Total Other Expenses. 0.19% 0.21% 0.21% 0.19%
---- ---- ---- ----
Total Fund Operating 0.93% 1.95% 1.95% 1.18%
Expenses.............. ==== ==== ==== ====
</TABLE>
- --------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and investment programs.
See "Purchase of Shares--Initial Sales Charge Alternatives--Class A and
Class D Shares"--page 28.
(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) Prior to the date of this Prospectus, the Fund has not offered its Class C
and Class D shares to the public.
(d) Reduced for purchases of $25,000 and over. Class A or Class D purchases of
$1,000,000 or more may not be subject to an initial sales charge. See
"Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class
D Shares"--page 28.
(e) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that purchases of $1,000,000 or more which may not
be subject to an initial sales charge may instead be subject to a CDSC of
1.0% of amounts redeemed within the first year of purchase.
(f) Information for Class A and Class B shares is stated for the fiscal year
ended October 31, 1993. Information under "Other Expenses" for Class C and
Class D shares is estimated for the fiscal year ending October 31, 1994.
(g) See "Management of the Fund--Management and Advisory Arrangements"--page
25.
(h) See "Purchase of Shares--Distribution Plans"--page 33.
(i) See "Management of the Fund--Transfer Agency Services"--page 26.
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 above; (2)
a 5% annual return through-
out the periods and (3) re-
demption at the end of the
period:
Class A................. $61 $81 $101 $161
Class B................. $60 $81 $105 $208*
Class C................. $30 $61 $105 $227
Class D................. $64 $88 $114 $188
An investor would pay the
following expenses on the
same $1,000 investment as-
suming no redemption at the
end of the period:
Class A................. $61 $81 $101 $161
Class B................. $20 $61 $105 $208*
Class C................. $20 $61 $105 $227
Class D................. $64 $88 $114 $188
</TABLE>
- --------
* Assumes conversion to Class D shares approximately eight years after
purchase.
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Securities and Exchange Commission ("Commission") regulations. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL
RATES OF RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES 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 charges permitted under the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. ("NASD"). Merrill Lynch may
charge its customers a processing fee (presently $4.85) for confirming
purchases and redemptions. Purchases and redemptions directly through the
Fund's transfer agent are not subject to the processing fee. See "Purchase of
Shares" and "Redemption of Shares".
MERRILL LYNCH SELECT PRICING SM SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing SM System. The shares of each class may be purchased at a price equal
to the next determined net asset value per share subject to the sales charges
and ongoing fee arrangements described below. Shares of Class A and Class D
are sold to investors choosing the initial sales charge alternatives, and
shares of Class B and Class C are sold to investors choosing the deferred
sales charge alternatives. The Merrill Lynch Select Pricing SM System is used
by more than 50 mutual funds advised by Merrill Lynch Asset Management, L.P.
("MLAM" or the "Manager") or an affiliate of MLAM, Fund Asset Management, L.P.
("FAM"). Funds advised by MLAM or FAM are referred to herein as "MLAM-advised
mutual funds".
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 deferred sales charges and account maintenance fees that are imposed on
Class B and Class C shares, as well as the account maintenance fees that are
imposed on the Class D shares, will be imposed directly against those classes
and not against all assets of the Fund and, accordingly, such charges will not
affect the net asset value of any other class or have any impact on investors
choosing another sales charge option. Dividends paid by the Fund for each class
of shares will be calculated in the same manner at the same time and will
differ only to the extent that account maintenance and distribution fees and
any incremental transfer agency costs relating to a particular class are borne
exclusively by that class. Each class has different exchange privileges. See
"Shareholder Services -- Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges with respect to the Class B and Class C
shares in that the sales charges applicable to each class provide for the
financing of the distribution of the shares of the Fund. The distribution-
related revenues paid with respect to a class will not be used to finance the
distribution expenditures of another class. Sales personnel may receive
different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements for
each class of shares under the Merrill Lynch Select 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
most beneficial under his particular circumstances. More detailed information
as to each class of shares is set forth under "Purchase of Shares".
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
- ----------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
A Maximum 5.25% initial No No No
sales charge(2)(3)
- ----------------------------------------------------------------------------------------
B CDSC for a period of 4 0.25% 0.75% B shares convert to D shares
years at a rate of 4.0% automatically after
during the first year, approximately eight
decreasing 1.0% years(4)
annually to 0.0%
- ----------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.75% No
- ----------------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(3)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. Contingent deferred sales charges ("CDSCs") are
imposed if the redemption occurs within the applicable CDSC time period.
The charge will be assessed on an amount equal to the lesser of the
proceeds of redemption or the cost of the shares being redeemed.
(Footnotes continued on next page)
4
<PAGE>
(2) Offered only to eligible investors. See "Purchase of Shares -- Initial
Sales Charge Alternatives -- Class A and Class D Shares -- Eligible Class
A Investors".
(3) Reduced for purchases of $25,000 or more. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead will be subject to a 1.0% CDSC for one year. See "Class
A" and "Class D" below.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other MLAM-
advised mutual funds into which exchanges may be made have a ten year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares.
Investors that currently own Class A shares in a shareholder account
are entitled to purchase additional Class A shares in that account.
Other eligible investors include certain retirement plans and
participants in certain investment programs. In addition, Class A
shares will be offered to Merrill Lynch & Co., Inc. ("ML&Co.") and
its subsidiaries (the term "subsidiaries" when used herein with
respect to ML&Co., includes MLAM, FAM and certain other entities
directly or indirectly wholly-owned and controlled by ML&Co.) and
their directors and employees and to members of the Boards of MLAM-
advised mutual funds. The maximum initial sales charge is 5.25%,
which is reduced for purchases of $25,000 and over. Purchases of
$1,000,000 or more may not be subject to an initial sales charge but
if the initial sales charge is waived such purchases will be subject
to a CDSC of 1.0% if the shares are redeemed within one year after
purchase. Sales charges also are reduced under a right of
accumulation which takes into account the investor's holdings of all
classes of all MLAM-advised mutual funds. See "Purchase of Shares --
Initial Sales Charge Alternatives -- Class A and Class D Shares".
Class B: Class B shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%,
an ongoing distribution fee of 0.75% of the Fund's average net assets
attributable to the Class B shares, and a CDSC if they are redeemed
within four years of purchase. Approximately eight years after
issuance, Class B shares will convert automatically into Class D
shares of the Fund, which are subject to an account maintenance fee
but no distribution fee; Class B shares of certain other MLAM-advised
mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately ten years. If Class B shares
of the Fund are exchanged for Class B shares of another MLAM-advised
mutual fund, the conversion period applicable to the Class B shares
acquired in the exchange will apply, 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
will also 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".
5
<PAGE>
Class C: Class C shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.75% of the Fund's average net
assets attributable to Class C shares. Class C shares are also subject
to a CDSC if they are redeemed within one year of purchase. Although
Class C shares are subject to a 1.0% CDSC for only one year (as
compared to four years for Class B), Class C shares have no conversion
feature and, accordingly, an investor that purchases Class C shares
will be subject to distribution fees that will be imposed on Class C
shares for an indefinite period subject to annual approval by the
Fund's Board of Directors and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. Purchases of $1,000,000 or more may not be subject
to an initial sales charge but if the initial sales charge is waived,
such purchase will be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. The schedule of initial sales
charges and reductions for Class D shares is the same as the schedule
for Class A shares. Class D shares also will be issued upon 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
PricingSM System that the investor believes is most beneficial under his
particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because of the account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative
particularly attractive because similar sales charge reductions are not
available with respect to the deferred sales charges imposed in connection with
purchases of Class B or Class C shares. Investors not qualifying for reduced
initial sales charges who expect to maintain their investment for an extended
period of time also may elect to purchase Class A or Class D shares, because
over time the accumulated ongoing account maintenance and distribution fees on
Class B or Class C shares may exceed the initial sales charge and, in the case
of Class D shares, the account maintenance fee. Although some investors that
previously purchased Class A shares may no longer be eligible to purchase Class
A shares of other MLAM-advised mutual funds, those previously purchased Class A
shares, together with Class B, Class C and Class D share holdings, will count
toward a right of accumulation which may qualify the investor for reduced
initial sales charges on new initial sales charge purchases. In addition, the
ongoing Class B and Class C account maintenance and distribution fees will
cause Class B and Class C shares to have higher expense ratios, pay lower
dividends and have lower total returns than the initial sales charge shares.
The ongoing Class D account maintenance fees will cause Class D shares to have
a higher expense ratio, pay lower dividends and have a lower total return than
Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the
benefit of putting all of the investor's dollars to work from the time the
investment is made. The deferred sales charge alternatives may be particularly
appealing to
6
<PAGE>
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 forgo 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, other than for the six month
period ended April 30, 1994, which is unaudited, 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, 1993, and the independent auditors' report
thereon are included in the Statement of Additional Information; unaudited
financial statements for the six months ended April 30, 1994, are also included
in the Statement of Additional Information. Financial Information is not
presented for Class C or Class D shares because no shares of those classes were
publicly issued as of the date of this Prospectus. Further information about
the performance of the Fund is contained in the Fund's most recent annual
report to shareholders which may be obtained, without charge, by calling or by
writing the Fund at the telephone number or address on the front cover of this
Prospectus.
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------
FOR THE
PERIOD
FEB. 3,
FOR THE SIX FOR THE YEAR ENDED OCTOBER 31, 1989+ TO
MONTHS ENDED ------------------------------------ OCT. 31,
APRIL 30, 1994 1993 1992 1991 1990 1989
-------------- -------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DE-
CREASE) IN NET
ASSET VALUE: (UNAUDITED)
PER SHARE OPERAT-
ING PERFORMANCE:
Net asset value,
beginning of pe-
riod............. $ 13.52 $ 11.92 $ 12.16 $ 10.37 $ 10.79 $ 10.00
----------- -------- -------- ------- ------- -------
Investment in-
come -- net..... .28 .39 .36 .55 .60 .45
Realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions --
net............ .04 2.14 .89 2.24 (.16) .48
----------- -------- -------- ------- ------- -------
Total from in-
vestment opera-
tions............ .32 2.53 1.25 2.79 .44 .93
----------- -------- -------- ------- ------- -------
Less dividends
and distribu-
tions:
Investment in-
come -- net..... (.29) (.81) (.89) (.45) (.66) (.14)
Realized gain on
investments --
net............ (.23) (.12) (.60) (.55) (.20) --
----------- -------- -------- ------- ------- -------
Total dividends
and distribu-
tions............ (.52) (.93) (1.49) (1.00) (.86) (.14)
----------- -------- -------- ------- ------- -------
Net asset value,
end of period.... $ 13.32 $ 13.52 $ 11.92 $ 12.16 $ 10.37 $ 10.79
=========== ======== ======== ======= ======= =======
TOTAL INVESTMENT
RETURN**
Based on net as-
set value per
share............ 2.41++% 22.61% 11.78% 28.89% 3.91% 9.34++%
=========== ======== ======== ======= ======= =======
RATIOS TO AVERAGE
NET ASSETS:
Expenses, exclud-
ing distribution
fees............. .85%* .93% 1.07% 1.29% 1.29% 1.37%*
=========== ======== ======== ======= ======= =======
Expenses......... .85%* .93% 1.07% 1.29% 1.29% 1.37%*
=========== ======== ======== ======= ======= =======
Investment in-
come--net........ 4.10%* 3.90% 10.82% 8.96% 4.37% 5.31%*
=========== ======== ======== ======= ======= =======
SUPPLEMENTAL DA-
TA:
Net assets, end
of period (in
thousands)....... $ 1,219,669 $917,806 $245,839 $72,702 $49,691 $47,172
=========== ======== ======== ======= ======= =======
Portfolio turn-
over............. 35.64% 50.35% 59.56% 81.21% 129.51% 88.59%
=========== ======== ======== ======= ======= =======
<CAPTION>
CLASS B
----------------------------------------------------------------------
FOR THE
PERIOD
FEB. 3,
FOR THE SIX FOR THE YEAR ENDED OCTOBER 31, 1989+ TO
MONTHS ENDED ----------------------------------------- OCT. 31,
APRIL 30, 1994 1993 1992 1991 1990 1989
---------------- ----------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DE-
CREASE) IN NET
ASSET VALUE: (UNAUDITED)
PER SHARE OPERAT-
ING PERFORMANCE:
Net asset value,
beginning of pe-
riod............. $ 13.38 $ 11.83 $ 12.10 $ 10.33 $ 10.73 $ 10.00
---------------- ----------- --------- --------- --------- -----------
Investment in-
come -- net..... .21 .28 .22 .44 .49 .38
Realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions --
net............ .03 2.11 .91 2.22 (.16) .47
---------------- ----------- --------- --------- --------- -----------
Total from in-
vestment opera-
tions............ .24 2.39 1.13 2.66 .33 .85
---------------- ----------- --------- --------- --------- -----------
Less dividends
and distribu-
tions:
Investment in-
come -- net..... (.23) (.72) (.80) (.34) (.53) (.12)
Realized gain on
investments --
net............ (.23) (.12) (.60) (.55) (.20) --
---------------- ----------- --------- --------- --------- -----------
Total dividends
and distribu-
tions............ (.46) (.84) (1.40) (.89) (.73) (.12)
---------------- ----------- --------- --------- --------- -----------
Net asset value,
end of period.... $ 13.16 $ 13.38 $ 11.83 $ 12.10 $ 10.33 $ 10.73
================ =========== ========= ========= ========= ===========
TOTAL INVESTMENT
RETURN**
Based on net as-
set value per
share............ 1.86%++ 21.42% 10.64% 27.48% 2.93% 8.50%++
================ =========== ========= ========= ========= ===========
RATIOS TO AVERAGE
NET ASSETS:
Expenses, exclud-
ing distribution
fees............. .86%* .95% 1.09% 1.31% 1.31% 1.40%*
================ =========== ========= ========= ========= ===========
Expenses......... 1.86%* 1.95% 2.09% 2.31% 2.31% 2.40%*
================ =========== ========= ========= ========= ===========
Investment in-
come--net........ 3.08%* 2.87% 11.95% 7.98% 3.35% 4.29%*
================ =========== ========= ========= ========= ===========
SUPPLEMENTAL DA-
TA:
Net assets, end
of period (in
thousands)....... $ 5,822,106 $4,299,545 $958,949 $161,328 $115,682 $113,649
================ =========== ========= ========= ========= ===========
Portfolio turn-
over............. 35.64% 50.35% 59.56% 81.21% 129.51% 88.59%
================ =========== ========= ========= ========= ===========
</TABLE>
- ----
+Commencement of Operations.
++Aggregate total investment return.
*Annualized.
**Total investment returns exclude the effects of sales loads.
8
<PAGE>
SPECIAL CONSIDERATIONS
As a global fund, the Fund may invest in U.S. and foreign securities.
Investments in securities of foreign entities and securities denominated in
foreign currencies involve risks not typically involved in domestic investment,
including fluctuations in foreign exchange rates, future foreign political and
economic developments, and the possible imposition of exchange controls or
other foreign or U.S. 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 U.S. 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
those currencies 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 U.S. economy in such respects as
growth of gross national product, rate of inflation, capital reinvestment,
resources, self-sufficiency and balance of payments position.
With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social instability
or diplomatic developments which could affect investment in those countries.
There may be less publicly available information about a foreign financial
instrument than about a U.S. instrument, and foreign entities may not be
subject to accounting, auditing and financial reporting standards and
requirements comparable to those to which U.S. entities are subject. In
addition, certain foreign investments may be subject to foreign withholding
taxes. Investors will be able to deduct such taxes in computing their taxable
income or to use such amounts as credits against their U.S. income taxes if
more than 50% of the Fund's total assets at the close of any taxable year
consists of stock or securities in foreign corporations. See "Additional
Information -- Taxes". Foreign financial markets, while generally growing in
volume, typically have substantially less volume than U.S. markets, and
securities of many foreign companies are less liquid and their prices more
volatile than securities of comparable domestic companies. 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
portfolio securities due to settlement problems could result either in losses
to the Fund due to subsequent declines in value of the 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 U.S.
securities. There is generally less government supervision and regulation of
exchanges, financial institutions and issuers in foreign countries than there
is in the U.S.
The operating expense ratio of the Fund can be expected to be higher than
that of an investment company investing exclusively in U.S. securities because
the expenses of the Fund, such as custodial costs, are higher.
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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 securities markets 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 or currencies which are the subject of the hedge.
There can be no assurance that a liquid secondary market for options and
futures contracts will exist at any specific time. See "Investment Objective
and Policies -- Portfolio Strategies Involving Options and Futures".
The Fund has established no rating criteria for the fixed income securities
in which it may invest. 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 securities that are in
default.
The net asset value of the Fund's shares, to the extent the Fund invests in
fixed income securities, will be affected by changes in the general level of
interest rates. When interest rates decline, the value of a portfolio of fixed
income securities can be expected to rise. Conversely, when interest rates
rise, the value of a portfolio of fixed income securities can be expected to
decline.
As a non-diversified investment company, the Fund may invest a larger
percentage of its assets in individual issuers than a diversified investment
company. In this regard, the Fund is not subject to the general limitation that
it not invest more than 5% of its total assets in the securities of any one
issuer. To the extent the Fund makes investments in excess of 5% of its assets
in a particular issuer, its exposure to credit and market risks associated with
that issuer is increased.
INVESTMENT OBJECTIVE AND POLICIES
The Fund is a non-diversified, open-end management investment company. The
Fund's investment objective is to seek a high total investment return,
consistent with prudent risk, through a fully-managed investment policy
utilizing United States and foreign equity, debt and money market securities
the combination of which will be varied from time to time both with respect to
types of securities and markets in response to changing market and economic
trends. Total investment return is the aggregate of capital value changes and
income. This objective is a fundamental policy which the Fund may not change
without a vote of a majority of the Fund's outstanding voting securities. There
can be no assurance that the Fund's investment objective will be achieved. The
Fund may employ a variety of instruments and techniques to enhance income and
to hedge against market and currency risk, as described under "Portfolio
Strategies Involving Options and Futures" below.
The Fund will invest in a portfolio of U.S. and foreign equity, debt and
money market securities. The composition of the portfolio among these
securities and markets will be varied from time to time by the Manager, in
response to changing market and economic trends. This fully managed investment
approach provides the Fund with the opportunity to benefit from anticipated
shifts in the relative performance of different types of securities and
different capital markets. For example, at times the Fund may emphasize
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investments in equity securities in anticipation of significant advances in
stock markets and at times may emphasize debt securities in anticipation of
significant declines in interest rates. Similarly, the Fund may emphasize
foreign markets in its security selection when such markets are expected to
outperform, in U.S. dollar terms, the U.S. markets. The Fund will seek to
identify longer-term structural or cyclical changes in the various economies
and markets of the world which are expected to benefit certain capital markets
and certain securities in those markets to a greater extent than other
investment opportunities.
In determining the allocation of assets among capital markets, the Manager
will consider, among other factors, the relative valuation, condition and
growth potential of the various economies, including current and anticipated
changes in the rates of economic growth, rates of inflation, corporate profits,
capital reinvestment, resources, self-sufficiency, balance of payments,
governmental deficits or surpluses and other pertinent financial, social and
political factors which may affect such markets. In allocating among equity,
debt and money market securities within each market, the Manager also will
consider the relative opportunity for capital appreciation of equity and debt
securities, dividend yields, and the level of interest rates paid on debt
securities of various maturities.
In selecting securities denominated in foreign currencies, the Manager will
consider, among other factors, the effect of movement in currency exchange
rates on the U.S. dollar value of such securities. An increase in the value of
a currency will increase the total return to the Fund of securities denominated
in such currency. Conversely, a decline in the value of the currency will
reduce the total return. The Manager may seek to hedge all or a portion of the
Fund's foreign securities through the use of forward foreign currency
contracts, currency options, futures contracts and options thereon. See
"Portfolio Strategies Involving Options and Futures" below.
While there are no prescribed limits on the geographical allocation of the
Fund's assets, the Manager anticipates that it will invest primarily in the
securities of corporate and governmental issuers domiciled or located in the
U.S., Canada, Western Europe and the Far East. In addition, the Manager
anticipates that a portion of the Fund's assets normally will be invested in
the U.S. securities markets and the other major capital markets. Under normal
conditions, the Fund's investments will be denominated in at least three
currencies or multinational currency units. However, the Fund reserves the
right to invest substantially all of its assets in U.S. markets or U.S. dollar-
denominated obligations when market conditions warrant.
Similarly, there are no prescribed limits on the allocation of the Fund's
assets among equity, debt and money market securities. Therefore, at any given
time, the Fund's assets may be primarily invested in either equity, debt or
money market securities or in any combination thereof. However, the Manager
anticipates that the Fund's portfolio generally will include both equity and
debt securities.
EQUITY SECURITIES
Within the portion of the Fund's portfolio allocated to equity securities,
the Manager will seek to identify the securities of companies and industry
sectors which are expected to provide high total return relative to alternative
equity investments. The Fund generally will seek to invest in securities the
Manager believes to be undervalued. Undervalued issues include securities
selling at a discount from the price-to-book value ratios and price/earnings
ratios computed with respect to the relevant stock market averages. The Fund
may also consider as undervalued, securities selling at a discount from their
historic price-to-book value or
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<PAGE>
price/earnings ratios, even though these ratios may be above the ratios for the
stock market averages. Securities offering dividend yields higher than the
yields for the relevant stock market averages or higher than such securities'
historic yield may also be considered to be undervalued. The Fund may also
invest in the securities of small and emerging growth companies when such
companies are expected to provide a higher total return than other equity
investments. Such companies are characterized by rapid historical growth rates,
above-average returns on equity or special investment value in terms of their
products or services, research capabilities or other unique attributes. The
Manager will seek to identify small and emerging growth companies that possess
superior management, marketing ability, research and product development skills
and sound balance sheets. Investment in the securities of small and emerging
growth companies involves greater risk than investment in larger, more
established companies. Such risks include the fact that securities of small or
emerging growth companies may be subject to more abrupt or erratic market
movements than larger, more established companies or the market average in
general. Also, these companies may have limited product lines, markets or
financial resources, or they may be dependent on a limited management group.
There may be periods when market and economic conditions exist that favor
certain types of tangible assets as compared to other types of investments. For
example, the value of precious metals can be expected to benefit from such
factors as rising inflationary pressures or other economic, political or
financial uncertainty or instability. Real estate values, which are influenced
by a variety of economic, financial and local factors, tend to be cyclical in
nature. During periods when the Manager believes that conditions favor a
particular real asset as compared to other investment opportunities, the Fund
may emphasize investments related to that asset such as investments in precious
metal-related securities or real estate-related securities as described below.
The Fund may invest up to 25% of its total assets in any particular industry
sector.
Precious Metal-Related Securities. Precious metal-related securities are
equity securities of companies that explore for, extract, process or deal in
precious metals, i.e., gold, silver and platinum, and asset-based securities
indexed to the value of such metals. Based on historical experience, during
periods of economic or financial instability the securities of such companies
may be subject to extreme price fluctuations, reflecting the high volatility of
precious metal prices during such periods. In addition, the instability of
precious metal prices may result in volatile earnings of precious metal-related
companies which, in turn, may affect adversely the financial condition of such
companies. Asset-based securities are debt securities, preferred stock or
convertible securities, the principal amount, redemption terms or conversion
terms of which are related to the market price of some precious metal such as
gold bullion. The Fund will purchase only asset-based securities which are
rated, or are issued by issuers that have outstanding debt obligations rated,
BBB or better by Standard & Poor's Ratings Group ("S&P") or Baa or better by
Moody's Investors Service, Inc. ("Moody's") or commercial paper rated A-1 by
S&P or Prime-1 by Moody's or of issuers that the Manager has determined to be
of similar creditworthiness. Securities rated BBB by S&P or Baa by Moody's,
while considered "investment grade", have certain speculative characteristics.
If the asset-based security is backed by a bank letter of credit or other
similar facility, the Manager may take such backing into account in determining
the creditworthiness of the issuer.
Real Estate-Related Securities. The real estate-related securities which will
be emphasized are equity and convertible debt securities of real estate
investment trusts, which own income-producing properties, and mortgage real
estate investment trusts which make various types of mortgage loans often
combined with equity features. The securities of such trusts generally pay
above average dividends and may offer the potential for capital appreciation.
Such securities may be subject to the risks customarily associated with the
real estate
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industry, including declines in the value of the real estate investments of the
trusts. Real estate values are affected by numerous factors including (i)
governmental regulation (such as zoning and environmental laws) and changes in
tax laws; (ii) operating costs; (iii) the location and the attractiveness of
the properties; (iv) changes in economic conditions (such as fluctuations in
interest and inflation rates and business conditions); and (v) supply and
demand for improved real estate. Such trusts also are dependent on management
skill and may not be diversified in their investments.
Index-Related Securities. The Fund may invest in securities whose potential
return is based on the change in particular measurements of value or rate (an
"index"). As an illustration, the Fund may invest in a security that pays
interest and returns principal based on the change in an equity index or index
of interest rates. Interest and principal payable on a security may also be
based on relative changes among particular indices. In addition, the Fund may
invest in securities whose potential investment return is inversely based on
the change in particular indices. For example, the Fund may invest in
securities that pay a higher rate of interest and principal when a particular
index decreases and pay a lower rate of interest and principal when the value
of the index increases. To the extent that the Fund invests in such types of
securities, it will be subject to the risks associated with changes in the
particular indices, which may include reduced or eliminated interest payments
and losses of invested principal.
Certain indexed securities, including certain inverse securities, may have
the effect of providing a degree of investment leverage, because they may
increase or decrease in value at a rate that is a multiple of the changes in
applicable indices. As a result, the market value of such securities will
generally be more volatile than the market values of fixed-rate securities. The
Fund believes that indexed securities, including inverse securities, represent
flexible portfolio management instruments that may allow the Fund to seek
potential investment rewards, hedge other portfolio positions, or vary the
degree of portfolio leverage relatively efficiently under certain market
conditions.
DEBT SECURITIES
The debt securities in which the Fund may invest include securities issued or
guaranteed by the U.S. Government and its agencies or instrumentalities, by
foreign governments (including foreign states, provinces and municipalities)
and agencies or instrumentalities thereof and debt obligations issued by U.S.
and foreign corporations. Such securities may include mortgage-backed
securities issued or guaranteed by governmental entities or by private issuers.
In addition, the Fund may invest in debt securities issued or guaranteed by
international organizations designed or supported by multiple governmental
entities (which are not obligations of the U.S. Government or foreign
governments) to promote economic reconstruction or development ("supranational
entities") such as the International Bank for Reconstruction and Development
(the "World Bank").
U.S. Government securities include: (i) U.S. Treasury obligations (bills,
notes and bonds), which differ in their interest rates, maturities and times of
issuance, all of which are backed by the full faith and credit of the U.S.; and
(ii) obligations issued or guaranteed by U.S. Government agencies or
instrumentalities, including government guaranteed mortgage-related securities,
some of which are backed by the full faith and credit of the U.S. Treasury
(e.g., direct pass-through certificates of the Government National Mortgage
Association), some of which are supported by the right of the issuer to borrow
from the U.S. Government (e.g., obligations of Federal Home Loan Banks) and
some of which are backed only by the credit of the issuer itself (e.g.,
obligations of the Student Loan Marketing Association).
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In the case of mortgage-related securities, prepayments occur when the holder
of an individual mortgage prepays the remaining principal before the mortgage's
scheduled maturity date. As a result of the pass-through of prepayments of
principal on the underlying securities, a mortgage-related security is often
subject to more rapid prepayment of principal than its stated maturity would
indicate. Because the prepayment characteristics of the underlying mortgages
vary, it is not possible to predict accurately the realized yield or average
life of a particular issue of pass-through certificates. Prepayment rates are
important because of their effect on the yield and price of the securities.
Accelerated prepayments adversely impact yields for pass-through securities
purchased at a premium (i.e., a price in excess of principal amount) and may
involve additional risk of loss of principal because the premium may not have
been fully amortized at the time the obligation is repaid. The opposite is true
for pass-through securities purchased at a discount. The Fund may purchase
mortgage-related securities at a premium or at a discount.
The obligations of foreign governmental entities have various kinds of
government support and include obligations issued or guaranteed by foreign
governmental entities with taxing power. These obligations may or may not be
supported by the full faith and credit of a foreign government. The Fund will
invest in foreign government securities of issuers considered stable by the
Manager. The Manager does not believe that the credit risk inherent in the
obligations of stable foreign governments is significantly greater than that of
U.S. Government securities.
It is expected that the Fund generally will invest the portion of its assets
allocated to debt obligations in the securities of governmental issuers and in
corporate debt securities, including convertible debt securities, rated BBB or
better by S&P or Baa or better by Moody's or which, in the Manager's judgment,
possess similar credit characteristics ("investment grade bonds"). Debt
securities ranked in the fourth highest rating category, while considered
"investment grade", have more speculative characteristics and are more likely
to be downgraded than securities rated in the three highest rating categories.
See the Statement of Additional Information for more information regarding
ratings of debt securities. The Manager considers the ratings assigned by S&P
and Moody's as one of several factors in its independent credit analysis of
issuers. If a debt security in the Fund's portfolio is downgraded below
investment grade, the Manager will consider factors such as price, credit risk,
market conditions and interest rates and will sell such security only if, in
the Manager's judgment, it is advantageous to do so.
The Fund is authorized to invest a portion of its debt portfolio in fixed
income securities rated below investment grade by a nationally recognized
rating agency or in unrated securities which, in the Manager's judgment,
possess similar credit characteristics ("high yield bonds"). The Fund's Board
of Directors has adopted a policy that the Fund will not invest more than 35%
of its assets in obligations rated below Baa or BBB by Moody's or S&P,
respectively. Investment in high yield bonds (which are sometimes referred to
as "junk" bonds) involves substantial risk. Investments in high yield bonds
will be made only when, in the judgment of the Manager, such securities provide
attractive total return potential, relative to the risk of such securities, as
compared to higher quality debt securities. Securities rated BB or lower by S&P
or Ba or lower by Moody's are considered by those rating agencies to have
varying degrees of speculative characteristics. Consequently, although high
yield bonds can be expected to provide higher yields, such securities may be
subject to greater market price fluctuations and risk of loss of principal than
lower yielding, higher rated fixed income securities. The Fund will not invest
in debt securities in the lowest rating categories (CC or lower for S&P or Ca
or lower for Moody's) unless the Manager believes that the financial condition
of the issuer or the protection afforded the particular securities is stronger
than would otherwise be indicated by such low ratings. See the Statement of
Additional Information for additional information regarding high yield
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bonds. Although the Fund may invest in convertible preferred stock rated below
investment grade, an investment in an equity security such as preferred stock
is not subject to the above noted percentage restriction applicable to the
Fund's investments in non-investment grade debt securities.
High yield bonds may be issued by less creditworthy companies or by larger,
highly leveraged companies and are frequently issued in corporate
restructurings such as mergers and leveraged buyouts. Such securities are
particularly vulnerable to adverse changes in the issuer's industry and in
general economic conditions. High yield bonds frequently are junior obligations
of their issuers, so that in the event of the issuer's bankruptcy, claims of
the holders of high yield bonds will be satisfied only after satisfaction of
the claims of senior securityholders. While the high yield bonds in which the
Fund may invest normally do not include securities which, at the time of
investment, are in default or the issuers of which are in bankruptcy, there can
be no assurance that such events will not occur after the Fund purchases a
particular security, in which case the Fund may experience losses and incur
costs.
High yield bonds tend to be more volatile than higher rated fixed income
securities so that adverse economic events may have a greater impact on the
prices of high yield bonds than on higher rated fixed income securities. Like
higher rated fixed income securities, high yield bonds are generally purchased
and sold through dealers who make a market in such securities for their own
accounts. However, there are fewer dealers in the high yield bond market which
may be less liquid than the market for higher rated fixed income securities
even under normal economic conditions. Also, there may be significant
disparities in the prices quoted for high yield bonds by various dealers.
Adverse economic conditions or investor perceptions (whether or not based on
economic fundamentals) may impair the liquidity of this market and may cause
the prices the Fund receives for its high yield bonds to be reduced, or the
Fund may experience difficulty in liquidating a portion of its portfolio. Under
such conditions, judgment may play a greater role in valuing certain of the
Fund's portfolio securities than in the case of securities trading in a more
liquid market.
The average maturity of the Fund's portfolio of debt securities will vary
based on the Manager's assessment of pertinent economic market conditions. As
with all debt securities, changes in market yields will affect the value of
such securities. Prices generally increase when interest rates decline and
decrease when interest rates rise. Prices of longer term securities generally
fluctuate more in response to interest rate changes than do shorter term
securities.
MONEY MARKET SECURITIES
Money market securities in which the Fund may invest consist of short-term
securities issued or guaranteed by the U.S. Government and its agencies and
instrumentalities; commercial paper, including variable amount master demand
notes, rated at least "A" by S&P or "Prime" by Moody's; and repurchase
agreements, purchase and sale contracts, and money market instruments issued by
commercial banks, domestic savings banks, and savings and loan associations
with total assets of at least one billion dollars. The obligations of
commercial banks may be issued by U.S. banks, foreign branches of U.S. banks
("Eurodollar" obligations) or U.S. branches of foreign banks ("Yankeedollar"
obligations).
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 adverse movements in the equity, debt and
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currency markets. The Fund has authority to write (i.e., sell) covered put and
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 and in "Risk Factors in
Options and Futures Transactions" further below), the Manager believes that,
because the Fund will (i) write only covered options on portfolio securities
and (ii) 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 its shares, the net
asset value of the Fund's shares 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, debt and currency
markets occur. Reference is made to the Statement of Additional Information for
further information concerning these strategies.
Writing Covered 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 also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options which means that so
long as the Fund is obligated as the writer of the option it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S.
Government securities or other high grade liquid debt or equity securities
denominated in U.S. dollars or non-U.S. currencies with a securities depository
with a value equal to or greater than the exercise price of the underlying
securities. By writing a put, the Fund will be obligated to purchase the
underlying security at a price that may be higher than the market value of that
security at the time of exercise for as long as the option is outstanding. The
Fund may engage in closing transactions in order to terminate put options that
it has written.
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 stated 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
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costs. Prior to its expiration, a put option may be sold in a closing sale
transaction and profit or loss from the sale will depend on whether the amount
received is more or less than the premium paid for the put option plus the
related transaction costs. A closing sale transaction cancels out the Fund's
position as the purchaser of an option by means of an offsetting sale of an
identical option prior to the expiration of the option it has purchased. In
certain circumstances, the Fund may purchase call options on securities held in
its portfolio on which it has written call options or on securities which it
intends to purchase. The Fund will not purchase options on securities
(including stock index options discussed below) 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. The Fund may purchase or write
put and call options on stock indices to hedge against the risks of market-wide
stock price movements in the securities in which the Fund invests. Options on
indices are similar to options on securities except that on exercise or
assignment, the parties to the contract pay or receive an amount of cash equal
to the difference between the closing value of the index and the exercise price
of the option times a specified multiple. The Fund may invest in stock index
options based on a broad market index, e.g., the S&P 500 Index, or on a narrow
index representing an industry or market segment, e.g., the AMEX Oil & Gas
Index.
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 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 the equity securities in which it invests and in financial
futures contracts in connection with the debt securities in which it invests.
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 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 advance, it
may purchase 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 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 futures contract or the purchase
of a call option or the writing of a put option on a future, but under unusual
circumstances (e.g., the Fund experiences a significant amount of redemptions),
a long futures position may be terminated without the corresponding purchase of
securities.
The Fund also has authority to purchase and write call and put options on
futures contracts and stock indices in connection with its hedging activities.
Generally, these strategies are utilized under the same market
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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 and stock
indices rather than selling the underlying futures contract in anticipation of
a decrease in the market value of its securities. Similarly, the Fund may
purchase call options, or write put options on futures contracts and stock
indices, as a substitute for the purchase of such futures to hedge against the
increased cost resulting from an increase in the market value of securities
which the Fund intends to purchase.
The Fund may engage in options and futures transactions on U.S. and foreign
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 prices 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 and price set at the time of the contract. The Fund's dealings in
forward foreign exchange will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or
sale of forward foreign currency with respect to specific receivables or
payables of the Fund accruing in connection with the purchase and sale of its
portfolio securities, the sale and redemption of shares of the Fund or the
payment of dividends and distributions by the Fund. Position hedging is the
sale of forward foreign currency with respect to portfolio security positions
denominated or quoted in such foreign currency. The Fund will not speculate in
forward foreign exchange. Hedging against a decline in the value of a currency
does not eliminate fluctuations in the prices of portfolio securities or
prevent losses if the prices of such securities decline. Such transactions also
preclude the opportunity for gain if the value of the hedged currency should
rise. Moreover, it may not be possible for the Fund to hedge against a
devaluation that is so generally anticipated that the Fund is not able to
contract to sell the currency at a price above the devaluation level it
anticipates.
The Fund is also authorized to purchase or sell listed or over-the-counter
foreign currency options, foreign currency futures and related options on
foreign currency futures as a short or long hedge against possible variations
in foreign exchange rates. Such transactions may be effected with respect to
hedges on non-U.S. dollar denominated securities owned by the Fund, sold by the
Fund but not yet delivered, or committed or anticipated to be purchased by the
Fund. As an illustration, the Fund may use such techniques to hedge the stated
value in U.S. 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 yen for dollars at a specified price
by a future date (a technique called a "straddle"). By selling such a call
option in this illustration, the Fund gives up the opportunity to profit
without limit from increases in the relative value of the yen to the dollar.
The Manager believes that "straddles" of the type which may be utilized by the
Fund constitute hedging transactions and are consistent with the policies
described above.
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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. 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 or 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 which it has committed or anticipates
to purchase which are denominated in such currency and, in the case of
securities which 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. Regulations of the Commodity
Futures Trading Commission ("CFTC") applicable to the Fund provide that the
futures trading activities described herein will not result in the Fund being
deemed a "commodity pool", as defined under such regulations if the Fund
adheres to certain restrictions. In particular, the Fund may purchase and sell
futures contracts and options thereon (i) for bona fide hedging purposes, and
(ii) for non-hedging purposes, if the aggregate initial margin and premiums
required to establish positions in such contracts and options does not exceed
5% of the liquidation value of the Fund's portfolio, after taking into account
unrealized profits and unrealized losses on any such contracts and options.
These restrictions are in addition to other restrictions on the Fund's hedging
activities mentioned herein.
When the Fund purchases a futures contract, or writes a put option or
purchases a call option thereon, an amount of cash and cash equivalents will be
deposited in a segregated account with the Fund's custodian so that the amount
so segregated, plus the amount of initial and variation margin held in the
account of its broker, equals the market value of the futures contract, thereby
ensuring that the use of such futures contract is unleveraged.
Restrictions on OTC Options. The Fund will engage in OTC options, including
over-the-counter stock index options, 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 U.S. Government securities or with
affiliates of such banks or dealers which have capital of at least $50 million
or whose obligations are guaranteed by an entity having capital of at least $50
million.
The staff of the Securities and Exchange 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 transaction, the sum of
the market value of OTC options currently outstanding which are held by the
Fund, the market value of the underlying securities covered by OTC call options
currently outstanding which were sold by the Fund and margin deposits on the
Fund's existing OTC options on futures contracts exceeds 10% of the total
assets of the Fund, taken at market value, together with all other assets of
the Fund which 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 if 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
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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
Securities and Exchange 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 or currencies which are the subject of the hedge.
If the price of the options or futures moves more or less than the price of the
hedged securities or currencies, 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 correctly predict price movements in the market involved in a
particular options or futures transaction. To compensate for imperfect
correlations, the Fund may purchase or sell stock index options or futures
contracts in a greater dollar amount than the hedged securities if the
volatility of the hedged securities is historically greater than the volatility
of the stock index options or futures contracts. Conversely, the Fund may
purchase or sell fewer stock index options or futures contracts if the
volatility of the price of the hedged securities is historically less than that
of the stock index options or futures contracts. The risk of imperfect
correlation generally tends to diminish as the maturity date of the stock index
option or futures contract approaches.
The Fund intends to enter into options and futures transactions, on an
exchange or in the over-the-counter market, only if there appears to be a
liquid secondary market for such options or futures or, in the case of over-
the-counter transactions, the Manager believes the Fund can receive on each
business day at least two independent bids or offers. However, there can be no
assurance that a liquid secondary market will exist at any specific time. Thus,
it may not be possible to close an options or futures position. The inability
to close options and futures positions also could have an adverse impact on the
Fund's ability to hedge effectively its portfolio. There is also the risk of
loss by the Fund of margin deposits or collateral in the event of bankruptcy of
a broker with whom the Fund has an open position in an option, a futures
contract or related option.
The exchanges on which the Fund intends to conduct options transactions have
generally established limitations governing the maximum number of call or put
options on the same underlying security or currency (whether or not covered)
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. 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
Non-Diversified Status. The Fund is classified as non-diversified within the
meaning of the Investment Company Act, which means that the Fund is not limited
by such Act in the proportion of its assets that it may invest in securities of
a single issuer. However, the Fund's investments will be limited so as to
qualify as a "regulated investment company" for purposes of the Internal
Revenue Code of 1986, as amended. See
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"Additional Information -- Taxes". To qualify, among other requirements, the
Fund will limit its investments so that, at the close of each quarter of the
taxable year, (i) not more than 25% of the market value of the Fund's total
assets will be invested in the securities of a single issuer and (ii) with
respect to 50% of the market value of its total assets, not more than 5% of the
market value of its total assets will be invested in the securities of a single
issuer, and the Fund will not own more than 10% of the outstanding voting
securities of a single issuer. A fund which elects to be classified as
"diversified" under the Investment Company Act must satisfy the foregoing 5%
and 10% requirements with respect to 75% of its total assets. To the extent
that the Fund assumes large positions in the securities of a small number of
issuers, the Fund's yield may fluctuate to a greater extent than that of a
diversified company as a result of changes in the financial condition or in the
market's assessment of the issuers.
Portfolio Transactions. Since portfolio transactions may be effected on
foreign securities exchanges, the Fund may incur settlement delays on certain
of such exchanges. See "Special Considerations" above. Where possible, the Fund
will deal directly with the dealers who make a market in the securities
involved except in those circumstances where better prices and execution are
available elsewhere. Such dealers usually are acting as principal for their own
account. On occasion, securities may be purchased directly from the issuer.
Such portfolio securities are generally traded on a net basis and do not
normally involve either brokerage commissions or transfer taxes. Securities
firms may receive brokerage commissions on certain portfolio transactions,
including options, futures and options on futures transactions and the purchase
and sale of underlying securities upon exercise of options. The Fund has no
obligation to deal with any broker in the execution of transactions in
portfolio securities. Under the Investment Company Act, persons affiliated with
the Fund, including Merrill Lynch, are prohibited from dealing with the Fund as
a principal in the purchase and sale of securities unless a permissive order
allowing such transactions is obtained from the Commission. Affiliated persons
of the Fund, and affiliated persons of such affiliated persons, may serve as
its broker in transactions conducted on an exchange and in over-the-counter
transactions conducted on an agency basis. In addition, consistent with the
Rules of Fair Practice of the NASD, the Fund 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. Costs associated with
transactions in foreign securities are generally higher than with transactions
in U.S. securities, although the Fund will endeavor to achieve the best net
results in effecting such transactions.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase securities on a when-issued basis, and it may purchase or sell
securities for delayed delivery. These transactions occur when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future to secure what is considered an advantageous yield and price to the Fund
at the time of entering into the transaction. Although the Fund has not
established any limit on the percentage of its assets that may be committed in
connection with such transactions, the Fund will maintain a segregated account
with its custodian of cash, cash equivalents, U.S. Government securities or
other high grade liquid debt or equity securities denominated in U.S. dollars
or non-U.S. currencies in an aggregate amount equal to the amount of its
commitment in connection with such purchase transactions.
Standby Commitment Agreements. The Fund may from time to time enter into
standby commitment agreements. Such agreements commit the Fund, for a stated
period of time, to purchase a stated amount of a fixed income security which
may be issued and sold to the Fund at the option of the issuer. The price and
coupon of the security is fixed at the time of the commitment. At the time of
entering into the agreement, the Fund is paid a commitment fee, regardless of
whether or not the security is ultimately issued, which is
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<PAGE>
typically approximately 0.5% of the aggregate purchase price of the security
which the Fund has committed to purchase. The Fund will enter into such
agreements only for the purpose of investing in the security underlying the
commitment at a yield and price which is considered advantageous to the Fund.
The Fund will not enter into a standby commitment with a remaining term in
excess of 90 days and will limit its investment in such commitments so that the
aggregate purchase price of the securities subject to such commitments,
together with the value of portfolio securities subject to legal restrictions
on resale, will not exceed 10% of its assets taken at the time of acquisition
of such commitment or security. The Fund will at all times maintain a
segregated account with its custodian of cash, cash equivalents, U.S.
Government securities or other high grade liquid debt or equity securities
denominated in U.S. dollars or non-U.S. currencies in an aggregate amount equal
to the purchase price of the securities underlying the commitment.
There can be no assurance that the securities subject to a standby commitment
will be issued and the value of the security, if issued, on the delivery date
may be more or less than its purchase price. Since the issuance of the security
underlying the commitment is at the option of the issuer, the Fund may bear the
risk of a decline in the value of such security and may not benefit from an
appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security can
reasonably be expected to be issued, and the value of the security will
thereafter be reflected in the calculation of the Fund's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment
fee. In the event the security is not issued, the commitment fee will be
recorded as income on the expiration date of the standby commitment.
Repurchase Agreements; Purchase and Sale Contracts. The Fund may invest in
securities pursuant to repurchase agreements or purchase and sale contracts.
Under a repurchase agreement, the seller agrees, upon entering into the
contract with the Fund, to repurchase a security (typically a security issued
or guaranteed by the U.S. government) at a mutually agreed upon time and price,
thereby determining the yield during the term of the agreement. This insulates
the Fund from fluctuations in the market value of the underlying security
during such period, although, to the extent the repurchase agreement is not
denominated in U.S. dollars, the Fund's return may be affected by currency
fluctuations. Repurchase agreements may be entered into only with a member bank
of the Federal Reserve System, a primary dealer in U.S. government securities
or an affiliate thereof. A purchase and sale contract is similar to a
repurchase agreement, but purchase and sale contracts, unlike repurchase
agreements, allocate interest on the underlying security to the purchaser
during the term of the agreement. In all instances, the Fund takes possession
of the underlying securities when investing in repurchase agreements or
purchase and sale contracts. Nevertheless, if the seller were to default on its
obligation to repurchase a security under a repurchase agreement or purchase
and sale contract and the market value of the underlying security at such time
was less than the Fund had paid to the seller, the Fund would realize a loss.
The Fund may not invest more than 10% of its net assets in repurchase
agreements or purchase and sale contracts maturing in more than seven days,
together with all other illiquid securities.
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
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collateral in cash or securities issued or guaranteed by the U.S. Government.
Such collateral will be maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. This limitation is a
fundamental policy, and it may not be changed without the approval of the
holders of a majority of the Fund's outstanding voting securities, as defined
in the Investment Company Act. During the period of such a loan, the Fund
receives the income on the loaned securities and either receives the income on
the collateral or other compensation, i.e., negotiated loan premium or fee, for
entering into the loan and thereby increases its yield. In the event that the
borrower defaults on its obligation to return borrowed securities, because of
insolvency or otherwise, the Fund could experience delays and costs in gaining
access to the collateral and could suffer a loss to the extent that the value
of the collateral falls below the market value of the borrowed securities.
Investment Restrictions. The Fund's investment activities are subject to
further restrictions that are described in the Statement of Additional
Information. Investment restrictions and policies which are fundamental
policies 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 (a) 67% of the shares
represented at a meeting at which more than 50% of the outstanding shares are
represented or (b) more than 50% of the outstanding shares). Among its
fundamental policies, the Fund may not invest more than 25% of its total
assets, taken at market value at the time of each investment, in the securities
of issuers of any particular industry (excluding the U.S. Government and its
agencies or instrumentalities). Other fundamental policies include policies
which (i) limit investments in securities which cannot be readily resold
because of legal or contractual restrictions or which are not otherwise readily
marketable, including repurchase agreements and purchase and sale contracts
maturing in more than seven days, if, regarding all such securities, more than
10% of its net assets, taken at market value, would be invested in such
securities, (ii) limit investments in securities of other investment companies,
except in connection with certain specified transactions and with respect to
investments of up to 10% of the Fund's assets in securities of closed-end
investment companies and (iii) restrict the issuance of senior securities and
limit bank borrowings except that the Fund may borrow amounts of up to 10% of
its assets for extraordinary purposes or to meet redemptions. The Fund will not
purchase securities while borrowings exceed 5% of its total assets. The Fund
has no present intention to borrow money in amounts exceeding 5% of its total
assets. Although not a fundamental policy, the Fund will include OTC options
and the securities underlying such options in calculating the amount of its
total assets subject to the limitation set forth in clause (i) above. However,
as discussed above, the Fund may treat the securities it uses as cover for
written OTC options as liquid, and, therefore, will be excluded from this
restriction, provided it follows a specified procedure. The Fund will not
change or modify this policy prior to the change or modification by the
Commission staff of its position regarding OTC options, as discussed above.
The Board of Directors of the Fund, at a meeting held on August 4, 1994,
approved certain changes to the fundamental and non-fundamental investment
restrictions of the Fund. These changes were proposed in connection with the
creation of a set of standard fundamental and non-fundamental investment
restrictions that would be adopted, subject to shareholder approval, by all of
the non-money market mutual funds advised by MLAM or FAM. The proposed uniform
investment restrictions are designed to provide each of these funds, including
the Fund, with as much investment flexibility as possible under the Investment
Company Act and applicable state securities regulations, help promote
operational efficiencies and facilitate monitoring of compliance. The
investment objective and policies of the Fund will be unaffected by the
adoption of the proposed investment restrictions.
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The full text of the proposed investment restrictions is set forth under
"Investment Objective and Policies -- Proposed Uniform Investment Restrictions"
in the Statement of Additional Information. Shareholders of the Fund are
currently considering whether to approve the proposed revised investment
restrictions. If such shareholder approval is obtained, the Fund's current
investment restrictions will be replaced by the proposed restrictions, and the
Fund's Prospectus and Statement of Additional Information will be supplemented
to reflect such change.
Portfolio Turnover. The Manager will effect portfolio transactions without
regard to holding period, if, in its judgment, such transactions are advisable
in light of a change in circumstance in general market, economic or financial
conditions. As a result of its investment policies, the Fund may engage in a
substantial number of portfolio transactions. Accordingly, while the Fund
anticipates that its annual portfolio turnover rate should not exceed 200%
under normal conditions, it is impossible to predict portfolio turnover rates.
The portfolio turnover rate is calculated by dividing the lesser of the Fund's
annual sales or purchases of portfolio securities (exclusive of purchases or
sales of securities whose maturities at the time of acquisition were one year
or less) by the monthly average value of the securities in the portfolio during
the year. High portfolio turnover involves correspondingly greater transaction
costs in the form of dealer spreads and brokerage commissions, which are borne
directly by the Fund.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Board of Directors of the Fund consists of five individuals, four of whom
are not "interested persons" of the Fund as defined in the Investment Company
Act. The Board of Directors of the Fund is responsible for the overall
supervision of the operations of the Fund and performs the various duties
imposed on the directors of investment companies by the Investment Company Act.
The Directors of the Fund are:
Arthur Zeikel* -- President and Chief Investment Officer of the Manager;
President and Director of Princeton Services, Inc.; Executive Vice President of
Merrill Lynch & Co., Inc. ("ML & Co."); Executive Vice President of Merrill
Lynch; Director of the Distributor.
Donald Cecil -- Special Limited Partner of Cumberland Partners (an investment
partnership).
Edward H. Meyer -- Chairman of the Board, President and Chief Executive
Officer of Grey Advertising Inc.
Charles C. Reilly -- Self-employed financial consultant; former President and
Chief Investment Officer of Verus Capital, Inc.; former Senior Vice President
of Arnhold and S. Bleichroeder, Inc.; Adjunct Professor, Columbia University
Graduate School of Business.
Richard R. West -- Professor of Finance, and Dean from 1984 to 1993, New York
University Leonard N. Stern School of Business Administration.
- --------
* Interested person, as defined in the Investment Company Act, of the Fund.
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MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager, Merrill Lynch Asset Management, L.P., which does business as
Merrill Lynch Asset Management, is owned and controlled by ML & Co., a
financial services holding company and the parent of Merrill Lynch. The Manager
provides the Fund with management and investment advisory services. The Manager
or an affiliate, Fund Asset Management, L.P. ("FAM"), acts as the manager for
more than 100 registered investment companies. The Manager also offers
portfolio management and portfolio analysis services to individuals and
institutions. As of August 31, 1994, the Manager and FAM had a total of
approximately $165.7 billion in investment company and other portfolio assets
under management, including accounts of certain affiliates of the Manager.
The management agreement with the Manager (the "Management Agreement")
provides that, subject to the direction of the Board of Directors of the Fund,
the Manager is responsible for the actual management of the Fund's portfolio.
The responsibility for making decisions to buy, sell or hold a particular
security rests with the Manager, subject to review by the Board of Directors.
The Manager provides the portfolio manager for the Fund who considers
analyses from various sources (including brokerage firms with which the Fund
does business), makes the necessary decisions, and places transactions
accordingly. The Manager is also obligated to perform certain administrative
and management services for the Fund and is obligated to provide all of the
office space, facilities, equipment and personnel necessary to perform its
duties under the Management Agreement.
The Management Agreement provides that the Fund will pay the Manager a
monthly fee at the annual rate of 0.75% of the average daily net assets of the
Fund. The Manager has agreed to waive a portion of its management fee payable
by the Fund so that such fee is reduced for average daily net assets of the
Fund in excess of $2.5 billion from the annual rate of 0.75% to 0.70%, and
further reduced from 0.70% to 0.65% for average daily net assets in excess of
$5 billion. For the fiscal year ended October 31, 1993, the Fund paid the
Manager a fee at the rate of 0.74% of average daily net assets. This fee is
higher than that of most mutual funds, but management of the Fund believes this
fee, which is typical for a global fund, is justified by the global nature of
the Fund. For the fiscal year ended October 31, 1993, the Manager received a
fee of $18,984,493 (based on average net assets of $2.6 billion). At August 31,
1994, the net assets of the Fund aggregated approximately $7.9 billion. At this
asset level, the annual management fee would aggregate approximately $43.3
million. 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 Merrill Lynch & Co., Inc. and
an affiliate of the Manager, pursuant to which the Manager pays MLAM U.K. a fee
computed at the rate of 0.10% of the average daily net assets of the Fund for
providing investment advisory services to the Manager with respect to the Fund.
For the fiscal year ended October 31, 1993, the fee paid by the Manager to MLAM
U.K. pursuant to such agreement aggregated $2,293,281. At the Fund's August 31,
1994, asset level, the annual fee paid by the Manager to MLAM U.K. would
aggregate approximately $7.9 million. MLAM U.K. has offices at Ropemaker Place,
25 Ropemaker Street, 1st Floor, London EC24 9LY, England.
Bryan N. Ison, Vice President of the Fund, is the Fund's Portfolio Manager.
Mr. Ison has been a Portfolio Manager of the Manager since 1984 and a Vice
President of the Manager since 1985. Mr. Ison has been primarily responsible
for the management of the Fund's portfolio since it commenced operations.
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The Management Agreement obligates the Fund to pay certain expenses incurred
in its operations including, among other things, the investment advisory 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.
Accounting services are provided to the Fund by the Manager, and the Fund
reimburses the Manager for its costs in connection with such services on a
semi-annual basis. For the fiscal year ended October 31, 1993, the Fund
reimbursed the Manager $213,891 for such accounting services. For the fiscal
year ended October 31, 1993, the ratio of total expenses to average net assets
was 0.93% for the Class A shares and 1.95% for the Class B shares; no Class C
shares or Class D shares had been issued during that year.
TRANSFER AGENCY SERVICES
Financial Data Services, Inc. (the "Transfer Agent"), which is a wholly-owned
subsidiary of ML & Co., acts as the Fund's transfer agent pursuant to a
Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement ( the "Transfer Agency Agreement"). Pursuant to the Transfer Agency
Agreement, the Transfer Agent is responsible for the issuance, transfer and
redemption of shares and the opening and maintenance of shareholder accounts.
Pursuant to the Transfer Agency Agreement, the Transfer Agent receives an
annual fee of $11.00 per Class A or Class D shareholder account and $14.00 per
Class B or Class C shareholder account, nominal miscellaneous fees (e.g.,
account closing fees) and is entitled to reimbursement for out-of-pocket
expenses incurred by it under the Transfer Agency Agreement. For the fiscal
year ended October 31, 1993, the Fund paid $2,460,346 to the Transfer Agent
pursuant to the Transfer Agency Agreement. At August 31, 1994, the Fund had
96,988 Class A shareholder accounts, 510,347 Class B shareholder accounts, no
Class C shareholder accounts and no Class D shareholder accounts. At this level
of accounts, the annual fee payable to the Transfer Agent would aggregate
approximately $8.2 million, plus miscellaneous and out-of-pocket expenses.
PURCHASE OF SHARES
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), an affiliate of
both the Manager and Merrill Lynch, acts as the distributor of 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 retirement plans, the
minimum initial purchase is $100, and the minimum subsequent purchase is $1.
The Fund is offering its shares in four classes at a public offering price
equal to the next determined net asset value per share plus sales charges
imposed either at the time of purchase or on a deferred basis depending upon
the class of shares selected by the investor under the Merrill Lynch Select
PricingSM System, as described below. The applicable offering price for
purchase orders is based upon the net asset value of the Fund next determined
after receipt of the purchase orders by the Distributor. As to purchase orders
received by securities dealers prior to 4:15 p.m., New York time, which
includes orders received after the determination of the net asset value on the
previous day, the applicable offering price will be based on the net asset
value as
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of 4:15 p.m., New York time, on the day the orders are placed with the
Distributor, provided the orders are received by the Distributor prior to 4:30
p.m., New York time, on that day. If the purchase orders are not received
prior to 4:30 p.m., New York time, such orders shall be deemed received on the
next business day. The Fund or the Distributor may suspend the continuous
offering of the Fund's shares of any class at any time in response to
conditions in the securities markets or otherwise and may thereafter resume
such offering from time to time. Any order may be rejected by the Distributor
or the Fund. Neither the Distributor nor the dealers are permitted to withhold
placing orders to benefit themselves by a price change. Merrill Lynch may
charge its customers a processing fee (presently $4.85) to confirm a sale of
shares to such customers. Purchases directly through the 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 contingent deferred sales charge and
ongoing distribution fees. A discussion of the factors that investors should
consider in determining the method of purchasing shares under the Merrill
Lynch Select 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
identical interests in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The deferred sales charges and account maintenance fees that are imposed on
Class B and Class C shares, as well as the account maintenance fees that are
imposed on Class D shares, will be imposed directly against those classes and
not against all assets of the Fund and, accordingly, such charges will not
affect the net asset value of any other class or have any impact on investors
choosing another sales charge option. Dividends paid by the Fund for each
class of shares will be calculated in the same manner at the same time and
will differ only to the extent that account maintenance and distribution fees
and any incremental transfer agency costs relating to a particular class are
borne exclusively by that class. Class B, Class C and Class D shares each have
exclusive voting rights with respect to the Rule 12b-1 distribution plan
adopted with respect to such class pursuant to which account maintenance
and/or distribution fees are paid. See "Distribution Plans" below. Each class
has different exchange privileges. See "Shareholder Services -- Exchange
Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges with respect to Class B and Class C shares in
that the sales charges applicable to each class provide for the financing of
the distribution of the shares of the Fund. The distribution-related revenues
paid with respect to a class will not be used to finance the distribution
expenditures of another class. Sales personnel may receive different
compensation for selling different classes of shares. Investors are advised
that only Class A and Class D shares may be available for purchase through
securities dealers, other than Merrill Lynch, which are eligible to sell
shares.
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
- -------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
A Maximum 5.25% initial No No No
sales charge(2)(3)
- -------------------------------------------------------------------------------
B CDSC for a period of 4 0.25% 0.75% B shares convert to D
years, at a rate of shares automatically
4.0% during the first after approximately
year, decreasing 1.0% eight years(4)
annually to 0.0%
- -------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.75% No
- -------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(3)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs may be imposed if the redemption occurs
within the applicable CDSC time period. The charge will be assessed on an
amount equal to the lesser of the proceeds of redemption or the cost of
the shares being redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives -- Class A and Class D Shares -- Eligible Class A Investors".
(3) Reduced for purchases of $25,000 or more. Class A and Class D share
purchases of $1,000,000 or more will not be subject to an initial sales
charge but instead will be subject to a 1.0% CDSC for one year.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other MLAM-
advised mutual funds into which exchanges may be made have a ten year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible to
purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternatives is the next determined net
asset value plus varying sales charges (i.e., sales loads), as set forth
below.
<TABLE>
<CAPTION>
SALES LOAD AS DISCOUNT TO
SALES LOAD AS PERCENTAGE* OF SELECTED DEALERS
PERCENTAGE OF THE NET AMOUNT AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE INVESTED THE OFFERING 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 4.17 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>
28
<PAGE>
- --------
*Rounded to the nearest one-hundredth percent.
** Class A and Class D purchases of $1,000,000 or more made on or after
October 21, 1994, will be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. Class A purchases made prior to
October 21, 1994 may be subject to a CDSC if the shares are redeemed within
one year of purchase at the following annual rates: 1.00% on purchases of
$1,000,000 to $2,500,000; 0.60% on purchases of $2,500,001 to $3,500,000;
0.40% on purchases of $3,500,001 to $5,000,000; and 0.25% on purchases of
more than $5,000,000 in lieu of paying an initial sales charge. 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 401(k) 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.
During the fiscal year ended October 31, 1993, the Fund sold 51,001,581 Class
A shares for aggregate net proceeds of $652,336,461. The gross sales charges
for the sale of Class A shares of the Fund for that year were $13,935,192, of
which $861,771 and $13,073,421 were received by the Distributor and Merrill
Lynch, respectively. For the fiscal year ended October 31, 1993, the
Distributor received CDSCs of $636, all of which were paid to Merrill Lynch,
with respect to redemption within one year after purchase of Class A shares
purchased subject to front-end sales charge waivers.
Eligible Class A Investors. Class A shares are offered to a limited group of
investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors that currently own Class A shares in a
shareholder account, including participants in the Merrill Lynch Blueprint SM
Program, are entitled to purchase additional Class A shares in that account.
Certain employer sponsored retirement or savings plans, including eligible 401
(k) plans, may purchase Class A shares at net asset value provided such plans
meet the required minimum number of eligible employees or required amount of
assets advised by MLAM or any of its affiliates. Class A shares are available
at net asset value to corporate warranty insurance reserve fund programs
provided that the program has $3 million or more initially invested in MLAM-
advised mutual funds. Also eligible to purchase Class A shares at net asset
value are participants in certain investment programs including TMA SM Managed
Trusts to which Merrill Lynch Trust Company provides discretionary trustee
services and certain purchases made in connection with the Merrill Lynch
Mutual Fund Adviser program. In addition, Class A shares will be offered at
net asset value to ML & Co. and its subsidiaries and their directors and
employees and to members of the Boards of MLAM-advised investment companies,
including the Fund. Certain persons who acquired shares of certain MLAM-
advised closed-end funds who wish to reinvest the net proceeds from a sale of
their closed-end fund shares of common stock in shares of the Fund also may
purchase Class A shares of the Fund if certain conditions set forth in the
Statement of Additional Information are met. For example, Class A shares of
the Fund and certain other MLAM-advised mutual funds are offered at net asset
value to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. who
wish to reinvest the net proceeds from a sale of certain of their shares of
common stock of Merrill Lynch Senior Floating Rate Fund, Inc. in shares of
such funds.
Reduced Initial Sales Charges. No initial 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".
29
<PAGE>
Class D shares are offered at net asset value without sales charge to an
investor who has a business relationship with a Merrill Lynch financial
consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Class D shares are offered with reduced sales charges and, in certain
circumstances, at net asset value, to participants in the Merrill Lynch
Blueprint SM Program.
Additional information concerning these reduced initial sales charges,
including information regarding investments by Employee Sponsored Retirement or
Savings Plans, is set forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES -- CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four year CDSC,
while Class C shares are subject only to a one year 1.0% CDSC. On the other
hand, approximately eight years after Class B shares are issued, such Class B
shares, together with shares issued upon dividend reinvestment with respect to
those shares, are automatically converted into Class D shares of the Fund and
thereafter will be subject to lower continuing fees. See "Conversion of Class B
Shares to Class D Shares" below. Both Class B and Class C shares are subject to
an account maintenance fee of 0.25% of net assets and a distribution fee 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 "Description
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 its 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 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.
30
<PAGE>
Imposition of the CDSC and the distribution fee on Class B and Class C shares
is limited by the NASD asset-based sales charge rule. See "Limitations on the
Payment of Deferred Sales Charges" below. The proceeds from the ongoing account
maintenance fee are used to compensate Merrill Lynch for providing continuing
account maintenance activities. Class B shareholders of the Fund exercising the
exchange privilege described under "Shareholder Services -- Exchange Privilege"
will continue to be subject to the Fund's CDSC schedule if such schedule is
higher than the CDSC schedule relating to the Class B shares acquired as a
result of the exchange.
Contingent Deferred Sales Charges -- Class B Shares. Class B shares which 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 CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B CDSC
AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
------------------- -----------------
<S> <C>
0-1........................................................ 4.00%
1-2........................................................ 3.00
2-3........................................................ 2.00
3-4........................................................ 1.00
4 and thereafter........................................... 0.00
</TABLE>
For the fiscal year ended October 31, 1993, the Distributor received CDSCs of
$1,701,006 with respect to redemptions of Class B shares, all of which were
paid to Merrill Lynch.
In determining whether a 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 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 purchases 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 the CDSC because of dividend reinvestment. With respect
to the remaining 40 shares, the CDSC is applied only to the original cost of
$10 per share and not to the increase in net asset value of $2 per share.
Therefore, $400 of the $600 redemption proceeds will be charged at a rate of
2.0% (the applicable rate in the third year after purchase).
31
<PAGE>
The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended) 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 also
is waived for any Class B shares which are purchased by eligible 401(k) or
eligible 401(a) plans which are rolled over into a Merrill Lynch or Merrill
Lynch Trust Company custodied IRA and held in such account at the time of
redemption. The Class B CDSC also is waived for any Class B shares which are
purchased by a Merrill Lynch rollover IRA that was funded by a rollover from a
terminated 401(k) plan managed by the MLAM Private Portfolio Group and held in
such account at the time of redemption. Additional information concerning the
waiver of the Class B CDSC is set forth in the Statement of Additional
Information.
Contingent Deferred Sales Charges -- Class C Shares. Class C shares which
are redeemed within one year after purchase may be subject to a 1.0% CDSC
charged as a percentage of the dollar amount subject thereto. The charge will
be assessed on an amount equal to the lesser of the proceeds of redemption or
the cost of the shares being redeemed. Accordingly, no Class C CDSC will be
imposed on increases in net asset value above the initial purchase price. In
addition, no Class C CDSC will be assessed on shares derived from reinvestment
of dividends or capital gains distributions.
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.
32
<PAGE>
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert
approximately ten years after initial purchase. If, during the Conversion
Period, a shareholder exchanges Class B shares with an eight-year Conversion
Period for Class B shares with a ten-year Conversion Period, or vice versa, the
Conversion Period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked onto
the holding period for the shares acquired.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the
CDSC normally imposed on purchases of Class B shares ("Class B Retirement
Plans"). When the first share of any MLAM-advised mutual fund purchased by a
Class B Retirement Plan has been held for ten years (i.e., ten years from the
date the relationship between MLAM-advised mutual funds and the Class B
Retirement Plan was established), all Class B shares of all MLAM-advised mutual
funds held in that Class B Retirement Plan will be converted into Class D
shares of the appropriate Funds. Subsequent to such conversion, that Class B
Retirement Plan will be sold Class D shares of the appropriate funds at net
asset value.
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or
distribution fees paid by the Fund to the Distributor with respect to such
classes. The Class B and Class C Distribution Plans provide for the payment of
account maintenance fees and distribution fees, and the Class D Distribution
Plan provides for the payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual
rate of 0.25% of the average daily net assets of the Fund attributable to
shares of the relevant class in order to compensate the Distributor and Merrill
Lynch (pursuant to a sub-agreement) in connection with account maintenance
activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.75% of
the average daily net assets of the Fund attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services, and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C
shares through dealers without the assessment of an initial sales charge and at
the same time permit the dealer 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.
33
<PAGE>
Prior to July 7, 1993, the Fund paid the Distributor an ongoing distribution
fee, accrued daily and paid monthly, at the annual rate of 1.00% of average
daily net assets of the Class B shares of the Fund under a distribution plan
previously adopted by the Fund (the "Prior Plan") to compensate the Distributor
and Merrill Lynch for providing account maintenance and distribution-related
activities and services to Class B shareholders. The fee rate payable and the
services provided under the Prior Plan are identical to the aggregate fee rate
payable and the services provided under the Class B Distribution Plan, the
difference being that the account maintenance and distribution services have
been unbundled.
For the fiscal year ended October 31, 1993, the Fund paid the Distributor
$20,873,731 pursuant to the Prior Plan and the Class B Distribution Plan (based
on average net assets subject to the Prior Plan and the Class B Distribution
Plan of $2.1 billion), all of which was paid to Merrill Lynch for providing
account maintenance and distribution-related activities and services in
connection with Class B shares. The Fund did not begin to offer shares of Class
C or Class D publicly until the date of this Prospectus. Accordingly, no
payments have been made pursuant to the Class C or Class D Distribution Plans
prior to the date of this Prospectus. At August 31, 1994, the net assets of the
Fund subject to the Class B Distribution Plan aggregated approximately $6.5
billion. At this asset level, the annual fee payable pursuant to the Class B
Distribution Plan would aggregate approximately $65.5 million.
The payments under the Distribution Plans are based upon 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, 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.
At December 31, 1993, the fully allocated accrual expenses incurred by the
Distributor and Merrill Lynch with respect to Class B shares for the period
since February 3, 1989 (commencement of operations) exceeded fully allocated
accrual revenues by approximately $87,524,000 (1.80% of Class B net assets at
that date). As of December 31, 1993, direct cash expenses for the period since
February 3, 1989 (commencement of operations) exceeded direct cash revenues by
$17,461,314 (0.36% of Class B net assets at that date). As of May 31, 1994,
direct cash expenses for the period since February 3, 1989 (commencement of
operations) exceeded direct cash revenues by $9,611,509 (0.16% of Class B 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 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
34
<PAGE>
in connection with the account maintenance and/or distribution of each class of
shares separately. The initial sales charges, the account maintenance fee, the
distribution fee and/or the CDSCs received with respect to one class will not
be used to subsidize the sale of shares of another class. Payments of the
distribution fee on Class B shares will terminate upon conversion of those
Class B shares into Class D shares as set forth under "Deferred Sales Charge
Alternatives -- Class B and Class C Shares -- Conversion of Class B Shares to
Class D Shares".
Limitations on the Payment of Deferred Sales Charges. The maximum sales
charge rule in the Rules of Fair Practice of the NASD imposes a limitation on
certain asset-based sales charges such as the Fund's distribution fee and the
CDSC 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 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.
REDEMPTION OF SHARES
The Fund is required to redeem for cash all shares of the Fund upon receipt
of a written request in proper form. The redemption price is the net asset
value per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC which may be applicable, there will be no
charge for redemption if the redemption request is sent directly to the
Transfer Agent. Shareholders liquidating their holdings will receive upon
redemption all dividends reinvested through the date of redemption. The value
of shares at the time of redemption may be more or less than the shareholder's
cost, depending on the market value of the securities held by the Fund at such
time.
REDEMPTION
A shareholder wishing to redeem shares may do so without charge by tendering
the shares directly to the Transfer Agent, Financial Data Services, Inc.,
Transfer Agency Mutual Fund Operations, P.O. Box 45289, Jacksonville, Florida
32232-5289. Redemption requests delivered other than by mail should be
delivered to Financial Data Services, Inc., Transfer Agency Mutual Fund
Operations, 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484. Proper
notice of redemption in the case of shares deposited with the Transfer Agent
may be accomplished by a written letter requesting redemption. Proper notice of
redemption
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in the case of shares for which certificates have been issued may be
accomplished by a written letter as noted above accompanied by certificates for
the shares to be redeemed. The notice in either event requires the signatures
of all persons in whose names the shares are registered, signed exactly as
their names appear on the Transfer Agent's register or on the certificate, as
the case may be. The signature(s) on the notice must be guaranteed by an
"eligible guarantor institution" (including, for example, Merrill Lynch branch
offices and certain other financial institutions) as such term is defined in
Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended, the
existence and validity of which may be verified by the Transfer Agent through
the use of industry publications. Notarized signatures are not sufficient. In
certain instances, the Transfer Agent may require additional documents, such
as, but not limited to, trust instruments, death certificates, appointments as
executor or administrator, or certificates of corporate authority. For
shareholders redeeming directly with the Transfer Agent, payment 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 good payment (e.g., cash or
certified check drawn on a U.S. 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 normally will 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 close of business on the
New York Stock Exchange on the day received and that such request is received
by the Fund from such dealer not later than 4:30 p.m., New York time, on the
same day. Dealers have the responsibility of submitting such repurchase
requests to the Fund not later than 4:30 p.m., New York time, in order to
obtain that day's closing price.
The foregoing repurchase arrangements are for the convenience of shareholders
and do not involve a charge by the Fund (other than any applicable CDSC).
Securities firms which do not have selected dealer agreements with the
Distributor, however, may impose a transaction charge on the shareholder for
transmitting the notice of repurchase to the Fund. Merrill Lynch may charge its
customers a processing fee (presently $4.85) to confirm a repurchase of shares
to such customers. Redemptions directly through the Transfer Agent are not
subject to the processing fee. The Fund reserves the right to reject any order
for repurchase, which right of rejection might adversely affect shareholders
seeking redemption through the repurchase procedure. A shareholder whose order
for repurchase is rejected by the Fund, however, may redeem shares as set forth
above.
REINSTATEMENT PRIVILEGE -- CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a one-
time privilege to reinstate their accounts by purchasing Class A or Class D
shares, as the case may be, of the Fund at net asset value without a sales
charge up to the dollar amount redeemed. The reinstatement privilege may be
exercised by sending a notice of exercise along with a check for the amount to
be reinstated to the Transfer Agent within 30 days after the date the request
for redemption was accepted by the Transfer Agent or the Distributor. The
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reinstatement will be made at the net asset value per share next determined
after the notice of reinstatement is received and cannot exceed the amount of
the redemption proceeds. The reinstatement privilege is a one-time privilege
and may be exercised by the Class A or Class D shareholder only the first time
such shareholder makes a redemption.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below which are designed to facilitate investment in shares of the
Fund. Certain of such services are not available to investors who place
purchase orders for the Fund's shares through the Merrill Lynch BlueprintSM
Program. Full details as to each of such services, copies of the various plans
described below and instructions as to how to participate in the various plans
and services, or to change options with respect thereto, can be obtained from
the Fund by calling the telephone number on the cover page hereof or from the
Distributor or Merrill Lynch. Certain of these services are available only to
U.S. investors.
Investment Account. Each shareholder whose account is maintained at the
Transfer Agent has an Investment Account and will receive statements, at least
quarterly, from the Transfer Agent. These statements will serve as transaction
confirmations for automatic investment purchases and the reinvestment of
ordinary income dividends and long-term capital gain distributions. The
statements will also show any other activity in the account since the preceding
statement. Shareholders will receive separate transaction confirmations for
each purchase or sale transaction other than automatic investment purchases and
the reinvestment of ordinary income dividends and long-term capital gain
distributions. A shareholder may make additions to his Investment Account at
any time by mailing a check directly to the Transfer Agent. Shareholders also
may 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 will be opened automatically, without charge,
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. If the new brokerage firm is willing to accommodate the
shareholder in this manner, the shareholder must request that he be issued
certificates for his shares and then must turn the certificates over to the new
firm for re-registration as described in the preceding sentence. Shareholders
considering transferring a tax-deferred retirement account such as an
individual retirement account from Merrill Lynch to another brokerage firm or
financial institution should be aware that, if the firm to which the retirement
account is to be transferred will not take delivery of shares of the Fund, a
shareholder must either redeem the shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm, or such
shareholder must continue to maintain a retirement account at Merrill Lynch for
those shares.
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Exchange Privilege. U.S. Shareholders of each class of shares of the Fund
have an exchange privilege with certain other MLAM-advised mutual funds. There
is currently no limitation on the number of times a shareholder may exercise
the exchange privilege. The exchange privilege may be modified or terminated in
accordance with the rules of the Commission.
Under the Merrill Lynch Select PricingSM System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund in
his account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class
A shareholder wants to exchange Class A shares for shares of a second MLAM-
advised mutual fund, and the shareholder does not hold Class A shares of the
second fund in his account at the time of the exchange and is not otherwise
eligible to acquire Class A shares of the second fund, the shareholder will
receive Class D shares of the second fund as a result of the exchange. Class D
shares also may be exchanged for Class A shares of a second MLAM-advised mutual
fund at any time as long as, at the time of the exchange, the shareholder holds
Class A shares of the second fund in the account in which the exchange is made
or is otherwise eligible to purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the relative
net asset values per Class A or Class D share, respectively, plus an amount
equal to the difference, if any, between the sales charge previously paid on
the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares will be exchanged with shares of the same
Class of other MLAM-advised mutual fund.
Shares of the Fund which are subject to a CDSC will be exchangeable on the
basis of relative net asset value per share without the payment of any CDSC
that might otherwise be due upon redemption of the shares of the Fund. For
purposes of computing the CDSC that may be payable upon a disposition of the
shares acquired in the exchange, the holding period for the previously owned
shares of the Fund is "tacked" to the holding period of the newly acquired
shares of the other Fund.
Class A, Class B, Class C and Class D shares also will be exchangeable for
shares of certain MLAM- advised money market funds specifically designated as
available for exchange of holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for reduction of any CDSC imposed on such shares, if
any, and with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the
Fund's CDSC schedule if such schedule is higher than the CDSC schedule relating
to the Class B shares of the MLAM-advised mutual fund from which the exchange
has been made.
Exercise of the exchange privilege is treated as a sale for Federal income
tax purposes. For further information, see "Shareholder Services -- Exchange
Privilege" in the Statement of Additional Information.
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The Fund's exchange privilege is modified with respect to purchases of Class
A and Class D shares under the Merrill Lynch Mutual Fund Adviser ("MFA")
program. First, the initial allocation of assets is made under the MFA program.
Then, any subsequent exchange under the MFA program of Class A or Class D
shares of a MLAM-advised mutual fund for Class A or Class D shares of the Fund
will be made solely on the basis of the relative net asset values of the shares
being exchanged. Therefore, there will not be a charge for any difference
between the sales charge previously paid on the shares of the other MLAM
advised mutual fund and the sales charge payable on the shares of the Fund
being acquired in the exchange under the MFA program.
Automatic Reinvestment of Dividends and Capital Gains Distributions. All
dividends and capital gains distributions are reinvested automatically in full
and fractional shares of the Fund 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 by telephone (1-800-MER-FUND) to the Transfer Agent if the
shareholder's account is maintained with the Transfer Agent, elect to have
subsequent dividends or capital gains distributions, or both, paid in cash,
rather than reinvested, in which event payment will be mailed on or about the
payment date. Cash payments can also be directly deposited to the shareholder's
bank account. No CDSC will be imposed upon redemption of shares issued as a
result of the automatic reinvestment of dividends or capital gains
distributions.
Systematic Withdrawal Plan. A Class A or Class D shareholder may elect to
receive systematic withdrawal payments from his Investment Account in the form
of payments by check or through automatic payment by direct deposit to his bank
account on either a monthly or quarterly basis. 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, subject
to certain conditions.
Automatic Investment Plans. Regular additions of Class A, Class B, Class C
and Class D shares may be made to an investor's Investment Account by
prearranged charges of $50 or more to his regular bank account. Investors who
maintain CMA(R) accounts may arrange to have periodic investments made in the
Fund in their CMA(R) accounts or in certain related accounts in amounts of $100
or more through the CMA(R) Automated Investment Program.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return for
various specified time periods in advertisements or information furnished to
present or prospective shareholders. Average annual total return is computed
separately for Class A, Class B, Class C and Class D shares in accordance with
a formula 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 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
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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 fees and any incremental transfer agency costs
relating to each class of shares will be borne exclusively by that class. The
Fund will include performance data for all classes of shares of the Fund in any
advertisement or information including performance data of the Fund.
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return
calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return, and (2) the maximum applicable sales
charges will not be included with respect to 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 longer
periods of time. In advertisements directed to investors whose purchases are
subject to reduced sales charges in the case of Class A and Class D shares or
waiver of the CDSC in the case of Class B shares (such as investors in certain
retirement plans), performance data may take into account the reduced, and not
the maximum, sales charge or may not take into account the CDSC and therefore
may reflect greater total return since, due to the reduced sales charges or
waiver of the CDSC, a lower amount of expenses may be 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 the effect of such total return on a
hypothetical $1,000 investment in the Fund at the beginning of each specified
period.
Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate, and an investor's shares, when redeemed, may be worth more
or less than their original cost.
On occasion, the Fund may compare its performance to the Standard & Poor's
500 Composite Stock Price Index, the Dow Jones Industrial Average, or
performance data published by Lipper Analytical Services, Inc., Morningstar
Publications, Inc., Money Magazine, U.S. News & World Report, Business Week,
CDA Investment Technology, Inc., Forbes Magazine, Fortune Magazine or other
industry publications. In addition, from time to time the Fund may include the
Fund's risk-adjusted performance ratings assigned by Morningstar Publications,
Inc. in advertising or supplemental sales literature. As with other performance
data, performance comparisons should not be considered representative of the
Fund's relative performance for any future period.
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ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all of its net investment income, if
any. Dividends from such net investment income are paid at least annually. All
net realized long- or short-term capital gains, if any, are distributed to the
Fund's shareholders at least annually. 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 to that
class. See "Additional Information -- Determination of Net Asset Value".
Dividends and distributions may be reinvested automatically in shares of the
Fund, at net asset value without a sales charge. Shareholders may elect in
writing to receive any such dividends or distributions, or both, in cash.
Dividends and distributions are taxable to shareholders as described below
whether they are reinvested in shares of the Fund or received in cash. From
time to time, the Fund may declare a special distribution at or about the end
of the calendar year in order to comply with a Federal income tax requirement
that certain percentages of its ordinary income and capital gains be
distributed during the calendar year.
Certain gains or losses attributable to foreign currency related gains or
losses from certain of the Fund's investments may increase or decrease the
amount of the Fund's income available for distribution to shareholders. If such
losses exceed other income during a taxable year, (a) the Fund would not be
able to make any ordinary dividend distributions, and (b) distributions made
before the losses were realized would be recharacterized as returns of capital
to shareholders, rather than as ordinary dividends, reducing each shareholder's
tax basis in his Fund shares for Federal income tax purposes. For a detailed
discussion of the Federal tax considerations relevant to foreign currency
transactions, see "Additional Information -- Taxes". If in any fiscal year the
Fund has net income from certain foreign currency transactions, such income
will be distributed annually.
All net realized long- or short-term capital gains, if any, are declared and
distributed to the Fund's shareholders annually after the close of the Fund's
fiscal year. Capital gains distributions will be automatically reinvested in
shares unless the shareholder elects to receive such distributions in cash.
See "Shareholder Services -- Automatic Reinvestment of Dividends and Capital
Gains Distributions" for information as to how to elect either dividend
reinvestment or cash payments. Dividends and distributions are taxable to
shareholders as described below whether they are reinvested in shares of any
portfolio or received in cash.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of the Fund is determined
once daily as of 4:15 p.m., New York time, on each day during which the New
York Stock Exchange is open for trading. Any assets or liabilities initially
expressed in terms of non-U.S. dollar currencies are translated into U.S.
dollars at the prevailing market rates as quoted by one or more banks or
dealers on the day of valuation. The net asset value is computed by dividing
the market value of the securities held by the Fund plus any cash or other
assets (including interest and dividends accrued but not yet received) minus
all liabilities (including accrued expenses) by the total number of shares
outstanding at such time. Expenses, including the management fees payable to
the Manager and any account maintenance and/or distribution fees payable to the
Distributor, are accrued daily. The per share net asset value of Class A shares
generally will be higher than the per share
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net asset value of shares of the other classes, reflecting the daily expense
accruals of the account maintenance, distribution and higher transfer agency
fees applicable with respect to Class B and Class C shares and the daily
expense accruals of the account maintenance fees applicable with respect to
Class D shares; moreover, the per share net asset value of Class D shares
generally will be higher than the per share net asset value of Class B and
Class C shares, reflecting the daily expense accruals of the distribution and
the higher transfer agency fees applicable with respect to Class B and Class C
shares. It is expected, however, that the per share net asset value of the
classes will tend to converge immediately after the payment of dividends or
distributions which will differ by approximately the amount of the expense
accrual differentials between the classes.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the over-the-counter market are valued
at the last available bid price in the over-the-counter market prior to the
time of valuation. When the Fund writes a call option, the amount of the
premium received is recorded on the books of the Fund as an asset and an
equivalent liability. The amount of the liability is subsequently valued to
reflect the current market value of the option written, based upon 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
by the Fund are valued at their 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.
Securities and assets for which market quotations are not readily available
are valued at fair value as determined in good faith under the direction of the
Board of Directors of the Fund.
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (the "Code"). If it so qualifies, the Fund (but not
its shareholders) will not be subject to Federal income tax on the part of its
net ordinary income and net realized capital gains which it distributes to
Class A, and Class B, Class C and Class D shareholders (together, the
"shareholders"). The Fund intends to distribute substantially all of such
income.
Dividends paid by the Fund from its ordinary income and distributions of the
Fund's net realized short-term capital gains (together referred to hereafter as
"ordinary income dividends") are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
(including long-term gains from certain transactions in futures and options)
("capital gain dividends") are taxable to shareholders as long-term capital
gains, regardless of the length of time the shareholder has owned Fund shares.
Distributions in excess of the Fund's earnings and profits will first reduce
the adjusted tax basis of a holder's shares and, after such adjusted tax basis
is reduced to zero, will constitute capital gains to such holder (assuming the
shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. A portion of the Fund's ordinary income dividends may be eligible
for the dividends received deduction allowed to corporations under the Code, if
certain requirements are met. If the Fund pays a dividend in January that
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was declared in the previous October, November or December to shareholders of
record on a specified date in one of such months, then such dividend will be
treated for tax purposes as being paid by the Fund and received by its
shareholders on December 31 of the year in which such dividend was declared.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% U.S.
withholding tax under existing provisions of the Code applicable to foreign
individuals and entities unless a reduced rate of withholding or a withholding
exemption is provided under applicable treaty law. Nonresident shareholders are
urged to consult their own tax advisers concerning the applicability of the
U.S. withholding tax.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes. Shareholders may be
able to claim U.S. foreign tax credits with respect to such taxes, subject to
certain conditions and limitations contained in the Code. For example, certain
retirement accounts cannot claim foreign tax credits on investments in foreign
securities held in the Fund. If more than 50% in value of the Fund's total
assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible, and intends, to file an election with
the Internal Revenue Service pursuant to which shareholders of the Fund will be
required to include their proportionate shares of such withholding taxes in
their U.S. income tax returns as gross income, treat such proportionate shares
as taxes paid by them, and deduct such proportionate shares in computing their
taxable incomes or, alternatively, use them as foreign tax credits against
their U.S. income taxes. No deductions for foreign taxes, however, may be
claimed by noncorporate shareholders who do not itemize deductions. A
shareholder that is a nonresident alien individual or a foreign corporation may
be subject to U.S. withholding tax on the income resulting from the Fund's
election described in this paragraph but may not be able to claim a credit or
deduction against such U.S. tax for the foreign taxes treated as having been
paid by such shareholder. The Fund will report annually to its shareholders the
amount per share of such withholding taxes.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
Under Code Section 988, foreign currency gains or losses from certain debt
instruments, 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 any distributions made before the
losses were realized but in the same taxable year would be recharacterized as a
return of capital to shareholders, thereby reducing the basis of each
shareholder's Fund shares and resulting in a capital gain for any shareholder
who received a distribution greater than the shareholder's tax basis in Fund
shares (assuming the shares were held as a capital asset).
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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 the sales charge paid to the Fund
reduces any sales charge the shareholder would have owed upon purchase of the
new shares in the absence of the exchange privilege. Instead, such sales charge
will be treated as an amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action
either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs which
are derived from interest on U.S. Government obligations. State law varies as
to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
ORGANIZATION OF THE FUND
The Fund was incorporated under Maryland law on June 9, 1988. It has an
authorized capital of 2,200,000,000 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, of which Class A and Class C consists of 200,000,000
shares, and Class B and Class D consists of 900,000,000 shares. Shares of Class
A, Class B, Class C and Class D Common Stock represent interests 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 the distribution of such shares. Each class has exclusive
voting rights with respect to matters relating to account maintenance and
distribution expenditures, as applicable. See "Purchase of Shares". The Fund
has received an order from the Securities and Exchange Commission permitting
the issuance and sale of multiple classes of Common Stock. The Board of
Directors of the Fund may classify and reclassify the shares of the Fund into
additional classes of Common Stock at a future date.
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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 matters 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 on 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 auditors. Also, the by-laws of the Fund require that a special
meeting of stockholders be held upon the written request of at least 10% of the
outstanding shares of the Fund entitled to vote at such meeting. Voting rights
for Directors are not cumulative. Shares issued are fully paid and non-
assessable and have no preemptive rights. Shares have the conversion rights
disclosed 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 on liquidation or dissolution after satisfaction of
outstanding liabilities, except, as noted above, Class B, Class C and Class D
shares bear certain additional expenses.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts, the shareholder should notify in writing:
Financial Data Services, Inc.
Attn: TAMFO
P.O. Box 45289
Jacksonville, FL 32232-5289
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this,
please call your Merrill Lynch financial consultant or Financial Data Services,
Inc. at 1-800-637-3863.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
45
<PAGE>
[This page intentionally left blank]
46
<PAGE>
MERRILL LYNCH GLOBAL ALLOCATION 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 (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 Allocation Fund, Inc., and establish an Investment
Account as described in the Prospectus. In the event that I am not eligible to
purchase Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $............ payable to Financial Data Services,
Inc. as an initial investment (minimum $1,000). I understand that this
purchase will be executed at the applicable offering price next to be
determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the Right of Accumulation as outlined in the Statement of
Additional Information: Please list all funds. (Use a separate sheet of
paper if necessary.)
1. .................................. 4. ..................................
2. .................................. 5. ..................................
3. .................................. 6. ..................................
Name...........................................................................
First Name Initial Last Name
Name of Co-Owner (if any)......................................................
First Name Initial Last Name
Address........................................................................
................................................. Date........................
(Zip Code)
Occupation........................... Name and Address of Employer ........
..................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
(In the case of co-owner, a joint tenancy with rights 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 Allocation Fund, Inc.
Authorization Form.
SPECIFY TYPE OF ACCOUNT (CHECK ONE) [_] CHECKING [_] SAVINGS
Name on your account ..........................................................
Bank Name .....................................................................
Bank Number ...................... Account Number ............................
Bank Address ..................................................................
I agree that this authorization will remain in effect until I provide written
notification to Financial Data Services, Inc. amending or terminating this
service.
Signature of Depositor ........................................................
Signature of Depositor ............................... Date...................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED
CHECK MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD
ACCOMPANY THIS APPLICATION.
- -------------------------------------------------------------------------------
A-1
<PAGE>
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.--AUTHORIZATION FORM (PART 1) --
(CONTINUED)
3. SOCIAL SECURITY 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 under "Additional
Information--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 UNDER-REPORTING 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)
Dear Sir/Madam:
..................., 19......
Date of Initial Purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Global Allocation 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 Fund's 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 Allocation Fund, Inc. held as security.
By .................................. .....................................
Signature of Owner Signature of Co-Owner
(If registered in joint names,
both must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name............................. (2) Name.............................
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 made under a Letter of
Intention 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 Allocation
Fund, Inc.
c/o Financial Data Services, Inc. By ..................................
Transfer Agency Mutual Fund Operations Authorized Signature of Dealer
P.O. Box 45289
Jacksonville, FL 32232-5289 [_][_][_] [_][_][_][_]...............
Branch-Code F/C No. F/C Last Name
[_][_][_] [_][_][_][_][_]
Dealer's Customer A/C No.
A-2
<PAGE>
MERRILL LYNCH GLOBAL ALLOCATION 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
Name of Owner...................... [_][_][_] [_][_] [_][_][_][_]
Name of Co-Owner (if any).......... Social Security No. or
Taxpayer Identification
Number
Address............................ Account Number ....................
(if existing account)
...................................
- -------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN--CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of [_] Class A or [_] Class D shares in Merrill Lynch Global
Allocation Fund, Inc., at cost or current offering price. Withdrawals to be
made either (check one) [_] Monthly on the 24th day of each month, or
[_] Quarterly on the 24th day of March, June, September and December. If the
24th falls on a weekend or holiday, the next succeeding business day will be
utilized. Begin systematic withdrawal on . . . . . . . . . .(month), or as
soon as possible thereafter.
SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE): [_] $
or [_] % of the current value of [_] Class A or [_] Class D shares in the
account.
SPECIFY WITHDRAWAL METHOD: [_] check or [_] direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a)I hereby authorize payment by check
[_] as indicated in Item 1.
[_] to the order of..........................................................
Mail to (check one)
[_] the address indicated in Item 1.
[_] Name (Please Print)......................................................
Address .......................................................................
..........................................................................
Signature of Owner................................ Date..................
Signature of Co-Owner (if any)............................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO BANK ACCOUNT AND IF
NECESSARY DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO FINANCIAL DATA SERVICES, INC. AMENDING OR TERMINATING
THIS SERVICE.
Specify type of account (check one): [_] checking [_] savings
Name on your Account...........................................................
Bank Name......................................................................
Bank Number........................ Account Number............................
Bank Address...................................................................
...............................................................................
Signature of Depositor................................. Date..................
Signature of Depositor.........................................................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID"
OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHALL ACCOMPANY THIS APPLICATION.
A-3
<PAGE>
- -------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Financial Data Services, Inc. draw an automated
clearing house ("ACH") debit on my checking account described below each month
to purchase: (choose one)
[_] Class A shares [_] Class B shares [_] Class C shares [_] Class D shares
of Merrill Lynch Global Allocation Fund, Inc., subject to the terms set forth
below. In the event that I am not eligible to purchase Class A shares, I
understand that Class D shares will be purchased.
FINANCIAL DATA SERVICES, INC. AUTHORIZATION TO HONOR ACH DEBITS
DRAWN BY FINANCIAL DATA SERVICES,
INC.
You are hereby authorized to draw an To...............................Bank
ACH debit each month on my bank (Investor's Bank)
account for investment in Merrill
Lynch Global Allocation Fund, Inc. Bank Address.........................
as indicated below:
Amount of each ACH debit $........ City...... State...... Zip Code......
Account Number ...................
As a convenience to me, I hereby
Please date and invest ACH debits on request and authorize you to pay and
the 20th of each month beginning charge to my account ACH debits
drawn on my account by and payable
..................................... to Financial Data Services, Inc., I
agree that your rights in respect to
................(month) each such debit shall be the same as
if it were a check drawn on you and
or as soon thereafter as possible. signed personally by me. This
I agree that you are drawing these authority is to remain in effect
ACH debits voluntarily at my request until revoked by me in writing.
and that you shall not be liable for Until you receive such notice, you
any loss arising from any delay in shall be fully protected in honoring
preparing or failure to prepare any any such debit. I further agree that
such debit. If I change banks or if any such debit be dishonored,
desire to terminate or suspend this whether with or without cause and
program, I agree to notify you whether intentionally or
promptly in writing. I hereby inadvertently, you shall be under no
authorize you to take any action to liability.
correct erroneous ACH debits of my
bank account or purchases of fund ............ .....................
shares including liquidating shares Date Signature of
of the Fund and crediting my bank Depositor
account. I further agree that if a
debit is not honored upon ............ .....................
presentation, Financial Data Bank Signature of Depositor
Services, Inc. is authorized to Account (If joint account,
discontinue immediately the Automatic Number both must sign)
Investment Plan and to liquidate
sufficient shares held in my account
to offset the purchase made with the
returned dishonored debit.
............ .....................
Date Signature of
Depositor
......................
Signature of Depositor
(If joint account,
both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" SHOULD ACCOMPANY THIS APPLICATION.
A-4
<PAGE>
MANAGER
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
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 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
TRANSFER AGENT
Financial Data Services, Inc.
Administrative Offices:
Transfer Agency Mutual Fund Operations
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540
COUNSEL
Brown & Wood
One World Trade Center
New York, New York 10048-0557
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY 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..................................................... 9
Investment Objective and Policies.......................................... 10
Equity Securities......................................................... 11
Debt Securities........................................................... 13
Money Market Securities................................................... 15
Portfolio Strategies Involving Options and Futures........................ 15
Other Investment Policies and Practices................................... 20
Management of the Fund..................................................... 24
Board of Directors........................................................ 24
Management and Advisory Arrangements...................................... 25
Transfer Agency Services.................................................. 26
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............................................... 30
Distribution Plans........................................................ 33
Limitations on the Payment of Deferred Sales Charges...................... 35
Redemption of Shares....................................................... 35
Redemption................................................................ 35
Repurchase................................................................ 36
Reinstatement Privilege--
Class A and Class D Shares............................................... 36
Shareholder Services....................................................... 37
Performance Data........................................................... 39
Additional Information..................................................... 41
Dividends and Distributions............................................... 41
Determination of Net Asset Value.......................................... 41
Taxes..................................................................... 42
Organization of the Fund.................................................. 44
Shareholder Reports....................................................... 45
Shareholder Inquiries..................................................... 45
Authorization Form......................................................... A-1
</TABLE>
Code # 10810-1094
PROSPECTUS
- -------------------------------------------------------------------------------
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
October 21, 1994
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
- -----------------------------------
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
----------------
Merrill Lynch Global Allocation Fund, Inc. (the "Fund") is a non-diversified
mutual fund seeking high total investment return, consistent with prudent
risk, through a fully-managed investment policy utilizing United States and
foreign equity, debt and money market securities, the combination of which
will be varied from time to time both with respect to types of securities and
markets in response to changing market and economic trends. Total investment
return is the aggregate of capital value changes and income. There can be no
assurance that the Fund's investment objective will be achieved. The Fund may
employ a variety of instruments and techniques to enhance income and to hedge
against market and currency risk.
----------------
Pursuant to the Merrill Lynch Select Pricing SM System, the Fund offers four
classes of shares each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select Pricing SM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances.
----------------
This Statement of Additional Information of the Fund is not a prospectus and
should be read in conjunction with the prospectus of the Fund, dated October
21, 1994 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission and can be obtained, without charge, by calling or by
writing the Fund at the above telephone number or address. This Statement of
Additional Information has been incorporated by reference into the Prospectus.
----------------
MERRILL LYNCH ASSET MANAGEMENT--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
----------------
The date of this Statement of Additional Information is October 21, 1994.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to seek a high total investment return,
consistent with prudent risk, through a fully-managed investment policy
utilizing United States and foreign equity, debt and money market securities
the combination of which will be varied from time to time both with respect to
types of securities and markets in response to changing market and economic
trends. Reference is made to "Investment Objective and Policies" in the
Prospectus for a discussion of the investment objective and policies of the
Fund.
While it is the policy of the Fund generally not to engage in trading for
short-term gains, Merrill Lynch Asset Management, L.P., doing business as
Merrill Lynch Asset Management (the "Manager"), will effect portfolio
transactions without regard to holding period if, in its judgment, such
transactions are advisable in light of a change in circumstances of a
particular company or within a particular industry or due to general market,
economic or financial conditions. Accordingly, while the Fund anticipates that
its annual turnover rate should not exceed 200% under normal conditions, it is
impossible to predict portfolio turnover rates. The portfolio turnover rate is
calculated by dividing the lesser of the Fund's annual sales or purchases of
portfolio securities (exclusive of purchases or sales of 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. The portfolio
turnover rates for the fiscal years ending October 31, 1992, and 1993 were
59.56% and 50.35%, respectively. The Fund is subject to the Federal income tax
requirement that less than 30% of the Fund's gross income must be derived from
gains from the sale or other disposition of securities held for less than three
months.
The U.S. Government has from time to time in the past imposed restrictions,
through taxation and otherwise, on foreign investments by U.S. investors such
as the Fund. If such restrictions should be reinstituted, it might become
necessary for the Fund to invest all or substantially all of its assets in U.S.
securities. In such event, the Fund would review its investment objective and
investment policies to determine whether changes are appropriate. Any changes
in the investment objective or fundamental policies set forth under "Investment
Restrictions" below would require the approval of the holders of a majority of
the Fund's outstanding voting securities.
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 on each day the Fund determines its net asset value in U.S.
dollars, the Fund intends to manage its portfolio so as to give reasonable
assurance that it will be able to obtain U.S. dollars to the extent necessary
to meet anticipated redemptions. See "Redemption of Shares". Under present
conditions, the Fund does not believe that these considerations will have any
significant effect on its portfolio strategy, although there can be no
assurance in this regard.
PRECIOUS METAL-RELATED SECURITIES
The Fund may invest in the equity securities of companies that explore for,
extract, process or deal in precious metals, i.e., gold, silver and platinum,
and in asset-based securities indexed to the value of such metals. Such
securities may be purchased when they are believed to be attractively priced in
relation to the value of a company's precious metal-related assets or when the
value of precious metals are expected to benefit from inflationary pressure or
other economic, political or financial uncertainty or instability. The prices
of precious metals and of the securities of precious metal-related companies
historically have been subject to
2
<PAGE>
high volatility. In addition, the earnings of precious metal-related companies
may be adversely affected by volatile metals prices which may adversely affect
the financial condition of such companies.
The major producers of gold include the Republic of South Africa, the former
republics of the Soviet Union, Canada, the United States, Brazil and Australia.
Sales of gold by the former republics of the Soviet Union are largely
unpredictable and often relate to political and economic considerations rather
than to market forces. Economic, social and political developments within South
Africa may significantly affect South African gold production.
The Fund presently does not intend to invest in companies the assets of which
are located primarily in the Republic of South Africa, which produces
approximately 60% of the gold mined in nations outside of what until recently
constituted the Communist bloc. This limitation may affect adversely the Fund's
ability to invest in gold-related securities and during certain periods may
result in the Fund restricting its investments to relatively few companies.
This limitation is not a fundamental policy of the Fund and may be changed by
the Directors, without a vote of the shareholders, if they determine that such
action is warranted. The Fund will notify its shareholders of any change in
this policy with respect to South Africa.
The Fund may invest in debt securities, preferred stock or convertible
securities, the principal amount, redemption terms or conversion terms of which
are related to the market price of some precious metals such as gold bullion.
These securities are referred to as "asset-based securities". The Fund will
purchase only asset-based securities which are rated, or are issued by issuers
that have outstanding debt obligations rated, BBB or better by Standard &
Poor's Corporation ("S&P") or Baa or better by Moody's Investors Service, Inc.
("Moody's") or commercial paper rated A-1 by S&P or Prime-1 by Moody's or of
issuers that the Manager has determined to be of similar creditworthiness. If
the asset-based security is backed by a bank letter of credit or other similar
facility, the Manager may take such backing into account in determining the
creditworthiness of the issuer. While the market prices for an asset-based
security and the related natural resource asset generally are expected to move
in the same direction, there may not be perfect correlation in the two price
movements. Asset-based securities may not be secured by a security interest in
or claim on the underlying natural resource asset. The asset-based securities
in which the Fund may invest may bear interest or pay preferred dividends at
below market (or even at relatively nominal) rates. As an example, assume gold
is selling at a market price of $300 per ounce and an issuer sells a $1,000
face amount gold related note with a seven year maturity, payable at maturity
at the greater of either $1,000 in cash or in the then market price of three
ounces of gold. If at maturity, the market price of gold is $400 per ounce, the
amount payable on the note would be $1,200. Certain asset-based securities may
be payable at maturity in cash at the stated principal amount or, at the option
of the holder, directly in a stated amount of the asset to which it is related.
In such instance, because the Fund presently does not intend to invest directly
in natural resource assets, the Fund would sell the asset-based security in the
secondary market, to the extent one exists, prior to maturity if the value of
the stated amount of the asset exceeds the stated principal amount and thereby
realize the appreciation in the underlying asset.
REAL ESTATE-RELATED SECURITIES
The real estate-related securities which will be emphasized by the Fund are
equity securities of real estate investment trusts, which own income-producing
properties, and mortgage real estate investment trusts which make various types
of mortgage loans often combined with equity features. The securities of such
trusts generally pay above average dividends and may offer the potential for
capital appreciation. Such securities
3
<PAGE>
will be subject to the risks customarily associated with the real estate
industry, including declines in the value of the real estate investments of the
trusts. Real estate values are affected by numerous factors including (i)
governmental regulations (such as zoning and environmental laws) and changes in
tax laws, (ii) operating costs, (iii) the location and the attractiveness of
the properties, (iv) changes in economic conditions (such as
fluctuations in interest and inflation rates and business conditions) and (v)
supply and demand for improved real estate. Such trusts also are dependent on
management skill and may not be diversified in their investments.
PORTFOLIO STRATEGIES INVOLVING OPTIONS AND FUTURES
Reference is made to the discussion under the caption "Investment Objective
and Policies--Portfolio Strategies Involving Options and Futures" in the
Prospectus for information with respect to various portfolio strategies
involving options and futures. The Fund may seek to increase its return through
the use of options on portfolio securities and to hedge its portfolio against
movements in the equity, debt and currency markets. The Fund has authority to
write (i.e., sell) covered put and 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 stock futures and financial futures, and
related options on such futures. The Fund may also deal in forward foreign
transactions and foreign currency options and futures, and related options on
such futures. Each of such portfolio strategies is described in the Prospectus.
Although certain risks are involved in options and futures transactions (as
discussed in the Prospectus and below), the Manager believes that, because the
Fund will (i) write only covered call options on portfolio securities and (ii)
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 its shares, the net asset value
of the Fund's shares will fluctuate. There can be no assurance that the Fund's
hedging transactions will be effective. The following is further information
relating to portfolio strategies involving options and futures that the Fund
may utilize.
Writing Covered 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 particular hedge against the price of the
underlying security declining.
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 would realize 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 would realize a gain or loss from the sale of the
underlying security.
4
<PAGE>
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options which means that so
long as the Fund is obligated as the writer of the option, it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S.
Government securities or other high grade liquid debt or equity securities
denominated in U.S. dollars or non-U.S. currencies with a securities depository
with a value equal to or greater than the exercise price of the underlying
securities. By writing a put, the Fund will be obligated to purchase the
underlying security at a price that may be higher than the market value of that
security at the time of exercise for as long as the option is outstanding. The
Fund may engage in closing transactions in order to terminate put options that
it has written.
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, New York Stock Exchange, Philadelphia Stock Exchange and Pacific
Stock Exchange. Options referred to herein and in the Fund's Prospectus may
also be options traded on foreign securities exchanges such as the London Stock
Exchange and the Amsterdam Stock Exchange. An option position may be closed out
only on an exchange which 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 a closing transaction in a particular option, 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 until it delivers the
underlying security upon exercise. Reasons for the absence of a liquid
secondary market on an exchange include the following: (i) there may be
insufficient trading interest in certain options; (ii) restrictions may be
imposed by an exchange on opening transactions or closing transactions or both;
(iii) trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of options or underlying securities;
(iv) unusual or unforeseen circumstances may interrupt normal operations on an
exchange; (v) the facilities of an exchange or the Clearing Corporation may not
at all times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that exchange that had been issued by the Clearing Corporation as a
result of trades on that exchange would continue to be exercisable in
accordance with their terms.
The Fund may also enter into over-the-counter option transactions ("OTC
options"), which are two party contracts with price and terms negotiated
between the buyer and seller. The staff of the Securities and Exchange
Commission has taken the position that OTC options and the assets used as cover
for written OTC options are illiquid securities.
Purchasing Options. The Fund may purchase put options to hedge against a
decline in the market value of its equity holdings. By buying a put, the Fund
has a right to sell the underlying security at the exercise price, thus
limiting the Fund's risk of loss through a decline in the market value of the
security until the put option expires. The amount of any appreciation in the
value of the underlying security will be offset partially by the amount of the
premium paid for the put option and any related transaction costs. Prior to its
expiration, a put option may be sold in a closing sale transaction; profit or
loss from the sale will depend on whether the amount received is more or less
than the premium paid for the put option plus the related transaction cost. A
closing sale transaction cancels out the Fund's position as the purchaser of an
option by means of an offsetting sale of an identical option prior to the
expiration of the option it has purchased. In
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certain circumstances, the Fund may purchase call options on securities held in
its portfolio on which it has written call options or on securities which it
intends to purchase. The Fund may purchase either exchange traded options or
OTC options. The Fund will not purchase options on securities (including stock
index options discussed below) if as a result of such purchase the aggregate
cost of all outstanding options on securities held by the Fund would exceed 5%
of the market value of the Fund's total assets.
Stock Index Options and Futures and Financial Futures. As described in the
Prospectus, the Fund is authorized to engage in transactions in stock index
options and futures and financial futures, and related options on such futures.
Set forth below is further information concerning futures transactions.
A futures contract is an agreement between two parties to buy and sell a
security or, in the case of an index-based futures contract, to make and accept
a cash settlement for a set price on a future date. A majority of transactions
in futures contracts, however, do not result in the actual delivery of the
underlying instrument or cash settlement, but are settled through liquidation,
i.e., by entering into an offsetting transaction.
The purchase or sale of a futures contract differs from the purchase or sale
of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker and the relevant contract
market, which varies, but is generally about 5% of the contract amount, must be
deposited with the broker. This amount is known as "initial margin" and
represents a "good faith" deposit assuring the performance of both the
purchaser and seller under the futures contract. Subsequent payments to and
from the broker, called "variation margin", are required to be made on a daily
basis as the price of the futures contract fluctuates, making the long and
short positions in the futures contract more or less valuable, a process known
as "mark to the market". At any time prior to the settlement date of the
futures contract, the position may be closed out by taking an opposite position
which will operate to terminate the position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the broker and the purchaser realizes a loss or gain.
In addition, a nominal commission is paid on each completed sale transaction.
An order has been obtained from the Securities and Exchange Commission
exempting the Fund from the provisions of Section 17(f) and Section 18(f) of
the Investment Company Act of 1940, as amended (the "Investment Company Act"),
in connection with its strategy of investing in futures contracts. Section
17(f) relates to the custody of securities and other assets of an investment
company and may be deemed to prohibit certain arrangements between the Fund and
commodities brokers with respect to initial and variation margin. Section 18(f)
of the Investment Company Act prohibits an open-end investment company such as
the Fund from issuing a "senior security" other than a borrowing from a bank.
The staff of the Securities and Exchange 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 of
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 one tenth of one percent due to the costs of
converting from one currency to another. However, the Fund has authority to
deal in forward foreign exchange among currencies of the different countries in
which it will invest as a hedge against possible variations in the foreign
exchange rates among these currencies. This is accomplished through contractual
agreements to purchase or sell a specified currency at a specified future date
and price set at the time of the contract. The Fund's dealings in forward
foreign
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exchange will be limited to hedging involving either specific transactions or
portfolio positions. Transaction hedging is the purchase or sale of forward
foreign currency with respect to specific receivables or payables of the Fund
accruing in connection with the purchase and sale of its portfolio securities,
the sale and redemption of shares of the Fund or the payment of dividends and
distributions by the Fund. Position hedging is the sale of forward foreign
currency with respect to portfolio security positions denominated or quoted in
such foreign currency. The Fund will not speculate in forward foreign exchange.
The Fund may not position hedge with respect to the currency of a particular
country to an extent greater than the aggregate market value (at the time of
making such sale) of the securities held in its portfolio denominated or quoted
in that particular foreign currency. If the Fund enters into a position hedging
transaction, its custodian will place cash or liquid equity or debt securities
in a separate account of the Fund in an amount equal to the value of the Fund's
total assets committed to the consummation of such forward contract. If the
value of the securities placed in the separate account declines, additional
cash or securities will be placed in the account so that the value of the
account will equal the amount of the Fund's commitment with respect to such
contracts. The Fund will enter into such transactions only to the extent, if
any, deemed appropriate by the Manager. The Fund will not enter into a forward
contract with a term of more than one year.
The Fund is also authorized to purchase or sell listed or over-the-counter
foreign currency options, foreign currency futures and related options on
foreign currency futures as a short or long hedge against possible variations
in foreign exchange rates. Such transactions may be effected with respect to
hedges on non-U.S. dollar denominated securities owned by the Fund, sold by the
Fund but not yet delivered, or committed or anticipated to be purchased by the
Fund. As an illustration, the Fund may use such techniques to hedge the stated
value in U.S. dollars of an investment in a yen denominated security. In such
circumstances, for example, the Fund may purchase a foreign currency put option
enabling it to sell a specified amount of Japanese yen for dollars at a
specified price by a future date. To the extent the hedge is successful, a loss
in the value of the yen relative to the dollar will tend to be offset by an
increase in the value of the put option. To offset, in whole or part, the cost
of acquiring such a put option, the Fund may also sell a call option which, if
exercised, requires it to sell a specified amount of yen for dollars at a
specified price by a future date (a technique called a "straddle"). By selling
such call option in this illustration, the Fund gives up the opportunity to
profit without limit from increases in the relative value of the yen to the
dollar. The Manager believes that "straddles" of the type which may be utilized
by the Fund constitute hedging transactions and are consistent with the
policies described above.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the
currency at a price above the devaluation level it anticipates. The cost to the
Fund of engaging in foreign currency transactions varies with such factors as
the currencies involved, the length of the contract period and the market
conditions then prevailing. Since transactions in foreign currency exchange
usually are conducted on a principal basis, no fees or commissions are
involved.
Risk Factors in Options and Futures Transactions. Utilization of options and
futures transactions involves the risk of imperfect correlation in movements in
the prices of options and futures contracts and movements in the prices of the
securities and currencies which are the subject of the hedge. If the price of
the options and futures contract moves more or less than the prices of the
hedged securities or currencies, the Fund will experience a gain or loss which
will not be completely offset by movements in the prices of the
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securities and currencies which are the subject of the hedge. The successful
use of options and futures also depends on the Manager's ability to correctly
predict price movements in the market involved in a particular options or
futures transaction.
Prior to exercise or expiration, an exchange-traded option or futures
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 specific 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), unless there is only one dealer, in which case
that dealer's price is used. 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 or currency underlying futures
contracts it holds. The inability to close options and futures positions also
could have an adverse impact on the Fund's ability to hedge effectively its
portfolio. There is also the risk of loss by the Fund of margin deposits in the
event of bankruptcy of a broker with whom the Fund has an open position in a
futures contract or related option. The risk of loss from investing in futures
transactions is theoretically unlimited.
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
Non-Diversified Status. The Fund is classified as non-diversified within the
meaning of the Investment Company Act, which means that the Fund is not limited
by such Act in the proportion of its assets that it may invest in securities of
a single issuer. However, the Fund's investments will be limited so as to
qualify as a "regulated investment company" for purposes of the Internal
Revenue Code of 1986, as amended. See "Dividends, Distributions and Taxes--
Taxes". To qualify, among other requirements, the Fund will limit its
investments so that, at the close of each quarter of the taxable year, (i) not
more than 25% of the market value of the Fund's total assets will be invested
in the securities of a single issuer, and (ii) with respect to 50% of the
market value of its total assets, not more than 5% of the market value of its
total assets will be invested in the securities of a single issuer, and the
Fund will not own more than 10% of the outstanding voting securities of a
single issuer. A fund which elects to be classified as "diversified" under the
Investment Company Act must satisfy the foregoing 5% and 10% requirements with
respect to 75% of its total assets.
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To the extent that the Fund assumes large positions in the securities of a
small number of issuers, the Fund's net asset value may fluctuate to a greater
extent than that of a diversified company as a result of changes in the
financial condition or in the market's assessment of the issuers.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase securities on a when-issued basis, and it may purchase or sell
securities for delayed delivery. These transactions occur when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future to secure what is considered an advantageous yield and price to the Fund
at the time of entering into the transaction. Although the Fund has not
established any limit on the percentage of its assets that may be committed in
connection with such transactions, the Fund will maintain a segregated account
with its custodian of cash, cash equivalents, U.S. Government securities or
other high grade liquid debt or equity securities denominated in U.S. dollars
or non-U.S. currencies in an aggregate amount equal to the amount of its
commitment in connection with such purchase transactions.
Standby Commitment Agreements. The Fund may from time to time enter into
standby commitment agreements. Such agreements commit the Fund, for a stated
period of time, to purchase a stated amount of a fixed income security which
may be issued and sold to the Fund at the option of the issuer. The price and
coupon of the security is fixed at the time of the commitment. At the time of
entering into the agreement, the Fund is paid a commitment fee, regardless of
whether or not the security is ultimately issued, which is typically
approximately 0.5% of the aggregate purchase price of the security which the
Fund has committed to purchase. The Fund will enter into such agreement only
for the purpose of investing in the security underlying the commitment at a
yield and price which is considered advantageous to the Fund. The Fund will not
enter into a standby commitment with a remaining term in excess of 90 days and
will limit its investment in such commitments so that the aggregate purchase
price of the securities subject to such commitments, together with the value of
portfolio securities subject to legal restrictions on resale, will not exceed
10% of its assets taken at the time of acquisition of such commitment or
security. The Fund will at all times maintain a segregated account with its
custodian of cash, cash equivalents, U.S. Government securities or other high
grade liquid debt or equity securities denominated in U.S. dollars or non-U.S.
currencies in an aggregate amount equal to the purchase price of the securities
underlying the commitment.
There can be no assurance that the securities subject to a standby commitment
will be issued, and the value of the security, if issued, on the delivery date
may be more or less than its purchase price. Since the issuance of the security
underlying the commitment is at the option of the issuer, the Fund may bear the
risk of a decline in the value of such security and may not benefit from an
appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security can
reasonably be expected to be issued, and the value of the security will
thereafter be reflected in the calculation of the Fund's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment
fee. In the event the security is not issued, the commitment fee will be
recorded as income on the expiration date of the standby commitment.
Repurchase Agreements; Purchase and Sale Contracts. The Fund may invest in
securities pursuant to repurchase agreements or purchase and sale contracts.
Repurchase agreements may be entered into only with a member bank of the
Federal Reserve System or primary dealer in U.S. Government securities or an
affiliate thereof. Purchase and sale contracts may be entered into only with
financial institutions which have capital of at least $50 million or whose
obligations are guaranteed by an entity having capital of at least $50 million.
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Under such agreements, the other party agrees, upon entering into the contract
with the Fund, to repurchase the security at a mutually agreed upon time and
price in a specified currency, 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 although it may be affected by currency
fluctuations. In the case of repurchase agreements, the prices at which the
trades are conducted do not reflect the accrued interest on the underlying
obligations; whereas, in the case of purchase and sale contracts, the prices
take into account accrued interest. Such agreements usually cover short
periods, often under one week. Repurchase agreements may be construed to be
collateralized loans by the purchaser to the seller secured by the securities
transferred to the purchaser. In the case of a repurchase agreement, as a
purchaser, the Fund will require the seller to provide additional collateral if
the market value of the securities falls below the repurchase price at any time
during the term of the repurchase agreement; the Fund does not have the right
to seek additional collateral in the case of purchase and sale contracts. In
the event of default by the seller under a repurchase agreement construed to be
a collateralized loan, the underlying securities are not owned by the Fund but
constitute only collateral for the seller's obligation to pay the repurchase
price. Therefore, the Fund may suffer time delays and incur costs of possible
losses in connection with the disposition of the collateral. A purchase and
sale contract differs from a repurchase agreement in that the contract
arrangements stipulate that the securities are owned by the Fund. In the event
of a default under such a repurchase agreement or under a purchase and sale
contract, instead of the contractual fixed rate of return, the rate of return
to the Fund would depend on intervening fluctuations of the market values of
such securities and the accrued interest on the securities. In such event, the
Fund would have rights against the seller for breach of contract with respect
to any losses arising from market fluctuations following the failure of the
seller to perform. While the substance of purchase and sale contracts in
similar to repurchase agreements, because of the different treatment with
respect to accrued interest and additional collateral, management believes that
purchase and sale contracts are not repurchase agreements as such term is
understood in the banking and brokerage community. The Fund may not invest more
than 10% of its net assets in repurchase agreements or purchase and sale
contracts maturing in more than seven days.
Lending of Portfolio Securities. Subject to investment restriction (8) below,
the Fund may lend securities from its portfolio to approved borrowers and
receive therefor collateral in cash or securities issued or guaranteed by the
U.S. Government which are 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 loan 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. With respect to the lending of portfolio
securities, there is the risk of failure by the borrower to return the
securities involved in such transactions.
High Yield Bonds. The Fund is authorized to invest a portion of its debt
portfolio in fixed income securities rated below investment grade by a
nationally recognized statistical rating agency or in unrated bonds which, in
the Manager's judgment, possess similar credit characteristics ("high yield
bonds"). Issuers
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of high yield bonds 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 is 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 bonds may be
more likely to experience financial stress, especially if such issuers are
highly leveraged. During such periods, such issuers may not have sufficient
revenues to meet their interest payment obligations. The issuer's ability to
service its debt obligations also may be adversely affected by specific issuer
developments or the issuer's inability to meet specific projected business
forecasts or the unavailability of additional financing. The risk of loss due
to default by the issuer is significantly greater for the holder of high yield
bonds because such securities may be unsecured and may be subordinated to other
creditors of the issuer. The Fund's Board of Directors has adopted a policy
that the Fund will not invest more than 35% of its assets in obligations rated
below Baa or BBB by Moody's or S&P, respectively.
High yield bonds frequently have call or redemption features which would
permit issuers to repurchase such securities from the Fund. If a call were
exercised by an 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 bonds because
there may be a thin trading market for such securities. The secondary trading
market for high yield bonds 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
bonds, particularly in a thinly traded market. Factors adversely affecting the
market value of high yield bonds are likely to affect adversely 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 portfolio holding or to
participate in the restructuring of the obligation.
Current Investment Restrictions. The Fund has adopted the following
restrictions and policies relating to the investment of its assets and its
activities, which are fundamental policies and may not be changed without the
approval of the holders of 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 shares represented at a meeting at which more than
50% of the outstanding shares are represented or (ii) more than 50% of the
outstanding shares). The Fund may not:
1. 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).
2. Make investments for the purpose of exercising control or management.
3. Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization, or
by purchase in the open market of securities of closed-end investment
companies where no underwriter or dealer's commission or profit, other than
customary broker's commission, is involved and only if immediately
thereafter not more than (i) 3% of the total outstanding voting stock of
such company is owned by the Fund, (ii) 5% of the Fund's total assets,
taken at market value, would be invested in any one such company, (iii) 10%
of the Fund's total assets, taken at market value, would be invested in
such securities.
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4. Purchase or sell real estate (including real estate limited
partnerships), except that the Fund may invest in securities secured by
real estate or interests therein or issued by companies, including real
estate investment trusts, which invest in real estate or interests therein.
5. Purchase any securities on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities. The payment by the Fund of initial or
variation margin in connection with futures or related options
transactions, if applicable, shall not be considered the purchase of a
security on margin.
6. Make short sales of securities or maintain a short position.
7. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, short-term commercial paper, certificates of deposit, bankers'
acceptances and repurchase agreements and purchase and sale contracts shall
not be deemed to be the making of a loan, and except further that the Fund
may lend its portfolio securities as set forth in (8) below.
8. Lend its portfolio securities in excess of 33 1/3% of its total
assets, taken at market value; provided that such loans may only be made in
accordance with the guidelines set forth above.
9. Issue senior securities, borrow money or pledge its assets except that
the Fund may borrow from a bank as a temporary measure for extraordinary or
emergency purposes or to meet redemptions in amounts not exceeding 10%
(taken at the market value) of its total assets and pledge its assets to
secure such borrowings. (For the purpose of this restriction, collateral
arrangements with respect to the writing of options, and, if applicable,
futures contracts, options on futures contracts, and collateral
arrangements with respect to initial and variation margin are not deemed to
be a pledge of assets and neither such arrangements nor the purchase or
sale of futures or related options are deemed to be the issuance of a
senior security.) The Fund will not purchase securities while borrowings
exceed 5% (taken at market value) of its total assets.
10. Invest in securities which cannot be readily resold because of legal
or contractual restrictions or which are not otherwise readily marketable,
including repurchase agreements and purchase and sale contracts maturing in
more than seven days, if at the time of acquisition more than 10% of its
net assets would be invested in such securities. Asset-backed securities
which the Fund has the option to put to the issuer or a stand-by bank or
broker and receive the principal amount or redemption price thereof less
transaction costs on no more than seven days' notice or when the Fund has
the right to convert such securities into a readily marketable security in
which it could otherwise invest upon not less than seven days' notice are
not subject to this restriction.
11. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended, in selling portfolio securities.
12. Purchase or sell interests in oil, gas or other mineral exploration
or development programs, except that the Fund may invest in securities
issued by companies that engage in oil, gas or other mineral exploration or
development activities.
Additional investment restrictions adopted by the Fund, which may be changed
by the Directors, provide that the Fund may not:
(i) Invest in warrants if at the time of acquisition its investments in
warrants, valued at the lower of cost or market value, would exceed 5% of
the Fund's net assets; included within such limitation, but
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not to exceed 2% of the Fund's net assets, are warrants which are not
listed on the New York or American Stock Exchange. For purposes of this
restriction, warrants acquired by the Fund in units or attached to
securities may be deemed to be without value.
(ii) Purchase or sell commodities or commodity contracts, except that the
Fund may deal in forward foreign exchange between currencies of the
different countries in which it may invest and purchase and sell stock
index and currency options, stock index futures, financial futures and
currency futures contracts and related options on such futures.
(iii) Invest in securities of corporate issuers having a record, together
with predecessors, of less than three years of continuous operation, if
more than 5% of its total assets, taken at market value, would be invested
in such securities.
(iv) Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent described in the Fund's
Prospectus and in this Statement of Additional Information, as amended from
time to time.
(v) Purchase or retain the securities of any issuer, if those individual
officers and directors of the Fund, the officers and general partner of the
Manager, the directors of such general partner or any subsidiary thereof
each owning beneficially more than 1/2 of 1% of the securities of such
issuer own in the aggregate more than 5% of the securities of such issuer.
(vi) Invest more than 35% of its assets in obligations rated below Baa or
BBB by Moody's or S&P, respectively.
(vii) Purchase oil, gas or other mineral leases.
The staff of the Securities and Exchange Commission (the "Commission") has
taken the position that purchased OTC options and the assets used as cover for
written OTC options are illiquid securities. Therefore, the Fund has adopted an
investment policy pursuant to which it will not purchase or sell OTC options
if, as a result of such transaction, the sum of the market value of OTC options
currently outstanding which are held by the Fund, the market value of the
underlying securities covered by OTC call options currently outstanding which
were sold by the Fund and margin deposits on the Fund's existing OTC options on
futures contracts exceeds 10% of the total assets of the Fund, taken at market
value, together with all other assets of the Fund which 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 if 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 securities 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.
Portfolio securities of the Fund generally may not be purchased from, sold or
loaned to the Manager or its affiliates or any of their directors, general
partners, officers or employees, acting as principal, unless pursuant to a rule
or exemptive order under the Investment Company Act.
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<PAGE>
Proposed Uniform Investment Restrictions. As discussed in the Prospectus
under "Investment Objective and Policies--Investment Restrictions", the Board
of Directors of the Fund has approved the replacement of the Fund's existing
investment restrictions with the fundamental and non-fundamental investment
restrictions set forth below. These uniform investment restrictions have been
proposed for adoption by all of the non-money market mutual funds advised by
Fund Asset Management, L.P. ("FAM") or its affiliate, Merrill Lynch Asset
Management, L.P. ("MLAM" or the "Manager"). The investment objective and
policies of the Fund will be unaffected by the adoption of the proposed
investment restrictions.
Shareholders of the Fund are currently considering whether to approve the
proposed revised investment restrictions. If such shareholder approval is
obtained, the Fund's current investment restrictions will be replaced by the
proposed restrictions, and the Fund's Prospectus and Statement of Additional
Information will be supplemented to reflect such change.
Under the proposed fundamental investment restrictions, the Fund may not:
1. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
2. Make investments for the purpose of exercising control or management.
3. Purchase or sell real estate, except that, to the extent permitted by
applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
4. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time to
time.
5. Issue senior securities to the extent such issuance would violate
applicable law.
6. 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.
7. 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.
8. 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
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<PAGE>
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 proposed non-fundamental investment restrictions, the Fund may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law.
b. Make short sales of securities or maintain a short position, except to
the extent permitted by applicable law.
c. Invest in securities which cannot be readily resold because of legal
or contractual restrictions or which cannot otherwise be marketed, redeemed
or put to the issuer or a third party, if at the time of acquisition more
than 15% of its total assets would be invested in such securities. This
restriction shall not apply to securities which mature within seven days or
securities which the Board of Directors of the Fund has otherwise
determined to be liquid pursuant to applicable law. Notwithstanding the 15%
limitation herein, to the extent the laws of any state in which the Fund's
shares are registered or qualified for sale require a lower limitation, the
Fund will observe such limitation. As of the date hereof, therefore, the
Fund will not invest more than 10% of its total assets in securities which
are subject to this investment restriction (c). Securities purchased in
accordance with Rule 144A under the Securities Act (a "Rule 144A security")
and determined to be liquid by the Fund's Board of Directors are not
subject to the limitations set forth in this investment restriction (c).
Notwithstanding the fact that the Board may determine that a Rule 144A
security is liquid and not subject to limitations set forth in this
investment restriction (c), the State of Ohio does not recognize Rule 144A
securities as securities that are free or restrictions as to resale. To the
extent required by Ohio law, the Fund will not invest more than 5% of its
total assets in securities of issuers that are restricted as to
disposition, including Rule 144A securities.
d. Invest in warrants if, at the time of acquisition, its investments in
warrants, valued at the lower of cost or market value, would exceed 5% of
the Fund's net assets; included within such limitation, but not to exceed
2% of the Fund's net assets, are warrants which are not listed on the New
York Stock Exchange or American Stock Exchange or a major foreign exchange.
For purposes of this restriction, warrants acquired by the Fund in units or
attached to securities may be deemed to be without value.
e. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more
than 5% of the Fund's total assets would be invested in such securities.
This restriction shall not apply to mortgage-backed securities, asset-
backed securities or obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
f. Purchase or retain the securities of any issuer, if those individual
officers and directors of the Fund, the officers and general partner of the
Manager, the directors of such general partner or the officers and
directors of any subsidiary thereof each owning beneficially more than one-
half of one percent of the securities of such issuer own in the aggregate
more than 5% of the securities of such issuer.
g. Invest in real estate limited partnership interests or interests in
oil, gas or other mineral leases, or exploration or development programs,
except that the Fund may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or development activities.
15
<PAGE>
h. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Fund's
Prospectus and Statement of Additional Information, as they may be amended
from time to time.
i. Notwithstanding fundamental investment restriction (b) above, borrow
amounts in excess of 10% of its total assets, taken at market value, and
then only from banks as a temporary measure for extraordinary or emergency
purposes such as the redemption of Fund shares. The Fund will not purchase
securities while borrowings exceed 5% (taken at market value) of its total
assets.
Because of the affiliation of the Manager with the Fund, the Fund is
prohibited from engaging in certain transactions involving the Manager's
affiliate, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch"), or its affiliates except for brokerage transactions permitted under
the Investment Company Act involving only usual and customary commissions or
transactions pursuant to an exemptive order under the Investment Company Act.
See "Portfolio Transactions and Brokerage". Without such an exemptive order,
the Fund would be prohibited from engaging in portfolio transactions with
Merrill Lynch or its affiliates acting as principal and from purchasing
securities in public offerings which are not registered under the Securities
Act of 1933, as amended, in which such firm or any of its affiliates
participate as an underwriter or dealer.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of each executive officer and Director is P.O. Box
9011, Princeton, New Jersey 08543-9011.
Arthur Zeikel--President and Director(1)(2)--President of the Manager (which
term as used herein includes its corporate predecessors) since 1977 and Chief
Investment Officer since 1976; President and Chief Investment Officer of FAM
(which term as used herein includes its corporate predecessors) since 1977;
President and Director of Princeton Services, Inc. ("Princeton Services") since
1993; Executive Vice President of Merrill Lynch since 1990 and a Senior Vice
President thereof from 1985 to 1990; Executive Vice President of Merrill Lynch
& Co., Inc. ("ML & Co.") since 1990; Director of the Distributor.
Donald Cecil--Director(2)--1114 Avenue of the Americas, New York, New York
10036. Special Limited Partner of Cumberland Partners (investment partnership)
since 1982; Member of Institute of Chartered Financial Analysts; Member and
Chairman of Westchester County (N.Y.) Board of Transportation.
Edward H. Meyer--Director(2)--777 Third Avenue, New York, New York 10017.
President of Grey Advertising Inc. since 1968, Chief Executive Officer since
1970, and Chairman of the Board of Directors since 1972; Director of The May
Department Stores Company, Bowne & Co., Inc. (financial printers), Ethan Allen
Interiors Inc. and Harman International Industries, Inc.
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<PAGE>
Charles C. Reilly--Director(2)--9 Hampton Harbor Road, Hampton Bays, N.Y.
11946. Self-employed financial consultant since 1990; President and Chief
Investment Officer of Verus Capital, Inc. from 1979 to 1990; former Senior Vice
President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business since 1990; Adjunct
Professor, Wharton School, University of Pennsylvania, 1990; Director, Harvard
Business School Alumni Association.
Richard R. West--Director(2)--482 Tepi Drive, Southbury, Connecticut 06488.
Professor of Finance since 1984, and Dean from 1984 to 1993, New York
University Leonard N. Stern School of Business Administration; Director of Re
Capital Corp. (reinsurance holding company), Bowne & Co., Inc., (financial
printers), Vornado, Inc. (real estate holding company), Smith-Corona
Corporation (manufacturer of typewriters and word processors) and Alexander's,
Inc. (real estate company).
Terry K. Glenn--Executive Vice President(1)(2)--Executive Vice President of
the Manager and FAM since 1983; Executive Vice President and Director of
Princeton Services since 1993; President and Director of the Distributor since
1986.
Norman R. Harvey--Senior Vice President(1)(2)--Senior Vice President of the
Manager and FAM since 1982; Senior Vice President of Princeton Services since
1993.
Bryan N. Ison--Vice President(1)--Vice President of the Manager since 1985;
Portfolio Manager since 1984.
Donald C. Burke--Vice President(1)(2)--Vice President and Director of
Taxation of the Manager since 1990; employee of Deloitte & Touche LLP from 1982
to 1990.
Gerald M. Richard--Treasurer (1)(2)--Senior Vice President and Treasurer of
the Manager and FAM since 1984; Senior Vice President and Treasurer of
Princeton Services since 1993; Vice President of the Distributor since 1981 and
Treasurer since 1984.
Michael J. Hennewinkel--Secretary (1)(2)--Vice President of the Manager since
1985; attorney associated with the Manager since 1982.
- --------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a director, trustee or officer of one or more
additional investment companies for which the Manager, or its affiliate
FAM, acts as investment adviser or manager.
At September 30, 1994, the officers and Directors of the Fund as a group (11
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Director of the Fund, and the other officers
of the Fund owned less than 1% of the outstanding shares of common stock of ML
& Co.
The Fund pays each Director not affiliated with the Manager a fee of $3,500
per year plus $500 per meeting attended, together with such Director's actual
out-of-pocket expenses relating to attendance at meetings. The Fund also
compensates members of its Audit and Nominating Committee, which consists of
all of the unaffiliated Directors, at a rate of $500 per meeting attended. The
Chairman of the Audit and Nominating Committee receives an additional fee of
$250 per meeting attended. For the fiscal year ended October 31, 1993, fees and
expenses paid to the unaffiliated Directors aggregated $30,741.
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<PAGE>
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 held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Manager or its affiliates act as an adviser. Because of different objectives or
other factors, a particular security may be bought for one or more clients when
one or more clients are selling the same security. If purchases or sales of
securities by the Manager for the Fund or other funds for which it acts as
investment adviser or for its other 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 Management
Agreement provides that the Manager is entitled to receive for its services to
the Fund monthly compensation at the annual rate of 0.75% of the average daily
net assets of the Fund. The Manager has agreed to waive a portion of its
management fee payable by the Fund so that such fee is reduced for average
daily net assets of the Fund in excess of $2.5 billion from the annual rate of
0.75% to 0.70%, and further reduced from 0.70% to 0.65% for average daily net
assets in excess of $5 billion. For the fiscal year ended October 31, 1993, the
Fund paid the Manager a fee at the rate of 0.74% of average daily net assets.
For the fiscal years ended October 31, 1991, 1992 and 1993, the total
management fees paid by the Fund to the Manager aggregated $1,424,907,
$3,938,829 and $18,984,493, respectively.
The Manager has also entered into a sub-advisory agreement with Merrill Lynch
Asset Management U.K. Limited ("MLAM U.K.") pursuant to which the Manager pays
MLAM U.K. a fee computed at the rate of 0.10% of the average daily net assets
of the Fund for providing investment advisory services to the Manager with
respect to the Fund. For the fiscal years ended October 31, 1991, 1992 and 1993
the fees paid by MLAM to MLAM U.K. pursuant to such arrangement aggregated
$189,988, $525,177 and $2,293,281, respectively.
California imposes limitations on the expenses of the Fund. These expense
limitations require that the Manager reimburse the Fund in an amount necessary
to prevent the ordinary operating expenses of the Fund (excluding interest,
taxes, distribution fees, brokerage fees and commissions and extraordinary
charges such as litigation costs) from exceeding 2.5% of the Fund's first $30
million of average daily net assets, 2.0% of the next $70 million of average
daily net assets and 1.5% of the remaining average daily net assets. The
Manager's obligation to reimburse the Fund is limited to the amount of the
management fee. No fee payment will be made to the Manager during any fiscal
year which will cause such expenses to exceed the most restrictive expense
limitation applicable at the time of such payment.
The Fund has received an order from the State of California partially waiving
the expense limitations described above. Pursuant to the terms of such order,
the expense limitations that would otherwise apply are waived to the extent the
Fund's expense for custodial services, management and auditing fees exceeds the
average of such fees of a group of funds managed by the Manager or its
subsidiary which primarily invest domestically. Since the commencement of
operations of the Fund, no reimbursement of expenses has been required pursuant
to the applicable expense limitation provisions discussed above.
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<PAGE>
The Management Agreement obligates the Manager to provide investment advisory
services and to pay all compensation of and furnish office space for officers
and employees of the Fund connected with investment and economic research,
trading and investment management of the Fund, as well as the fees of all
Directors of the Fund who are affiliated persons of the Manager or any of their
affiliates. The Fund pays all other expenses incurred in its operation,
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 unaffiliated Directors; accounting and pricing costs (including the daily
calculation of net asset value); insurance; interest; brokerage costs;
litigation and other extraordinary or non-recurring expenses; and other
expenses properly payable by the Fund. Accounting services are provided to the
Fund by the Manager, and the Fund reimburses the Manager for its costs in
connection with such services on a semi-annual basis. For the fiscal year ended
October 31, 1993, the amount of such reimbursement was $213,891. As required by
the Fund's distribution agreements, the Distributor will pay certain
promotional expenses of the Fund incurred in connection with the offering of
its shares. Certain expenses in connection with the distribution of Class B
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 Alternative--Class B Shares--Distribution Plan".
ML & Co., Merrill Lynch Investment Management, Inc. and Princeton Services,
Inc. are "controlling persons" of the Manager as defined under the Investment
Company Act because of their ownership of its voting securities or their power
to exercise a controlling influence over its management or policies.
Duration and Termination. Unless earlier terminated as described herein, the
Management Agreement and the sub-advisory 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 contracts or interested persons (as
defined in the Investment Company Act) of any such party. Such contracts are
not assignable and may be terminated without penalty on 60 days' written notice
at the option of either party thereto or by the vote of the shareholders of the
Fund.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
The Fund issues four classes of shares under the Merrill Lynch Select
PricingSM System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B and Class C are
sold to investors choosing the deferred sales charge alternatives. Each Class
A, Class B, Class C and Class D shares of the Fund represents identical
interests in the investment portfolio of the Fund and has the same rights,
except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
Class B, Class C and Class D shares each have exclusive voting rights with
respect to the Rule 12b-1 distribution plan adopted with respect to such class
pursuant to which account maintenance and/or distribution fees are paid. Each
class has different exchange privileges. See "Shareholder Services -- Exchange
Privilege".
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<PAGE>
The Merrill Lynch Select PricingSM System is used by more than 50 mutual
funds advised by the Manager, or its affiliate, FAM. Funds advised by the
Manager or FAM are referred to herein as "MLAM-advised mutual funds".
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offering of each class of shares
of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the
offering of each class of shares of the Fund. After the prospectuses,
statements of additional information and periodic reports have been prepared,
set in type and mailed to shareholders, the Distributor pays for the printing
and distribution of copies thereof used in connection with the offering to
dealers and investors. The Distributor also pays for other supplementary sales
literature and advertising costs. The Distribution Agreements are subject to
the same renewal requirements and termination provisions as the Management
Agreement described above.
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
The Fund commenced the public offering of its Class A shares on February 3,
1989. The gross sales charges for the sale of Class A shares for the fiscal
year ended October 31, 1991, were $277,616, of which the Distributor received
$12,476 and Merrill Lynch received $265,140. The gross sales charges for the
sale of Class A shares for the fiscal year ended October 31, 1992, were
$3,517,696, of which the Distributor received $91,712 and Merrill Lynch
received $3,425,984. The gross sales charges for the sale of Class A shares for
the fiscal year ended October 31, 1993, were $13,935,192, of which the
Distributor received $861,771 and Merrill Lynch received $13,073,421.
The term "purchase", as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his spouse and their children under the
age of 21 years purchasing shares for his or their own account and to single
purchases by a trustee or other fiduciary purchasing shares for a single trust
estate or single fiduciary account (including a pension, profit-sharing or
other employee benefit trust created pursuant to a plan qualified under Section
401 of the Code) although more than one beneficiary is involved. The term
"purchase" also includes purchases by any "company", as that term is defined in
the Investment Company Act, but does not include purchases by any such company
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 of an investment adviser.
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 MLAM or the Investment
Adviser who purchased such closed-end fund shares prior to October 21, 1994,
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
20
<PAGE>
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 the closed-
end fund shares must be made through Merrill Lynch, and the net proceeds
therefrom must be immediately reinvested in Eligible Class A or Class D shares.
Second, the closed-end fund shares must either have been acquired in the
initial public offering or be shares representing dividends from shares of
common stock acquired in such offering. Third, the closed-end fund shares must
have been continuously maintained in a Merrill Lynch securities account.
Fourth, there must be a minimum purchase of $250 to be eligible for the
investment option. Class A shares of the Fund are offered at net asset value to
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. ("Senior Floating
Rate Fund") who wish to reinvest the net proceeds from a sale of certain of
their shares of common stock of Senior Floating Rate Fund in shares of the
Fund. In order to exercise this investment option, Senior Floating Rate Fund
shareholders must sell their Senior Floating Rate Fund shares to the Senior
Floating Rate Fund in connection with a tender offer conducted by the Senior
Floating Rate Fund and reinvest the proceeds immediately in the Fund. This
investment option is available only with respect to the proceeds of Senior
Floating Rate Fund shares as to which no Early Withdrawal Charge (as defined in
the Senior Floating Rate Fund prospectus) is applicable. Purchase orders from
Senior Floating Rate Fund shareholders wishing to exercise this investment
option will be accepted only on the day that the related Senior Floating Rate
Fund tender offer terminates and will be effected at the net asset value of the
Fund at such day.
REDUCED INITIAL SALES CHARGES
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 Class A or Class D shares of the Fund or 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 record-keeping services. The Letter of Intention is not a
binding obligation to purchase any amount of Class A or Class D shares;
however, its execution will result in the purchaser paying a lower sales charge
at the appropriate quantity purchase level. A purchase not originally made
pursuant to a Letter of Intention may be included under a subsequent Letter of
Intention executed within 90 days of such purchase if the Distributor is
informed in writing of this intent within such 90-day period. The value of
Class A and Class D shares of the Fund and of other MLAM-advised mutual funds
presently held, at cost or maximum offering price (whichever is higher), on the
date of the first purchase under the Letter of Intention, may be included as a
credit toward completion of such Letter, but the reduced sales charge
applicable to the amount covered by such Letter will be applied only to new
purchases. If the total amount of shares purchased
21
<PAGE>
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 shares actually purchased through the Letter. Class A or
Class D shares equal to five percent of the intended amount will be held in
escrow during the 13-month period (while remaining registered in the name of
the purchaser) 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
a purchase during the term of such Letter would otherwise be subject to a
further reduced sales charge based on the right of accumulation, the purchaser
will be entitled on that purchase and subsequent purchases to the reduced
percentage sales charge which would be applicable to a single purchase equal to
the total dollar value of the Class A or Class D shares 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 D shares of the Fund are offered to
participants in the Merrill Lynch BlueprintSM Program ("Blueprint"). In
addition, participants in Blueprint who own Class A shares or the Fund may
purchase additional Class A shares of the Fund through Blueprint. Blueprint is
directed to small investors, group IRAs and participants in certain affinity
groups such as credit unions, 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%, $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 or Class D shares of the Fund are offered at net asset value plus a sales
charge of 1/2 of 1% for corporate or group IRA programs placing orders to
purchase their Class A or Class D shares through Blueprint. Services, including
the exchange privilege, available to Class A and Class D investors through
Blueprint, however, 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 a 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.
22
<PAGE>
TMA SM Managed Trusts. Class A shares are offered to TMA SM Managed Trusts
to which Merrill Lynch Trust Company provides discretionary trustee services
at net asset value.
Employer Sponsored Retirement and Savings Plans. Class A and Class D shares
are offered at net asset value to employer sponsored retirement or savings
plans, such as tax qualified retirement plans within the meaning of Section
401(a) of the Code, deferred compensation plans within the meaning of Sections
403(b) and 457 of the Code, other deferred compensation arrangements,
Voluntary Employee Benefits Association ("VEBA") plans, and non-qualified
After Tax Savings and Investment programs, maintained on the Merrill Lynch
Group Employee Services system, herein referred to as "Employer Sponsored
Retirement or Savings Plans", provided the plan has accumulated $20 million or
more in MLAM-advised mutual funds (in the case of Class A shares) or $5
million or more in MLAM-advised mutual funds (in the case of Class D shares).
Class D shares may be offered at net asset value to new Employer Sponsored
Retirement or Savings Plans, provided the plan has $3 million or more
initially invested in MLAM-advised mutual funds. Assets of Employer Sponsored
Retirement or Savings Plans sponsored by the same sponsor or an affiliated
sponsor may be aggregated. Class A shares and Class D shares also are offered
at net asset value to Employer Sponsored Retirement or Savings Plans that have
at least 1,000 employees eligible to participate in the plan (in the case of
Class A shares) or between 500 and 999 employees eligible to participate in
the plan (in the case of Class D shares). Employees eligible to participate in
Employer Sponsored Retirement or Savings Plans of the same sponsoring employer
or its affiliates may be aggregated. Tax qualified retirement plans within the
meaning of Section 401(a) of the Code meeting any of the foregoing
requirements and which are provided specialized services (e.g., plans whose
participants may direct on a daily basis their plan allocations among a wide
range of investments including individual corporate equities and other
securities in addition to mutual fund shares) by Blueprint, are offered Class
A shares at a price equal to net asset value per share plus a reduced sales
charge of 0.50%. Any Employer Sponsored Retirement or Savings Plan which does
not meet the above described qualifications to purchase Class A shares at net
asset value has the option of (i) purchasing Class A shares at the initial
sales charge schedule and possible CDSC schedule disclosed in the Prospectus
if it is otherwise eligible to purchase Class A shares, (ii) purchasing Class
D shares at the initial sales charge and possible CDSC schedule disclosed in
the Prospectus, (iii) if the Employer Sponsored Retirement or Savings Plan
meets the specified requirements, purchasing Class B shares with a waiver of
the CDSC upon redemption, or if the Employer Sponsored Retirement or Savings
Plan does not qualify to purchase Class B shares with a waiver of the CDSC
upon redemption, purchasing Class C shares at the CDSC schedule disclosed in
the Prospectus. The minimum initial and subsequent purchase requirements are
waived in connection with all the above referenced Employer Sponsored
Retirement or Savings Plans.
Purchase Privilege of Certain Persons. Directors of the Fund, members of the
Boards of other MLAM-advised investment companies, directors and employees of
ML & Co. and its subsidiaries (the term "subsidiaries" when used herein with
respect to Merrill Lynch & Co., Inc. includes MLAM, FAM and certain other
entities directly or indirectly wholly owned and controlled by Merrill Lynch &
Co., Inc.) 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 will be 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
23
<PAGE>
from a redemption of a mutual fund that was sponsored by the financial
consultant's previous firm and was subject to a sales charge either at the time
of purchase or on a deferred basis. Second, the investor also must establish
that such redemption had been made within 60 days prior to the investment in
the Fund, and the proceeds from the redemption had been maintained in the
interim in cash or a money market fund.
Class D shares of the Fund are also offered at net asset value, without 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, if the following conditions are satisfied:
first, the investor must purchase Class D shares of the Fund with proceeds from
a redemption of shares of such other mutual fund and such fund was subject to a
sales charge either at the time of purchase or on a deferred basis; second,
such purchase of Class D shares must be made within 90 days after such notice
of termination.
Class D shares of the Fund will be offered at net asset value, without a
sales charge, to an investor who has a business relationship with a Merrill
Lynch financial consultant and who has invested in a mutual fund for which
Merrill Lynch has not served as a selected dealer if the following conditions
are satisfied: First, the investor must advise Merrill Lynch that it will
purchase Class D shares of the Fund with proceeds from the redemption of such
shares of other mutual funds and that such shares have been outstanding for a
period of no less than six months. Second, such purchase of Class D shares must
be made within 60 days after the redemption and the proceeds from the
redemption must be maintained in the interim in cash or a money market fund.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation
with a public or private investment company. The value of the assets or company
acquired in a tax-free transaction may be adjusted in appropriate cases to
reduce possible adverse tax consequences to the Fund which might result from an
acquisition of assets having net unrealized appreciation which is
disproportionately higher at the time of acquisition than the realized or
unrealized appreciation of the Fund. The issuance of Class D shares for
consideration other than cash is limited to bona fide reorganizations,
statutory mergers or other acquisitions of portfolio securities which (i) meet
the investment objectives and policies of the Fund; (ii) are acquired for
investment and not for resale (subject to the understanding that the
disposition of the Fund's portfolio securities shall at all times remain within
its control); and (iii) are liquid securities, the value of which is readily
ascertainable, which are not restricted as to transfer either by law or
liquidity of market (except that the Fund may acquire through such transactions
restricted or illiquid securities to the extent the Fund does not exceed the
applicable limits on acquisition of such securities set forth under "Investment
Objective and Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares -- Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant
24
<PAGE>
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 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 shareholder. 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. Each Distribution Plan can be terminated at any
time, without penalty, by the vote of a majority of the Independent Directors
or by the vote of the holders of a majority of the outstanding related class of
voting securities of the Fund. A Distribution Plan cannot be amended to
increase materially the amount to be spent by the Fund without the approval of
the related class of shareholders, and all material amendments are required to
be approved by the vote of the 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 Rules of Fair Practice of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on
certain asset-backed 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.
25
<PAGE>
The following table sets forth comparative information as of April 30, 1994,
with respect to the Class B shares of the Fund indicating the maximum
allowable payments that can be made under the NASD maximum sales charge rule
and the Distributor's voluntary maximum for the fiscal period February 3, 1989
(commencement of operations) to April 30, 1994.
DATA CALCULATED AS OF APRIL 30, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
ANNUAL
DISTRIBUTION
ALLOWABLE ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT NET
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID ASSET
SALES (1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
---------- --------- ---------- -------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule As
Adopted................ $4,825,339 $301,584 $18,075 $319,659 $46,066 $273,593 $43,666
Under Distributor's
Voluntary Waiver....... $4,825,339 $301,584 $24,126 $325,710 $46,066 $279,644 $43,666
</TABLE>
- --------
(1) Purchase price of all eligible Class B shares sold since February 3, 1989
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%, as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. Of the
distribution fee payments made prior to July 7, 1993, under a price plan
at the 1.0% rate, 0.75% of average daily net assets has been treated as a
distribution fee and 0.25% of average daily net assets has been deemed to
have been a service fee and not subject to the NASD maximum sales charge
rule. See "Purchase of Shares--Distribution Plans" in the Prospectus.
(4) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any CDSC payments) is amortizing
the unpaid balance. No assurance can be given that payments of the
distribution fee will reach either the voluntary maximum or the NASD
maximum.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended only for any period during which trading on the
New York Stock Exchange is restricted as determined by the Commission or such
Exchange is closed (other than customary weekend and holiday closings), for
any period during which an emergency exists as defined by the Commission as a
result of which disposal of portfolio securities or determination of the net
asset value of the Fund is not reasonably practicable, and for such other
periods as the Commission may by order permit for the protection of
shareholders of the Fund.
DEFERRED SALES CHARGES -- CLASS B SHARES
As discussed in the Prospectus under "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares", while Class B shares
redeemed within four years of purchase are subject to a CDSC, under most
circumstances, the charge is waived (i) on redemptions of Class B shares in
connection with certain post-retirement withdrawals from an Individual
Retirement Account ("IRA") or other retirement plan or (ii) on redemptions of
Class B shares following the death or disability of a Class B
26
<PAGE>
shareholder. Redemptions for which the waiver applies are: (a) any partial or
complete redemption in connection with a tax-free 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,
1991, 1992 and 1993, the Distributor received CDSCs of $313,780, $301,136 and
$1,701,006, respectively, all of which was paid to Merrill Lynch.
Merrill Lynch Blueprint SM Program. Class B shares are offered to certain
participants in the Merrill Lynch Blueprintsm Program ("Blueprint"). Blueprint
is directed to small investors, group IRAs and participants in certain
affinity groups such as trade associations and credit unions. 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. Services, including the exchange privilege, available to Class B
investors through Blueprint, however, may differ from those available to other
investors in Class B shares. Orders for purchases and redemptions of Class B
shares of the Fund will 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 the 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.
Retirement Plans. Any Retirement Plan which does not meet the qualifications
to purchase Class A or Class D shares at net asset value has the option of
purchasing Class A or Class D shares at the sales charge schedule disclosed in
the Prospectus, or if the Retirement Plan meets the following requirements,
then it may purchase Class B shares with a waiver of the CDSC upon redemption.
The CDSC is waived for any Eligible 401(k) Plan redeeming Class B shares.
"Eligible 401(k) Plan" is defined as a retirement plan qualified under Section
401(k) of the Code with a salary reduction feature offering a menu of
investments to plan participants. The CDSC is also waived for redemptions from
a 401(a) plan qualified under the Code, provided, however, that each such plan
has the same or an affiliated sponsoring employer as an Eligible 401(k) Plan
purchasing Class B shares of MLAM-advised mutual funds ("Eligible 401(a)
Plan"). Other tax qualified retirement plans within the meaning of Section
401(a) or 403 (b) of the Code which are provided specialized services (e.g.,
plans whose participants may direct on a daily basis their plan allocations
among a menu of investments) by independent administration firms contracted
through Merrill Lynch also may purchase Class B shares with a waiver of the
CDSC. The CDSC also is waived for any Class B shares which are purchased by an
Eligible 401(k) Plan or Eligible 401(a) Plan and are rolled over into a
Merrill Lynch or Merrill Lynch Trust Company custodied IRA and held in such
account at the time of redemption. The Class B CDSC also is waived for any
Class B shares which are purchased by a Merrill Lynch rollover IRA that was
funded by a rollover from a terminated 401(k) plan managed by the MLAM Private
Portfolio Group and held in such account at the time of redemption. The
minimum initial and subsequent purchase requirements are waived in connection
with all the above referenced Retirement Plans.
27
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
Reference is made to "Investment Objective and Policies -- Other Investment
Policies and Practices -- Portfolio Transactions" in the Prospectus.
Subject to policies established by the Board of Directors of the Fund, the
Manager is primarily responsible for the execution of the Fund's portfolio
transactions. In executing such transactions, the Manager seeks to obtain the
best net results for the Fund, taking into account such factors as price
(including the applicable brokerage commission or dealer spread), size of
order, difficulty of execution and operational facilities of the firm involved
and the firm's risk in positioning a block of securities. Subject to obtaining
the best price and execution, brokers who provide supplemental investment
research to the Manager 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 under the Management Agreement, and the
expenses of the Manager will not necessarily be reduced as a result of the
receipt of such supplemental information. In addition, consistent with the
Rules of Fair Practice of the NASD 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. It is possible that certain of the supplementary investment research so
received will primarily benefit one or more other investment companies or other
accounts for which investment discretion is exercised. Conversely, the Fund may
be the primary beneficiary of the research or services received as a result of
portfolio transactions effected for such other accounts or investment
companies.
For the fiscal year ended October 31, 1991, the Fund paid total brokerage
commissions of $306,596, of which $22,617 or 7.38% was paid to Merrill Lynch
for effecting 7.03% of the aggregate dollar amount of transactions in which the
Fund paid brokerage commissions. For the fiscal year ended October 31, 1992,
the Fund paid total brokerage commissions of $1,236,287, of which $72,320 or
5.85% was paid to Merrill Lynch for effecting 2.69% of the aggregate dollar
amount of transactions in which the Fund paid brokerage commissions. For the
fiscal year ended October 31, 1993, the Fund paid total brokerage commissions
of $3,047,988, of which $246,070 or 8.1% was paid to Merrill Lynch for
effecting 8.4% of the aggregate dollar amount of transactions in which the Fund
paid brokerage commissions.
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.
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 and persons who are affiliated with such affiliated
persons are prohibited from dealing with the Fund as principal in the purchase
and sale of securities unless a permissive order allowing such transactions is
obtained from the Commission. Since transactions in the over-the-counter market
usually involve transactions with dealers acting as principal for their own
accounts, affiliated persons of the Fund, including Merrill Lynch and any of
its affiliates, will not serve as the Fund's dealer in such transactions.
28
<PAGE>
However, affiliated persons of the Fund may serve as its broker in listed or
over-the-counter transactions conducted on an agency basis provided that, among
other things, the fee or commission received by such affiliated broker is
reasonable and fair compared to the fee or commission received by non-
affiliated brokers in connection with comparable transactions.
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 U.S. dollars, the Fund intends to manage its portfolio so as to
give reasonable assurance that it will be able to obtain U.S. 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 U.S. national securities exchanges from executing
exchange 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 disclosing 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 have considered the possibilities of seeking to recapture for
the benefit of the Fund brokerage commissions and other expenses of possible
portfolio transactions by conducting portfolio transactions through affiliated
entities. For example, brokerage commissions received by affiliated brokers
could be offset against the advisory fee paid by the Fund. After considering
all factors deemed relevant, the Directors made a determination not to seek
such recapture. The Directors will reconsider this matter from time to time.
DETERMINATION OF NET ASSET VALUE
Reference is made to "Additional Information -- Determination of Net Asset
Value" in the Prospectus concerning the determination of net asset value. The
net asset value of the shares of the Fund is determined once daily Monday
through Friday as of 4:15 p.m., New York time, on each day the New York Stock
Exchange is open for trading. The New York Stock Exchange is not open on New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day. Any assets or liabilities initially
expressed in terms of non-U.S. dollar currencies are translated into U.S.
dollars at the prevailing market rates as quoted by one or more banks or
dealers on the day of valuation. Net asset value is computed by dividing the
value of the securities held by the Fund plus any cash or other assets
(including interest and dividends accrued but not yet received) minus all
liabilities (including accrued expenses) by the total number of shares
outstanding at such time. Expenses, including the management fees and any
account maintenance and/or distribution fees, are accrued daily. The per share
net asset value of the Class B, Class C and Class D shares generally will be
lower than the per share net asset value of the Class A shares reflecting the
daily expense accruals of the account maintenance, distribution and higher
transfer agency fees applicable with respect to the Class B and Class C shares
and the daily expense accruals of the
29
<PAGE>
account maintenance fees applicable with the respect to the Class D shares;
moreover, the per share net value of the Class B and Class C shares generally
will be lower than the per share net asset value of its Class D shares
reflecting the daily expense accruals of the distribution fees and higher
transfer agency fees applicable with respect to the Class B and Class C shares
of the Fund. It is expected, however, that the per share net asset value of the
four classes will tend to converge 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 which are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the over-the-counter market are valued
at the last available bid price in the over-the-counter market prior to the
time of valuation. When the Fund writes a call option, the amount of the
premium received is recorded on the books of the Fund as an asset and an
equivalent liability. The amount of the liability is subsequently valued to
reflect the current market value of the option written, based upon 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
by the Fund are valued at their 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.
Securities and assets for which market quotations are not readily available
are valued at fair value as determined in good faith under the direction of the
Board of Directors of the Fund.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designed to facilitate investment in its shares. Full details as to each of
such services and copies of the various plans described below can be obtained
from the Fund, the Distributor or Merrill Lynch. Certain of these services are
available only to U.S. investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the transfer agent has an
Investment Account and will receive statements at least quarterly, from the
transfer agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gain distributions. The statements will also
show any other activity in the account since the preceding statement.
Shareholders will receive separate transaction confirmations for each purchase
or sale transaction other than automatic investment purchases and the
reinvestment of ordinary income dividends and long-term capital gains
distributions. A shareholder may make additions to his Investment Account at
any time by mailing a check directly to the Fund's transfer agent.
Share certificates are issued only for full shares and only upon the specific
request of the shareholder. Issuance of certificates representing all or only
part of the full shares in an Investment Account may be requested by a
shareholder directly from the Fund's transfer agent.
30
<PAGE>
Shareholders considering transferring their Class A shares from Merrill Lynch
to another brokerage firm or financial institution should be aware that, if the
firm to which the Class A or Class D shares are to be transferred will not take
delivery of shares of the Fund, a shareholder either must redeem the Class A or
Class D shares (paying any applicable CDSC) so that the cash proceeds can be
transferred to the account at the new firm or such shareholder must continue to
maintain an Investment Account at the Transfer Agent for those Class A or Class
D shares. Shareholders interested in transferring their Class B or Class C
shares from Merrill Lynch and who do not wish to have an Investment Account
maintained for such shares at the Transfer Agent may request their new
brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder at the Transfer Agent.
Shareholders considering transferring a tax-deferred retirement account such as
an individual retirement account from Merrill Lynch to another brokerage firm
or financial institution should be aware that, if the firm to which the
retirement account is to be transferred will not take delivery of shares of the
Fund, a shareholder must either redeem the shares (paying any applicable CDSC)
so that the cash proceeds can be transferred to the account at the new firm, or
such shareholder must continue to maintain a retirement account at Merrill
Lynch for those shares.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor as
described in the Prospectus) or Class B, Class C or Class D shares at the
applicable public offering price either through the shareholder's securities
dealer or by mail directly to the Fund's transfer agent, acting as agent for
such securities dealer. Voluntary accumulation also can be made through a
service known as the 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. For
investors who buy shares of the Fund through Blueprint no minimum charge to the
investors' bank account is required. An investor whose shares of the Fund are
held within a CMA(R) account may arrange to have periodic investments made in
the Fund in amounts of $100 or more ($1 for retirement accounts) through the
CMA(R) Automated Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions to the contrary are given as to the method of
payment of dividends and capital gains distributions, dividends and
distributions will be reinvested automatically in additional shares of the
Fund. Such reinvestment will be at the net asset value of shares of the Fund as
of the close of business on the ex-dividend date of the dividend or
distribution. Shareholders may elect in writing to receive either their
dividends or capital gains distributions, or both, in cash, in which event
payment will be mailed or direct deposited on or about the payment date.
Shareholders may, at any time, notify the transfer agent in writing or by
telephone (1-800-MER-FUND) that they no longer wish to have their dividends
and/or distributions reinvested in shares of the Fund or vice versa, and
commencing ten days after receipt by the transfer agent of such notice, those
instructions will be effected.
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<PAGE>
SYSTEMATIC WITHDRAWAL PLANS--CLASS A AND CLASS D SHARES
A Class A or Class D shareholder may elect to make withdrawals from an
Investment Account on either a monthly or quarterly basis as provided below.
Quarterly withdrawals are available for shareholders who have acquired Class A
or Class D shares of the Fund having a value, based on cost or the current
offering price, of $5,000 or more and monthly withdrawals are available for
shareholders with Class A or Class D shares with such a value of $10,000 or
more.
At the time of each withdrawal payment, sufficient Class A or Class D shares
are redeemed from those on deposit in the shareholder's account to provide the
withdrawal payment specified by the shareholder. The shareholder may specify
either a dollar amount or a percentage of the value of his Class A or Class D
shares. Redemptions will be made at net asset value as determined at the close
of business of the New York Stock Exchange (currently 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 Exchange is not open for business on
such date, the Class A or Class D shares will be redeemed at the close of
business on the following business day. The check for the withdrawal payment
will be mailed, or the direct deposit of the withdrawal payment will be made,
on the next business day following redemption. When a shareholder is making
systematic withdrawals, dividends and distributions on all Class A or Class D
shares in the Investment Account are reinvested automatically in Class A or
Class D shares of the Fund, respectively. A shareholder's Systematic Withdrawal
Plan may be terminated at any time, without charge or penalty, by the
shareholder, the Fund, the Fund's transfer agent or the Distributor.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be reduced
correspondingly. Purchases of additional Class A or Class D shares concurrent
with withdrawals are ordinarily disadvantageous to the shareholder because of
sales charges and tax liabilities. The Fund will not knowingly accept purchase
orders for Class A or Class D shares of the Fund from investors who maintain a
Systematic Withdrawal Plan unless such purchase is equal to at least one year's
scheduled withdrawals or $1,200, whichever is greater. Periodic investments may
not be made into an Investment Account in which the shareholder has elected to
make systematic withdrawals.
A Class A or Class D shareholder whose shares are held within a CMA(R),
CBA(R) or Retirement Account may elect to have shares redeemed on a monthly,
bimonthly, quarterly, semiannual or annual basis through the Systematic
Redemption Program. The minimum fixed dollar amount redeemable is $25. The
proceeds of systematic redemptions will be posted to the shareholder's account
five business days after the date the shares are redeemed. Monthly systematic
redemptions will be made at net asset value on the first Monday of each month,
bimonthly systematic redemptions will be made at net asset value on the first
Monday of every other month, and quarterly, semiannual or annual redemptions
are made at net asset value on the first Monday of months selected at the
shareholder's option. If the first Monday of the month is a holiday, the
redemption will be processed at net asset value on the next business day. The
Systematic Redemption Program is not available if Fund shares are being
purchased within the account pursuant to the Automatic Investment Program. For
more information on the Systematic Redemption Program, eligible shareholders
should contact their Financial Consultant.
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<PAGE>
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds listed below. Under the Merrill
Lynch Select 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 his account in which
the exchange is made at the time of the exchange or is otherwise eligible to
purchase Class A shares of the second fund. If the Class A shareholder wants to
exchange Class A shares for shares of a second MLAM-advised mutual fund, but
does not hold Class A shares of the second fund in his account at the time of
the exchange and is not otherwise eligible to acquire Class A shares of the
second fund, the shareholder will receive Class D shares of the second fund as
a result of the exchange. Class D shares also may be exchanged for Class A
shares of a second MLAM-advised mutual fund at any time as long as, at the time
of the exchange, the shareholder holds Class A shares of the second fund in the
account in which the exchange is made or is otherwise eligible to purchase
Class A shares of the second fund. Class B, Class C and Class D shares will be
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 will be exchangeable for shares of certain
MLAM-advised money market funds specifically designated below as available for
exchange by holders of Class A, Class B, Class C or Class D shares. Shares with
a net asset value of at least $100 are required to qualify for the exchange
privilege, and any shares utilized in an exchange must have been held by the
shareholder for 15 days. It is contemplated that the exchange privilege may be
applicable to other new mutual funds whose shares may be distributed by the
Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount
equal to the difference, if any, between the sales charge previously paid on
the outstanding Class A or Class D shares and the sales charge payable at the
time of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have taken
place, the "sales charge previously paid" shall include the aggregate of the
sales charge 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
may be exchanged into the Class A or Class D shares of the other funds or into
shares of the Class A and Class D money market funds with a reduced 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
33
<PAGE>
of the Fund acquired through use of the exchange privilege will be subject to
the Fund's CDSC schedule if such schedule is higher than the CDSC schedule
relating to the Class B shares of the fund from which the exchange has been
made. For purposes of computing the sales charge 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
shares of the Fund for those of Merrill Lynch Special Value Fund, Inc.
("Special Value Fund") after having held the Fund Class B shares for two and a
half years. The 2% sales charge that generally would apply to a redemption
would not apply to the exchange. Three years later the investor may decide to
redeem the Class B shares of Special Value Fund and receive cash. There will be
no CDSC due on this redemption, since by "tacking" the two and a half year
holding period of Fund Class B shares to the three year holding period for the
Special Value Fund Class B shares, the investor will be deemed to have held the
new Class B shares for more than five years.
Shareholders also may exchange shares of the Fund into shares of a money
market fund advised by the Manager or its affiliates, but the period of time
that Class B or Class C shares are held in a money market fund will not count
towards satisfaction of the holding period requirement for purposes of reducing
the CDSC or with respect to Class B shares, towards satisfaction of the
conversion period. However, shares of a money market fund which were acquired
as a result of an exchange for Class B or Class C shares of the Fund may, in
turn, be exchanged back into Class B or Class C shares, respectively, of any
fund offering such shares, in which event the holding period for Class B or
Class C shares of the fund will be aggregated with previous holding periods for
purposes of reducing the CDSC. Thus, for example, an investor may exchange
Class B shares of the Fund for shares of Merrill Lynch Institutional Fund
("Institutional Fund") after having held the Fund Class B shares for two and a
half years and three years later decide to redeem the shares of Institutional
Fund for cash. At the time of this redemption, the 2% CDSC that would have been
due had the Class B shares of the Fund been redeemed for cash rather than
exchanged for shares of Institutional Fund will be payable. If instead of such
redemption the shareholder exchanged such shares for Class B shares of a fund
which the shareholder continued to hold for an additional two and half years,
any subsequent redemption will not incur a CDSC.
Set forth below is a description of the investment objectives of the other
funds into which exchanges can be made:
Funds Issuing Class A, Class B, Class C and Class D Shares:
Merrill Lynch Adjustable Rate
Securities Fund, Inc..........
High current income consistent with a policy
of limiting the degree of fluctuation in net
asset value by investing primarily in a
portfolio of adjustable rate securities,
consisting principally of mortgage-backed
and asset-backed securities.
Merrill Lynch Americas Income
Fund, Inc.....................
A high level of current income, consistent
with prudent investment risk, by investing
primarily in debt securities denominated in
a currency of a country located in the
Western Hemisphere (i.e., North and South
America and the surrounding waters).
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<PAGE>
Merrill Lynch Arizona Limited
Maturity Municipal Bond Fund..
A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and Arizona income taxes as is
consistent with prudent investment
management through investment in a portfolio
primarily of intermediate-term investment
grade Arizona Municipal Bonds.
Merrill Lynch Arizona
Municipal Bond Fund...........
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Arizona
income taxes as is consistent with prudent
investment management.
Merrill Lynch Arkansas
Municipal Bond Fund...........
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series Fund, whose
objective is to provide as high a level of
income exempt from Federal and Arkansas
income taxes as is consistent with prudent
investment management.
Merrill Lynch Asset Growth
Fund, Inc. ...................
High total investment return, consistent with
prudent risk, from investment in United
States and foreign equity, debt and money
market securities the combination of which
will be varied both with respect to types of
securities and markets in response to
changing market and economic trends.
Merrill Lynch Asset Income
Fund, Inc. ...................
A high level of current income through
investment primarily in United States fixed
income securities.
Merrill Lynch Balanced Fund
for Investment and
Retirement.................... As high a level of total investment return as
is consistent with reasonable risk by
investing in common stocks and other types
of securities, including fixed income
securities and convertible securities.
Merrill Lynch Basic Value
Fund, Inc.....................
Capital appreciation and, secondarily, income
through investment in securities, primarily
equities, that are undervalued and therefore
represent basic investment value.
Merrill Lynch California
Insured Municipal Bond Fund...
A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and California
income taxes as is consistent with prudent
investment management through investment in
a portfolio consisting primarily of insured
California Municipal Bonds.
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<PAGE>
Merrill Lynch California
Limited Maturity Municipal
Bond Fund..................... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and California income taxes as is
consistent with prudent investment
management through investment in a portfolio
primarily of intermediate-term investment
grade California Municipal Bonds.
Merrill Lynch California
Municipal Bond Fund...........
A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and California
income taxes as is consistent with prudent
investment management.
Merrill Lynch Capital Fund, The highest total investment return
Inc........................... consistent with prudent risk through a fully
managed investment policy utilizing equity,
debt and convertible securities.
Merrill Lynch Colorado
Municipal Bond Fund...........
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Colorado
income taxes as is consistent with prudent
investment management.
Merrill Lynch Connecticut
Municipal Bond Fund...........
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Connecticut
income taxes as is consistent with prudent
investment management.
Merrill Lynch Corporate Bond
Fund, Inc.....................
Current income from three separate
diversified portfolios of fixed income
securities.
Merrill Lynch Developing
Capital Markets Fund, Inc.....
Long-term appreciation through investment in
securities, principally equities, of issuers
in countries having smaller capital markets.
Merrill Lynch Dragon Fund, Capital appreciation primarily through
Inc........................... investment in equity and debt securities of
issuers domiciled in developing countries
located in Asia and the Pacific Basin.
Merrill Lynch Eurofund.........
Capital appreciation primarily through
investment in equity securities of
corporations domiciled in Europe.
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<PAGE>
Merrill Lynch Federal
Securities Trust..............
High current return through investments in
U.S. Government and Government agency
securities, including GNMA mortgage-backed
certificates and other mortgage-backed
Government securities.
Merrill Lynch Florida Limited
Maturity Municipal Bond Fund..
A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal income taxes as is consistent with
prudent investment management while serving
to offer shareholders the opportunity to own
securities exempt from Florida intangible
personal property taxes through investment
in a portfolio primarily of intermediate-
term investment grade Florida Municipal
Bonds.
Merrill Lynch Florida
Municipal Bond Fund...........
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal income taxes as
is consistent with prudent investment
management, while seeking to offer
shareholders the opportunity to own
securities exempt from Florida intangible
personal property taxes.
Merrill Lynch Fund For
Tomorrow, Inc.................
Long-term growth through investment in a
portfolio of good quality securities,
primarily common stock, potentially
positioned to benefit from demographic and
cultural changes as they affect consumer
markets.
Merrill Lynch Fundamental
Growth Fund, Inc..............
Long-term growth of capital through
investment in a diversified portfolio of
equity securities placing particular
emphasis on companies that have exhibited an
above-average growth rate in earnings.
Merrill Lynch Global Bond Fund
for Investment and
Retirement.................... High total investment return from investment
in a global portfolio of debt instruments
denominated in various currencies and
multinational currency units.
Merrill Lynch Global
Convertible Fund, Inc.........
High total return from investment primarily
in an internationally diversified portfolio
of convertible debt securities, convertible
preferred stock and "synthetic" convertible
securities consisting of a combination of
debt securities or preferred stock and
warrants or options.
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<PAGE>
Merrill Lynch Global Holdings,
Inc. (residents of Arizona
must meet investor
suitability standards)........
The highest total investment return
consistent with prudent risk through
worldwide investment in an internationally
diversified portfolio of securities.
Merrill Lynch Global Resources
Trust.........................
Long-term growth and protection of capital
from investment in securities of domestic
and foreign companies that possess
substantial natural resource assets.
Merrill Lynch Global SmallCap
Fund, Inc. ...................
Long-term growth of capital by investing
primarily in equity securities of companies
with relatively small market capitalizations
located in various foreign countries and in
the United States.
Merrill Lynch Global Utility
Fund, Inc.....................
Capital appreciation and current income
through investment of at least 65% of its
total assets in equity and debt securities
issued by domestic and foreign companies
which are primarily engaged in the ownership
or operation of facilities used to generate,
transmit or distribute electricity, tele-
communications, gas or water.
Merrill Lynch Growth Fund for
Investment and Retirement.....
Growth of capital and, secondarily, income
from investment in a diversified portfolio
of equity securities placing principal
emphasis on those securities which
management of the fund believes to be
undervalued.
Merrill Lynch Healthcare Fund,
Inc. (residents of Wisconsin
must meet investor
suitability standards)........
Capital appreciation through worldwide
investment in equity securities of companies
that derive or are expected to derive a
substantial portion of their sales from
products and services in healthcare.
Merrill Lynch International
Equity Fund...................
Capital appreciation and, secondarily, income
by investing in a diversified portfolio of
equity securities of issuers located in
countries other than the United States.
Merrill Lynch Latin America
Fund, Inc.....................
Capital appreciation by investing primarily
in Latin American equity and debt
securities.
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<PAGE>
Merrill Lynch Maryland
Municipal Bond Fund...........
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Maryland
income taxes as is consistent with prudent
investment management.
Merrill Lynch Massachusetts
Limited Maturity Municipal
Bond Fund.....................
A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and Massachusetts income taxes as is
consistent with prudent investment
management through investment in a portfolio
primarily of intermediate-term investment
grade Massachusetts Municipal Bonds.
Merrill Lynch Massachusetts
Municipal Bond Fund...........
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Massachusetts
income taxes as is consistent with prudent
investment management.
Merrill Lynch Michigan Limited
Maturity Municipal Bond Fund..
A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and Michigan income taxes as is
consistent with prudent investment
management through investment in a portfolio
primarily of intermediate-term investment
grade Michigan Municipal Bonds.
Merrill Lynch Michigan
Municipal Bond Fund...........
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Michigan
income taxes as is consistent with prudent
investment management.
Merrill Lynch Minnesota
Municipal Bond Fund...........
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Minnesota
personal income taxes as is consistent with
prudent investment management.
Merrill Lynch Municipal Bond
Fund, Inc.....................
Tax-exempt income from three separate
diversified portfolios of municipal bonds.
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<PAGE>
Merrill Lynch Municipal
Intermediate Term Fund........
Currently the only portfolio of Merrill Lynch
Municipal Series Trust, a series fund, whose
objective is to provide as high a level as
possible of income exempt from Federal
income taxes by investing in investment
grade obligations with a dollar weighted
average maturity of five to twelve years.
Merrill Lynch New Jersey
Limited Maturity Municipal
Bond Fund..................... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and New Jersey income taxes as is
consistent with prudent investment
management through a portfolio primarily of
intermediate-term investment grade New
Jersey Municipal Bonds.
Merrill Lynch New Jersey
Municipal Bond Fund...........
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and New Jersey
income taxes as is consistent with prudent
investment management.
Merrill Lynch New Mexico
Municipal Bond Fund...........
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and New Mexico
income taxes as is consistent with prudent
investment management.
Merrill Lynch New York Limited
Maturity Municipal Bond Fund..
A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal, New York State and New York City
income taxes as is consistent with prudent
investment management through investment in
a portfolio primarily of intermediate-term
investment grade New York Municipal Bonds.
Merrill Lynch New York
Municipal Bond Fund...........
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal, New York State
and New York City income taxes as is
consistent with prudent investment
management.
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<PAGE>
Merrill Lynch North Carolina
Municipal Bond Fund...........
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and North
Carolina income taxes as is consistent with
prudent investment management.
Merrill Lynch Ohio Municipal
Bond Fund.....................
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Ohio income
taxes as is consistent with prudent
investment management.
Merrill Lynch Oregon Municipal
Bond Fund.....................
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Oregon income
taxes as is consistent with prudent
investment management.
Merrill Lynch Pacific Fund, Capital appreciation by investing in equity
Inc........................... securities of corporations domiciled in Far
Eastern and Western Pacific countries,
including Japan, Australia, Hong Kong and
Singapore.
Merrill Lynch Pennsylvania
Limited Maturity Municipal
Bond Fund.....................
A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and Pennsylvania income taxes as is
consistent with prudent investment
management through investment in a portfolio
of intermediate-term investment grade
Pennsylvania Municipal Bonds.
Merrill Lynch Pennsylvania
Municipal Bond Fund...........
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Pennsylvania
personal income taxes as is consistent with
prudent investment management.
Merrill Lynch Phoenix Fund, Long-term growth of capital by investing in
Inc........................... equity and fixed income securities,
including tax-exempt securities, of issuers
in weak financial condition or experiencing
poor operating results believed to be
undervalued relative to the current or
prospective condition of such issuer.
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<PAGE>
Merrill Lynch Short-Term
Global Income Fund, Inc.......
As high a level of current income as is
consistent with prudent investment
management from a global portfolio of high
quality debt securities denominated in
various currencies and multinational
currency units and having remaining
maturities not exceeding three years.
Merrill Lynch Special Value
Fund, Inc.....................
Long-term growth of capital from investments
in securities, primarily common stocks, of
relatively small companies believed to have
special investment value and emerging growth
companies regardless of size.
Merrill Lynch Strategic
Dividend Fund.................
Long-term total return from investment in
dividend paying common stocks which yield
more than Standard & Poor's 500 Composite
Stock Price Index.
Merrill Lynch Technology Fund,
Inc...........................
Capital appreciation through worldwide
investment in equity securities of companies
that derive or are expected to derive a
substantial portion of their sales from
products and services in technology.
Merrill Lynch Texas Municipal
Bond Fund.....................
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal income taxes as
is consistent with prudent investment
management by investing primarily in a
portfolio of long-term, investment grade
obligations issued by the State of Texas,
its political subdivisions, agencies and
instrumentalities.
Merrill Lynch Utility Income
Fund, Inc.....................
High current income through investment in
equity and debt securities issued by
companies which are primarily engaged in the
ownership or operation of facilities used to
generate, transmit or distribute
electricity, telecommunications, gas or
water.
Merrill Lynch World Income
Fund, Inc.....................
High current income by investing in a global
portfolio of fixed income securities
denominated in various currencies, including
multinational currencies.
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<PAGE>
Class A Share Money Market Funds:
Merrill Lynch Ready
AssetsTrust...................
Preservation of capital, liquidity and the
highest possible current income consistent
with the foregoing objectives from the
short-term money market securities in which
the Trust invests.
Merrill Lynch Retirement
Reserves Money Fund
(available only for exchanges
within certain retirement
plans)........................
Currently the only portfolio of Merrill Lynch
Retirement Series Trust, a series fund,
whose objectives are current income,
preservation of capital and liquidity
available from investing in a diversified
portfolio of short-term money market
securities.
Merrill Lynch U.S.A.
Government Reserves...........
Preservation of capital, current income and
liquidity available from investing in direct
obligations of the U.S. Government and
repurchase agreements relating to such
securities.
Merrill Lynch U.S. Treasury
Money Fund....................
Preservation of capital, liquidity and
current income through investment
exclusively in a diversified portfolio of
short-term marketable securities which are
direct obligations of the U.S. Treasury.
Class B, Class C and Class D Share Money Market Funds:
Merrill Lynch Government Fund.. A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
consistent with liquidity and security of
principal from investment in securities
issued or guaranteed by the U.S. Government,
its agencies and instrumentalities and in
repurchase agreements secured by such
obligations.
Merrill Lynch Institutional
Fund..........................
A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide maximum current
income consistent with liquidity and the
maintenance of a high quality portfolio of
money market securities.
Merrill Lynch Institutional
Tax-Exempt Fund...............
A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
exempt from Federal income taxes,
preservation of capital and liquidity
available from investing in a diversified
portfolio of short-term, high quality
municipal bonds.
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<PAGE>
Merrill Lynch Treasury Fund.... A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
consistent with liquidity and security of
principal from investment in direct
obligations of the U.S. Treasury and up to
10% of its total assets in repurchase
agreements secured by such obligations.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, shareholders should contact their Merrill
Lynch financial consultant, who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other funds described above
with shares for which certificates have not been issued, may exercise the
exchange privilege by wire through their securities dealers. The Fund reserves
the right to require a properly completed Exchange Application. This exchange
privilege may be modified or terminated in accordance with the rules of the
Commission. The Fund reserves the right to limit the number of times an
investor may exercise the exchange privilege. Certain funds may suspend the
continuous offering of their shares 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
It is the Fund's intention to distribute all of its net investment income, if
any. Dividends from such net investment income are paid at least annually. All
net realized long- or short-term capital gains, if any, are distributed to the
Fund's shareholders at least annually. From time to time, the Fund may declare
a special distribution at or about the end of the calendar year in order to
comply with a Federal income tax requirement that certain percentages of its
ordinary income and capital gains be distributed during the taxable year.
Premiums from expired call options written by the Fund and net gains from
closing purchase transactions are treated as short-term capital gains for
Federal income tax purposes. 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 described below whether they are invested in shares
of the Fund or received in cash. The per share dividends and distributions on
Class B and Class C shares will be lower than the per share dividends and
distributions on Class A and Class D shares as a result of the account
maintenance, distribution and higher transfer agency fees applicable with
respect to the Class B and Class C shares; similarly, the per share dividends
and distributions on Class D shares will be lower than the per share dividends
and distributions on Class A shares as a result of the account maintenance fees
applicable with respect to the Class D shares. See "Determination of Net Asset
Value".
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (the "Code"). If it so qualifies,
44
<PAGE>
the Fund (but not its shareholders) will not be subject to Federal income tax
on the part of its net ordinary income and net realized capital gains which it
distributes to Class A, Class B, Class C and Class D shareholders (together,
the "shareholders"). The Fund intends to distribute substantially all of such
income.
Dividends paid by the Fund from its ordinary income and distributions of the
Fund's net realized short-term capital gains (together referred to hereafter as
"ordinary income dividends") are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
(including long-term gains from certain transactions in futures and options)
("capital gain dividends") are taxable to shareholders as long-term capital
gains, regardless of the length of time the shareholder has owned Fund shares.
Any loss upon the sale or exchange of Fund shares held for six months or less,
however, will be treated as long-term capital loss to the extent of any capital
gain dividends received by the shareholder. Distributions in excess of the
Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. A portion of the Fund's ordinary income dividends may be eligible
for the dividends received deduction allowed to corporations under the Code, if
certain requirements are met. For this purpose, the Fund will allocate
dividends eligible for the dividends received deduction among the Class A,
Class B, Class C and Class D shareholders according to a method (which it
believes is consistent with the Securities and Exchange Commission exemptive
order permitting the issuance and sale of multiple classes of stock) that is
based on the gross income allocable to Class A, Class B, Class C and Class D
shareholders during the taxable year, or such other method as the Internal
Revenue Service may prescribe. If the Fund pays a dividend in January 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 by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% U.S.
withholding tax under existing provisions of the Code applicable to foreign
individuals and entities unless a reduced rate of withholding or a withholding
exemption is provided under applicable treaty law. Nonresident shareholders are
urged to consult their own tax advisers concerning the applicability of the
U.S. withholding tax.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the 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
45
<PAGE>
foreign tax credits on investments in foreign securities held in the Fund. If
more than 50% in value of the Fund's total assets at the close of its taxable
year consists of securities of foreign corporations, the Fund will be eligible,
and intends, to file an election with the Internal Revenue Service pursuant to
which shareholders of the Fund will be required to include their proportionate
shares of such withholding taxes in their U.S. income tax returns as gross
income, treat such proportionate shares as taxes paid by them, and deduct such
proportionate shares in computing their taxable incomes or, alternatively, use
them as foreign tax credits against their U.S. income taxes. No deductions for
foreign taxes, however, may be claimed by noncorporate shareholders who do not
itemize deductions. A shareholder that is a nonresident alien individual or a
foreign corporation may be subject to U.S. withholding tax on the income
resulting from the Fund's election described in this paragraph but may not be
able to claim a credit or deduction against such U.S. tax for the foreign taxes
treated as having been paid by such shareholder. The Fund will report annually
to its shareholders the amount per share of such withholding taxes. 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 the sales charge paid to the Fund
reduces any sales charge the shareholder would have owed upon purchase of the
new shares in the absence of the exchange privilege. Instead, such sales charge
will be treated as an amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income
and capital gains in the manner necessary to avoid imposition of the 4% excise
tax, there can be no assurance that sufficient amounts of the Fund's taxable
income and capital gains will be distributed to avoid entirely the imposition
of the tax. In such event, the Fund will be liable for the tax only on the
amount by which it does not meet the foregoing distribution requirements.
Tax Treatment of Options, Futures and Forward Foreign Exchange Transactions.
The Fund may write, purchase or sell options, futures or 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 non-equity option or a regulated futures contract for
a
46
<PAGE>
non-U.S. currency for which the Fund elects to have gain or loss treated as
ordinary gain or loss under Code Section 988 (as described below), gain or loss
from Section 1256 contracts will be 60% long-term and 40% short-term capital
gain or loss. The mark-to-market rules outlined above, however, will not apply
to certain transactions entered into by the Fund solely to reduce the risk of
changes in price or interest or currency exchange rates with respect to its
investments.
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The
Fund may, nonetheless, elect to treat the gain or loss from certain forward
foreign exchange contracts as capital. In this case, gain or loss realized in
connection with a forward foreign exchange contract that is a Section 1256
contract will be characterized as 60% long-term and 40% short-term capital gain
or loss.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's transactions in options and futures contracts. Under
Section 1092, the Fund may be required to postpone recognition for tax purposes
of losses incurred in certain closing transactions in options and futures
contracts.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the
Fund may be restricted in effecting closing transactions within three months
after entering into an option or futures contract.
Special Rules for Certain Foreign Currency Transactions. In general, gains
from "foreign currencies" and from foreign currency options, foreign currency
futures and forward foreign exchange contracts relating to investments in
stock, 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, foreign currency futures and 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 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
forward contracts, from futures contracts that are not "regulated futures
contracts" and from unlisted options will be treated as ordinary income or loss
under Code Section 988. In certain circumstances, the Fund may elect capital
gain or loss treatment for such transactions. Regulated futures contracts, as
described above, will be taxed under Code Section 1256 unless application of
Section 988 is elected by the Fund. In general, however, Code Section 988 gains
or losses will increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company
taxable income during a taxable year, the Fund would not be able to make any
ordinary income dividend distributions, and any distributions made before the
losses were realized but in the same taxable year would be recharacterized as a
return of capital to shareholders, thereby reducing the basis of each
shareholder's Fund shares and resulting in a capital gain for any shareholder
who received a distribution greater than the shareholder's tax 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.
----------------
47
<PAGE>
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action
either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs which
are derived from interest on U.S. Government obligations. State law varies as
to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present
or prospective shareholders. 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 a formula specified by the
Commission.
Average annual total return quotations for the specified periods are computed
by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including the maximum sales charge in the case of
Class A and Class D shares and the CDSC that would be applicable to a complete
redemption of the investment at the end of the specified period in the case of
Class B and Class C shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (i) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted,
and (ii) the maximum applicable sales charges will not be included. 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 longer periods of time.
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<PAGE>
Set forth below is total return information for the Class A and Class B
shares of the Fund for the periods indicated. Since Class C and Class D shares
have not been issued prior to the date of this Statement of Additional
Information, performance information concerning Class C and Class D shares is
not yet provided.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
---------------------------- ----------------------------
REDEEMABLE REDEEMABLE
EXPRESSED AS A VALUE OF A EXPRESSED AS A VALUE OF A
PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL
BASED $1,000 BASED $1,000
ON A INVESTMENT ON A INVESTMENT
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF
$1,000 THE $1,000 THE
PERIOD INVESTMENT PERIOD INVESTMENT PERIOD
------ -------------- ------------- -------------- -------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended April 30,
1994................... 5.55% $1,055.50 6.25% $1,062.50
Five Years Ended April
30, 1994............... 13.99% $1,924.40 14.04% $1,928.80
Inception (February 3,
1989) to April 30,
1994................... 13.57% $1,947.50 13.58% $1,948.10
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
For the six months ended
April 30, 1994......... 2.41% $1,024.10 1.86% $1,018.60
Year Ended October 31,
1993................... 22.61% $1,226.10 21.42% $1,214.20
Year Ended October 31,
1992................... 11.78% $1,117.80 10.64% $1,106.40
Year Ended October 31,
1991................... 28.89% $1,288.90 27.48% $1,274.80
Year Ended October 31,
1990................... 3.91% $1,039.10 2.93% $1,029.30
Inception (February 3,
1989) to October 31,
1989................... 9.34% $1,093.40 8.50% $1,085.00
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (February 3,
1989) to April 30,
1994................... 94.75% $1,947.50 94.81% $1,948.10
</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 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 not take into account 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 may be
deducted.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund was incorporated under Maryland law on June 9, 1988. It has an
authorized capital of 2,200,000,000 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, of which Class A and Class C each consist of 200,000,000
shares and Class B and Class D each consist of 900,000,000 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
49
<PAGE>
relating to such account maintenance and/or distribution expenditures. The
Fund has received an order from the Commission permitting the issuance and
sale of multiple classes of Common Stock. The Board of Directors of the Fund
may classify and reclassify the shares of the Fund into additional classes of
Common Stock at a future date.
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 does not require shareholders to act upon any of the following matters:
(i) election of Directors; (ii) approval of an investment advisory agreement;
(iii) approval of a distribution agreement; and (iv) ratification of selection
of independent accountants. Also, the by-laws of the Fund require that a
special meeting of stockholders be held upon the written request of at least
10% of the outstanding shares of the Fund entitled to vote at such meeting.
Voting rights for Directors are not cumulative. Shares issued are fully paid
and non-assessable and have no preemptive rights. Redemption and conversion
rights are discussed elsewhere herein and in the Prospectus. Each share 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 are 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 5,000
shares of each class of stock for an aggregate of $100,000. Such shares were
acquired for investment and can only be disposed of by redemption. The
organizational expenses of the Fund will be paid by the Fund and amortized
over a period not exceeding five years. The proceeds realized by the Manager
upon redemption of any of such shares will be reduced by the proportionate
amount of the unamortized organizational expenses which the number of shares
redeemed bears to the number of shares initially purchased.
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class A and
Class B shares of the Fund based on the value of the Fund's net assets on
April 30, 1994, and its shares outstanding on that date is as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B
-------------- --------------
<S> <C> <C>
Net Assets................................. $1,219,668,720 $5,822,105,707
============== ==============
Number of Shares Outstanding............... 91,586,124 442,451,775
============== ==============
Net Asset Value Per Share (net assets di-
vided by number of shares outstanding).... $ 13.32 $ 13.16
Sales Charge (for Class A shares: 5.25% of
offering price (5.54% of net amount in-
vested))*................................. 0.74 **
-------------- --------------
Offering Price............................. $ 14.06 $ 13.16
============== ==============
</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 Charge--Class
B Shares" herein.
As of April 30, 1994, no Class C or Class D shares of the Fund had been
publicly offered.
50
<PAGE>
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to ratification by the shareholders of the
Fund. The independent auditors are responsible for auditing the annual
financial statements of the Fund.
CUSTODIAN
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109
(the "Custodian"), acts as the custodian of the Fund's assets. Under its
contract with the Fund, the Custodian is authorized to establish separate
accounts in foreign currencies and to cause foreign securities owned by the
Fund to be held in its offices outside the U.S. and with certain foreign banks
and securities depositories. The Custodian is responsible for safeguarding and
controlling the Fund's cash and securities, handling the receipt and delivery
of securities and collecting interest and dividends on the Fund's investments.
TRANSFER AGENT
Financial Data Services, Inc., Transfer Agency Mutual Fund Operations, 4800
Deer Lake Drive East, Jacksonville, Florida 32246-6484 (the "Transfer Agent"),
acts as the Fund's transfer agent. The Transfer Agent is responsible for the
issuance, transfer and redemption of shares and the opening, maintenance and
servicing of shareholder accounts. See "Management of the Fund--Transfer Agency
Services" in the Prospectus.
LEGAL COUNSEL
Brown & Wood, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on October 31 of each year. The Fund sends
to its shareholders at least semi-annually reports showing the Fund's portfolio
and other information. An annual report, containing financial statements
audited by independent auditors, is sent to shareholders each year. After the
end of each year, shareholders will receive Federal income tax information
regarding dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Commission, Washington,
D.C., under the Securities Act of 1933 and the Investment Company Act, to which
reference is hereby made.
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<PAGE>
Under a separate agreement, Merrill Lynch has granted the Fund the right to
use the "Merrill Lynch" name and has reserved the right to withdraw its consent
to the use of such name by the Fund at any time or to grant the use of such
name to any other company, and the Fund has granted Merrill Lynch, under
certain conditions, the use of any other name it might assume in the future,
with respect to any corporation organized by Merrill Lynch.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's shares on September 30, 1994.
52
<PAGE>
APPENDIX
RATINGS OF FIXED INCOME SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") CORPORATE RATINGS
<TABLE>
<C> <S>
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
Baa Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and 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.
</TABLE>
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
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<PAGE>
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
The term "commercial paper" as used by Moody's means promissory obligations
not having an original maturity in excess of nine months. Moody's makes no
representations as to whether such commercial paper is by any other definition
"commercial paper" or is exempt from registration under the Securities Act of
1933, as amended.
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations
are exempt from registration under the Securities Act of 1933, nor does it
represent that any specific note is a valid obligation of a rated issuer or
issued in conformity with any applicable law. Moody's employs the following
three designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
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 obligations. The effect
of industry characteristics and market compositions 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 commercial paper obligations are
supported by the credit of another entity or entities, then the name or names
of such supporting entity or entities are listed within the 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
affiliated corporations, commercial banks, insurance companies, foreign
governments or other entities, but only as one factor in the total rating
assessment. Moody's makes no representation and gives no opinion on the legal
validity or enforceability of any support arrangement. You are cautioned to
review with your counsel any questions regarding particular support
arrangements.
54
<PAGE>
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS
Because of the fundamental differences between preferred stocks and bonds, a
variation of the bond rating symbols is being used in the quality ranking of
preferred 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.
Preferred stock rating symbols and their definitions are as follows:
"aaa" An issue which is rated "aaa" is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.
"aa" An issue which is rated "aa" is considered a high-grade preferred stock.
This rating indicates that there is a reasonable assurance the 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 protections 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 payments.
"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.
55
<PAGE>
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S
("STANDARD & POOR'S") CORPORATE DEBT RATINGS
A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.
The debt rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform any audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or unavailability
of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
(1) likelihood of default-capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation; (2) nature of and provisions of the obligation; and
(3) protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
<TABLE>
<C> <S>
AAA Debt rated AAA has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely
strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small
degree.
A Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
SPECULATIVE Debt rated BB, B, CCC, CC and C is regarded as having
GRADE predominantly speculative characteristics with respect to capacity
to pay interest and repay principal. BB indicates the least degree
of speculation and C the highest. While such debt will likely have
some quality and protective characteristics, these are outweighed
by large uncertainties or major exposures to adverse conditions.
BB Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to inadequate capacity to
meet timely interest and principal payments. The BB rating
category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
</TABLE>
56
<PAGE>
<TABLE>
<C> <S>
B Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual
or implied BB or BB- rating.
CCC Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions
to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial, or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The CCC
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied B or B- rating.
CC The rating CC is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed,
but debt service payments are continued.
CI The rating CI is reserved for income bonds on which no interest is being
paid.
D Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D
rating also will be used upon the filing of a bankruptcy petition if debt
service payments are jeopardized.
</TABLE>
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
categories.
N.R. 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.
Debt obligations of issuers outside the United States and its territories are
rated on the same basis as domestic corporate and municipal issues. The ratings
measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories ("AAA", "AA", "A", "BBB", commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the Legal Investment Laws of various states may impose certain rating or other
standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
57
<PAGE>
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into four categories, ranging from "A-1" for
the highest quality obligations to "D" for the lowest. The four categories are
as follows:
A Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with
the numbers 1, 2, and 3 to indicate the relative degree of safety.
A-1This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are
denoted with a plus (+) sign designation.
A-2Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for
issues designated "A-1".
A-3Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations
carrying the higher designations.
B Issues rated "B" are regarded as having only an adequate capacity for
timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace period.
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information.
DESCRIPTION OF STANDARD & POOR'S PREFERRED STOCK RATINGS
A Standard & Poor's preferred stock rating is an assessment of the capacity
and willingness of an issuer to pay preferred stock dividends and any
applicable sinking fund obligations. A preferred stock rating differs from a
bond rating inasmuch as it is assigned to an equity issue, which issue is
intrinsically different from, and subordinated to, a debt issue. Therefore, to
reflect this difference, the preferred stock rating symbol will normally not be
higher than the bond rating symbol assigned to, or that would be assigned to,
the senior debt of the same issuer.
The preferred stock ratings are based on the following considerations:
I. Likelihood of payment--capacity and willingness of the issuer to meet
the timely payment of preferred stock dividends and any applicable sinking
fund requirements in accordance with the terms of the obligation.
58
<PAGE>
II. Nature of, and provisions of, the issue.
III. 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 CCC
Preferred stock rated "BB", "B", and "CCC" are regarded, on balance, as
predominately speculative with respect to the issuer's capacity to pay
preferred stock obligations. "BB" indicates the lowest degree of
speculation and "CCC" the highest degree of speculation. While such issues
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.
CC The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C A preferred stock rated "C" is a non-paying issue.
D A preferred stock rated "D" is a non-paying issue with the issuer in
default on debt instruments.
NR indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate
a particular type of obligation as a matter of policy.
Plus (+) or minus (-): To provide more detailed indications of preferred
stock quality, the ratings from "AA" to "CCC" may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
The preferred stock ratings are not a recommendation to purchase or sell a
security, inasmuch as market price is not considered in arriving at the rating.
Preferred stock ratings are wholly unrelated to Standard & Poor's earnings and
dividend rankings for common stocks.
The ratings are based on current information furnished to Standard & Poor's
by the issuer, and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
59
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
Merrill Lynch Global Allocation Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Global Allocation Fund, Inc. as
of October 31, 1993, the related statements of operations for the year then
ended and changes in net assets for each of the years in the two-year period
then ended, and the financial highlights for each of the years in the four-year
period then ended and the period February 3, 1989 (commencement of operations)
to October 31, 1989. These financial statements and the financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and the financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at October
31, 1993, by correspondence with the custodian, brokers, and affiliated funds.
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 Allocation Fund, Inc. as of October 31, 1993, the results of its
operations, the changes in its net assets, and the financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Princeton, New Jersey
December 17, 1993
60
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
Shares Value Percent of
Industries Held Common Stocks, Notes & Warrants Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Australia
Banking 2,595,293 Westpac Banking Corp. $ 5,448,334 $ 7,829,947 0.2%
Food 3,500,000 Goodman Fielder Wattie Ltd. 3,602,956 3,706,290 0.1
Insurance 1,026,831 GIO Australia Holdings Ltd. 1,432,775 2,188,382 0.0
Tobacco 1,442,400 Rothmans Holdings, Ltd. 5,941,981 7,300,852 0.1
1,242,300 WD & HO Wills Holdings, Ltd. 2,092,022 3,019,907 0.1
-------------- -------------- -----
8,034,003 10,320,759 0.2
Utilities 37,254 Australian Gas & Light Co. 115,666 110,658 0.0
Total Common Stocks in Australia 18,633,734 24,156,036 0.5
Austria
Utilities--Electric 38,650 Energie Versorgung Niederoesterreich AG (EVN) 2,801,675 4,251,828 0.1
29,150 Oesterreichische Elektrizitats AG (Verbund) 1,223,237 1,765,318 0.0
-------------- -------------- -----
4,024,912 6,017,146 0.1
Total Common Stocks in Austria 4,024,912 6,017,146 0.1
Belgium
Mining 83,000 Union Miniere N.V. 4,909,492 5,670,055 0.1
Total Common Stocks in Belgium 4,909,492 5,670,055 0.1
Canada
Natural Resources 300,000 Canadian Pacific, Ltd. 3,503,161 5,062,500 0.1
Oil & Related 353,000 International Petroleum Corp. 1,000,196 551,563 0.0
Telecommunications 100,000 BCE Telecommunications, Inc. 3,375,484 3,525,000 0.1
Total Common Stocks in Canada 7,878,841 9,139,063 0.2
Finland
Paper & Forest
Products 325,000 Repola OY S 3,891,635 4,835,300 0.1
Total Common Stocks in Finland 3,891,635 4,835,300 0.1
France
Automobiles 38,300 Peugeot S.A. 3,966,996 4,257,369 0.1
Banking 53,900 Compagnie Financiere de Paribas 4,269,897 4,475,202 0.1
86,500 Societe Generale 9,605,405 10,131,361 0.2
-------------- -------------- -----
13,875,302 14,606,563 0.3
Capital Goods 27,695 Compagnie de Fives-Lille 1,444,568 2,040,237 0.0
Insurance 53,860 GAN S.A. (Registered) 3,637,238 5,041,197 0.1
Miscellaneous 31,100 Christian Dior S.A. 1,519,667 1,723,742 0.0
Multi-Industry 14,905 EuraFrance 4,256,713 5,692,132 0.1
Oil & Related 65,000 Societe Nationale Elf Aquitaine 4,402,248 5,043,304 0.1
Publishing 181,000 Matra Hachette 3,698,767 4,323,263 0.1
Retail 50,000 Pinault-Printemps Group 6,380,119 7,169,039 0.1
Utilities 18,600 Compagnie Generale des Eaux 7,970,772 8,644,378 0.2
Total Common Stocks in France 51,152,390 58,541,224 1.1
</TABLE>
61
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Shares Value Percent of
Industries Held Common Stocks, Notes & Warrants Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Germany
Automobiles 7,670 Volkswagen of America, Inc. $ 1,633,275 $ 1,804,706 0.0%
Banking 4,400 Bayerische Vereinsbank AG 1,036,492 1,374,261 0.0
16,500 Deutsche Bank AG 7,560,471 8,329,322 0.2
-------------- -------------- -----
8,596,963 9,703,583 0.2
Capital Goods 369,636 Klockner Werke AG 17,229,762 22,074,410 0.4
Chemicals 80,000 Bayer AG 13,403,028 15,273,813 0.3
Construction 6,330 Hochtief AG 3,965,302 4,120,454 0.1
Pharmaceuticals 21,950 Schering AG 11,893,453 14,281,592 0.3
Multi-Industry 49,100 Mannesmann AG 8,195,476 9,984,204 0.2
6,138 Mannesmann AG (New Shares) 919,688 1,248,127 0.0
57,600 Veba AG 14,765,678 16,139,695 0.3
-------------- -------------- -----
23,880,842 27,372,026 0.5
Steel 85,000 Thyssen AG 10,329,445 12,055,838 0.3
Total Common Stocks in Germany 90,932,070 106,686,422 2.1
Hong Kong
Telecommunications 1,180,000 Hong Kong Telecommunications Ltd. 754,179 2,550,113 0.0
Utilities--Electric 564,000 China Light & Power Co., Ltd. 841,166 3,795,277 0.1
Total Common Stocks in Hong Kong 1,595,345 6,345,390 0.1
Ireland
Building &
Construction 1,065,600 CRH PLC 3,594,241 5,067,991 0.1
Insurance 380,000 Irish Life PLC 1,098,601 1,231,168 0.0
Miscellaneous--
Consumer Goods 2,178,000 Waterford Wedgewood Units 1,080,827 1,225,866 0.0
Paper & Forest
Products 273,000 Smurfit (Jefferson) Group 1,089,661 914,249 0.0
Total Common Stocks in Ireland 6,863,330 8,439,274 0.1
Italy
Multi-Industry 9,295,795 Compagnie Industriali Riunite S.p.A. (CIR) 7,392,425 8,944,859 0.2
Paper & Forest
Products 983,100 Cartiere Burgo S.p.A 2,783,820 5,530,844 0.1
Telecommunications 3,000,000 Societa Finanziara Telefonica S.p.A. (STET) 4,365,656 7,654,943 0.1
11,181,363 Societa Finanziara Telefonica S.p.A. (STET) RISP 20,700,047 21,999,730 0.4
7,458,000 Societa Italiana Esercizio Telecom S.p.A. (S.I.P.) 6,820,816 16,306,350 0.3
-------------- -------------- -----
31,886,519 45,961,023 0.8
Utilities--Gas 1,006,000 Italgas Sud S.p.A. 2,259,850 2,975,197 0.1
Total Common Stocks in Italy 44,322,614 63,411,923 1.2
Japan
Automobiles &
Equipment 1,293,000 Suzuki Motor Corp. 10,914,306 11,215,954 0.2
197,000 Toyoda Automatic Loom Works, Ltd. 1,787,668 2,966,374 0.1
154,000 Toyota Motor Corp. 1,661,167 2,674,550 0.0
-------------- -------------- -----
14,363,141 16,856,878 0.3
Beverage 265,000 Chukyo Coca-Cola Bottling Co., Ltd. 3,346,988 3,476,212 0.1
297,000 Hokkaido Coca-Cola Bottling Co., Ltd. 3,649,358 4,883,695 0.1
379,000 Kinki Coca-Cola Bottling Co., Ltd. 6,078,381 6,827,252 0.1
172,000 Mikuni Coca-Cola Bottling Co., Ltd. 2,723,642 3,098,383 0.1
372,000 Sanyo Coca-Cola Bottling Co., Ltd. 5,515,502 5,532,748 0.1
-------------- -------------- ----
21,313,871 23,818,290 0.5
</TABLE>
62
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
Shares Value Percent of
Industries Held Common Stocks, Notes & Warrants Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Capital Goods 1,401,000 Mitsubishi Heavy Industries America, Inc. 8,959,190 8,736,028 0.1
Electrical Engineering 227,000 Chudenko Corp. 7,039,991 8,178,291 0.2
47,000 Kyudenko Corp. 547,117 811,917 0.0
-------------- -------------- -----
7,587,108 8,990,208 0.2
Electronics 620,000 Canon, Inc. 7,833,515 8,533,949 0.1
189,000 Hitachi, Ltd. 1,899,032 1,503,270 0.0
100,000 Kyocera Corp. 2,680,297 5,681,293 0.1
750,000 Matsushita Electric Industrial Co., Ltd. 8,302,338 10,184,758 0.2
-------------- -------------- -----
20,715,182 25,903,270 0.4
Insurance 962,000 Dai-Tokyo Fire & Marine Insurance Co., Ltd. 5,500,445 7,233,885 0.1
620,000 Fuji Fire & Marine Insurance Co., Ltd. 3,441,502 4,181,062 0.1
1,322,000 Koa Fire & Marine Insurance Co., Ltd. 6,884,434 8,670,885 0.2
1,158,000 Nichido Fire & Marine Insurance Co., Ltd. 6,710,343 8,376,111 0.2
970,000 Nippon Fire & Marine Insurance Co., Ltd. 4,622,675 7,329,855 0.1
452,000 Sumitomo Marine & Fire Insurance Co., Ltd. 2,953,549 3,929,164 0.1
430,000 Tokio Marine & Fire Insurance Co., Ltd. 4,193,919 5,283,141 0.1
-------------- -------------- -----
34,306,867 45,004,103 0.9
Metals 188,000 Toyo Seikan Kaisha, Ltd. 4,182,592 5,053,857 0.1
Pharmaceuticals 208,000 Sankyo Company Ltd. 5,597,722 5,399,353 0.1
126,000 Taisho Pharmaceuticals Co. 2,632,536 2,642,217 0.1
-------------- -------------- -----
8,230,258 8,041,570 0.2
Photography 341,000 Fuji Photo Film Co., Ltd. 7,848,972 7,969,792 0.2
Retail Stores 116,000 Ito Yokado Co., Ltd. 3,795,422 5,829,469 0.1
58,000 Sangetsu Co., Ltd. 1,601,930 2,041,386 0.0
-------------- -------------- -----
5,397,352 7,870,855 0.1
Total Common Stocks in Japan 132,904,533 158,244,851 3.0
Netherlands
Airlines 901,000 KLM Royal Dutch Airlines 17,486,458 19,026,436 0.4
Banking 268,850 ABN Amro Holding N.V. 8,099,465 10,267,782 0.2
Beverage 23,283 Heineken Holdings 2,129,208 2,229,223 0.0
23,237 Heineken N.V. 2,268,817 2,491,797 0.1
-------------- ------------- -----
4,398,025 4,721,020 0.1
Chemicals 97,650 Akzo N.V. 8,704,846 9,313,109 0.2
Insurance 250,400 Amev N.V. 9,528,450 10,908,383 0.2
385,965 Internationale Nederlanden Groep N.V. 12,885,006 16,875,704 0.3
-------------- -------------- -----
22,413,456 27,784,087 0.5
Mining 97,550 Dutch State Mining 4,519,467 5,297,795 0.1
Miscellaneous--
Manufacturing 10,000 Nijverdal Ten Cate N.V. 501,699 456,383 0.0
Paper & Forest
Products 300,720 Koninklijke KNP 5,008,146 6,430,289 0.1
Total Common Stocks in the Netherlands 71,131,562 83,296,901 1.6
</TABLE>
63
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Shares Value Percent of
Industries Held Common Stocks, Notes & Warrants Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
New Zealand
Paper & Forest
Products 164,330 Carter Holt Harvey, Ltd. $ 166,358 $ 336,844 0.0%
Total Common Stocks in New Zealand 166,358 336,844 0.0
Norway
Energy 1,000 Norsk Hydro (ADR)++ 20,685 30,000 0.0
Total Common Stocks in Norway 20,685 30,000 0.0
Portugal
Banking 536,520 Banco Commercial Portuguese (ADR)++ 6,588,763 7,377,150 0.1
50,000 Espirito Santo Financial Holding Co. (ADR)++ 1,365,500 1,650,000 0.1
-------------- -------------- -----
7,954,263 9,027,150 0.2
Total Common Stocks in Portugal 7,954,263 9,027,150 0.2
South Korea
Automobiles & Equipment 30,773 +++++Kia Motors (GDS)++++ 1,017,000 774,454 0.0
Total Common Stocks in South Korea 1,017,000 774,454 0.0
Spain
Banking 61,775 Banco Popular Espano 6,511,311 8,040,190 0.2
83,000 Bank Intercontinental S.A. 4,607,612 7,214,163 0.1
-------------- -------------- -----
11,118,923 15,254,353 0.3
Energy & Petroleum 418,500 Repsol S.A. 10,048,364 12,572,158 0.3
Insurance 30,000 Mapfre S.A. 1,130,029 1,390,980 0.0
Miscellaneous 125,000 Autopista Espana (ACESA) 1,314,565 1,337,123 0.0
12,500 Autopista Espana (ACESA) (New Shares) 48,560 133,712 0.0
260,000 Grupo Fosforera Espanola S.A. 2,635,037 1,976,892 0.1
-------------- -------------- -----
3,998,162 3,447,727 0.1
Multi-Industry 45,750 Corporacion Financiera Alba S.A. 1,611,658 1,613,101 0.0
Real Estate 205,148 Metrovacesa 4,967,085 6,583,393 0.1
205,148 Metrovacesa (Rights) (f) 0 35,173 0.0
281,983 Vallehermoso Espanola S.A. 3,544,817 5,212,954 0.1
-------------- -------------- -----
8,511,902 11,831,520 0.2
Telecommunications 645,000 Telefonica Nacional de Espana S.A. 6,527,932 8,438,129 0.2
184,000 Telefonica Nacional de Espana S.A. (ADR)++ 5,492,987 7,153,000 0.1
-------------- -------------- -----
12,020,919 15,591,129 0.3
Utilities--Electric 55,000 Empresa Nacional de Electricidad S.A. 1,524,812 2,599,329 0.0
14,935 Empresa Nacional de Electricidad S.A. (ADR)++ 311,466 700,078 0.0
500,100 Fuerzas Electricidad Cataluna (FECSA) (Series A) 3,268,178 3,034,524 0.1
1,291,800 Iberdrola I S.A. 7,717,166 8,531,754 0.2
-------------- -------------- -----
12,821,622 14,865,685 0.3
Total Common Stocks in Spain 61,261,579 76,566,653 1.5
Sweden
Electrical Equipment 120,000 ASEA AB 'B' Free 6,532,086 8,112,002 0.2
Mining 725,725 Trelleborg 'B' Free 5,291,716 5,897,806 0.1
Multi-Industry 245,000 Svedala 3,925,653 4,434,635 0.1
Total Common Stocks in Sweden 15,749,455 18,444,443 0.4
Switzerland
Banking 28,500 Schweizerischer Bankverein (Bearer) 7,250,975 9,662,322 0.2
Building &
Construction 16,650 Holderbank Financiere Glarus AG (Bearer) 7,108,098 9,265,618 0.2
</TABLE>
64
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
Shares Value Percent of
Industries Held Common Stocks, Notes & Warrants Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Electrical Equipment 29,800 BBC Brown Boveri & Cie (Bearer) 17,422,295 20,165,868 0.4
14,194 Landis & Gyr AG 5,301,621 5,943,324 0.1
-------------- -------------- -----
22,723,916 26,109,192 0.5
Food 20,155 Nestle AG (Registered) 12,443,223 16,143,601 0.3
Insurance 2,460 Baloise Holding Insurance (Registered) 3,018,431 3,871,007 0.1
20,250 Winterthur (Registered) 7,901,693 10,503,140 0.2
-------------- -------------- -----
10,920,124 14,374,147 0.3
Machinery 11,460 Sulzer Gebrueder AG (Registered) 5,277,957 6,160,708 0.1
7,400 Sulzer Gebrueder AG (Warrants) (a) 0 29,486 0.0
-------------- -------------- -----
5,277,957 6,190,194 0.1
Metals 14,983 Alusuisse-Lonza Holdings (Registered) 4,279,146 5,464,186 0.1
Pharmaceuticals 19,800 Ciba-Geigy AG 9,511,983 10,323,226 0.2
3,427 Roche Holdings, Ltd. Genusschein AG 9,911,136 13,296,492 0.2
1,460 Sandoz AG (Part. Cert.) 2,573,492 3,598,973 0.1
6,427 Sandoz AG (Registered) 14,872,369 16,059,904 0.3
-------------- -------------- -----
36,868,980 43,278,595 0.8
Total Common Stocks & Warrants in Switzerland 106,872,419 130,487,855 2.5
United Kingdom
Aerospace 1,202,500 Rolls Royce PLC 2,979,298 2,716,476 0.1
Airlines 881,875 British Airways PLC 3,984,182 4,941,123 0.1
Banking 428,000 National Westminster Bank PLC 3,096,090 3,523,959 0.1
Beverage 922,600 Grand Metropolitan PLC 6,023,852 5,690,348 0.1
35,000 Grand Metropolitan PLC (ADR)++ 1,031,100 879,375 0.0
-------------- -------------- -----
7,054,952 6,569,723 0.1
Conglomerates 510,000 Hanson PLC 1,999,223 2,050,287 0.0
50,000 Hanson PLC (ADR)++ 984,250 1,006,250 0.0
-------------- -------------- -----
2,983,473 3,056,537 0.0
Electrical Equipment 367,700 BICC PLC 2,000,812 2,218,692 0.0
1,499,200 General Electric Co. PLC 6,894,412 7,820,670 0.2
-------------- -------------- -----
8,895,224 10,039,362 0.2
Energy & Petroleum 45,000 British Petroleum Co. Ltd. PLC (ADR)++ 2,638,675 2,801,250 0.1
Food 600,000 Tate & Lyle PLC 3,660,538 3,388,536 0.1
350,000 United Biscuit PLC 2,086,198 1,924,629 0.0
-------------- -------------- -----
5,746,736 5,313,165 0.1
Insurance 599,000 Commercial Union Assurance Co. PLC 5,354,117 5,777,617 0.1
297,000 Lloyds Abbey Life PLC 1,915,705 2,034,860 0.0
-------------- -------------- -----
7,269,822 7,812,477 0.1
Leisure 715,000 Forte PLC 2,023,903 2,348,419 0.0
350,000 Thorn EMI PLC (Ordinary) 5,241,890 4,931,212 0.1
-------------- -------------- -----
7,265,793 7,279,631 0.1
Multi-Industry 775,000 BTR PLC 3,942,202 4,261,679 0.1
21,000 BTR PLC (Warrants) (a) 0 44,318 0.0
253,125 English China Clay Group (ECC) 2,348,459 1,572,492 0.0
-------------- -------------- -----
6,290,661 5,878,489 0.1
Newspaper & Publishing 110,000 Reuters Holdings PLC 2,198,582 2,668,026 0.1
Pharmaceuticals 360,000 SmithKline Beecham Corp. PLC (ADR)++ 10,280,908 10,215,000 0.2
1,000,000 Zeneca Group PLC 9,406,370 11,473,464 0.2
-------------- -------------- -----
19,687,278 21,688,464 0.4
</TABLE>
65
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Shares Held/ Value Percent of
Industries Face Amount Common Stocks, Notes & Warrants Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
United Kingdom (concluded)
Retail Stores 908,700 Boots Company PLC $ 6,217,049 $ 6,995,641 0.1%
1,000,000 Dixons Group PLC 3,779,526 3,923,568 0.1
421,500 Marks & Spencer PLC 2,531,515 2,524,526 0.0
-------------- -------------- -----
12,528,090 13,443,735 0.2
Steel 1,500,000 British Steel PLC 1,442,449 2,864,651 0.1
Telecommunications 425,000 British Telecommunications PLC 2,570,211 2,911,837 0.1
Utilities--Gas 546,800 British Gas PLC 2,153,009 2,803,657 0.1
Waste Disposal 83,500 Attwoods PLC (ADR)++ 759,800 772,375 0.0
Total Common Stocks & Warrants in the United Kingdom 99,544,325 107,084,937 2.1
United States
Aerospace 56,000 Boeing Co. 2,003,133 2,100,000 0.0
Airlines 50,000 UAL Corp. 6,306,722 7,600,000 0.1
955,900 USAir Group Inc. 12,833,444 13,741,063 0.3
-------------- -------------- -----
19,140,166 21,341,063 0.4
Apparel 271,500 Fruit of the Loom, Inc. 8,460,180 9,570,375 0.2
Automobiles 110,300 General Motors Corp. 3,895,971 5,253,037 0.1
Banking 85,000 Albank Financial Corp. 971,875 1,678,750 0.0
200,000 AmSouth Bancorporation 5,358,151 5,850,000 0.1
125,000 Anchor Bancorp, Inc. 1,562,500 1,875,000 0.0
75,000 BankAmerica Corp. 3,219,677 3,131,250 0.1
129,500 Banknorth Group, Inc. 1,865,422 2,525,250 0.0
150,000 Bank of New York 8,011,500 7,987,500 0.2
308,500 Chase Manhattan Corp. 9,370,061 10,180,500 0.2
1,391 Chase Manhattan Corp. (Warrants) (a) 6,955 11,476 0.0
369,600 Chemical Banking Corp. 12,428,621 14,784,000 0.3
1,222,200 City National Corp. 8,488,816 9,319,275 0.2
1,127,500 Comerica Inc. 30,278,134 29,737,812 0.6
155,000 Continental Bank Corp. 4,089,050 3,952,500 0.1
387,700 First American Bank 15,330,321 14,926,450 0.3
244,200 First Union Corp. 9,833,016 9,920,625 0.2
199,900 Mellon Bank Corp. 10,557,433 10,769,612 0.2
20,000 Mercantile Bancorp 445,625 985,000 0.0
45,000 Premier Bankcorp 708,437 804,375 0.0
10,000 Trustcompany Bancorp NY 288,320 447,500 0.0
-------------- -------------- -----
122,813,914 128,886,875 2.5
Biotechnology 282,536 Applied Immune Sciences, Inc. 5,104,499 3,602,334 0.1
60,000 Cordis Corp. 1,440,000 2,385,000 0.0
-------------- -------------- -----
6,544,499 5,987,334 0.1
Computers 148,500 Boole & Babbage, Inc. 2,962,360 3,823,875 0.1
27,200 Digital Equipment Corp. 1,553,514 969,000 0.0
300,000 International Business Machines Corp. 15,067,744 13,800,000 0.3
-------------- -------------- -----
19,583,618 18,592,875 0.4
Conglomerates 125,000 ADT Limited 1,434,405 1,125,000 0.0
20,833 ADT Limited (Warrants) (a) 0 28,645 0.0
-------------- -------------- -----
</TABLE>
66
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
Shares Value Percent of
Industries Held Common Stocks, Notes & Warrants Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
1,434,405 1,153,645 0.0
Electronics 110,448 Bell Industries, Inc. 1,028,022 2,029,482 0.1
28,193 Texas Instruments Inc. 2,111,078 1,850,166 0.0
-------------- -------------- -----
3,139,100 3,879,648 0.1
Energy & Petroleum 30,000 Anadarko Petroleum Corp. 570,550 1,410,000 0.0
163,900 Ashland Coal, Inc. 4,132,919 4,589,200 0.1
85,000 Brown (Tom), Inc. 366,313 1,211,250 0.0
49,500 Cabot Oil & Gas Corp. (Class A) 529,030 1,188,000 0.0
34,600 Coastal Corp. 817,773 947,175 0.0
153,000 Coho Resources, Inc. 1,662,813 841,500 0.0
130,000 Helmerich & Payne, Inc. 2,773,422 3,900,000 0.1
41,400 Mitchell Energy Development Corp. (Class A) 584,792 1,014,300 0.0
77,850 Mitchell Energy Development Corp. (Class B) 1,132,335 1,664,044 0.0
50,000 Murphy Oil Corp. 1,899,720 2,250,000 0.0
1,063,400 Occidental Petroleum Corp. 21,219,009 19,672,900 0.4
61,200 Pennzoil Co. 3,775,844 3,503,700 0.1
199,700 Plains Resources, Inc. 2,052,005 1,772,338 0.0
344,248 Santa Fe Energy Resources, Inc. 3,000,432 3,313,386 0.1
335,800 USX-Marathon Group 5,949,229 6,212,300 0.1
138,800 Unocal Corp. 3,272,336 4,059,900 0.1
-------------- -------------- -----
53,738,522 57,549,993 1.0
Financial Services 340,000 Student Loan Marketing Association 15,220,014 15,172,500 0.3
Healthcare Services 661,200 Baxter International, Inc. 14,282,787 15,703,500 0.3
1,463,400 Beverly Enterprises, Inc. 14,866,990 15,914,475 0.3
2,331,300 Hillhaven Corp. 6,464,152 9,179,494 0.2
269,200 Manor Care, Inc. 5,230,692 6,057,000 0.1
30,000 Meditrust SBI 915,726 1,020,000 0.0
283,000 Regency Health Services, Inc. 2,378,182 3,183,750 0.1
366,100 US Surgical Corp. 9,597,305 8,694,875 0.2
-------------- -------------- -----
53,735,834 59,753,094 1.2
Hospital Management 170,800 Community Psychiatric Centers 1,688,862 2,391,200 0.0
450,000 Novacare Inc. 5,561,246 5,850,000 0.1
-------------- -------------- -----
7,250,108 8,241,200 0.1
Index-Related US$ 40,800 Republic of Austria Stock Index Growth Notes
due 8/15/1996 432,941 515,100 0.0
Information Processing 1,745,000 Amdahl Corp. 7,886,675 8,070,625 0.2
Insurance 60,000 Horace Mann Educators, Inc. 1,518,600 1,560,000 0.0
Leisure 93,700 Handleman Co. 1,044,752 1,147,825 0.0
Metals 277,500 Alcan Aluminum, Ltd. 4,669,221 5,688,750 0.1
87,700 Aluminum Co. of America 5,801,607 5,963,600 0.1
132,800 Reynolds Metals Co. 5,801,771 5,610,800 0.1
-------------- -------------- -----
16,272,599 17,263,150 0.3
Oil Services 465,000 Arethusa (Off-Shore) Ltd. 4,650,000 6,393,750 0.2
149,800 Atwood Oceanics, Inc. 1,238,663 1,722,700 0.0
43,400 Cliffs Drilling Co. 595,425 531,650 0.0
375,000 Noble Drilling Corp. 3,178,125 3,609,375 0.1
-------------- -------------- -----
9,662,213 12,257,475 0.3
</TABLE>
67
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Shares Value Percent of
Industries Held Common Stocks, Notes & Warrants Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
United States (concluded)
Paper & Forest
Products 425,000 Boise Cascade Corp. $ 9,431,664 $ 8,712,500 0.2%
350,000 Bowater, Inc. 7,112,925 6,868,750 0.1
112,000 Champion International Corp. 3,318,152 3,290,000 0.1
105,400 International Paper Co. 6,715,285 6,244,950 0.1
-------------- -------------- -----
26,578,026 25,116,200 0.5
Pharmaceuticals 600,000 ALZA Corp. 13,048,597 15,450,000 0.3
121,500 Alteon Inc. 1,205,188 1,123,875 0.0
139,400 American Home Products 8,256,144 8,712,500 0.2
58,200 AutoImmune Inc. 385,575 436,500 0.0
400,000 Bristol-Myers Squibb Co. 22,797,751 23,500,000 0.5
173,000 Immune Response Corp. 2,272,832 2,119,250 0.0
200,000 Johnson & Johnson 7,266,450 8,425,000 0.2
350,000 Lilly (Eli) & Co. 17,982,583 18,943,750 0.4
496,500 Merck & Co. 16,850,368 15,950,062 0.3
41,300 Pfizer, Inc. 2,617,082 2,570,925 0.0
780,500 Syntex Corp. 15,220,206 14,146,563 0.3
-------------- -------------- -----
107,902,776 111,378,425 2.2
Pollution Control 85,000 WMX Technologies, Inc. 2,099,075 2,093,125 0.0
Publishing 223,900 Jostens Inc. 4,199,326 4,338,062 0.1
301,500 New York Times (Class A) 7,158,778 7,122,937 0.1
410,000 Valassis Communications, Inc. 4,810,850 4,458,750 0.1
-------------- -------------- -----
16,168,954 15,919,749 0.3
Real Estate
Investment Trust 418,000 Dial REIT, Inc. 4,187,750 4,441,250 0.1
294,300 Health Equity Properties, Inc. 2,490,300 2,906,212 0.1
75,000 LTC Properties, Inc. 750,000 1,012,500 0.0
-------------- -------------- -----
7,428,050 8,359,962 0.2
Resources 440,000 Horsham Corp. 3,550,742 5,885,000 0.1
Retail Stores 478,500 Baker (J.), Inc. 8,040,414 8,254,125 0.2
516,900 ++++++Buttrey Food & Drug 4,084,486 3,489,075 0.1
156,700 Dayton Hudson Corp. 10,496,970 10,890,650 0.2
910,000 Filene's Basement Corp. 8,201,994 9,782,500 0.2
161,300 Gap Inc. (The) 4,219,217 5,746,312 0.1
342,000 Hook-SupeRx, Inc. 3,476,715 2,394,000 0.0
200,000 Jones Apparel Group N.Y. 3,934,504 6,250,000 0.1
373,900 Liz Claiborne Inc. 8,022,626 7,104,100 0.1
422,900 Payless Cashways Inc. 5,097,382 5,074,800 0.1
225,000 Safeway Inc. 2,296,520 4,893,750 0.1
600,000 Service Merchandise Co., Inc. 6,169,250 6,000,000 0.1
55,000 Smith Food and Drug 1,082,048 1,100,000 0.0
-------------- -------------- -----
65,122,126 70,979,312 1.3
Savings Banks 109,000 Bankers Corp. 1,180,743 3,896,750 0.1
760,000 ++++++Crossland Federal Savings Bank 18,250,000 21,660,000 0.4
500,000 Dime Savings Bank of New York 3,417,510 4,062,500 0.1
105,200 Downey Savings & Loan Association 1,295,198 2,774,650 0.1
1,962,053 Glendale Federal Savings Bank 17,527,227 14,715,398 0.3
</TABLE>
68
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
Shares Value Percent of
Industries Held Common Stocks, Notes & Warrants Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
770,194 Glendale Federal Savings Bank (Warrants) (a) 0 2,118,034 0.0
37,500 NS Bancorp, Inc. 300,000 1,157,813 0.0
119,340 Portsmouth Bank Shares, Inc. 1,215,375 1,939,275 0.0
-------------- -------------- -----
43,186,053 52,324,420 1.0
Shoes & Leather 182,300 NIKE, Inc. (Class B) 9,775,784 8,818,762 0.2
Telecommunications 104,500 GTE Corp. 3,514,166 4,153,875 0.1
Textiles 675,000 Burlington Industries 9,694,587 9,956,250 0.2
Tobacco 190,000 Loews Corp. 18,058,755 17,788,750 0.3
786,100 Philip Morris Companies, Inc. 37,656,262 42,252,875 0.8
-------------- -------------- -----
55,715,017 60,041,625 1.1
Utilities--Electric 125,000 CMS Energy Corp. 2,290,025 3,296,875 0.1
1,500,000 Centerior Energy Corp. 23,810,903 22,500,000 0.4
100,000 General Public Utilities Corp. 2,784,780 3,287,500 0.1
-------------- -------------- -----
28,885,708 29,084,375 0.6
Utilities--Gas 77,100 Atmos Energy Corp. 1,445,257 2,399,737 0.0
126,900 Pacific Enterprises 2,486,131 3,331,125 0.1
40,800 South Jersey Industries, Inc. 711,756 1,014,900 0.0
-------------- -------------- -----
4,643,144 6,745,762 0.1
Total Common Stocks, Notes & Warrants in the
United States 738,041,452 789,152,656 15.1
Total Investments in Common Stocks, Notes & Warrants 1,468,867,994 1,666,688,577 32.0
<CAPTION>
Equity Closed-End Funds
<S> <C> <S> <C> <C> <C>
Portugal
Financial Services 39,500 Capital Portugal Fund 2,052,116 2,892,087 0.1
Total Equity Closed-End Funds in Portugal 2,052,116 2,892,087 0.1
United States
Financial Services 240,000 Austria Fund 2,017,632 2,280,000 0.1
166,666 European Warrant Fund 1,363,723 2,229,158 0.0
11,700 Global Yield Fund 89,797 96,525 0.0
300,100 Growth Fund of Spain, Inc. 2,630,827 3,151,050 0.1
150,000 Irish Investment Fund, Inc. 1,086,041 1,312,500 0.0
100,000 Italy Fund 761,520 1,025,000 0.0
25,600 Jakarta Growth Fund 158,080 256,000 0.0
40,000 Portugal Fund 360,368 505,000 0.0
Total Equity Closed-End Funds in the United States 8,467,988 10,855,233 0.2
Total Investments in Equity Closed-End Funds 10,520,104 13,747,320 0.3
</TABLE>
69
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Shares Value Percent of
Industries Held Preferred Stocks Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Germany
Automobiles 30,150 Volkswagen of America, Inc. (Pfd.) $ 5,737,121 $ 5,887,758 0.1%
Multi-Industry 37,000 R.W.E. AG (Pfd.) 7,073,579 8,471,663 0.2
Total Preferred Stocks in Germany 12,810,700 14,359,421 0.3
Spain
Banking 225,000 Santander Overseas Bank (8% Pfd. Series D) (ADR)++ 5,463,250 5,962,500 0.1
Total Preferred Stocks in Spain 5,463,250 5,962,500 0.1
United Kingdom
Engineering 750,000 AMEC PLC (6.50% Convertible Pfd.) 968,501 1,114,650 0.0
Retail Stores 545,000 Signet Group (Pfd.) (ADR)++ 2,194,907 3,065,625 0.1
Waste Disposal 1,700,000 Attwoods PLC (8.50% Convertible Pfd.) 2,417,796 2,248,621 0.1
Total Preferred Stocks in the United Kingdom 5,581,204 6,428,896 0.2
United States
Airlines 100,000 +++++AMR Corp. (Pfd. $3.00) 5,065,500 5,437,500 0.1
5,000 +++++UAL (6.25% Convertible Pfd.) 471,875 600,000 0.0
170,000 USAir Group (Pfd. $4.375, Series B) 8,998,950 9,073,750 0.2
-------------- -------------- -----
14,536,325 15,111,250 0.3
Automobiles & Equipment 20,000 Ford Motor Co. (8.40% Convertible Pfd., Series A) 1,000,000 2,095,000 0.0
Banking 100,000 Fourth Financial Corp. (Convertible Pfd., Class A) 2,500,000 2,800,000 0.1
30,300 Marine Midland Banks, Inc. (Adj. Rate Pfd., Series A) 907,425 1,378,650 0.0
100,000 Onbancorp, Inc. (6.75% Convertible Pfd.,
Series B) 2,668,750 3,125,000 0.1
126,512 +++++Riggs National Corp. (Convertible Pfd.) 3,162,800 3,320,940 0.1
-------------- -------------- -----
9,238,975 10,624,590 0.3
Energy & Petroleum 150,000 Grant Tensor Corp. (9.75% Convertible Pfd.) 1,853,375 1,406,250 0.0
64,219 Santa Fe Energy Resources, Inc. (7% Pfd.) 954,075 1,276,353 0.0
50,000 Tenneco Inc. (Convertible Pfd., Series P) 1,475,000 2,068,750 0.0
-------------- -------------- -----
4,282,450 4,751,353 0.0
Financial Services 175,000 A/S Eksportfinans (8.70% Pfd.) 4,377,500 4,878,125 0.1
Natural Resources 200,000 +++++Amax Inc. (Convertible Pfd.) 13,875,125 13,325,000 0.3
20,000 Echo Bay Finance (Pfd., Series A) 500,000 845,000 0.0
219,000 Freeport-McMoRan Inc. (Convertible Pfd.) 7,703,330 8,157,750 0.1
-------------- -------------- -----
22,078,455 22,327,750 0.4
Oil Services 165,100 Chiles Offshore Corp. (Convertible Pfd.) 4,227,032 4,395,788 0.1
Paper & Forest
Products 300,000 Boise Cascade Corp. (Convertible Pfd.) 6,337,500 6,450,000 0.1
Real Estate 500,000 Catellus Development (7.25% Conv. Exchangeable Pfd.,
Series B) 25,000,000 25,000,000 0.5
70,000 Catellus Development (7.50% Pfd.) 3,644,600 4,007,500 0.1
-------------- -------------- -----
28,644,600 29,007,500 0.6
Savings Banks 1,750 Dime Savings Bank (Convertible Pfd.) 1,750,000 1,846,250 0.0
600,000 Glendale Federal Savings Bank (Convertible Pfd.,
Series E) 15,029,337 15,450,000 0.3
-------------- -------------- -----
16,779,337 17,296,250 0.3
Utilities--Electric 12,500 Gulf States Utilities (8.52% Pfd.) 1,363,750 1,287,500 0.0
Total Preferred Stocks in the United States 112,865,924 118,225,106 2.2
Total Investments in Preferred Stocks 136,721,078 144,975,923 2.8
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
(in US dollars)
Value Percent of
Face Amount Fixed-Income Securities Cost (Note la) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Canada Domtar, Inc. (2):
C$ 6,763,000 10.35% due 9/01/2006 4,014,962 4,533,254 0.1
3,500,000 10% due 4/15/2011 1,938,573 2,346,058 0.0
Olympia & York (4)+++:
29,694,000 Series 1, 10.70% due 11/04/1993 15,563,278 14,843,626 0.3
29,000,000 Series 2, 11% due 11/04/1998 15,553,595 14,496,705 0.3
8,275,000 Series 3, 11% due 10/04/1993 4,271,468 4,136,560 0.1
8,000,000 Talisman Energy, 8.50% due 12/01/2000 (26) 6,119,693 6,104,673 0.1
Total Fixed-Income Securities in Canada 47,461,569 46,460,876 0.9
Denmark Dkr 200,000,000 Kingdom of Denmark, 8% due 5/15/2003 (1) 32,615,197 33,009,766 0.6
Total Fixed-Income Securities in Denmark 32,615,197 33,009,766 0.6
European
Currency Units ECU 9,250,000 Banco Commercial Portuguese, Convertible Bonds,
8.75% due 5/21/2002 (3) 12,192,757 12,665,100 0.2
2,000,000 Credit Local de France, 8.011% due 10/16/2001 (4)(b) 1,392,919 1,393,161 0.0
34,000,000 Government of France, 8.25% due 4/25/2022 (1) 41,500,048 44,593,703 0.9
1,000,000 Investor International Placements, Convertible
Bonds, 7.25% due 6/21/2001 (4) 1,001,412 1,146,705 0.0
7,000,000 SKF--AB Lyons, Convertible Bonds, 8.007% due
7/26/2002 (5)(b) 4,409,462 4,073,370 0.1
Total Fixed-Income Securities in European
Currency Units 60,496,598 63,872,039 1.2
Finland Fim 75,000,000 Republic of Finland, 11% due 1/15/1999 (1) 14,754,836 15,445,552 0.3
Total Fixed-Income Securities in Finland 14,754,836 15,445,552 0.3
France Frf 4,500 Compagnie Generale des Eaux, Convertible Bonds,
6% due 1/01/1998 (7) 2,467,248 2,712,045 0.1
70,000 EuroDisney, S.C.A., Convertible Bonds, 6.75%
due 10/01/2001 (6) 1,872,189 1,521,609 0.0
200,000,000 Government of France, 8.50% due 4/25/2023 (1) 37,695,876 42,342,511 0.8
Total Fixed-Income Securities in France 42,035,313 46,576,165 0.9
Germany DM 7,000,000 Bundesrepublik Deutscheland, 6.25% due 2/20/1998 (1) 3,605,438 4,309,943 0.1
2,310,000 Commerzbank AG, Floating Rate Convertible Bonds,
7% due 12/31/2000 (3) 1,556,456 2,055,479 0.0
Total Fixed-Income Securities in Germany 5,161,894 6,365,422 0.1
Italy Softe SA-LUX (8):
Lit 2,000,000,000 4.25% due 7/30/1998 1,307,515 1,245,081 0.0
9,160,000,000 (Cum Warrants), 8.75% due 3/24/1997 (a) 7,123,916 10,165,888 0.2
6,300,000,000 (Ex-Warrants), 8.75% due 3/24/1997 (a) 4,551,041 3,718,642 0.1
Total Fixed-Income Securities in Italy 12,982,472 15,129,611 0.3
Japan Yen 2,850,000,000 Glaxo Holdings PLC, 4.30% due 9/28/1998 (9) 25,735,735 27,644,342 0.5
807,000,000 Hokkaido Coca-Cola Bottling Co., Ltd., 0.90%
due 6/30/1995 (42) 8,386,037 7,902,263 0.2
445,000,000 Matsushita Electric Works, 2.70% due 5/31/2002 (23) 3,905,187 5,089,238 0.1
535,000,000 Toyota Motor Corp., Convertible Bonds, 1.20%
due 1/28/1998 (10) 3,311,797 5,090,531 0.1
Total Fixed-Income Securities in Japan 41,338,756 45,726,374 0.9
New Zealand NZ$ 2,000,000 Natural Gas Corp. Holdings, Convertible Bonds,
10.50% due 10/14/1997(7) 1,186,318 2,216,000 0.0
Total Fixed-Income Securities in New Zealand 1,186,318 2,216,000 0.0
</TABLE>
71
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Value Percent of
Face Amount Fixed-Income Securities Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Spain Pta 605,000,000 Banco de Santander, Convertible Bonds, 9%
due 6/24/1994(3) $ 4,603,421 $ 5,772,643 0.1%
Government of Spain (1):
600,000,000 11.60% due 1/15/1997 5,013,855 4,886,769 0.1
7,500,000,000 11.30% due 1/15/2002 70,028,259 65,266,493 1.3
6,500,000,000 10.90% due 8/30/2003 50,389,810 56,108,833 1.1
Total Fixed-Income Securities in Spain 130,035,345 132,034,738 2.6
Switzerland CHF 1,500,000 American Medical International, Inc., 5%
due 3/18/1996 (11) 493,386 972,513 0.0
4,155,000 Carter Holt Harvey Financial, Ltd. (Ex-Warrants),
5.875% due 10/16/2001 (2)(a) 2,230,080 2,721,922 0.1
4,010,000 Chrysler Financial Corp., 5.75% due 6/18/1996 (4) 1,914,011 2,779,404 0.1
1,401,000 Ciba-Geigy AG, Convertible Bonds, 2% due8/09/1998(1) 1,178,587 1,163,794 0.0
3,020,000 News International, 5.375% due 4/30/1996 (13) 1,115,703 2,049,774 0.0
Total Fixed-Income Securities in Switzerland 6,931,767 9,687,407 0.2
United Kingdom Pounds
Sterling 3,750,000 Blue Circle, 10.50% due 6/21/2005 (15) 7,147,695 7,217,359 0.1
13,450,000 Elf Enterprises Finance PLC, Convertible Bonds,
8.75% due 6/27/2006 (4) 23,198,034 21,588,541 0.5
4,875,000 English China Clays PLC, Convertible Bonds,
6.50% due 9/30/2003 (14) 8,364,034 6,955,416 0.1
4,000,000 Government of Italy (Euro-Sterling), 10.50%
due 4/28/2014 (1) 5,373,493 7,326,966 0.1
5,250,000 Hanson PLC, Convertible Bonds, 9.50% due 1/31/2006 (5) 9,953,589 9,480,098 0.2
1,550,000 LASMO, Convertible Bonds, 7.75% due 10/04/2005 (12) 2,042,187 2,188,430 0.0
500,000 Land Securities PLC, Convertible Bonds, 6.75%
due 12/31/2002 (25) 679,603 795,117 0.0
1,500,000 RMC Capital Ltd., 8.75% due 5/31/2006 (14) 2,621,155 2,831,211 0.1
3,250,000 Redland Capital PLC, Convertible Bonds, 7.25%
due 1/28/2002 (15) 5,382,804 4,950,904 0.1
5,000,000 Tate & Lyle International, 5.75% 3/21/2001 (19) 6,515,102 6,520,703 0.1
Total Fixed-Income Securities in the United Kingdom 71,277,696 69,854,745 1.3
United States US$ 3,490,000 AEGON N.V., 7% due 9/15/2001 (16) 4,475,299 4,903,450 0.1
23,905,000 ARA Group, Inc., 12.50% due 7/15/2001 (35) 26,484,638 26,175,975 0.5
28,845,000 Allnet Communication Services, 9% due 5/15/2003 (8) 28,795,753 29,277,675 0.6
3,087,500 American Medical International, Inc., 6.50%
due 5/30/1997 (11) 2,578,063 2,971,719 0.1
27,450,000 Baldwin Co., 10.375% due 8/01/2003 (14) 27,352,438 25,254,000 0.5
14,500,000 +++++Banco de Galicia, 9% due 11/01/2003 (3) 14,459,390 14,471,000 0.3
35,000,000 Banco Rio de la Plata (Class 3), 8.50%
due 7/15/1998 (14) 35,351,875 35,437,500 0.7
319,000 Bankers Trust Co., Convertible Bonds, 7.625%
due 6/01/2033 (3) 7,620,125 8,174,375 0.2
10,000,000 Big Bear Stores Co., 13.75% due 6/15/1999 (22) 10,950,000 10,825,000 0.2
15,000,000 Brazil Investment Bonds, 6% due 9/15/2013 (1) 8,437,500 9,487,500 0.2
34,000,000 Bridge Oil (USA) Inc., 9.50% due 8/15/2000 (12) 34,032,500 34,340,000 0.7
8,000,000 +++++Card Establishment Services, Inc., 10%
due 10/01/2003 (4) 8,000,000 8,280,000 0.2
7,200,000 Cetus (Chiron) Corp., Convertible Bonds, 5.25%
due 5/21/2002 (17) 5,220,250 6,732,000 0.1
</TABLE>
72
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Value Percent of
Face Amount Fixed-Income Securities Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
30,000,000 +++++Cetus Collateralized Notes VI, 4.50% due
7/01/1994 (25) 30,000,000 30,000,000 0.6
1,419,300 Charter Medical Corp., 7.50% due 3/25/2001 (18) 1,138,988 1,238,339 0.0
Ciba-Geigy Corp. (9):
4,445,000 5.50% due 10/28/1998 (Warrants) (a) 5,040,775 5,334,000 0.1
24,945,000 +++++6.25% due 3/15/2016 25,632,050 25,693,350 0.5
15,000,000 +++++Clark R&M Holdings, 10.50%
due 2/15/2000 (12)(b) 7,724,204 7,762,500 0.1
Columbia Gas System, Inc. (26)+++:
6,500,000 7.50% due 6/01/1997 6,808,750 6,825,000 0.1
4,700,000 10.25% due 8/01/2011 5,340,375 5,640,000 0.1
10,000,000 10.50% due 6/01/2012 11,225,000 11,850,000 0.2
5,000,000 10.15% due 11/01/2013 5,562,500 5,925,000 0.1
4,000,000 9.50% due 10/10/2019 4,310,000 4,600,000 0.1
17,000,000 +++++Consoltex Group, Inc., 11% due 10/01/2003 (5) 17,030,000 17,255,000 0.3
8,725,000 Continental Cablevision, Inc., 12.875% due
11/01/2004 (36) 9,793,813 9,815,625 0.2
24,500,000 Crossland Federal Savings Bank, 9% due 9/01/2003 (3) 25,071,750 25,847,500 0.5
20,000,000 ++++Crown Packaging Ltd., 10.75% due 11/01/2000 20,000,000 20,150,000 0.4
31,000,000 DalTile International, Inc., 11.60% due
7/15/1998 (15)(b) 17,898,843 18,057,500 0.3
30,000,000 +++++Dell Computer Corp., 11% due 8/15/2000 (37) 30,000,000 30,000,000 0.6
Delta Airlines, Inc. (20):
8,000,000 Series A2, 9.20% due 9/23/2014 7,370,000 7,840,000 0.2
8,000,000 10.06% due 1/02/2016 8,005,000 8,400,000 0.2
416,666 Discovery Card Trust, 1990B, 9.20% due
11/15/1995 (21) 424,479 417,916 0.0
25,500,000 Dominion Textile, 8.875% due 11/01/2003 (39) 25,374,540 25,404,375 0.5
25,000,000 Eagle Food Centers, 8.625% due 4/15/2000 (33) 25,034,838 24,812,500 0.5
17,000,000 El Paso Electric Co., 10.375% due 1/02/2011 (7)+++ 14,530,000 14,280,000 0.3
54,450,000 El Paso Funding Corp., 10.75% due 4/01/2013 (7)+++ 46,733,000 45,465,750 0.9
EUA Power Corp. (7)+++:
1,000,000 Series B, 17.50% due 5/15/1993 475,000 260,000 0.0
3,157,600 Series C, 17.50% due 11/15/1992 1,915,790 820,976 0.0
30,000,000 First Union Real Estate, 8.875% due 10/01/2003 (32) 29,756,100 30,225,000 0.6
15,000,000 +++++Four Seasons Hotel, 9.125% due 7/01/2000 (6) 14,951,875 15,150,000 0.3
15,500,000 +++++Grand Union Co., 11.375% due 2/15/1999 (22) 15,910,000 16,352,500 0.3
HIH Capital Ltd., Convertible Bonds (14):
470,000 (Bearer), 7.50% due 9/25/2006 394,800 418,300 0.0
2,000,000 +++++7.50% due 9/25/2006 1,665,000 1,780,000 0.1
25,500,000 Harris Chemical, 9.90% due 7/15/2001 (34)(b) 20,439,078 20,846,250 0.4
22,000,000 Hillhaven Corp., 10.125% due 9/01/2001 (5) 22,087,500 22,990,000 0.4
7,750,000 Horace Mann Educators, Inc., 4% due 12/01/1999 (31) 7,682,500 7,905,000 0.2
3,550,000 Hospital Corp. of America, 6.67% due
6/01/1998 (11)(b) 2,363,683 2,627,000 0.0
77,000,000 International Semi-Tech Microelectronics Inc.,
11.50% due 8/15/2003 (14)(b) 35,801,611 40,136,250 0.8
29,000,000 K. Hovnanian Enterprises, 9.75% due 6/01/2005 (30) 28,858,500 29,580,000 0.6
11,340,680 Kearny Street Real Estate, 4.15% due 7/15/2000 (32) 11,362,489 11,369,032 0.2
4,000,000 Kroger Co. (The), 8.50% due 6/15/2003 (5) 4,008,750 4,120,000 0.1
7,500,000 LTC Properties, Convertible Bonds, 9.75%
due 7/01/2004 (25) 7,500,000 9,787,500 0.2
10,000,000 Lomas Mortgage USA, Inc., 9.75% due 10/01/1997 (25) 10,000,000 10,400,000 0.2
12,500,000 Marcus Cable, 11.875% due 10/01/2005 (8) 12,500,000 13,218,750 0.3
5,500,000 Mark IV Industries, 8.75% due 4/01/2003 (16) 5,497,500 5,692,500 0.1
583,333 Maryland National Bank (MBNA Credit Card Trust
1989-B), 8.50% due 11/30/1994 (21)(e) 602,109 583,916 0.0
</TABLE>
73
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Value Percent of
Face Amount Fixed-Income Securities Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
United States (concluded)
US$ 10,500,000 Mediq/PRN Senior Notes, 11.125% due 7/01/1999 (22) $ 10,925,000 $ 11,025,000 0.2%
Meditrust, Convertible Bonds (25):
6,000,000 7% due 3/01/1998 6,035,000 6,540,000 0.1
3,000,000 9% due 1/01/2002 3,000,000 3,660,000 0.1
10,000,000 NL Industries, Inc., 11.75% due 10/15/2003 (34) 10,000,000 10,075,000 0.2
5,000,000 Navistar Financial, 9.50% due 6/01/1996(4) 4,270,000 5,250,000 0.1
27,000,000 Nextel Communications Inc., 9.424% due
9/01/2003 (8)(b) 15,620,698 18,697,500 0.4
8,000,000 Noble Drilling Corp., 9.25% due 10/01/2003 (12) 8,000,000 8,260,000 0.2
1,000,000 Novacare, Inc., 5.50% due 1/15/2000 (11) 857,500 905,000 0.0
22,500,000 OMI Corp., 10.25% due 11/01/2003 (20) 22,500,000 22,725,000 0.4
14,000,000 OSI Specialties Corp., 9.25% due 10/01/2003 (5) 14,000,000 14,385,000 0.3
PDV America (14):
35,000,000 7.25% due 8/01/1998 34,856,150 35,525,000 0.7
10,000,000 7.75% due 8/01/2000 10,062,500 10,325,000 0.2
2,500,000 P.T. Indorayon, 5.50% due 10/01/2002 (2) 2,856,250 2,950,000 0.1
3,900,000 P.T. Pabrik Kertas Tjiwa Kimia, Convertible Bonds,
7.25% due 4/12/2001(2) 2,923,000 3,685,500 0.1
17,500,000 Paracelsus Healthcare Corp., 9.875% due 10/15/2003 (18) 17,560,000 17,718,750 0.3
20,400,000 Payless Cashways, 14.50% due 11/01/2000 (38) 21,574,439 21,420,000 0.4
6,500,000 +++++Petrolera Argentina San Jorge S.A., 11%
due 2/09/1998 (26) 6,278,750 6,775,000 0.1
5,500,000 Plaid Clothing Group, 11% due 8/01/2003 (39) 5,506,250 5,582,500 0.1
22,500,000 Plastic Specialties, 11.25% due 12/01/2003 (43) 22,500,000 22,500,000 0.4
+++++Presidio Oil Co. (26):
19,562,500 11.50% due 9/15/2000 20,017,500 20,296,094 0.4
8,750,000 13.25% due 7/15/2002 6,721,500 8,925,000 0.2
12,000,000 Price Co., Convertible Bonds, 5.50% due
2/28/2012 (14) 11,213,250 12,030,000 0.2
5,000,000 Primark Corp., 8.75% due 10/15/2000 (18) 4,948,750 5,018,750 0.1
23,000,000 Public Service of New Mexico, EIP Funding, 10.25%
due 10/01/2012 (7) 23,000,000 22,770,000 0.4
19,000,000 Public Service of New Mexico Lease Obligation,
First PV Funding, Convertible Bonds, 10.15%
due 1/15/1996(7) 18,058,125 18,240,000 0.3
10,200,000 Pueblo Xtra, 9.50% due 8/01/2003 (22) 10,210,125 10,429,500 0.2
4,000,000 Purina Mills, Inc., 10.25% due 9/01/2003 (19) 4,000,000 4,205,000 0.1
15,000,000 RJR Nabisco Holdings, Inc., 15% due 5/15/2001 (40)(c) 17,600,000 16,725,000 0.3
24,829,664 RTC Commercial Mortgage, 8.25% due 12/25/2000 (3) 24,449,460 24,643,442 0.5
5,000,000 Regency Health, Convertible Bonds, 6.50% due
1/15/2003 (18) 5,000,000 5,450,000 0.1
16,000,000 +++++Republic of Argentina, 4% due 3/31/2023 (1) 12,440,000 12,440,000 0.2
+++++Resolution Trust Co. (21)(e):
2,000,000 Class 2, 6.50% due 3/15/2003 1,931,250 1,980,000 0.0
8,000,000 Class 3, 9% due 3/15/2003 7,575,000 7,940,000 0.2
7,500,000 N2 Class 3, 8.75% due 3/15/2003 7,209,375 7,443,750 0.1
5,000,000 Riverwood International Corp., 10.75% due
6/15/2000 (41) 5,300,000 5,400,000 0.1
3,000,000 Roosevelt Financial Group, Inc., 9.50%
due 8/01/2002 (27) 3,000,000 3,217,500 0.0
27,882,000 Salant Corp., Secured, 10.50% due 12/31/1998 (39) 27,324,360 27,603,180 0.5
10,075,000 Sequa Corp., 9.625% due 10/15/1999 (14) 9,874,313 10,427,625 0.2
30,000,000 Sherritt Gordon Ltd., 9.75% due 4/01/2003 (29) 30,096,250 30,000,000 0.5
</TABLE>
74
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Value Percent of
Face Amount Fixed-Income Securities Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
5,000,000 Siemens Corp., 8% due 6/24/2002 (9) 6,536,250 7,275,000 0.1
21,500,000 Sifto Canada, Inc., 8.50% due 7/15/2000 (5) 21,507,500 21,607,500 0.4
5,500,000 Sizeler Properties, Convertible Bonds, 8% due
7/15/2003 (24) 5,505,000 5,720,000 0.1
5,000,000 Ssangyong Oil Corp., 3.75% due 12/31/2008 (12) 5,330,750 5,312,500 0.1
18,500,000 Sweetheart Cup Co., 9.625% due 9/01/2000 (41) 18,500,000 19,286,250 0.4
3,110,000 Telefonica Nacional de Espana, Convertible Bonds,
4% due 7/28/2003 (8) 3,899,825 4,322,900 0.1
15,500,000 Texfi Industries, 8.75% due 8/01/1999 (39) 15,323,300 15,035,000 0.3
12,500,000 Transtexas Gas Corp., 10.50% due 9/01/2000 (12) 12,500,000 13,375,000 0.3
2,220,000 Tung Ho Steel Enterprise, Convertible Bonds, 4%
due 7/26/2001 (24) 2,243,700 2,530,800 0.0
33,200,000 Turner Broadcasting Co., 12% due 10/15/2001 (14) 36,849,138 36,271,000 0.7
46,917,000 United Mexican States (Rights) (d) 0 0 0.0
United Mexican States Discount Notes (1):
37,500,000 8.50% due 9/15/2002 38,194,375 39,281,250 0.7
88,000,000 5% due 3/31/2008 81,643,750 84,150,000 1.6
30,500,000 4.25% due 12/31/2019 24,947,500 26,420,625 0.5
8,000,000 USAir, Inc., 10.375% due 3/01/2013 (28) 8,000,000 8,050,000 0.1
4,000,000 USAir Pass Thru, 9.625% due 9/01/2003 (28) 4,000,000 4,025,000 0.1
2,000,000 US Trails Senior Secured, 12% due 7/15/1998 (4) 1,587,500 1,670,000 0.0
6,000,000 USX-Marathon Oil Co., 7% due 6/15/2017 (12) 5,650,000 5,790,000 0.1
5,875,000 Veba International Finance (Cum Warrants), 6%
due 4/06/2000 (4)(a) 7,083,300 8,650,938 0.1
20,430,700 Vista Properties, 13.75% due 10/31/2001 (25)(c) 10,734,376 9,602,429 0.2
4,350,000 Wainoco Oil Corp., 12% due 8/01/2002 (26) 4,207,625 4,611,000 0.1
-------------- -------------- -----
1,581,117,705 1,619,383,806 31.0
US Government &
Agency Obligations 75,000,000 US Treasury Bond, 10.50% due 8/15/1995 (1) 84,257,813 83,449,200 1.6
Total Fixed-Income Securities in the United States 1,665,375,518 1,702,833,006 32.6
Total Investments in Fixed-Income Securities 2,131,653,279 2,189,211,701 41.9
<CAPTION>
Short-Term Securities
<S> <S> <C> <S> <C> <C> <C>
United States
Commercial
Paper* US$ 50,000,000 American Express Co., 3.08% due 11/16/1993 49,927,278 49,927,278 0.9
Avco Financial Services:
15,000,000 3.11% due 11/08/1993 14,988,089 14,988,089 0.3
45,000,000 3.11% due 11/10/1993 44,957,238 44,957,238 0.8
20,000,000 3.09% due 12/03/1993 19,941,633 19,941,633 0.4
30,000,000 Bank One Diversified, 3.09% due 12/09/1993 29,897,000 29,894,000 0.6
12,549,000 Certificate of Deposit, Time Deposit, 3.156%
due 11/12/1993 12,549,000 12,549,000 0.2
Ciesco L.P.:
30,000,000 3.10% due 11/01/1993 29,994,833 29,994,833 0.6
40,000,000 3.10% due 11/15/1993 39,944,889 39,944,889 0.8
33,000,000 Cooper Industries, Inc., 3.07% due 11/03/1993 32,988,743 32,988,743 0.6
50,000,000 Corporate Asset Funding, Inc., 3.08% due 11/04/1993 49,978,611 49,978,611 0.9
123,483,000 General Electric Capital Corp., 2.93% due 11/01/1993 123,462,900 123,462,900 2.4
19,000,000 International Lease Finance Corp., 3.10%
due 11/03/1993 18,993,456 18,993,456 0.3
Kmart Corp.:
25,000,000 3.09% due 11/02/1993 24,993,563 24,993,563 0.5
50,000,000 3.07% due 12/02/1993 49,859,292 49,859,292 0.9
</TABLE>
75
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<CAPTION>
Value Percent of
Face Amount Short-Term Securities Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
United States (concluded)
Matterhorn Capital Co.:
US$ 49,819,000 3.07% due 11/24/1993 $ 49,712,789 $ 49,712,789 1.0%
22,150,000 3.07% due 12/01/1993 22,089,555 22,089,555 0.4
Nestle Capital Corp.:
41,845,000 3.05% due 11/15/1993 41,788,277 41,788,277 0.8
42,000,000 3.05% due 11/16/1993 41,939,508 41,939,508 0.8
PepsiCo, Inc.:
50,000,000 3.08% due 11/09/1993 49,957,222 49,957,222 0.9
50,000,000 3.07% due 12/01/1993 49,863,555 49,863,555 0.9
20,000,000 Pfizer Inc., 3.06% due 11/03/1993 19,993,200 19,993,200 0.4
50,000,000 Philip Morris Companies, Inc., 3.08% due 11/05/1993 49,974,333 49,974,333 0.9
Preferred Receivables Funding Corp.:
37,800,000 3.12% due 11/16/1993 37,744,308 37,744,308 0.7
50,000,000 3.09% due 12/01/1993 49,862,667 49,862,667 1.0
Sanwa Business Credit Corp.:
35,000,000 3.10% due 11/05/1993 34,981,506 34,981,506 0.7
25,000,000 3.12% due 11/23/1993 24,948,000 24,948,000 0.5
50,000,000 Sara Lee Corp., 3.07% due 11/19/1993 49,914,722 49,914,722 1.0
50,000,000 Shell Oil Co., 3.03% due 12/02/1993 49,861,125 49,861,125 1.0
Siemens Corp.:
30,000,000 3.06% due 11/16/1993 29,956,650 29,956,650 0.6
50,000,000 3.08% due 11/23/1993 49,897,333 49,897,333 1.0
40,000,000 Xerox Credit Corp., 3.09% due 11/01/1993 39,993,133 39,993,133 0.8
Total Investments in Short-Term Securities 1,234,954,408 1,234,951,408 23.6
Total Investments $4,982,716,863 5,249,574,929 100.6
==============
Unrealized Appreciation on Forward Foreign Exchange Contracts** 14,024,732 0.3
Variation Margin on Stock Index Futures Contracts*** 175,000 0.0
Liabilities in Excess of Other Assets (46,423,852) (0.9)
-------------- -----
Net Assets $5,217,350,809 100.0%
============== =====
</TABLE>
(a)Warrants entitle the Fund to purchase a predetermined number of shares of
stock/face amount of bonds at a predetermined price until the expiration date.
(b)The interest rate shown represents the yield-to-maturity on this zero coupon
issue.
(c)Represents a pay-in-kind security.
(d)The rights may be exercised until 12/31/2019.
(e)Subject to principal paydowns as a result of prepayments or refinancings of
the underlying mortgage instruments. As a result, the average life may be less
than the original maturity.
(f)The rights may be exercised until 11/12/1993. Corresponding industry groups
for fixed-income securities:
(1) Government
(2) Paper & Forest Products
(3) Banking
(4) Financial
(5) Industrial
***Financial futures contracts purchased as of October 31, 1993 were
as follows:
Number of Expiration Value
Contracts Issue Date (Note 1e)
290 Standard & Poor's 500 Index December 1993 $ 67,867,250
============
Total Financial Futures Contracts Purchased
(Total Contract Price--$66,845,750) $ 67,867,250
============
Financial futures contracts sold as of October 31, 1993 were as follows:
Number of Expiration Value
Contracts Issue Date (Note 1e)
700 US Treasury Bonds December 1993 $(80,565,625)
============
Total Financial Futures Contracts Sold
(Total Contract Price--$80,600,162) $(80,565,625)
============
The market value of pledged securities is $103,943,125.
76
<PAGE>
(6) Leisure
(7) Utilities--Electric
(8) Telecommunications
(9) Pharmaceutical
(10) Automobiles & Equipment
(11) Hospital Management
(12) Oil & Related
(13) Newspaper/Publishing
(14) Multi-Industry
(15) Building Materials
(16) Electrical Equipment
(17) Biotechnology
(18) Healthcare
(19) Food
(20) Transportation
(21) Asset-Backed Security
(22) Supermarkets
(23) Electronics
(24) Metals
(25) Real Estate Investment Trust
(26) Energy Related
(27) Savings Bank
(28) Airlines
(29) Resources
(30) Building & Construction
(31) Insurance
(32) Real Estate
(33) Advertising
(34) Chemicals
(35) Commercial Services
(36) Broadcasting
(37) Computers
(38) Retail
(39) Textiles
(40) Food & Tobacco
(41) Packaging & Containers
(42) Beverages
(43) Plastics
++American Depositary Receipt (ADR).
++++Global Depositary Shares (GDS).
++++++Investment in Companies 5% or more of whose outstanding securities are
held by the Fund (such companies are defined as "Affiliated Companies" in
section 2(a)(3) of the Investment Company Act of 1940) are as follows:
Net Share Net Dividend
Industry Affiliate Activity Cost Income
Retail Stores Buttrey Food & Drug 274,700 $ 1,980,462 --
Banking Crossland Federal Savings Bank 760,000 18,250,000 --
*Commercial Paper is traded on a discount basis; the interest rates shown are
the discount rates paid at the time of purchase by the Fund.
**Forward foreign exchange contracts as of October 31, 1993 were as follows:
Unrealized
Expiration Appreciation
Foreign Currency Sold Date (Depreciation)
Chf 109,000,000 November 1993 $ 3,335,278
DM 108,000,000 November 1993 3,035,355
Dkr 100,000,000 November 1993 (12,624)
Dkr 50,000,000 December 1993 (74,167)
ECU 38,000,000 November 1993 557,926
Pta 16,200,000,000 November 1993 1,157,017
Ffr 431,500,000 November 1993 1,178,479
Pound
Sterling 27,000,000 November 1993 378,950
Yen 17,350,000,000 December 1993 3,190,988
Nlg 83,000,000 November 1993 1,548,129
Total (US$ Commitment--$656,391,867) $14,295,331
-----------
Foreign Currency Purchased
Lit 20,000,000,000 November 1993 (270,599)
Total (US$ Commitment--$12,549,650) $ (270,599)
-----------
Total Unrealized Appreciation--Net on
Forward Foreign Exchange Contracts $14,024,732
===========
+++Non-income producing security.
+++++Restricted securities as to resale. The value of the Fund's investment
in restricted securities was approximately $276,152,000, representing 5.3%
of net assets.
Acquisition Value
Issue Date Cost (Note 1a)
AMR Corp. (Pfd. $3.00) 6/21/93 $ 5,065,500 $ 5,437,500
Amax Inc. (Convertible Pfd.) 8/05/93 13,875,125 13,325,000
Banco de Galicia, 9% due 11/01/2003 10/29/93 14,459,390 14,471,000
Card Estalishment Services, Inc.,
10% due 10/01/2003 10/05/93 8,000,000 8,280,000
Cetus Collateralized Notes VI, 4.50%
due 7/01/1994 7/08/93 30,000,000 30,000,000
Ciba-Geigy Corp., 6.25% due
3/15/2016 4/23/93 25,632,050 25,693,350
Clark R&M Holdings, 10.50% due
2/15/2000 5/20/93 7,724,204 7,762,500
Consoltex Group, Inc., 11% due
10/01/2003 9/23/93 17,030,000 17,255,000
Crown Packaging Ltd., 10.75% due
11/01/2000 10/22/93 20,000,000 20,150,000
Dell Computer Corp., 11% due
8/15/2000 8/19/93 30,000,000 30,000,000
Four Seasons Hotel, 9.125% due
7/01/2000 6/23/93 14,951,875 15,150,000
Grand Union Co., 11.375% due
2/15/1999 9/03/93 15,910,000 16,352,500
HIH Capital Ltd., Convertible Bonds,
7.50% due 9/25/2006 7/14/92 1,665,000 1,780,000
Kia Motors (GDS) 11/15/91 1,017,000 774,454
Presidio Oil Co:
13.25% due 7/15/2002 8/19/92 6,721,500 8,925,000
11.50% due 9/15/2000 8/03/93 20,017,500 20,296,094
Petrolera Argentina San Jorge S.A.,
11% due 2/09/1998 3/22/93 6,278,750 6,775,000
Republic of Argentina, 4% due
3/31/2023 10/29/93 12,440,000 12,440,000
Resolution Trust Co.:
Class 2, 6.50% due 3/15/2003 3/11/93 1,931,250 1,980,000
Class 3, 9% due 3/15/2003 3/11/93 7,575,000 7,940,000
N2 Class 3, 8.75% due 3/15/2003 5/04/93 7,209,375 7,443,750
Riggs National Corp.
(Convertible Pfd.) 10/14/93 3,162,800 3,320,940
UAL (6.25% Convertible Pfd.) 2/23/93 471,875 600,000
------------ ------------
$271,138,194 $276,152,088
============ ============
See Notes to Financial Statements.
77
<PAGE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of October 31, 1993
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$4,982,716,863) (Note 1a) $5,249,574,929
Unrealized appreciation on forward foreign exchange contracts--net (Note 1c) 14,024,732
Variation margin on stock index futures contracts (Note 1e) 175,000
Foreign cash (Note 1c) 19,184,776
Cash 1,562,626
Receivables:
Capital shares sold $ 86,749,334
Securities sold 71,824,111
Interest 39,642,037
Dividends 2,848,905
Forward exchange contract (Note 1c) 1,565,493 202,629,880
------------
Deferred organization expenses (Note 1h) 4,680
Prepaid registration fees and other assets (Note 1h) 128,864
--------------
Total assets 5,487,285,487
--------------
Liabilities: Payables:
Securities purchased 256,020,905
Capital shares redeemed 5,932,910
Distributor (Note 2) 3,230,977
Investment adviser (Note 2) 2,844,478 268,029,270
------------
Accrued expenses and other liabilities 1,905,408
--------------
Total liabilities 269,934,678
--------------
Net Assets: Net assets $5,217,350,809
==============
Net Assets Class A Shares of Common Stock, $0.10 par value, 200,000,000 shares authorized $ 6,788,707
Consist of: Class B Shares of Common Stock, $0.10 par value, 400,000,000 shares authorized 32,142,925
Paid-in capital in excess of par 4,770,825,824
Undistributed investment income--net 31,215,711
Undistributed realized capital gains and foreign currency transaction gains--net 95,392,147
Unrealized appreciation on investments and foreign currency transactions--net 280,985,495
--------------
Net assets $5,217,350,809
==============
Net Asset Value: Class A--Based on net assets of $917,805,991 and 67,887,067 shares outstanding $ 13.52
==============
Class B--Based on net assets of $4,299,544,818 and 321,429,250 shares outstanding $ 13.38
==============
See Notes to Financial Statements.
</TABLE>
78
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended October 31, 1993
<S> <S> <C> <C>
Investment Income Interest and discount earned $ 100,272,507
(Notes 1f & 1g): Dividends (net of $1,726,498 foreign withholding tax) 23,357,953
--------------
Total income 123,630,460
--------------
Expenses: Distribution fees--Class B (Note 2) 20,873,731
Investment advisory fees (Note 2) 18,984,493
Transfer agent fees--Class B (Note 2) 2,070,253
Registration fees (Note 1h) 1,135,102
Custodian fees 994,262
Transfer agent fees--Class A (Note 2) 390,093
Printing and shareholder reports 264,539
Accounting services (Note 2) 213,891
Professional fees 56,257
Directors' fees and expenses 30,741
Amortization of organization expenses (Note 1h) 17,981
Other 29,281
--------------
Total expenses 45,060,624
--------------
Investment income--net 78,569,836
--------------
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net $ 99,410,434
(Loss) on Foreign currency transactions (3,312,211) 96,098,223
Investments & ------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net 287,398,684
(Notes 1c, 1g & 3): Foreign currency transactions 16,134,415 303,533,099
------------ --------------
Net realized and unrealized gain on investments and foreign
currency transactions 399,631,322
--------------
Net Increase in Net Assets Resulting from Operations $ 478,201,158
==============
See Notes to Financial Statements.
</TABLE>
79
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended October 31,
Increase (Decrease) in Net Assets: 1993 1992
<S> <S> <C> <C>
Operations: Investment income--net $ 78,569,836 $ 18,825,581
Realized gain on investments and foreign currency transactions--net 96,098,223 56,683,968
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net 303,533,099 (36,545,501)
-------------- --------------
Net increase in net assets resulting from operations 478,201,158 38,964,048
-------------- --------------
Dividends & Investment income--net:
Distributions to Class A (21,579,231) (6,166,424)
Shareholders Class B (78,516,167) (12,717,884)
(Note 1i): Realized gain on investments--net:
Class A (2,640,570) (3,800,726)
Class B (10,640,849) (8,575,567)
-------------- --------------
Net decrease in net assets resulting from dividends and distributions
to shareholders (113,376,817) (31,260,601)
-------------- --------------
Capital Share Net increase in net assets derived from capital share transactions 3,647,738,774 963,054,445
Transactions -------------- --------------
(Note 4):
Net Assets: Total increase in net assets 4,012,563,115 970,757,892
Beginning of year 1,204,787,694 234,029,802
-------------- --------------
End of year* $5,217,350,809 $1,204,787,694
============== ==============
*Undistributed investment income--net $ 31,215,711 $ 52,741,273
============== ==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Class A
--------------------------------------------------------------
For the
Period
The following per share data and ratios have been derived from Feb. 3,
information provided in the financial statements. 1989++ to
For the Year Ended October 31, Oct. 31,
Increase (Decrease) in Net Asset Value: 1993 1992 1991 1990 1989
<S> <S> <C> <C> <C> <C> <C>
Per Share Operating Net asset value beginning of period $ 11.92 $ 12.16 $ 10.37 $ 10.79 $ 10.00
Performance: ---------- ---------- ---------- ---------- ----------
Investment income--net .39 .36 .55 .60 .45
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net 2.14 .89 2.24 (.16) .48
---------- ---------- ---------- ---------- ----------
Total from investment operations 2.53 1.25 2.79 .44 .93
---------- ---------- ---------- ---------- ----------
</TABLE>
80
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Class A
--------------------------------------------------------------
For the
Period
The following per share data and ratios have been derived from Feb. 3,
information provided in the financial statements. 1989++ to
For the Year Ended October 31, Oct. 31,
Increase (Decrease) in Net Asset Value: 1993 1992 1991 1990 1989
<S> <S> <C> <C> <C> <C> <C>
Less dividends and distributions:
Investment income--net (.81) (.89) (.45) (.66) (.14)
Realized gain on investments--net (.12) (.60) (.55) (.20) --
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (.93) (1.49) (1.00) (.86) (.14)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 13.52 $ 11.92 $ 12.16 $ 10.37 $ 10.79
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share 22.61% 11.78% 28.89% 3.91% 9.34%+++
Return:** ========== ========== ========== ========== ==========
Ratios to Average Expenses .93% 1.07% 1.29% 1.29% 1.37%*
Net Assets: ========== ========== ========== ========== ==========
Investment income--net 3.90% 10.82% 8.96% 4.37% 5.31%*
========== ========== ========== ========== ==========
Supplemental Net assets, end of period (in thousands) $ 917,806 $ 245,839 $ 72,702 $ 49,691 $ 47,172
Data: ========== ========== ========== ========== ==========
Portfolio turnover 50.35% 59.56% 81.21% 129.51% 88.59%
========== ========== ========== ========== ==========
<CAPTION>
Class B
--------------------------------------------------------------
For the
Period
The following per share data and ratios have been derived from Feb. 3,
information provided in the financial statements. 1989++ to
For the Year Ended October 31, Oct. 31,
Increase (Decrease) in Net Asset Value: 1993 1992 1991 1990 1989
<S> <S> <C> <C> <C> <C> <C>
Per Share Operating Net asset value beginning of period $ 11.83 $ 12.10 $ 10.33 $ 10.73 $ 10.00
Performance: ---------- ---------- ---------- ---------- ----------
Investment income--net .28 .22 .44 .49 .38
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net 2.11 .91 2.22 (.16) .47
---------- ---------- ---------- ---------- ----------
Total from investment operations 2.39 1.13 2.66 .33 .85
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.72) (.80) (.34) (.53) (.12)
Realized gain on investments--net (.12) (.60) (.55) (.20) --
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (.84) (1.40) (.89) (.73) (.12)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 13.38 $ 11.83 $ 12.10 $ 10.33 $ 10.73
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share 21.42% 10.64% 27.48% 2.93% 8.50%+++
Return:** ========== ========== ========== ========== ==========
Ratios to Average Expenses, excluding distribution fees .95% 1.09% 1.31% 1.31% 1.40%*
Net Assets: ========== ========== ========== ========== ==========
Expenses 1.95% 2.09% 2.31% 2.31% 2.40%*
========== ========== ========== ========== ==========
Investment income--net 2.87% 11.95% 7.98% 3.35% 4.29%*
========== ========== ========== ========== ==========
Supplemental Net assets, end of period (in thousands) $4,299,545 $ 958,949 $ 161,328 $ 115,682 $ 113,649
Data: ========== ========== ========== ========== ==========
Portfolio turnover 50.35% 59.56% 81.21% 129.51% 88.59%
========== ========== ========== ========== ==========
<FN>
++Commencement of Operations.
+++Aggregate total investment return.
*Annualized.
**Total investment returns exclude the effects of sales loads.
See Notes to Financial Statements.
</TABLE>
81
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Global Allocation Fund, Inc. (the "Fund") is
registered under the Investment Company Act of 1940 as a non-
diversified, open-end management investment company. The shares
of the Fund are divided into Class A Shares and Class B Shares.
Class A Shares are sold with a front-end sales charge. Class B
Shares may be subject to a contingent deferred sales charge. Both
classes of shares have identical voting, dividend, liquidation
and other rights and the same terms and conditions, except that
Class B Shares bear certain expenses related to the distribution
of such shares and have exclusive voting rights with respect to
matters relating to such distribution expenditures. The following
is a summary of significant accounting policies followed by the
Fund.
(a) Valuation of investments--Portfolio securities which are
traded on US stock exchanges are valued at the last sale price on
the principal market 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 or yield equivalents obtained from one or more dealers in the
over-the-counter market prior to the time of valuation. Portfolio
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. Portfolio securities which are traded on
European stock exchanges are valued at the closing bid price on such
exchanges on the day the securities are being valued or, if closing
prices are unavailable, at the last traded bid price available prior
to the time of valuation. Short-term securities are valued at amortized
cost which approximates market.
Options written by the Fund are valued at the last asked price in
the case of exchange-traded options or, in the case of options traded
in the over-the-counter market, the average of the last asked price
as obtained from one or more dealers. Options purchased by the Fund
are valued at their last bid price in the case of exchange-traded
options or, in the case of options traded in the over-the-counter market,
the average of the last bid price as obtained from two or more
dealers, unless there is only one dealer, in which case that dealer's
price is used.
Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by
or under the direction of the Board of Directors of the Fund.
(b) Repurchase agreements--The Fund invests in US Government
securities pursuant to repurchase agreements with a member bank of the Federal
Reserve System or a primary dealer in US Government securities. Under such
agreements, the bank or primary dealer agrees to repurchase the security at a
mutually agreed upon time and price. The Fund takes possession of the underlying
securities, marks to market such securities and, if necessary, receives
additions to such securities daily to ensure that the contract is fully
collateralized.
(c) 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.
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.
(d) Options--The Fund can write covered call options and purchase
put options. When the Fund writes an option, an amount equal to
the premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current value of the option
written.
When a security is sold through an exercise of an option, the
related premium received (or paid) is deducted from (or added to)
the basis of the security sold. When an option expires (or the
fund enters into a closing transaction), the Fund realizes a gain
or loss on the option to the extent of the premiums received or
paid (or gain or loss to the extent the cost of the closing transaction
exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(e) Financial futures contracts--The Fund may purchase or sell
stock index futures contracts and options on such futures
contracts. Upon entering into a contract, the Fund deposits and
maintains as collateral such initial margin as required by the
exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an
amount of cash equal to the daily fluctuation in value of the contract.
Such receipts or payments are known as variation margin and are
recorded by the Fund as unrealized gains or losses. When the contract
is closed, the Fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened
and the value at the time it was closed.
(f) 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
82
<PAGE>
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.
(g) 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, except that if the ex-dividend date has
passed, certain dividends from foreign securities are recorded as
soon as the Fund is informed of the ex-dividend date. Interest
income (including amortization of discount) is recognized on the
accrual basis. Realized gains and losses on security transactions
are determined on the identified cost basis.
(h) Deferred organization expenses and prepaid registration
fees--Deferred organization expenses are charged to expense on a
straight-line basis over a five-year period. Prepaid registration
fees are charged to expense as the related shares are issued.
(i) Dividends and distributions--Dividends and distributions paid
by the Fund are recorded on the ex-dividend dates.
(j) Reclassifications--Certain 1992 amounts have been
reclassified to conform to the 1993 presentation.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management ("MLAM"). MLAM is the name under
which Merrill Lynch Investment Management, Inc. ("MLIM") does
business. MLIM is an indirect wholly-owned subsidiary of Merrill
Lynch & Co., Inc. The Fund has also entered into Distribution
Agreements and a Distribution Plan with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of MLIM.
MLAM is responsible for the management of the Fund's portfolio
and provides the necessary personnel, facilities, equipment and
certain other services necessary to the operations of the Fund.
From November 1, 1992 to July 20, 1993, the Fund paid a monthly
fee of 0.75%, on an annual basis of the average daily value of
the Fund's net assets. From July 21, 1993 to October 18, 1993,
the Fund paid 0.70%, on an annual basis on net assets above $2.5
billion. On October 19, 1993, the fee was further reduced on net
assets above $5.0 billion to 0.65%. MLAM has entered into a sub-
advisory agreement with Merrill Lynch Asset Management U.K., Ltd.
("MLAM U.K."), an affiliate of MLAM, pursuant to which MLAM
pays MLAM U.K. a fee computed at the rate of 0.10% of the average
daily net assets of the Fund for providing investment advisory
services to MLAM with respect to the Fund. For the year ended
October 31, 1993, MLAM paid MLAM U.K. a fee of $2,293,281
pursuant to such agreement. Certain of the states in which the
shares of the Fund are qualified for sale impose limitations on
the expenses of the Fund. The most restrictive annual expense
limitation requires that the Investment Adviser reimburse the
Fund to the extent the Fund's expenses (excluding interest,
taxes, distribution fees, brokerage fees and commissions, and
extraordinary items) exceed 2.5% of the Fund's first $30 million
of average daily net assets, 2.0% of the net $70 million of
average daily net assets, and 1.5% of the average daily net
assets in excess thereof. MLAM's obligation to reimburse the Fund
is limited to the amount of the management fee. No fee payment
will be made to MLAM during any fiscal year which will cause such
expenses to exceed the most restrictive expense limitation at the
time of such payment.
The Fund has adopted a Plan of Distribution (the "Plan")
pursuant to Rule 12b-1 under the Investment Company Act of 1940
pursuant to which MLFD receives a fee from the Fund at the end of
each month at an annual rate of 1.0% of the average daily net
assets of the Class B Shares of the Fund. This fee is to
compensate the Distributor for the services it provides and the
expenses borne by the Distributor under the Distribution
Agreement. As authorized by the Plan, the Distributor has entered
into an agreement with Merrill Lynch, Pierce, Fenner & Smith Inc.
("MLPF&S"), an affiliate of MLAM, which provides for the
compensation of MLPF&S for providing distribution-related
services to the Fund. For the year ended October 31, 1993, MLFD
earned $20,873,731 under the Plan, all of which was paid to MLPF&S
pursuant to the agreement.
For the year ended October 31, 1993, MLFD earned underwriting
discounts of $861,771, and MLPF&S earned dealer concessions of
$13,073,421, on sales of the Fund's Class A Shares.
MLPF&S also received contingent deferred sales charges of
$1,701,006 relating to transactions in Class B Shares and
$246,070 in commissions on the execution of portfolio security
transactions for the Fund during the year.
At October 31, 1993 the Fund owed affiliated funds $2,600,141 for
securities purchased.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary
of Merrill Lynch & Co., Inc., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLIM, MLPF&S, FDS, MLFD, and/or Merrill Lynch & Co., Inc.
3. Investments:
Purchases and sales of investments, excluding short-term
securities, for the year ended October 31, 1993 were
$3,659,033,015 and $973,659,891, respectively.
83
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
Net realized and unrealized gains (losses) as of October 31,
1993, were as follows:
Realized Unrealized
Gains (Losses) Gains (Losses)
Long-term investments $ 95,096,251 $ 266,861,066
Short-term investments (1,037) (3,000)
Foreign currency transactions (8,011,787) (953,340)
Options written (3,155,372) --
Forward foreign exchange contracts 7,854,948 14,024,732
Financial futures contracts 4,315,220 1,056,037
------------ --------------
Total $ 96,098,223 $ 280,985,495
============ ==============
Transactions in put options purchased for the year ended October
31, 1993 were as follows:
Premiums
Par Value Paid
Outstanding put options purchased at
beginning of year $ 260,000 $ 2,420,659
Options purchased 115,000 1,112,300
Options terminated in closing sale
transactions (80,000) (818,275)
Options expired (295,000) (2,714,684)
------------ --------------
Outstanding put options purchased at
end of year $ -- $ --
============ ==============
As of October 31, 1993, net unrealized appreciation for Federal
income tax purposes aggregated $266,856,233, of which
$317,165,960 related to appreciated securities and $50,309,727
related to depreciated securities. At October 31, 1993, the
aggregate cost of investments for Federal income tax purposes was
$4,982,718,696.
4. Capital Share Transactions:
Net increase in net assets derived from capital share
transactions was $3,647,738,774 and $963,054,445 for the years
ended October 31, 1993 and October 31, 1992, respectively.
Transactions in capital shares for Class A and Class B Shares
were as follows:
Class A Shares for the Year Dollar
Ended October 31, 1993 Shares Amount
Shares sold 51,001,581 $ 652,336,461
Shares issued to shareholders in reinvest-
ment of dividends and
distributions 1,771,977 20,906,783
------------ --------------
Total issued 52,773,558 673,243,244
Shares redeemed (5,508,522) (70,517,148)
------------ --------------
Net increase 47,265,036 $ 602,726,096
============ ==============
Class A Shares for the Year Dollar
Ended October 31, 1992 Shares Amount
Shares sold 15,261,352 $ 179,377,069
Shares issued to shareholders in reinvest-
ment of dividends 798,446 8,607,923
------------ --------------
Total issued 16,059,798 187,984,992
Shares redeemed (1,417,237) (16,534,197)
------------ --------------
Net increase 14,642,561 $ 171,450,795
============ ==============
Class B Shares for the Year Dollar
Ended October 31, 1993 Shares Amount
Shares sold 248,487,181 $3,152,585,403
Shares issued to shareholders in reinvest-
ment of dividends and distributions 6,532,523 76,482,665
------------ --------------
Total issued 255,019,704 3,229,068,068
Shares redeemed (14,631,176) (184,055,390)
------------ --------------
Net increase 240,388,528 $3,045,012,678
============ ==============
Class B Shares for the Year Dollar
Ended October 31, 1992 Shares Amount
Shares sold 69,893,598 $ 818,518,396
Shares issued to shareholders in reinvest-
ment of dividends 1,503,614 16,173,423
------------ --------------
Total issued 71,397,212 834,691,819
Shares redeemed (3,689,687) (43,088,169)
------------ --------------
Net increase 67,707,525 $ 791,603,650
============ ==============
5. Commitments:
At October 31, 1993, the Fund had entered into forward foreign
exchange contracts under which it had agreed to purchase and sell
various foreign currency with an approximate value of $7,107,000
and $1,133,000, respectively.
84
<PAGE>
THE FOLLOWING SEMI-ANNUAL FINANCIAL STATEMENTS FOR THE FUND FOR THE PERIOD
ENDED APRIL 30, 1994, ARE UNAUDITED. THESE UNAUDITED INTERIM FINANCIAL
STATEMENTS REFLECT ALL ADJUSTMENTS WHICH ARE, IN THE OPINION OF MANAGEMENT,
NECESSARY TO A FAIR STATEMENT OF THE RESULTS FOR THE INTERIM PERIOD PRESENTED.
ALL SUCH ADJUSTMENTS ARE OF A NORMAL RECURRING NATURE.
85
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
Value Percent of
COUNTRY Industries Shares Held Common Stocks, Notes & Warrants Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Australia Banking 2,595,293 Westpac Banking Corp. $ 5,448,334 $ 8,792,074 0.1%
Food 6,500,000 Goodman Fielder Wattie Ltd. 6,989,431 7,046,416 0.1
Tobacco 1,768,300 Rothmans Holdings, Ltd. 7,303,733 8,323,600 0.1
</TABLE>
86
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
Value Percent of
COUNTRY Industries Shares Held Common Stocks, Notes & Warrants Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
1,242,300 WD & HO Wills Holdings, Ltd. 2,092,022 3,632,634 0.1
------------ ------------ ------
9,395,755 11,956,234 0.2
Total Common Stocks in Australia 21,833,520 27,794,724 0.4
Austria Utilities-- 29,150 Oesterreichische Elektrizitats AG (Verbund) 1,223,237 1,553,495 0.0
Electric
Total Common Stocks in Austria 1,223,237 1,553,495 0.0
Belgium Mining 50,120 Union Miniere N.V. 2,964,624 3,809,202 0.1
Total Common Stocks in Belgium 2,964,624 3,809,202 0.1
Canada Natural Resources 300,000 Canadian Pacific, Ltd. 3,503,161 4,875,000 0.1
Oil & Related 353,000 International Petroleum Corp. 1,000,196 375,062 0.0
Telecommunications 100,000 BCE Telecommunications, Inc. 3,375,484 3,575,000 0.0
Total Common Stocks in Canada 7,878,841 8,825,062 0.1
Finland Banking 250,000 Kansallis-Osake-Pankki 533,290 563,640 0.0
3,033,915 Unitas Bank Ltd. 8,709,516 8,536,048 0.1
------------ ------------ ------
9,242,806 9,099,688 0.1
Metals 175,000 Outokumpu OY 1,920,901 2,804,226 0.0
Paper & 450,000 Repola OY S 5,925,368 7,957,107 0.1
Forest Products
Total Common Stocks in Finland 17,089,075 19,861,021 0.2
France Automobiles 38,300 Peugeot S.A. 3,966,996 6,031,921 0.1
Banking 53,900 Compagnie Financiere de Paribas 4,269,897 4,116,207 0.1
5,989 Compagnie Financiere de Paribas (New Shares) 418,613 457,365 0.0
86,500 Societe Generale 9,605,405 9,676,297 0.1
------------ ------------ ------
14,293,915 14,249,869 0.2
Capital Goods 27,695 Compagnie de Fives-Lille 1,444,568 3,102,972 0.0
Insurance 53,860 GAN S.A. (Registered) 3,637,238 4,108,408 0.1
Multi-Industry 15,650 EuraFrance 4,256,713 5,723,492 0.1
Utilities 26,128 Compagnie Generale des Eaux 11,466,525 11,870,715 0.2
Total Common Stocks in France 39,065,955 45,087,377 0.7
Germany Banking 4,950 Bayerische Vereinsbank AG 1,181,909 1,520,090 0.0
38,900 Deutsche Bank AG 18,544,907 18,334,045 0.3
------------ ------------ ------
19,726,816 19,854,135 0.3
Capital Goods 369,636 Kloeckner Werke AG 17,229,762 38,134,393 0.5
Chemicals 89,650 Bayer AG 15,407,964 21,299,650 0.3
Insurance 5,490 Munich Reinsurance Co. 9,599,956 10,764,706 0.1
Multi-Industry 57,600 Veba AG 14,765,678 17,858,606 0.3
Steel 85,000 Thyssen AG 10,329,445 14,682,051 0.2
Total Common Stocks in Germany 87,059,621 122,593,541 1.7
Hong Telecommuni- 1,180,000 Hong Kong Telecommunications Ltd. 754,179 2,261,005 0.0
Kong cations
Utilities-- 676,800 China Light & Power Co., Ltd. 841,166 3,526,825 0.1
Electric
Total Common Stocks in Hong Kong 1,595,345 5,787,830 0.1
Ireland Building & 1,065,600 CRH PLC 3,594,241 6,201,717 0.1
Construction
Miscellaneous-- 2,178,000 Waterford Wedgwood Units 1,080,827 1,877,303 0.0
Consumer Goods
Total Common Stocks in Ireland 4,675,068 8,079,020 0.1
</TABLE>
87
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Value Percent of
COUNTRY Industries Shares Held Common Stocks, Notes & Warrants Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Italy Banking 533,400 IMI (Ordinary) $ 3,443,328 $ 4,408,680 0.1%
Insurance 387,000 Assicurazioni Generali 10,169,033 11,237,838 0.1
Multi-Industry 6,949,495 Compagnie Industriali Riunite S.p.A. (CIR) 5,670,704 12,164,892 0.2
Telecommuni- 3,000,000 Societa Finanziaria Telefonica S.p.A. (STET) 4,365,656 11,539,912 0.1
cations 11,181,363 Societa Finanziaria Telefonica S.p.A.
(STET) (RISP) 20,700,047 36,474,717 0.5
3,958,000 Societa Italiana Esercizio Telecom S.p.A.
(S.I.P.) 3,323,376 11,779,466 0.2
------------ ------------ ------
28,389,079 59,794,095 0.8
Total Common Stocks in Italy 47,672,144 87,605,505 1.2
Japan Automobiles 1,512,000 Suzuki Motor Corp. 13,245,256 20,056,991 0.3
& Equipment 397,000 Toyoda Automatic Loom Works, Ltd. 4,589,043 6,826,668 0.1
295,000 Toyota Motor Corp. 4,030,746 5,768,399 0.1
------------ ------------ ------
21,865,045 32,652,058 0.5
Beverage 310,000 Chukyo Coca-Cola Bottling Co., Ltd. 3,892,222 4,721,431 0.1
284,000 Hokkaido Coca-Cola Bottling Co., Ltd. 3,496,769 5,246,340 0.1
423,000 Kinki Coca-Cola Bottling Co., Ltd. 6,836,980 8,395,991 0.1
245,000 Mikuni Coca-Cola Bottling Co., Ltd. 3,943,827 4,405,522 0.1
408,000 Sanyo Coca-Cola Bottling Co., Ltd. 6,054,493 7,817,628 0.1
------------ ------------ ------
24,224,291 30,586,912 0.5
Capital Goods 3,608,000 Mitsubishi Heavy Industries America, Inc. 21,963,469 23,930,431 0.3
Electrical 410,000 Chudenko Corp. 13,428,175 15,752,186 0.2
Engineering
Electronics 1,141,000 Canon, Inc. 14,706,779 18,499,067 0.3
189,000 Hitachi, Ltd. 1,899,032 1,782,844 0.0
1,413,000 Matsushita Electric Industrial Co., Ltd. 17,136,557 23,186,695 0.3
415,000 Murata Manufacturing Co., Ltd. 13,871,658 17,942,419 0.2
1,360,000 Sumitomo Electric Industries 15,481,185 19,243,392 0.3
------------ ------------ ------
63,095,211 80,654,417 1.1
Engineering & 29,000 Taihei Dengyo Kaisha Ltd. 657,632 849,170 0.0
Construction
Insurance 1,112,000 Dai-Tokyo Fire & Marine Insurance Co., Ltd. 6,505,779 8,522,747 0.1
665,000 Fuji Fire & Marine Insurance Co., Ltd. 3,727,641 4,534,833 0.1
1,322,000 Koa Fire & Marine Insurance Co., Ltd. 6,884,434 9,145,013 0.1
620,000 Mitsui Marine & Fire Insurance Co., Ltd. 5,004,638 5,019,947 0.1
1,182,000 Nichido Fire & Marine Insurance Co., Ltd. 6,863,646 9,732,888 0.1
1,295,000 Nippon Fire & Marine Insurance Co., Ltd. 6,665,367 9,543,579 0.1
1,775,000 Sumitomo Marine & Fire Insurance Co., Ltd. 13,830,866 17,197,111 0.3
1,625,000 Tokio Marine & Fire Insurance Co., Ltd. 17,355,002 20,757,591 0.3
630,000 Yasuda Fire & Marine Insurance Co., Ltd. 4,971,410 4,896,630 0.1
------------ ------------ ------
71,808,783 89,350,339 1.3
Metals 751,000 Toyo Seikan Kaisha, Ltd. 18,417,114 21,105,041 0.3
Pharmaceuticals 865,000 Sankyo Pharmaceuticals Co. Ltd. 21,123,949 19,633,979 0.3
384,000 Taisho Pharmaceuticals Co. 7,984,458 7,659,625 0.1
------------ ------------ ------
29,108,407 27,293,604 0.4
Photography 659,000 Fuji Photo Film Co., Ltd. 14,995,088 14,181,095 0.2
Retail Stores 448,000 Ito Yokado Co., Ltd. 20,618,869 23,551,145 0.3
</TABLE>
88
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Value Percent of
COUNTRY Industries Shares Held Common Stocks, Notes & Warrants Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
100,000 Sangetsu Co., Ltd. 3,160,832 3,655,301 0.1
------------ ------------ ------
23,779,701 27,206,446 0.4
Steel 10,000 Maruichi Steel Tube Ltd. 153,093 179,817 0.0
Total Common Stocks in Japan 303,496,009 363,741,516 5.2
Nether- Airlines 901,000 KLM Royal Dutch Airlines 17,486,458 25,888,024 0.4
lands
Banking 296,150 ABN Amro Holding N.V. 9,100,038 9,797,444 0.1
Beverage 23,283 Heineken Holdings Inc. 2,129,208 2,638,407 0.0
23,237 Heineken N.V. 2,268,817 2,952,671 0.1
------------ ------------ ------
4,398,025 5,591,078 0.1
Chemicals 113,650 Akzo N.V. 10,208,263 13,653,870 0.2
Electronics 486,000 Philips Electronics N.V. 12,590,702 14,172,825 0.2
Insurance 155,000 Aegon N.V. 8,361,695 7,983,083 0.1
250,400 Amev N.V. 9,528,450 9,736,284 0.2
385,965 Internationale Nederlanden Groep N.V. 12,885,006 16,085,330 0.2
------------ ------------ ------
30,775,151 33,804,697 0.5
Miscellaneous-- 10,000 Nijverdal Ten Cate N.V. 501,699 450,054 0.0
Manufacturing
Paper & Forest 300,720 Koninklijke KNP 5,008,146 7,897,534 0.1
Products
Total Common Stocks in the Netherlands 90,068,482 111,255,526 1.6
New Paper & Forest 164,330 Carter Holt Harvey, Ltd. 166,358 349,334 0.0
Zealand Products
Total Common Stocks in New Zealand 166,358 349,334 0.0
South Automobiles & 25,542 ++++++Kia Motors (GDS)++++ 823,544 698,148 0.0
Korea Equipment
Total Common Stocks in South Korea 823,544 698,148 0.0
Spain Banking 61,775 Banco Popular Espanol 6,511,311 7,160,596 0.1
83,000 Bank Intercontinental S.A. 4,607,612 7,310,881 0.1
------------ ------------ ------
11,118,923 14,471,477 0.2
Energy & Petroleum 218,500 Repsol S.A. 5,580,410 7,245,596 0.1
Insurance 30,000 Mapfre S.A. 1,130,028 1,263,509 0.0
Miscellaneous 137,500 Autopista Espana (ACESA) 1,363,125 1,348,538 0.0
195,000 Grupo Fosforera Espanola S.A. 1,696,601 1,818,653 0.0
------------ ------------ ------
3,059,726 3,167,191 0.0
Multi-Industry 45,750 Corporacion Financiera Alba S.A. 1,611,658 1,997,964 0.0
Real Estate 205,148 Metrovacesa 4,967,085 8,032,812 0.2
31,560 Metrovacesa (New Shares) 921,380 1,189,048 0.0
56,303 Vallehermoso Espanola S.A. 528,717 1,100,221 0.0
46,997 Vallehermoso Espanola S.A. (New Shares) 581,234 897,500 0.0
------------ ------------ ------
6,998,416 11,219,581 0.2
Telecommuni- 1,802,118 Telefonica Nacional de Espana S.A. 20,127,134 24,343,933 0.4
cations 184,000 Telefonica Nacional de Espana S.A. (ADR)++ 5,492,988 7,498,000 0.1
------------ ------------ ------
25,620,122 31,841,933 0.5
Utilities--Electric 30,000 Empresa Nacional de Electricidad S.A. 815,981 1,494,449 0.0
591,800 Iberdrola I S.A. 3,310,030 4,235,904 0.1
------------ ------------ ------
4,126,011 5,730,353 0.1
Total Common Stocks in Spain 59,245,294 76,937,604 1.1
</TABLE>
89
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Value Percent of
COUNTRY Industries Shares Held Common Stocks, Notes & Warrants Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Sweden Electrical-- 120,000 ASEA AB 'B' Free $ 6,532,086 $ 9,954,278 0.1%
Equipment
Mining 725,725 Trelleborg 'B' Free 5,291,716 9,859,621 0.1
Miscellaneous 200,000 SKF 'A' 3,713,376 4,075,767 0.1
350,000 SKF 'B' Free 6,569,663 7,132,593 0.1
------------ ------------ ------
10,283,039 11,208,360 0.2
Multi-Industry 245,000 Svedala Industri 'AB' Free 3,925,653 5,920,967 0.1
Total Common Stocks in Sweden 26,032,494 36,943,226 0.5
Switzer- Banking 35,700 Schweizerischer Bankverein (Bearer) 9,737,910 9,920,190 0.1
land
Electrical-- 29,800 BBC Brown Boveri & Cie (Bearer) 17,422,295 27,320,020 0.4
Equipment
Insurance 2,460 Baloise Holding Insurance (Registered) 3,018,431 4,493,071 0.1
Pharmaceuticals 19,800 Ciba-Geigy AG (Registered) 9,511,983 11,777,841 0.2
1,460 Sandoz AG (Part. Cert.) 2,573,492 3,849,478 0.1
6,427 Sandoz AG (Registered) 14,872,369 16,945,612 0.2
------------ ------------ ------
26,957,844 32,572,931 0.5
Total Common Stocks in Switzerland 57,136,480 74,306,212 1.1
United Aerospace 1,452,500 Rolls Royce PLC 3,586,733 4,467,091 0.1
Kingdom
Banking 428,000 National Westminster Bank PLC 3,096,090 2,917,890 0.0
Beverage 1,220,600 Grand Metropolitan PLC 8,154,275 8,765,251 0.1
35,000 Grand Metropolitan PLC (ADR)++ 1,031,100 997,500 0.0
------------ ------------ ------
9,185,375 9,762,751 0.1
Conglomerates 746,100 Hanson PLC 2,959,657 3,085,832 0.1
50,000 Hanson PLC (ADR)++ 984,250 1,031,250 0.0
------------ ------------ ------
3,943,907 4,117,082 0.1
Consumer Goods 850,000 Vendome Luxury Group (Units) 5,501,439 5,601,713 0.1
Electrical 1,230,200 General Electric Co. PLC 5,848,390 5,647,172 0.1
Equipment
Energy & 45,000 British Petroleum Co. Ltd. PLC (ADR)++ 2,638,675 3,150,000 0.0
Petroleum
Food 825,000 Tate & Lyle PLC 4,995,657 5,561,944 0.1
350,000 United Biscuit PLC 2,086,198 1,908,900 0.0
------------ ------------ ------
7,081,855 7,470,844 0.1
Insurance 599,000 Commercial Union Assurance Co. PLC 5,354,117 4,973,018 0.1
Leisure & 557,900 The Rank Organisation PLC 3,467,992 3,625,987 0.1
Entertainment 490,000 Thorn EMI PLC (Ordinary) 7,194,681 8,388,555 0.1
------------ ------------ ------
10,662,673 12,014,542 0.2
Pharmaceuticals 700,000 SmithKline Beecham Corp. PLC (ADR)++ 19,423,436 19,075,000 0.3
1,000,000 Zeneca Group PLC 9,406,370 10,423,200 0.1
------------ ------------ ------
28,829,806 29,498,200 0.4
Retail Stores 255,100 Boots Co. PLC 1,701,586 2,114,026 0.0
421,500 Marks & Spencer PLC 2,531,515 2,796,948 0.0
1,300,000 Tesco PLC 4,019,708 4,135,950 0.1
------------ ------------ ------
8,252,809 9,046,924 0.1
Steel 1,500,000 British Steel PLC 1,442,449 3,454,200 0.0
</TABLE>
90
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Value Percent of
COUNTRY Industries Shares Held Common Stocks, Notes & Warrants Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Utilities-- 520,000 Cable & Wireless International PLC 3,817,494 3,529,344 0.1
Communications
Utilities--Gas 435,800 British Gas PLC 1,789,284 1,881,675 0.0
Waste Disposal 83,500 Attwoods PLC (ADR)++ 759,800 782,812 0.0
Total Common Stocks in the United Kingdom 101,790,896 108,315,258 1.5
United Aerospace 56,000 Boeing Co. 2,003,133 2,520,000 0.0
States
Airlines 25,000 UAL Corp. 2,907,375 3,228,125 0.1
955,900 USAir Group Inc. 12,833,444 7,766,688 0.1
------------ ------------ ------
15,740,819 10,994,813 0.2
Apparel 860,000 Fruit of the Loom, Inc. 23,555,786 25,262,500 0.4
373,900 Liz Claiborne Inc. 8,022,626 9,347,500 0.1
------------ ------------ ------
31,578,412 34,610,000 0.5
Automobiles 110,300 General Motors Corp. 3,895,971 6,259,525 0.1
Banking 85,000 Albank Financial Corp. 971,875 1,731,875 0.0
280,500 AmSouth Bancorporation 7,624,356 8,800,687 0.1
678,400 Anchor Bancorp., Inc. 8,229,970 8,734,400 0.1
200,000 Bank of New York 10,650,626 11,075,000 0.2
75,000 BankAmerica Corp. 3,219,677 3,243,750 0.0
319,000 Bankers Trust Co. 7,620,125 7,097,750 0.1
129,500 Banknorth Group, Inc. 1,865,422 2,492,875 0.0
700,000 Barnett Banks Inc. 28,355,015 32,287,500 0.5
500,000 California Federal Bank 4,500,000 5,187,500 0.1
496,700 Charter One Financial, Inc. 9,263,048 10,430,700 0.2
798,500 Chase Manhattan Corp. 26,045,496 27,149,000 0.4
1,391 Chase Manhattan Corp. (Warrants) (a) 6,955 8,868 0.0
1,513,500 Chemical Banking Corp. 55,174,508 52,594,125 0.8
1,721,300 City National Corp. 12,174,108 17,213,000 0.2
1,337,500 Comerica Inc. 35,892,696 37,450,000 0.5
164,000 Continental Bank Corp. 4,305,590 5,658,000 0.1
375,000 CoreStates Financial Corp. 9,855,001 9,937,500 0.1
1,200,000 First of America Bank 44,882,312 45,300,000 0.6
1,025,000 First Commerce Corp. 26,395,098 27,418,750 0.4
400,000 First Union Corp. 16,226,028 17,850,000 0.3
1,426,103 KeyCorp. 42,386,643 45,100,492 0.6
498,600 Mellon Bank Corp. 26,731,868 27,796,950 0.4
112,950 Mercantile Bancorp. 2,920,618 4,066,200 0.1
45,000 Premier Bancorp. 708,437 787,500 0.0
283,800 Republic of New York Corp. 13,848,705 14,012,625 0.2
20,000 Trustcompany Bankcorp. NY 288,320 380,000 0.0
------------ ------------ ------
400,142,497 423,805,047 6.0
Biotechnology 362,536 Applied Immune Sciences, Inc. 5,834,069 3,081,556 0.0
Computers 148,500 Boole & Babbage, Inc. 2,962,360 3,898,125 0.1
321,600 Borland International Corp. 4,836,966 3,899,400 0.1
27,200 Digital Equipment Corp. 1,553,514 571,200 0.0
300,000 International Business Machines Corp. 15,067,744 17,175,000 0.2
------------ ------------ ------
24,420,584 25,543,725 0.4
Conglomerates 125,000 ADT Limited 1,434,405 1,187,500 0.0
20,833 ADT Limited (Warrants) (a) 0 6,510 0.0
------------ ------------ ------
1,434,405 1,194,010 0.0
Construction 28,000 K. Hovnanian Enterprises 285,784 350,000 0.0
& Housing
</TABLE>
91
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Shares Held/ Value Percent of
COUNTRY Industries Face Amount Common Stocks, Notes & Warrants Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
United Energy & 163,900 Ashland Coal, Inc. $ 4,132,919 $ 4,445,787 0.1%
States Petroleum 85,000 Brown (Tom), Inc. 366,313 1,094,375 0.0
(con- 49,500 Cabot Oil & Gas Corp. (Class A) 529,030 1,089,000 0.0
tinued) 34,600 Coastal Corp. 817,773 1,094,225 0.0
153,000 Coho Resources, Inc. 1,662,813 612,000 0.0
130,000 Helmerich & Payne, Inc. 2,773,422 3,396,250 0.1
46,400 Mitchell Energy Development Corp. (Class A) 675,717 904,800 0.0
174,350 Mitchell Energy Development Corp. (Class B) 2,755,451 3,399,825 0.1
50,000 Murphy Oil Corp. 1,899,720 2,200,000 0.0
106,100 Nuevo Energy Co. 2,048,791 1,976,112 0.0
1,563,400 Occidental Petroleum Corp. 29,245,537 27,750,350 0.4
203,000 Onbancorp, Inc. 6,085,242 5,988,500 0.1
61,200 Pennzoil Co. 3,775,844 3,014,100 0.0
199,700 Plains Resources, Inc. 2,052,005 1,148,275 0.0
1,794,248 Santa Fe Energy Resources, Inc. 16,331,708 15,923,950 0.2
311,200 Southern National Corp. 5,945,098 6,068,400 0.1
425,000 Trans Texas Gas Corp. 5,950,000 5,365,625 0.1
700,000 USX-Marathon Group 12,267,189 11,812,500 0.2
138,800 Unocal Corp. 3,272,336 3,834,350 0.1
------------ ------------ ------
102,586,908 101,118,424 1.5
Financial 750,100 Student Loan Marketing Association 32,766,557 29,441,425 0.4
Services
Foods/Food 405,500 Borden, Inc. 5,081,701 5,271,500 0.0
Processing 100,000 Eagle Food Centers, Inc. 612,500 525,000 0.0
------------ ------------ ------
5,694,201 5,796,500 0.0
Healthcare 961,200 Baxter International, Inc. 21,122,668 21,987,450 0.3
Services 650,000 Beverly Enterprises, Inc. 6,733,713 8,612,500 0.1
500,000 Hillhaven Corp. 7,233,093 9,937,500 0.1
150,000 Manor Care, Inc. 2,928,940 4,162,500 0.1
582,500 US Surgical Corp. 13,388,647 10,266,563 0.2
------------ ------------ ------
51,407,061 54,966,513 0.8
Hospital 55,000 Community Psychiatric Centers 580,744 797,500 0.0
Management
Index-Related US$ 40,800 Republic of Austria Stock Index Growth Notes
due 8/15/1996 432,941 499,800 0.0
Industrial 85,200 Cooper Industries, Inc. 3,081,334 3,248,250 0.0
Industrial Consumer 2,672 Gardner Denver Machinery, Inc. 22,042 22,044 0.0
Goods
Information 165,000 Amdahl Corp. 728,475 1,113,750 0.0
Processing 800,000 Unisys Corp. 9,264,381 8,700,000 0.1
------------ ------------ ------
9,992,856 9,813,750 0.1
Insurance 200,000 American General Corp. 5,176,374 5,100,000 0.1
571,000 Horace Mann Educators, Inc. 13,654,588 15,702,500 0.2
------------ ------------ ------
18,830,962 20,802,500 0.3
Leisure 93,700 Handleman Co. 1,044,751 1,018,988 0.0
Metals 277,500 Alcan Aluminum, Ltd. 4,669,221 5,792,812 0.1
130,000 Aluminum Co. of America 8,733,493 8,840,000 0.1
100,000 Inco Ltd. 2,132,000 2,437,500 0.0
132,800 Reynolds Metals Co. 5,801,771 5,577,600 0.1
------------ ------------ ------
</TABLE>
92
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Shares Held/ Value Percent of
COUNTRY Industries Face Amount Common Stocks, Notes & Warrants Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
21,336,485 22,647,912 0.3
Miscellaneous 223,900 Jostens Inc. 4,199,326 3,554,413 0.1
Multi-Industry 235,000 Loews Corp. 22,205,769 21,032,500 0.3
Natural Resources 300,000 Freeport McMoRan Inc. 5,137,697 5,737,500 0.1
Oil Services 670,000 Arethusa (Off-Shore) Ltd. 6,809,378 6,532,500 0.1
149,800 Atwood Oceanics, Inc. 1,238,663 1,872,500 0.0
43,400 Cliffs Drilling Co. 595,425 553,350 0.0
408,000 Gerrity Oil & Gas Corp. 5,748,846 3,111,000 0.1
1,800,000 Noble Drilling Corp. 14,009,718 12,375,000 0.2
------------ ------------ ------
28,402,030 24,444,350 0.4
Packaging 200,000 Stone Container Corp. 2,576,204 2,700,000 0.0
Paper & Forest 525,000 Boise Cascade Corp. 11,800,164 11,287,500 0.2
Products 435,000 Bowater, Inc. 8,882,625 9,135,000 0.1
112,000 Champion International Corp. 3,318,152 3,416,000 0.1
150,000 International Paper Co. 9,477,586 9,787,500 0.1
------------ ------------ ------
33,478,527 33,626,000 0.5
Pharmaceuticals/ 600,000 ALZA Corp. 13,048,597 15,150,000 0.2
Biotechnology 121,500 Alteon Inc. 1,205,188 911,250 0.0
139,400 American Home Products Corp. 8,256,144 8,050,350 0.1
58,200 AutoImmune Inc. 385,575 407,400 0.0
600,000 Bristol-Myers Squibb Co. 33,254,124 32,325,000 0.5
173,000 Immune Response Corp. 2,272,832 1,708,375 0.0
200,000 Johnson & Johnson Co. 7,266,450 8,275,000 0.1
325,000 Lilly (Eli) & Co. 16,618,583 16,006,250 0.2
550,000 Merck & Co. 18,652,516 16,293,750 0.3
156,300 Pfizer, Inc. 9,292,504 9,221,700 0.1
780,500 Syntex Corp. 15,220,206 11,805,063 0.2
------------ ------------ ------
125,472,719 120,154,138 1.7
Pollution Control 646,900 WMX Technologies, Inc. 16,148,443 16,900,263 0.2
Publishing 107,900 Deluxe Corp. 2,919,774 2,913,300 0.1
301,500 New York Times Co. (Class A) 7,158,778 7,650,563 0.1
------------ ------------ ------
10,078,552 10,563,863 0.2
Real Estate 373,100 First Union Real Estate Investments 2,861,920 2,658,337 0.1
174,400 Health Equity Properties, Inc. 1,469,320 1,700,400 0.0
661,300 Mid-America Realty Investments 6,616,640 6,613,000 0.1
------------ ------------ ------
10,947,880 10,971,737 0.2
Resources 440,000 Horsham Corp. 3,550,742 5,885,000 0.1
Retail Stores 608,500 Baker (J.) Inc. 10,187,765 12,778,500 0.2
516,900 ++++++Buttrey Food & Drug Stores Co. 4,084,486 2,584,500 0.0
156,700 Dayton Hudson Corp. 10,496,970 12,379,300 0.2
1,110,000 ++++++Filene's Basement Corp. 10,092,619 9,712,500 0.1
342,000 Hook-SupeRx, Inc. 3,476,715 4,531,500 0.1
150,000 Payless Cashways Inc. 1,812,800 2,362,500 0.0
660,000 Service Merchandise Co., Inc. 6,701,173 4,702,500 0.1
158,400 Smith Food & Drug Ltd. 3,067,501 2,989,800 0.0
1,063,500 The Vons Companies, Inc. 17,691,549 19,408,875 0.3
------------ ------------ ------
67,611,578 71,449,975 1.0
Savings & Loan 106,000 Ahmanson (H.F.) & Co. 1,767,857 1,934,500 0.0
Associations 50,000 Greenpoint Savings Bank 931,250 943,750 0.0
------------ ------------ ------
2,699,107 2,878,250 0.0
</TABLE>
93
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Value Percent of
COUNTRY Industries Shares Held Common Stocks, Notes & Warrants Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
United Savings Banks 248,000 Bankers Corp. $ 1,688,842 $ 4,278,000 0.1%
States 655,000 Brooklyn Bancorp Inc. (e) 15,782,500 22,106,250 0.3
(con- 500,000 Dime Savings Bank of New York 3,417,510 4,250,000 0.1
cluded) 196,400 Downey Savings & Loan Association 2,896,670 3,682,500 0.1
2,005,053++++++ Glendale Federal Savings Bank 17,644,852 14,787,266 0.2
770,194 Glendale Federal Savings Bank (Warrants) (a) 0 1,347,840 0.0
37,500 NS Bancorp, Inc. 300,000 1,153,125 0.0
200,000 Portsmouth Bank Shares, Inc. 1,396,014 2,100,000 0.0
-------------- -------------- ------
43,126,388 53,704,981 0.8
Shoes 182,300 NIKE, Inc. (Class B) 9,775,783 9,775,838 0.2
Telecommuni- 104,500 GTE Corp. 3,514,166 3,304,813 0.0
cations
Textiles 1,196,700 Burlington Industries, Inc. 16,747,082 18,249,675 0.3
Tobacco 760,000 Philip Morris Companies, Inc. 36,587,110 41,420,000 0.6
Utilities-- 500,000 Allegheny Power System, Inc. 11,795,010 11,812,500 0.2
Electric 125,000 CMS Energy Corp. 2,290,025 2,781,250 0.1
2,071,000 Centerior Energy Corp. 31,583,112 23,039,875 0.3
350,000 Commonwealth Edison Company Inc. 9,219,908 8,881,250 0.1
150,000 Consolidated Edison Company Inc. 4,390,815 4,593,750 0.1
300,000 General Public Utilities Corp. 8,663,890 9,150,000 0.1
400,000 Long Island Lighting Co. 9,545,750 8,900,000 0.1
750,000 Niagara Mohawk Power Corp. 13,840,921 13,781,250 0.2
75,000 Texas Utilities Co. 2,763,875 2,643,750 0.0
-------------- -------------- ------
94,093,306 85,583,625 1.2
Utilities--Gas 77,100 Atmos Energy Corp. 1,445,257 2,216,625 0.0
126,900 Pacific Enterprises 2,486,131 2,902,838 0.1
40,800 South Jersey Industries, Inc. 711,756 841,500 0.0
20,000 Western Digital Corp. 259,880 315,000 0.0
-------------- -------------- ------
4,903,024 6,275,963 0.1
Total Common Stocks, Notes & Warrants
in the United States 1,274,367,949 1,306,745,166 18.6
Total Investments in Common Stocks,
Notes & Warrants 2,144,184,936 2,410,288,767 34.2
<CAPTION>
Equity Closed-End Funds
<S> <S> <C> <S> <C> <C> <C>
Portugal Financial Services 39,500 Capital Portugal Fund 2,052,116 3,220,466 0.1
Total Equity Closed-End Funds in Portugal 2,052,116 3,220,466 0.1
United Financial Services 240,000 Austria Fund 2,017,632 2,340,000 0.0
States 166,666 European Warrant Fund 1,363,723 2,291,657 0.1
11,700 Global Yield Fund 89,797 81,900 0.0
300,100 Growth Fund of Spain, Inc. 2,630,827 3,038,513 0.0
150,000 Irish Investment Fund, Inc. 1,086,041 1,368,750 0.0
150,000 Italy Fund 1,198,520 1,687,500 0.0
25,600 Jakarta Growth Fund 158,080 259,200 0.0
40,000 Portugal Fund 360,368 535,000 0.0
</TABLE>
94
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Value Percent of
COUNTRY Industries Shares Held Equity Closed-End Funds Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Total Equity Closed-End Funds in the
United States 8,904,988 11,602,520 0.1
Total Investments in Equity Closed-End Funds 10,957,104 14,822,986 0.2
<CAPTION>
Preferred Stocks
<S> <S> <C> <S> <C> <C> <C>
Germany Automobiles 80,150 Volkswagen of America, Inc. (Pfd.) 17,907,876 20,212,790 0.3
Multi-Industry 40,000 R.W.E. AG (Pfd.) 7,689,009 8,856,712 0.1
Total Preferred Stocks in Germany 25,596,885 29,069,502 0.4
Spain Banking 225,000 Santander Overseas Bank (8% Pfd., Series D)
(ADR)++ 5,463,250 5,203,125 0.1
Total Preferred Stocks in Spain 5,463,250 5,203,125 0.1
United Engineering 750,000 AMEC PLC (6.50% Convertible Pfd.) 968,501 1,147,612 0.0
Kingdom
Retail Stores 545,000 Signet Group (Pfd.) (ADR)++ 2,194,907 4,905,000 0.1
Waste Disposal 1,700,000 Attwoods PLC (8.50% Convertible Pfd.) 2,417,796 2,472,480 0.0
Total Preferred Stocks in the United Kingdom 5,581,204 8,525,092 0.1
United Airlines 100,000 +++++AMR Corp. (Convertible Pfd. $3.00) 5,065,500 4,350,000 0.0
States 85,000 +++++UAL Corp. (6.25% Convertible Pfd.) 7,885,625 7,182,500 0.1
150,000 USAir Group, Inc. (Convertible Pfd. $4.375,
Series B) 7,940,250 4,706,250 0.1
------------ ------------ ------
20,891,375 16,238,750 0.2
Automobiles & 20,000 Ford Motor Co. (8.40% Convertible Pfd.,
Equipment Series A) 1,000,000 1,930,000 0.0
Banking 125,000 California Federal Bank (10.625% Pfd.) 12,500,000 12,562,500 0.2
100,000 Fourth Financial Corp. (Convertible Pfd.,
Class A) 2,500,000 2,750,000 0.0
30,300 Marine Midland Banks, Inc. (Adj. Rate Pfd.,
Series A) 907,425 1,393,800 0.0
100,000 Onbancorp, Inc. (6.75% Convertible Pfd.,
Series B) 2,668,750 2,575,000 0.0
151,512 Riggs National Corp. (10.75% Convertible
Pfd., Series B) 3,819,050 3,863,556 0.1
------------ ------------ ------
22,395,225 23,144,856 0.3
Energy & 150,000 Grant Tensor Corp. (9.75% Convertible Pfd.) 1,853,375 1,650,000 0.0
Petroleum 64,219 Santa Fe Energy Resources, Inc. (7% Pfd.) 954,075 1,196,079 0.0
50,000 Tenneco Inc. (Convertible Pfd., Series P) 1,475,000 2,056,250 0.1
------------ ------------ ------
4,282,450 4,902,329 0.1
Energy & Related 347,200 Chiles Offshore Corp. (6% Convertible Pfd.) 8,514,382 7,898,800 0.1
Financial 175,000 A/S Eksportfinans (8.70% Pfd.) 4,377,500 4,353,125 0.1
Services
Industrial 400,000 Prime Retail, Inc. (10.50% Pfd.) 10,000,000 9,600,000 0.1
1,100,000 US Surgical Devices (Convertible Pfd.) 24,805,000 23,375,000 0.4
------------ ------------ ------
34,805,000 32,975,000 0.5
Natural Resources 85,000 Alumax Inc. (Convertible Pfd.) 7,240,312 8,882,500 0.1
150,000 Cyprus Amax Minerals Co. (Convertible Pfd.,
Series A) 9,188,313 9,750,000 0.2
20,000 Echo Bay Finance Ltd. (Pfd., Series A) 500,000 755,000 0.0
245,000 Freeport-McMoRan Copper & Gold Inc.
(Convertible Pfd. Shares) 5,828,450 5,818,750 0.1
219,000 Freeport-McMoRan Inc. (Convertible Pfd.--Gold) 7,703,330 8,157,750 0.1
------------ ------------ ------
30,460,405 33,364,000 0.5
</TABLE>
95
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Value Percent of
COUNTRY Industries Shares Held Preferred Stocks Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
United Paper & Forest 300,000 Boise Cascade Corp. (Convertible Pfd.,
States Products Series G) $ 6,337,500 $ 6,150,000 0.1%
(con-
cluded) Real Estate 500,000 Catellus Development Corp. (7.25% Conv.
Exchangeable Pfd., Series B) 25,000,000 20,000,000 0.3
666,000 National Health Investors, Inc. (8.50%
Convertible Pfd.) 16,650,000 17,149,500 0.2
------------ ------------ ------
41,650,000 37,149,500 0.5
Savings Bank 659,900 Glendale Federal Savings Bank (8.75%
Convertible Pfd., Series E) 16,070,337 14,517,800 0.2
Utilities-- 12,500 Gulf States Utilities Co. (8.52% Pfd.) 1,363,750 1,275,000 0.0
Electric
Total Preferred Stocks in the United States 192,147,924 183,899,160 2.6
Total Investments in Preferred Stocks 228,789,263 226,696,879 3.2
<CAPTION>
Face Amount Fixed-Income Securities
<S> <S> <C> <S> <C> <C> <C>
Canada Canadian Government Bonds (1):
C$ 110,000,000 4.75% due 3/15/1996 78,342,254 76,307,024 1.1
50,000,000 6.50% due 6/01/2004 33,790,887 31,933,382 0.5
Domtar, Inc. (2):
6,763,000 10.35% due 9/01/2006 4,014,962 4,689,046 0.1
3,500,000 10% due 4/15/2011 1,938,573 2,375,996 0.0
Mark Resources Inc., Convertible Bonds (5):
7,250,000 7% due 4/15/2002 5,052,564 4,777,335 0.1
5,250,000 8% due 11/30/2004 3,962,054 3,687,545 0.1
+++Olympia & York Inc. (4):
57,194,000 Series 1, 10.70% due 11/04/1995 29,626,733 26,919,696 0.4
34,000,000 Series 2, 11% due 11/04/1998 18,060,242 16,002,896 0.2
65,000,000 Sheritt, Inc., 11% due 3/31/2004 (42) 47,056,898 45,419,985 0.6
14,500,000 Talisman Energy Convertible Bonds, 8.50% due
12/01/2000 (26) 11,040,982 10,394,641 0.1
Total Fixed-Income Securities in Canada 232,886,149 222,507,546 3.2
European ECU 15,200,000 Banco Commercial Portuguese, Convertible
Currency Units Bonds, 8.75% due 5/21/2002 (3) 21,270,256 22,127,400 0.3
2,000,000 Credit Local de France, 9.48%
due 10/16/2001 (4) (b) 1,462,354 1,382,380 0.0
37,500,000 Government of France, 8.25% due 4/25/2022 (1) 45,849,230 45,965,306 0.7
1,000,000 Investor International Placements,
Convertible Bonds, 7.25% due 6/21/2001 (4) 1,001,412 1,240,299 0.0
7,000,000 SKF-AB Lyons, Convertible Bonds, 7.356% due
7/26/2002 (5) (b) 4,647,712 4,463,329 0.1
Total Fixed-Income Securities in
European Currency Units 74,230,964 75,178,714 1.1
Finland Fim 75,000,000 Republic of Finland, 11% due 1/15/1999 (1) 14,754,836 15,636,121 0.2
Total Fixed-Income Securities in Finland 14,754,836 15,636,121 0.2
France Frf 4,500 Compagnie Generale des Eaux, Convertible
Bonds, 6% due 1/01/1998 (7) 2,467,248 2,616,841 0.1
20,000 IBM Finance, Convertible Bonds, 5.75%
due 1/01/1998 (3) 1,436,923 1,451,599 0.0
Total Fixed-Income Securities in France 3,904,171 4,068,440 0.1
</TABLE>
96
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Value Percent of
COUNTRY Industries Face Amount Fixed-Income Securities Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Germany DM Bundesrepublic Deutscheland:
7,000,000 6.25% due 2/20/1998 (1) 3,605,437 4,270,950 0.1
360,000,000 6.75% due 4/22/2003 (42) 217,907,042 218,280,543 3.1
100,000,000 6.50% due 7/15/2003 (1) 60,464,910 59,957,768 0.8
2,310,000 Commerzbank AG, Floating Rate Convertible
Bonds, 0% due 6/15/2001 (3) (b) 1,556,456 2,161,575 0.0
37,500,000 Freie Hansestadt Hamburg, 6.08% due
11/29/2018 (42) 21,421,335 21,617,647 0.3
164,000,000 Land Hessen, 6% due 11/29/2013 (42) 94,406,242 93,601,207 1.3
110,000,000 Mecklenberg Vorpommern, 6.15%
due 6/16/2023 (42) 61,012,437 62,051,282 0.9
22,000,000 Nordrhein-Westfalen, 6.125%
due 12/21/2018 (42) 12,594,837 12,708,899 0.2
62,000,000 Rheinland-Pfalz, 6.08% due 11/29/2018 (42) 35,633,056 35,797,285 0.5
50,000,000 Sachsen-Anhalt, 6% due 1/10/2014 (42) 28,632,994 28,506,787 0.4
205,000,000 Treuhandanstalt, 6.875% due 6/11/2003 (42) 121,620,921 124,954,148 1.8
Total Fixed-Income Securities in Germany 658,855,667 663,908,091 9.4
Ireland IrP 8,046,277 CRH Capital Corp., 6.50% due 4/30/2005 (4) 15,808,558 16,152,961 0.2
Total Fixed-Income Securities in Ireland 15,808,558 16,152,961 0.2
Italy Softe SA-LUX (8):
Lit 10,500,000,000 Convertible Bonds, 4.25% due 7/30/1998 7,317,044 8,447,517 0.1
15,460,000,000 (Ex-Warrants), 8.75% due 3/24/1997 (a) 9,991,958 9,668,573 0.1
Total Fixed-Income Securities in Italy 17,309,002 18,116,090 0.2
Japan Yen 2,850,000,000 Glaxo Holdings PLC, Convertible Bonds,
4.30% due 9/28/1998 (9) 25,735,735 28,284,367 0.4
650,000,000 Hankyu Corp., Convertible Bonds, 1.25%
due 9/30/1998 (20) 5,829,555 6,115,505 0.1
1,090,000,000 Hokkaido Coca-Cola Bottling Co., Ltd.,
Convertible Bonds, 0.90% due 6/30/1995 (41) 11,126,237 11,353,051 0.1
988,000,000 Matsushita Electric Works, Convertible
Bonds, 2.70% due 5/31/2002 (23) 9,691,544 11,785,713 0.2
535,000,000 Toyota Motor Corp., Convertible Bonds,
1.20% due 1/28/1998 (10) 3,311,798 5,730,078 0.1
Total Fixed-Income Securities in Japan 55,694,869 63,268,714 0.9
New Zealand NZ$ 3,000,000 Brierly Investments Ltd., Convertible Notes,
9% due 6/30/1998 (4) 1,832,476 2,125,809 0.1
2,000,000 Natural Gas Corp. Holdings, Convertible
Bonds, 10.50% due 10/14/1997 (7) 1,186,318 1,705,256 0.0
Total Fixed-Income Securities in New Zealand 3,018,794 3,831,065 0.1
Spain Pta 605,000,000 Banco de Santander, Convertible Bonds,
9% due 6/24/1994 (3) 4,603,421 4,791,636 0.1
Government of Spain (1):
2,000,000,000 10.25% due 11/30/1998 15,786,603 15,558,845 0.2
7,000,000,000 11.30% due 1/15/2002 64,934,781 57,435,233 0.8
4,600,000,000 10.30% due 6/15/2002 35,232,794 35,843,227 0.5
Total Fixed-Income Securities in Spain 120,557,599 113,628,941 1.6
Switzerland Chf 1,500,000 American Medical International, Inc.,
5% due 3/18/1996 (11) 493,386 1,039,372 0.0
4,010,000 Chrysler Financial Corp.,
5.75% due 6/18/1996 (4) 1,914,011 2,899,705 0.1
1,401,000 Ciba-Geigy AG, Convertible Bonds,
2% due 8/09/1998 (1) 1,178,587 1,339,169 0.0
3,020,000 News International, PLC,
5.375% due 4/30/1996 (13) 1,115,703 2,140,893 0.0
Total Fixed-Income Securities in Switzerland 4,701,687 7,419,139 0.1
</TABLE>
97
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Value Percent of
COUNTRY Face Amount Fixed-Income Securities Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
United Pound 3,750,000 Blue Circle, Convertible Bonds,
Kingdom Sterling 10.50% due 6/21/2005 (15) $ 7,147,695 $ 6,703,875 0.1%
20,950,000 Elf Enterprises Finance PLC,
Convertible Bonds, 8.75% due 6/27/2006 (4) 34,774,448 31,897,946 0.5
4,875,000 English China Clays PLC,
Convertible Bonds, 6.50% due 9/30/2003 (14) 8,364,034 7,570,266 0.1
5,250,000 Hanson PLC, Convertible Bonds,
9.50% due 1/31/2006 (5) 9,953,589 9,202,489 0.1
500,000 Land Securities PLC, Convertible Bonds,
6.75% due 12/31/2002 (25) 679,603 780,225 0.0
1,000,000 RMC Capital Ltd., Convertible Bonds,
8.75% due 5/31/2006 (14) 1,755,430 2,014,950 0.0
3,250,000 Redland Capital PLC, Convertible Bonds,
7.25% due 1/28/2002 (15) 5,382,804 5,022,225 0.1
8,350,000 Sainsbury (J) PLC, Convertible Bonds,
8.50% due 11/19/2005 (4) 16,072,715 15,623,059 0.2
5,750,000 Tate & Lyle International,
5.75% due 3/21/2001 (19) 7,504,988 7,709,456 0.1
35,000,000 United Kingdom Treasury Gilt,
8% due 6/10/2003 (42) 52,684,254 53,223,844 0.8
Total Fixed-Income Securities
in the United Kingdom 144,319,560 139,748,335 2.0
United US$ 3,490,000 AEGON N.V., Convertible Bonds, 7%
States due 9/15/2001 (16) 4,475,299 4,763,850 0.1
22,500,000 Alexander Haagen Properties Inc., Exchangeable
Debentures, 7.25% due 12/27/2003 (32) 22,500,000 21,600,000 0.3
43,500,000 Allison Engine, Inc., 10% due 12/01/2003 (5) 43,815,625 41,760,000 0.6
28,000,000 Allnet Communication Services, 9%
due 5/15/2003 (8) 27,743,272 26,740,000 0.4
3,087,500 American Medical International, Inc.,
6.50% due 5/30/1997 (11) 2,578,063 3,102,937 0.0
27,450,000 Baldwin Co., 10.375% due 8/01/2003 (14) 27,352,437 24,705,000 0.4
21,000,000 Banco de Galicia, 9% due 11/01/2003 (3) 20,913,960 18,060,000 0.3
108,000,000 Banco Nacional (BNCE), 7.25% due 2/02/2004 (3) 94,915,575 87,480,000 1.2
Banco Rio de la Plata (14):
60,000,000 (Class 3), 8.50% due 7/15/1998 60,508,125 55,650,000 0.8
32,000,000 8.75% due 12/15/2003 29,920,000 27,040,000 0.4
32,100,000 Beazer Homes USA, Inc., 9% due 3/01/2004 (30) 31,349,000 28,890,000 0.4
11,000,000 Best Buy Company Inc.,
8.625% due 10/01/2000 (5) 11,015,000 10,615,000 0.2
7,370,000 Boise Cascade Corp., 9.45% due 11/01/2009 (5) 8,024,087 7,664,800 0.1
25,000,000 Brazil Exit Bonds, 6% due 9/15/2013 (42) 14,425,854 11,375,000 0.2
34,000,000 Bridge Oil (USA), Inc.,
9.50% due 8/15/2000 (12) 34,032,500 31,960,000 0.5
675,000 CRH Capital Corp., Convertible Bonds,
5.75% due 4/30/2005 (4) 810,000 804,937 0.0
CTC Mansfield Funding Corp. (42):
15,000,000 10.25% due 3/30/2003 15,600,000 15,300,000 0.2
12,000,000 11.125% due 9/30/2016 12,820,000 12,360,000 0.2
40,000,000 California Energy Co., Inc.,
6.80% due 1/15/2004 (7) (b) 30,232,187 28,400,000 0.4
8,000,000 Calpine Corp., Inc., 9.25% due 2/01/2004 (7) 7,277,500 7,160,000 0.1
10,000,000 Centerpoint Properties Corp., Convertible Bonds,
8.22% due 1/15/2004 (4) 10,000,000 10,900,000 0.2
7,200,000 Cetus (Chiron) Corp., Convertible Bonds, 5.25%
due 5/21/2002 (17) 5,220,250 5,958,000 0.1
Ciba-Geigy Corp. (9):
7,945,000 5.50% due 10/28/1998 (Warrants) (a) 9,418,275 10,010,700 0.1
</TABLE>
98
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Value Percent of
COUNTRY Face Amount Fixed-Income Securities Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
24,945,000 +++++Convertible Bonds, 6.25% due 3/15/2016 25,632,050 24,009,562 0.3
Cleveland Electric Illuminating Company Inc.,
First Mortgage (7):
5,000,000 9.30% due 7/26/1999 5,437,500 5,081,250 0.1
12,500,000 9.25% due 7/29/1999 13,562,500 12,687,500 0.2
3,000,000 9.05% due 8/15/2001 3,093,750 2,940,000 0.0
7,500,000 7.625% due 8/01/2002 7,462,500 6,712,500 0.1
5,000,000 7.375% due 6/01/2003 4,700,000 4,375,000 0.1
30,000,000 +++++Collateralized Investment Co. Notes VI,
4.50% due 7/01/1994 (25) 30,000,000 30,000,000 0.4
+++Columbia Gas System, Inc. (26):
2,000,000 9% due 8/01/1993 2,326,250 2,430,000 0.0
6,500,000 7.50% due 6/01/1997 6,808,750 6,873,750 0.1
4,700,000 10.25% due 8/01/2011 5,340,375 5,922,000 0.1
10,000,000 10.50% due 6/01/2012 11,225,000 12,450,000 0.2
5,000,000 10.15% due 11/01/2013 5,562,500 6,200,000 0.1
4,000,000 9.50% due 10/10/2019 4,310,000 4,900,000 0.1
4,000,000 Congoleum Corp., 9% due 2/01/2001 (5) 4,000,000 3,720,000 0.1
12,500,000 Consoltex Group, Inc., 11% due 10/01/2003 (5) 12,530,000 12,312,500 0.2
27,000,000 Crossland Federal Savings Bank,
9% due 9/01/2003 (3) 27,678,000 25,920,000 0.4
20,000,000 Crown Packaging Ltd., 10.75% due 11/01/2000 (5) 20,000,000 19,600,000 0.3
5,000,000 DalTile International, Inc.,
10.597% due 7/15/1998 (15) (b) 3,029,864 3,000,000 0.0
26,500,000 Dell Computer Corp., 11% due 8/15/2000 (37) 26,577,500 26,897,500 0.4
Delta Airlines, Inc. (20):
8,000,000 Series A2, 9.20% due 9/23/2014 7,370,000 7,360,000 0.1
8,000,000 10.06% due 1/02/2016 8,005,000 8,000,000 0.1
20,000,000 Dominion Textile, 8.875% due 11/01/2003 (38) 19,901,600 18,450,000 0.3
+++++EUA Power Corp. (7):
1,000,000 Series B, 17.50% due 5/15/1993 475,000 125,000 0.0
3,157,600 Series C, 17.50% due 11/15/1992 1,915,790 394,700 0.0
30,000,000 Eagle Food Centers, 8.625% due 4/15/2000 (33) 29,972,337 28,275,000 0.4
19,000,000 Easco Corp., 10% due 3/15/2001 (4) 19,005,000 18,240,000 0.3
+++El Paso Electric Co. (7):
3,050,000 9.20% due 7/21/1997 2,501,000 2,478,125 0.0
23,000,000 10.375% due 1/02/2011 19,600,000 18,687,500 0.3
59,950,000 10.75% due 4/01/2013 51,355,500 48,709,375 0.7
8,500,000 Eletson Holdings Inc., 9.25% due 11/15/2003 (20) 8,537,500 7,990,000 0.1
19,000,000 Envirotest Systems Corp., 9.125%
due 3/15/2001 (5) 18,412,210 17,860,000 0.3
30,000,000 First Union Real Estate, 8.875%
due 10/01/2003 (32) 29,756,100 28,200,000 0.4
23,500,000 +++++Four Seasons Hotel, Inc., 9.125%
due 7/01/2000 (6) 23,401,875 21,502,500 0.3
26,000,000 Freeport-McMoRan Resources, 8.75%
due 2/15/2004 (24) 25,887,500 23,985,000 0.3
50,000,000 General Electric Capital Corp., 3.55%
due 1/19/1995 (4) 49,969,000 49,500,000 0.7
HIH Capital Ltd., Convertible Bonds (14):
470,000 +++++(Bearer), 7.50% due 9/25/2006 394,800 352,500 0.0
2,000,000 7.50% due 9/25/2006 1,665,000 1,500,000 0.0
10,000,000 Harris Chemical of North America, 9.193%
due 7/15/2001 (34) (b) 8,170,022 8,125,000 0.1
3,500,000 Hartmarx Corp., 10.875% due 1/15/2002 (5) 3,476,270 3,377,500 0.0
2,000,000 Hillhaven Corp., 10.125% due 9/01/2001 (5) 2,002,500 1,985,000 0.0
</TABLE>
99
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Value Percent of
COUNTRY Face Amount Fixed-Income Securities Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
United US$ 7,750,000 Horace Mann Educators, Inc., Convertible
States Bonds, 4% due 12/01/1999 (31) $ 7,682,500 $ 7,517,500 0.1%
(continued) 3,550,000 Hospital Corp. of America, 6.434%
due 6/01/1998 (11) (b) 2,421,324 2,653,625 0.0
77,000,000 International Semi-Tech Microelectronics Inc.,
10.284% due 8/15/2003 (14) (b) 37,222,458 37,152,500 0.5
26,500,000 K. Hovnanian Enterprises, 9.75%
due 6/01/2005 (30) 26,241,800 24,777,500 0.4
7,500,000 LTC Properties, Convertible Bonds, 9.75%
due 7/01/2004 (25) 7,500,000 9,900,000 0.1
7,000,000 Lend Lease Finance Corp. Ltd., Convertible
Bonds, 4.75% due 6/01/2003 (4) 7,950,000 7,752,500 0.1
10,000,000 Lomas Mortgage USA, Inc., 9.75%
due 10/01/1997 (25) 10,000,000 10,025,000 0.1
25,000,000 MDC Holdings Inc., 11.125% due 12/15/2003 (5) 24,709,000 24,250,000 0.3
15,000,000 MFS Communications Corp., Inc., 10.44%
due 1/15/2004 (5) (b) 8,912,639 8,625,000 0.1
8,500,000 Mediq/PRN Senior Notes, 11.125%
due 7/01/1999 (22) 8,845,000 8,521,250 0.1
Meditrust, Convertible Bonds (25):
6,000,000 7% due 3/01/1998 6,035,000 6,495,000 0.1
28,500,000 7.50% due 3/01/2001 28,500,000 28,215,000 0.4
3,000,000 9% due 1/01/2002 3,000,000 3,690,000 0.1
10,000,000 Methanex Corp., 8.875% due 11/15/2001 (5) 10,027,400 9,650,000 0.1
5,000,000 Mid-Atlantic Realty Trust, Convertible Bonds,
7.625% due 9/15/2003 (4) 4,875,000 4,850,000 0.1
12,500,000 Nacolah Holding Corp., 9.50% due 12/01/2003 (4) 12,500,000 11,812,500 0.2
5,000,000 National Health Investors, Inc., 7.375%
due 4/01/1998 (5) 5,125,000 5,037,500 0.1
23,000,000 Nationwide Health Properties Inc., 6.25%
due 1/01/1999 (5) 23,000,000 22,655,000 0.3
Nextel Communications Inc. (8) (b):
3,000,000 9.668% due 9/01/2003 1,884,912 1,882,500 0.0
23,500,000 10.70% due 8/15/2004 14,158,584 13,571,250 0.2
8,000,000 Noble Drilling Corp., 9.25% due 10/01/2003 (12) 8,000,000 7,560,000 0.1
1,000,000 Novacare, Inc., Convertible Bonds,
5.50% due 1/15/2000 (11) 857,500 920,000 0.0
22,000,000 OMI Corp., 10.25% due 11/01/2003 (20) 21,910,000 20,570,000 0.3
14,000,000 OSI Specialities Corp., 9.25% due 10/01/2003 (5) 14,000,000 13,300,000 0.2
Owens--Illinois, Inc. (5):
3,000,000 10.50% due 6/15/2002 3,051,000 3,060,000 0.0
19,500,000 9.75% due 8/15/2004 18,908,250 18,915,000 0.3
PDV America, Inc. (14):
35,000,000 7.25% due 8/01/1998 34,856,150 33,075,000 0.5
10,000,000 7.75% due 8/01/2000 10,062,500 9,387,500 0.1
2,000,000 P.T. Indorayon, Convertible Bonds,
5.50% due 10/01/2002 (2) 2,363,125 2,440,000 0.0
3,900,000 P.T. Pabrik Kertas Tjiwa Kimia, Convertible
Bonds, 7.25% due 4/12/2001 (2) 2,923,000 3,685,500 0.1
7,500,000 Paging Network, Inc., 8.875% due 2/01/2006 (5) 6,825,000 6,712,500 0.1
27,250,000 Paracelsus Healthcare Corp., 9.875%
due 10/15/2003 (18) 27,221,875 25,751,250 0.4
45,000,000 Penn Traffic Co., 8.625% due 12/15/2003 (5) 44,876,400 41,175,000 0.6
6,500,000 +++++Petrolera Argentina San Jorge S.A., 11%
due 2/09/1998 (26) 6,278,750 6,605,000 0.1
</TABLE>
100
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Value Percent of
COUNTRY Face Amount Fixed-Income Securities Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
9,545,000 Phoenix Home Life-Mutual Insurance Co., 8%
due 11/25/2023 (31) 9,545,000 8,781,400 0.1
30,500,000 Plastic Specialties & Technology, Inc., 11.25%
due 12/01/2003 (5) 30,540,000 28,975,000 0.4
25,062,500 +++++++Presidio Oil Co., 11.50%
due 9/15/2000 (26) 25,683,750 25,563,750 0.4
12,000,000 Price Co., Convertible Bonds, 5.50%
due 2/28/2012 (14) 11,213,250 10,170,000 0.1
23,000,000 Public Service of New Mexico, EIP Funding,
10.25% due 10/01/2012 (7) 23,000,000 22,770,000 0.3
13,200,000 Public Service of New Mexico, First PV Funding,
10.30% due 1/15/2014 (7) 13,213,000 12,870,000 0.2
18,000,000 Public Service of New Mexico Lease Obligation,
First PV Funding, Convertible Bonds, 10.15%
due 1/15/1996 (7) 17,128,125 17,370,000 0.2
14,500,000 Pueblo Xtra, 9.50% due 8/01/2003 (22) 14,111,375 13,231,250 0.2
24,500,560 RTC Commercial Mortgage, Class E, 8.25%
due 12/25/2020 (3) 24,125,395 22,418,013 0.3
18,500,000 Ralphs Grocery Company, 10.25% due
7/15/2002 (5) 19,166,250 18,453,750 0.3
4,000,000 Regency Health Services, Inc., Convertible
Bonds, 6.50% due 7/15/2003 (18) 4,000,000 5,440,000 0.1
Republic of Argentina (1):
12,500,000 Global Bond, 8.375% due 12/20/2003 11,456,250 10,625,000 0.2
184,500,000 Par Bond, 4.25% due 3/31/2023 101,644,750 97,323,750 1.4
113,000,000 4.312% due 3/31/2023 86,525,750 79,947,500 1.1
38,610,000 Republic of Brazil, 4.312% due 1/01/2001 30,178,912 27,895,725 0.4
7,480,875 +++++Resolution Trust Co., 9% due 3/15/2003
(Class 3) (21) (d) 7,083,453 7,480,875 0.1
3,000,000 Roosevelt Financial Group, Inc., 9.50%
due 8/01/2002 (27) 3,000,000 3,105,000 0.0
10,000,000 SKW Real Estate, 9.05% due 4/15/2004 9,996,030 9,950,000 0.1
Safeway, Inc. (5):
5,000,000 10% due 11/01/2002 5,247,500 5,237,500 0.1
5,000,000 9.30% due 2/01/2007 5,139,375 5,100,000 0.1
23,500,000 Salant Corp., Secured, 10.50%
due 12/31/1998 (38) 23,030,000 22,912,500 0.3
10,075,000 Sequa Corp., 9.625% due 10/15/1999 (14) 9,874,312 9,923,875 0.1
28,000,000 Sherritt Gordon Ltd., 9.75% due 4/01/2003 (29) 28,124,375 27,090,000 0.4
5,000,000 Siemens Corp., 8% due 6/24/2002
(With Warrants) (a) (9) 6,536,250 6,850,000 0.1
32,050,000 Sifto Canada, Inc., 8.50% due 7/15/2000 (5) 32,100,250 30,447,500 0.4
5,500,000 Sizeler Property Investors, Inc.,
Convertible Bonds, 8% due 7/15/2003 (24) 5,505,000 5,527,500 0.1
3,000,000 Ssangyong Oil Corp., 3.75% due 12/31/2008 (12) 3,195,750 3,495,000 0.0
9,000,000 Stone Consolidated Corp., 10.25%
due 12/15/2000 (40) 9,000,000 8,640,000 0.1
19,500,000 Stone Container Corp., 9.875%
due 2/01/2001 (2) 19,227,500 18,135,000 0.3
5,500,000 Storer Communications Inc., 10%
due 5/15/2003 (8) 5,538,500 5,445,000 0.1
38,000,000 Tarkett International, 9.50%
due 3/01/2002 (15) 36,711,250 35,150,000 0.5
18,250,000 Texfi Industries, Inc., 8.75%
due 8/01/1999 (39) 17,930,300 14,235,000 0.2
Toledo Edison Co. (42):
2,000,000 9.30% due 4/01/1998 2,130,000 2,045,000 0.0
15,425,000 7.25% due 8/01/1999 15,425,000 14,422,375 0.2
3,000,000 9.50% due 4/01/2001 3,221,250 3,030,000 0.0
2,000,000 7.91% due 4/01/2003 1,992,500 1,820,000 0.0
17,000,000 Transtexas Gas Corp., 10.50%
due 9/01/2000 (12) 17,073,125 17,000,000 0.2
2,220,000 Tung Ho Steel Enterprise, Convertible Bonds,
4% due 7/26/2001 (24) 2,243,700 2,575,200 0.0
</TABLE>
101
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<CAPTION>
Value Percent of
COUNTRY Face Amount Fixed-Income Securities Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
United United Mexican States, Discount Notes (1):
States US$ 10,000,000 8.50% due 9/15/2002 $ 9,420,000 $ 9,175,000 0.1%
(concluded) 65,000,000 Series A, 4.187% due 12/31/2019 58,148,000 54,437,500 0.8
35,000,000 Series B, 4.312% due 12/31/2019 30,062,500 29,312,500 0.4
United Mexican States, Rights (1):
99,996,000 (Series A) 0 0 0.0
53,845,000 (Series B) 0 0 0.0
11,000,000 USAir Inc., 10% due 7/01/2003 (28) 8,529,375 7,535,000 0.1
USAir Pass Thru (28):
7,500,000 9.625% due 9/01/2003 7,495,625 6,337,500 0.1
4,644,818 9.33% due 1/01/2006 4,529,163 4,226,785 0.1
9,000,000 10.375% due 3/01/2013 8,922,500 7,650,000 0.1
5,475,000 US Trails Senior Secured, 12%
due 7/15/1998 (4) 4,433,125 4,352,625 0.1
6,000,000 USX-Marathon Oil Co., 7% due 6/15/2017 (12) 5,650,000 5,310,000 0.1
5,875,000 Veba International Finance (Warrants),
6% due 4/06/2000 (4) (a) 7,083,300 9,282,500 0.1
21,834,700 Vista Properties, Inc., 13.75%
due 10/31/2001 (25) (c) 11,267,896 8,733,880 0.1
19,000,000 The Vons Companies, Inc., 9.625%
due 4/01/2002 (5) 20,335,000 19,190,000 0.3
Webb (Del E.) Corp. (30):
15,000,000 9.75% due 3/01/2003 15,000,000 14,137,500 0.2
4,500,000 9% due 2/15/2006 4,010,000 3,982,500 0.1
14,000,000 Wilrig AS, 11.25% due 3/15/2004 (5) 14,000,000 13,370,000 0.2
-------------- -------------- ------
2,428,465,430 2,324,105,114 33.0
US Government & US Treasury Notes:
Agency Obligations US 50,000,000 4% due 1/31/1996 49,531,250 48,671,900 0.7
85,000,000 4.625% due 2/29/1996 84,823,681 83,459,375 1.2
150,000,000 4.75% due 2/15/1997 149,103,248 144,890,700 2.0
150,000,000 7.50% due 11/15/2001 157,250,000 154,945,350 2.2
-------------- -------------- ------
440,708,179 431,967,325 6.1
Total Fixed-Income Securities in the
United States 2,869,173,609 2,756,072,439 39.1
Total Investments in Fixed-Income
Securities 4,215,215,465 4,099,536,596 58.2
<CAPTION>
Short-Term Securities
<S> <S> <C> <S> <C> <C> <C>
United States
Commercial Paper* US$ 106,618,000 General Electric Capital Corp., 3.53%
due 5/02/1994 106,597,091 106,597,091 1.5
33,383,000 Matterhorn Capital Corp., 3.78%
due 5/26/1994 33,291,864 33,291,864 0.5
Total Investments in Commercial Paper 139,888,955 139,888,955 2.0
US Government & 4,500,000 Federal National Mortgage Association,
Agency Obligations* 3.70% due 5/25/1994 4,488,438 4,488,438 0.1
Total Investments in US Government &
Agency Obligations 4,488,438 4,488,438 0.1
Total Investments in Short-Term Securities 144,377,393 144,377,393 2.1
Total Investments $6,743,524,161 6,895,722,621 97.9
==============
Unrealized
Depreciation on
Forward Foreign
Exchange Contracts** (20,446,866) (0.3)
</TABLE>
102
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<CAPTION>
Value Percent of
COUNTRY Face Amount Short-Term Securities Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Variation Margin on Stock
Index Futures Contracts*** 13,000 0.0
Other Assets Less Liabilities 166,485,672 2.4
-------------- ------
Net Assets $7,041,774,427 100.0%
============== ======
</TABLE>
(a)Warrants entitle the Fund to purchase a predetermined number of shares
of stock/face amount of bonds at a predetermined price until the expira-
tion date.
(b)The interest rate shown represents the yield-to-maturity on this zero
coupon issue.
(c)Represents a pay-in-kind security.
(d)Subject to principal paydowns as a result of prepayments or refinancings
of the underlying mortgage instruments. As a result, the average life may be
less than the original maturity.
(e)Name changed from Crossland Federal Savings Bank.
Corresponding industry groups for fixed-income securities:
(1)Government
(2)Paper & Forest Products
(3)Banking
(4)Financial
(5)Industrial
(6)Leisure
(7)Utilities--Electric
(8)Telecommunications
(9)Pharmaceutical
(10)Automobiles & Equipment
(11)Hospital Management
(12)Oil & Related
(13)Newspaper/Publishing
(14)Multi-Industry
(15)Building Materials
(16)Electrical Equipment
(17)Biotechnology
(18)Healthcare
(19)Food
(20)Transportation
(21)Asset-Backed Security
(22)Supermarkets
(23)Electronics
(24)Metals
(25)Real Estate Investment Trust
(26)Energy Related
(27)Savings Bank
(28)Airlines
(29)Resources
(30)Building & Construction
(31)Insurance
(32)Real Estate
(33)Advertising
(34)Chemicals
(35)Commercial Services
(36)Broadcasting
(37)Computers
(38)Textiles
(39)Food & Tobacco
(40)Packaging & Containers
(41)Beverages
(42)Government Regional
(43)Conglomerates
++American Depositary Receipt (ADR).
++++Global Depositary Shares (GDS).
++++++Investment in Companies 5% or more of whose outstanding securities are
held by the Fund (such companies are defined as "Affiliated Companies"
in section 2(a)(3) of the Investment Company Act of 1940) are as
follows:
<TABLE>
<CAPTION>
Net Share Net Dividend
Industry Affiliate Activity Cost Income
<S> <S> <C> <C> <C>
Retail Stores Buttrey Food & Drug
Stores Co. -- -- --
Retail Stores Filene's Basement Corp. 1,110,000 $10,092,619 --
Savings Banks Glendale Federal Savings
Bank 43,000 117,625 --
</TABLE>
*Commercial Paper and US Government & Agency Obligations are traded
on a discount basis; the interest rates shown are the discount rates
paid at the time of purchase by the Fund.
**Forward foreign exchange contracts as of April 30, 1994 were as
follows:
Expiration Unrealized
Foreign Currency Sold Date Depreciation
Chf 52,000,000 May 1994 $ (338,796)
DM 542,000,000 May 1994 (10,125,238)
DM 560,000,000 June 1994 (2,607,985)
ECU 35,000,000 May 1994 (655,935)
Frf 135,000,000 May 1994 (442,905)
Pound Sterling 46,000,000 May 1994 (1,642,536)
Nlg 98,000,000 May 1994 (1,076,297)
Pta1 3,950,000,000 May 1994 (2,925,593)
Yen 900,000,000 May 1994 (131,655)
Yen 33,000,000,000 June 1994 (499,926)
Total (US$ Commitment--$1,304,300,527) $(20,446,866)
------------
Total Unrealized Depreciation--Net On
Forward Foreign Exchange Contracts $(20,446,866)
============
***Financial futures contracts purchased as of April 30, 1994 were as
follows:
Number of Expiration Value
Contracts Issue Date (Notes 1a & 1e)
20 Standard & Poor's 500 Index June 1994 $ 4,503,500
Total Financial Futures Contracts Purchased
(Total Contract Price--$4,673,400) $ 4,503,500
============
The market value of pledged securities is $1,698,125.
+++Non-income producing security.
+++++Restricted security pursuant to Rule 144A.
+++++++Restricted securities as to resale. The value of the Fund's
investment in restricted securities was approximately representing
0.4% of net assets.
Acquisition Value
Issue Date Cost (Note 1a)
Presidio Oil Co., 11.50%
due 9/15/2000 8/03/1993 $ 25,683,750 $ 25,563,750
------------ ------------
$ 25,683,750 $ 25,563,750
============ ============
See Notes to Financial Statements.
103
<PAGE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of April 30, 1994
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$6,743,524,161) (Note 1a) $6,895,722,621
Variation margin on stock index futures contracts (Note 1e & 5) 13,000
Foreign cash (Note 1c) 881,576
Cash --
Receivables:
Securities sold $ 134,017,703
Interest 87,729,166
Capital shares sold 62,144,514
Dividends 7,054,352
Forward exchange contract (Note 1c) 197,979 291,143,714
-------------
Deferred organization expenses (Note 1h) 4,680
Prepaid registration fees and other assets (Note 1h) 128,864
--------------
Total assets 7,187,894,455
--------------
Liabilities: Unrealized depreciation on forward foreign exchange contracts (Note 1c) 20,446,866
Payables:
Securities purchased 85,339,277
Capital shares redeemed 16,350,994
Forward exchange contract (Note 1c) 8,338,528
Distributor (Note 2) 4,539,720
Investment adviser (Note 2) 3,865,397 118,433,916
-------------
Accrued expenses and other liabilities 7,239,246
--------------
Total liabilities 146,120,028
--------------
Net Assets Net assets $7,041,774,427
==============
Net Assets Class A Shares of Common Stock, $0.10 par value, 200,000,000 shares authorized $ 9,158,612
Consist of: Class B Shares of Common Stock, $0.10 par value, 900,000,000 shares authorized 44,245,178
Paid-in capital in excess of par 6,681,004,139
Undistributed investment income--net 31,073,492
Undistributed realized capital gains and foreign currency transaction gains--net 143,780,140
Unrealized appreciation on investments and foreign currency transactions--net 132,512,866
--------------
Net assets $7,041,774,427
==============
Net Asset Class A--Based on net assets of $1,219,668,720 and 91,586,124 shares outstanding $ 13.32
Value: ==============
Class B--Based on net assets of $5,822,105,707 and 442,451,775 shares outstanding $ 13.16
==============
See Notes to Financial Statements.
</TABLE>
104
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Six Months Ended April 30, 1994
<S> <S> <C> <C>
Investment Interest and discount earned $ 127,565,718
Income Dividends (net of $1,122,665 foreign withholding tax) 26,368,670
(Notes 1f Other 218,434
& 1g): --------------
Total income 154,152,822
--------------
Expenses: Distribution fees--Class B (Note 2) $ 25,776,706
Investment advisory fees (Note 2) 22,129,737
Transfer agent fees--Class B (Note 2) 2,204,374
Custodian fees 1,017,340
Registration fees (Note 1h) 623,145
Transfer agent fees--Class A (Note 2) 380,929
Printing and shareholder reports 274,102
Accounting services (Note 2) 115,346
Professional fees 44,126
Directors' fees and expenses 13,217
Amortization of organization expenses (Note 1h) 1,981
Other 24,539
-------------
Total expenses 52,605,542
--------------
Investment income-net 101,547,280
--------------
Realized & Realized gain (loss) from:
Unrealized Investments--net $ 163,262,599
Gain (Loss) Foreign currency transactions--net (17,427,950) 145,834,649
on Invest- --------------
ments & Change in unrealized appreciation/depreciation:
Foreign Investments--net (115,885,543)
Currency Foreign currency transactions--net (32,587,085) (148,472,628)
Transactions ------------- --------------
- --Net Net realized and unrealized loss on investments and foreign currency transactions (2,637,979)
(Notes 1c, --------------
1g & 3): Net Increase in Net Assets Resulting from Operations $ 98,909,301
==============
See Notes to Financial Statements.
</TABLE>
105
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Six For the
Months Ended Year Ended
April 30, October 31,
1994 1993
Increase (Decrease) in Net Assets:
<S> <S> <C> <C>
Operations: Investment income--net $ 101,547,280 $ 78,569,836
Realized gain on investments and foreign currency transactions--net 145,834,649 96,098,223
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net (148,472,628) 303,533,099
-------------- --------------
Net increase in net assets resulting from operations 98,909,301 478,201,158
-------------- --------------
Dividends & Investment income--net:
Distributions Class A (20,634,331) (21,579,231)
to Share- Class B (81,055,168) (78,516,167)
holders Realized gain on investments--net:
(Note 1i): Class A (16,636,230) (2,640,570)
Class B (80,810,426) (10,640,849)
-------------- --------------
Net decrease in net assets resulting from dividends and distributions to
shareholders (199,136,155) (113,376,817)
-------------- --------------
Capital Share Net increase in net assets derived from capital share transactions 1,924,650,472 3,647,738,774
Transactions -------------- --------------
(Note 4):
Net Assets: Total increase in net assets 1,824,423,618 4,012,563,115
Beginning of period 5,217,350,809 1,204,787,694
-------------- --------------
End of period* $7,041,774,427 $5,217,350,809
============== ==============
<FN>
*Undistributed investment income--net $ 31,073,492 $ 31,215,711
============== ==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Class A
The following per share data and ratios have been For the
derived from information provided in the financial Six Months
statements. Ended April 30, For the Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1994 1993 1992 1991 1990
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 13.52 $ 11.92 $ 12.16 $ 10.37 $ 10.79
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income--net .28 .39 .36 .55 .60
Realized and unrealized gain (loss) on
investments and foreign currency transactions--net .04 2.14 .89 2.24 (.16)
---------- ---------- ---------- ---------- ----------
Total from investment operations .32 2.53 1.25 2.79 .44
---------- ---------- ---------- ---------- ----------
</TABLE>
106
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Class A
The following per share data and ratios have been For the
derived from information provided in the financial Six Months
statements. Ended April 30, For the Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1994 1993 1992 1991 1990
<S> <S> <C> <C> <C> <C> <C>
Less dividends and distributions:
Investment income--net (.29) (.81) (.89) (.45) (.66)
Realized gain on investments--net (.23) (.12) (.60) (.55) (.20)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (.52) (.93) (1.49) (1.00) (.86)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 13.32 $ 13.52 $ 11.92 $ 12.16 $ 10.37
========== ========== ========== ========== ==========
Total Based on net asset value per share 2.41%++ 22.61% 11.78% 28.89% 3.91%
Investment ========== ========== ========== ========== ==========
Return:**
Ratios to Expenses .85%* .93% 1.07% 1.29% 1.29%
Average ========== ========== ========== ========== ==========
Net Assets: Investment income--net 4.10%* 3.90% 10.82% 8.96% 4.37%
========== ========== ========== ========== ==========
Supplemental Net assets, end of period (in thousands) $1,219,669 $ 917,806 $ 245,839 $ 72,702 $ 49,691
Data: ========== ========== ========== ========== ==========
Portfolio turnover 35.64% 50.35% 59.56% 81.21% 129.51%
========== ========== ========== ========== ==========
<CAPTION>>
Class B
The following per share data and ratios have been For the
derived from information provided in the financial Six Months
statements. Ended April 30, For the Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1994 1993 1992 1991 1990
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 13.38 $ 11.83 $ 12.10 $ 10.33 $ 10.73
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income--net .21 .28 .22 .44 .49
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net .03 2.11 .91 2.22 (.16)
---------- ---------- ---------- ---------- ----------
Total from investment operations .24 2.39 1.13 2.66 .33
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.23) (.72) (.80) (.34) (.53)
Realized gain on investments--net (.23) (.12) (.60) (.55) (.20)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (.46) (.84) (1.40) (.89) (.73)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 13.16 $ 13.38 $ 11.83 $ 12.10 $ 10.33
========== ========== ========== ========== ==========
Total Based on net asset value per share 1.86%++ 21.42% 10.64% 27.48% 2.93%
Investment ========== ========== ========== ========== ==========
Return:**
Ratios to Expenses, excluding distribution fees .86%* .95% 1.09% 1.31% 1.31%
Average ========== ========== ========== ========== ==========
Net Assets: Expenses 1.86%* 1.95% 2.09% 2.31% 2.31%
========== ========== ========== ========== ==========
Investment income--net 3.08%* 2.87% 11.95% 7.98% 3.35%
========== ========== ========== ========== ==========
Supplemental Net assets, end of period (in thousands) $5,822,106 $4,299,545 $ 958,949 $ 161,328 $ 115,682
Data: ========== ========== ========== ========== ==========
Portfolio turnover 35.64% 50.35% 59.56% 81.21% 129.51%
========== ========== ========== ========== ==========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
107
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Global Allocation Fund, Inc. (the "Fund") is regis-
tered under the Investment Company Act of 1940 as a non-diversi-
fied, open-end management investment company. The shares of the Fund
are divided into Class A Shares and Class B Shares. Class A Shares
are sold with a front-end sales charge. Class B Shares may be sub-
ject to a contingent deferred sales charge. Both classes of shares
have identical voting, dividend, liquidation and other rights and
the same terms and conditions, except that Class B Shares bear cer-
tain expenses related to the account maintenance and distribution of
such shares and have exclusive voting rights with respect to matters
relating to such account maintenance 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 US stock exchanges are valued at the last sale price on the prin-
cipal market 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
or yield equivalents obtained from one or more dealers in the over-
the-counter market prior to the time of valuation. Portfolio secur-
ities which are traded both in the over-the-counter market and on
a stock exchange are valued according to the broadest and most rep-
resentative market. Portfolio securities which are traded on Euro-
pean stock exchanges are valued at the closing bid price on such
exchanges on the day the securities are being valued or, if closing
prices are unavailable, at the last traded bid price available
prior to the time of valuation. Short-term securities are valued
at amortized cost which approximates market.
Options written by the Fund are valued at the last asked price in
the case of exchange-traded options or, in the case of options
traded in the over-the-counter market, the average of the last
asked price as obtained from one or more dealers. Options purchased
by the Fund are valued at their last bid price in the case of ex-
change-traded options or, in the case of options traded in the
over-the-counter market, the average of the last bid price as ob-
tained from two or more dealers, unless there is only one dealer,
in which case that dealer's price is used.
Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by
or under the direction of the Board of Directors of the Fund.
(b) Repurchase agreements--The Fund invests in US Government securities
pursuant to repurchase agreements with a member bank of the Federal Reserve
System or a primary dealer in US Government securities. Under such agreements,
the bank or primary dealer agrees to repurchase the security at a mutually
agreed upon time and price. The Fund takes possession of the underlying
securities, marks to market such securities and, if necessary, receives addi-
tions to such securities daily to ensure that the contract if fully
collateralized.
(c) 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) receivables or payables expressed in foreign
currencies into US dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates
on investments.
The Fund is authorized to enter into forward foreign exchange con-
tracts as a hedge against either specific transactions or portfolio
positions. Such contracts are not entered on the Fund's records.
However, the effect on operations is recorded from the date the Fund
enters into such contracts. Premium or discount is amortized over
the life of the contracts.
The Fund may also purchase or sell listed or over-the-counter foreign
currency options, foreign currency futures and related options on
foreign currency futures as a short or long hedge against possible
variations in foreign exchange rates. Such transactions may be
effected with respect to hedges on non-US dollar denominated secur-
ities owned by the Fund, sold by the Fund but not yet delivered, or
committed or anticipated to be purchased by the Fund.
(d) Options--The Fund can write covered call options and purchase
put options. When the Fund writes an option, an amount equal to the
premium received by the Fund is reflected as an asset and an equi-
valent liability. The amount of the liability is subsequently marked
to market to reflect the current value of the option written.
When a security is sold through an exercise of an option, the re-
lated premium received (or paid) is deducted from (or added to) the
basis of the security sold. When an option expires (or the Fund
enters into a closing transaction), the Fund realizes a gain or
loss on the option to the extent of the premiums received or paid
(or gain or loss to the extent the cost of the closing transaction
exceeds the premiums paid or received).
Written and purchased options are non-income producing
investments.
(e) Financial futures contracts--The Fund may purchase or sell
stock index futures contracts and options on such futures contracts.
108
<PAGE>
Upon entering into a contract, the Fund deposits and maintains as
collateral such initial margin as required by the exchange on which
the transaction is effected. Pursuant to the contract, the Fund
agrees to receive from or pay to the broker an amount of cash equal
to the daily fluctuation in value of the contract. Such receipts
or payments are known as variation margin and are recorded by the
Fund as unrealized gains or losses. When the contract is closed, the
Fund records a realized gain or loss equal to the difference between
the value of the contract at the time it was opened and the value
at the time it was closed.
(f) Income taxes--It is the Fund's policy to comply with the re-
quirements 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 cap-
ital gains at various rates.
(g) Security transactions and investment income--Security trans-
actions are recorded on the dates the transactions are entered into
(the trade dates). Dividend income is recorded on the ex-dividend
dates except that if the ex-dividend date has passed, certain divi-
dends from foreign securities are recorded as soon as the Fund is
informed of the ex-dividend date. Interest income (including amor-
tization of discount) is recognized on the accrual basis. Realized
gains and losses on security transactions are determined on the
identified cost basis.
(h) Deferred organization expenses and prepaid registration fees--
Deferred organization expenses are charged to expense on a straight-
line basis over a five-year period. Prepaid registration fees are
charged to expense as the related shares are issued.
(i) Dividends and distributions--Dividends and distributions paid
by the Fund are recorded on the ex-dividend dates.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). Effective January 1,
1994, the investment advisory business of MLAM was reorganized
from a corporation to a limited partnership. Both prior to and after
the reorganization, ultimate control of MLAM was vested with
Merrill Lynch & Co., Inc. ("ML & Co."). The general partner of
MLAM is Princeton Services, Inc., an indirect wholly-owned subsidiary
of ML & Co. The limited partners are ML & Co. and Merrill Lynch Invest-
ment Management, Inc. ("MLIM") which is also an indirect wholly-owned
subsidiary of ML & Co. The Fund has also entered into a Distribution
Agreement and a Distribution Plan with Merrill Lynch Funds Distributor,
Inc. ("MLFD" or "Distributor"), a wholly-owned subsidiary of MLIM.
MLAM is responsible for the management of the Fund's portfolio
and provides the necessary personnel, facilities, equipment and
certain other services necessary to the operations of the Fund. For
such services, the Fund pays a monthly fee of 0.75%, on an annual
basis, of the average daily value of the Fund's net assets. MLAM has
agreed to waive a portion of its fee payable by the Fund so that such
fee is reduced for average daily net assets of the Fund, in excess of
$2.5 billion from the annual rate of 0.75% to 0.70%, and further
reduced from 0.70% to 0.65% for average daily net assets in excess
of $5 billion. MLAM has entered into a sub-advisory agreement with
Merrill Lynch Asset Management U.K., Ltd. ("MLAM U.K."), an affil-
iate of MLAM, pursuant to which MLAM pays MLAM U.K. a fee computed
at the rate of 0.10% of the average daily net assets of the Fund
for providing investment advisory services to MLAM with respect to
the Fund. For the six months ended April 30, 1994, MLAM paid MLAM
U.K. a fee of $2,860,505 pursuant to such agreement. Certain of
the states in which the shares of the Fund are qualified for sale
impose limitations on the expenses of the Fund. The most restric-
tive annual expense limitation requires that the Investment Adviser
reimburse the Fund to the extent the Fund's expenses (excluding
interest, taxes, distribution fees, brokerage fees and commissions,
and extraordinary items) exceed 2.5% of the Fund's first $30 million
of average daily net assets, 2.0% of the next $70 million of average
daily net assets, and 1.5% of the average daily net assets in excess
thereof. MLAM's obligation to reimburse the Fund is limited to the
amount of the management fee. No fee payment will be made to MLAM
during any fiscal year which will cause expenses to exceed the most
restrictive expense limitation at the time of such payment.
The Fund has adopted a Plan of Distribution (the "Plan") in accord-
ance with Rule 12b-1 under the Investment Company Act of 1940
pursuant to which the Fund pays the Distributor an ongoing account
maintenance fee and distribution fee, which are accrued daily and
paid monthly, at the annual rates of 0.25% and 0.75%, respectively,
of the average daily net assets of the Class B Shares of the Fund.
The ongoing account maintenance fee compensates the Distributor
and Merrill Lynch for providing account maintenance services to
Class B shareholders, the distribution fee is to compensate the
Distributor for the services it provides and the expenses borne by
the Distributor under the Distribution Agreement. As authorized by
the Plan, the Distributor has entered into an agreement with Merrill
Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S"), an affiliate of
MLAM, which provides for the compensation of MLPF&S for
109
<PAGE>
providing distribution-related services to the Fund. For the six
months ended April 30, 1994, MLFD earned $25,776,706 under the plan,
all of which was paid to MLPF&S pursuant to the agreement.
For the six months ended April 30, 1994, MLFD earned underwriting
discounts of $408,624, and MLPF&S earned dealer concessions of
$6,397,179 on sales of the Fund's Class A Shares.
MLPF&S also received contingent deferred sales charges of
$2,605,465 relating to transactions in Class B Shares and $173,619
in commissions on the execution of portfolio security trans-
actions for the Fund during the period.
At April 30, 1994, the Fund owed affiliated funds $9,990,370 for
securities purchased.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary
of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLIM, MLPF&S, FDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended April 30, 1994 were $4,563,527,922 and
$1,876,272,227, respectively.
Net realized and unrealized gains (losses) as of April 30, 1994
were as follows:
Realized Unrealized
Gains (Losses) Gains (Losses)
Long-term investments $ 158,992,145 $ 152,198,460
Short-term investments (31,914) --
Foreign currency transactions 311,176 931,172
Forward foreign exchange contracts (17,739,126) (20,446,866)
Financial futures contracts 4,302,368 (169,900)
-------------- --------------
Total $ 145,834,649 $ 132,512,866
============== ==============
As of April 30, 1994, net unrealized appreciation for Federal in-
come tax purposes aggregated $152,215,167, of which $388,599,604 re-
lated to appreciated securities and $236,384,437 related to depre-
ciated securities. At April 30, 1994, the aggregate cost of invest-
ments, including put options purchased, less premiums received for
options written, for Federal income tax purposes was $6,743,524,161.
4. Capital Share Transactions:
Net increase (decrease) in net assets derived from capital share
transactions was $1,924,650,472 and $3,647,738,774 for the six
months ended April 30, 1994 and the year ended October 31, 1993,
respectively.
110
<PAGE>
Transactions in capital shares for Class A and Class B shares were
as follows:
Class A Shares for the Six Months Dollar
Ended April 30, 1994 Shares Amount
Shares sold 30,999,981 $ 416,541,972
Shares issued to shareholders in
reinvestment of dividends and
distributions 2,531,539 33,137,849
-------------- --------------
Total issued 33,531,520 449,679,821
Shares redeemed (9,832,463) (132,081,664)
-------------- --------------
Net increase 23,699,057 $ 317,598,157
============== ==============
Class A Shares for the Year Ended Dollar
October 31, 1993 Shares Amount
Shares sold 51,001,581 $ 652,336,461
Shares issued to shareholders in
reinvestment of dividends and
distributions 1,771,977 20,906,783
-------------- --------------
Total issued 52,773,558 673,243,244
Shares redeemed (5,508,522) (70,517,148)
-------------- --------------
Net increase 47,265,036 $ 602,726,096
============== ==============
Class B Shares for the Six Months Dollar
Ended April 30, 1994 Shares Amount
Shares sold 139,978,671 $1,860,424,125
Shares issued to shareholders in
reinvestment of dividends and
distributions 11,173,260 145,028,915
-------------- --------------
Total issued 151,151,931 2,005,453,040
Shares redeemed (30,129,406) (398,400,725)
-------------- --------------
Net increase 121,022,525 $1,607,052,315
============== ==============
Class B Shares for the Year Ended Dollar
October 31, 1993 Shares Amount
Shares sold 248,487,181 $3,152,585,403
Shares issued to shareholders in
reinvestment of dividends and
distributions 6,532,523 76,482,665
-------------- --------------
Total issued 255,019,704 3,229,068,068
Shares redeemed (14,631,176) (184,055,390)
-------------- --------------
Net increase 240,388,528 $3,045,012,678
============== ==============
5. Commitments:
At April 30, 1994, the Fund had entered into forward foreign ex-
change contracts under which it had agreed to purchase and sell var-
ious foreign currency with an approximate value of $16,855,000 and
$7,791,000, respectively.
111
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies.......................................... 2
Precious Metal-Related Securities......................................... 2
Real Estate-Related Securities............................................ 3
Portfolio Strategies Involving Options and Futures........................ 4
Other Investment Policies and Practices................................... 8
Management of the Fund..................................................... 16
Directors and Officers.................................................... 16
Management and Advisory Arrangements...................................... 18
Purchase of Shares......................................................... 19
Initial Sales Charge Alternatives--Class A and Class D Shares............. 20
Reduced Initial Sales Charges............................................. 21
Distribution Plans........................................................ 24
Limitations on the Payment of Deferred Sales Charges...................... 25
Redemption of Shares....................................................... 26
Deferred Sales Charges--Class B Shares.................................... 26
Portfolio Transactions and Brokerage....................................... 28
Determination of Net Asset Value........................................... 29
Shareholder Services....................................................... 30
Investment Account........................................................ 30
Automatic Investment Plan................................................. 31
Automatic Reinvestment of Dividends and Capital Gains Distributions....... 31
Systematic Withdrawal Plans--Class A and Class D Shares................... 32
Exchange Privilege........................................................ 33
Dividends, Distributions and Taxes......................................... 44
Dividends and Distributions............................................... 44
Taxes..................................................................... 44
Performance Data........................................................... 48
General Information........................................................ 49
Description of Shares..................................................... 49
Computation of Offering Price Per Share................................... 50
Independent Auditors...................................................... 51
Custodian................................................................. 51
Transfer Agent............................................................ 51
Legal Counsel............................................................. 51
Reports to Shareholders................................................... 51
Additional Information.................................................... 51
Security Ownership of Certain Beneficial Owners........................... 52
Appendix.................................................................. 53
Independent Auditors' Report............................................... 60
Financial Statements (audited)............................................. 61
Financial Statements (unaudited) .......................................... 85
</TABLE>
Code # 10811-1094
STATEMENT OF ADDITIONAL
INFORMATION
- -------------------------------------------------------------------------------
MERRILL LYNCH
GLOBAL ALLOCATION
FUND, INC.
October 21, 1994
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<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 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
