<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 24, 1994
SECURITIES ACT FILE NO. 33-22462
INVESTMENT COMPANY ACT FILE NO. 811-5576
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [_]
POST-EFFECTIVE AMENDMENT NO. 7 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 9 [X]
(CHECK APPROPRIATE BOX OR BOXES)
----------------
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
800 SCUDDERS MILL ROAD 08536
PLAINSBORO, NEW JERSEY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
----------------
COPIES TO:
COUNSEL FOR THE COMPANY:
PHILIP L. KIRSTEIN, ESQ.
BROWN & WOOD
ONE WORLD TRADE CENTER MERRILL LYNCH ASSET
NEW YORK, NEW YORK 10048-0557 MANAGEMENT
BOX 9011
ATTENTION: THOMAS R. SMITH, JR., ESQ. PRINCETON, N. J. 08543-9011
----------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
[X] immediately upon filing pursuant to paragraph (b), or
[_] on (date) pursuant to paragraph (b), or
[_] 60 days after filing pursuant to paragraph (a), or
[_] on (date) pursuant to paragraph (a) of Rule 485.
----------------
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS SHARES OF COMMON
STOCK UNDER THE SECURITIES ACT OF 1933 PURSUANT TO RULE 24F-2 UNDER THE
INVESTMENT COMPANY ACT OF 1940. THE NOTICE REQUIRED BY SUCH RULE FOR THE
REGISTRANT'S MOST RECENT FISCAL YEAR WAS FILED ON DECEMBER 21, 1993.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
------------- --------
<C> <S> <C>
PART A
Item 1. Cover Page.............. Cover Page
Item 2. Synopsis................ Fee Table
Item 3. Condensed Financial
Information............. Financial Highlights; Performance Data
Item 4. General Description of
Registrant.............. Investment Objective and Policies;
Additional Information
Item 5. Management of the Fund.. Fee Table; Management of the Fund; Inside
Back Cover Page
Item 5A. Management's Discussion
of Fund Performance..... Not Applicable
Item 6. Capital Stock and Other
Securities.............. Cover Page; Additional Information
Item 7. Purchase of Securities
Being Offered........... Cover Page; Fee Table; Alternative Sales
Arrangements; Purchase of Shares;
Shareholder Services; Additional
Information; Inside Back Cover Page
Item 8. Redemption or
Repurchase.............. Fee Table; Alternative Sales Arrangements;
Shareholder Services; Purchase of Shares;
Redemption of Shares
Item 9. Pending Legal
Proceedings............. Not Applicable
PART B
Item 10. Cover Page.............. Cover Page
Item 11. Table of Contents....... Back Cover Page
Item 12. General Information and
History................. Not Applicable
Item 13. Investment Objectives
and Policies............ Investment Objective and Policies
Item 14. Management of the Fund.. Management of the Fund
Item 15. Control Persons and
Principal Holders of
Securities.............. Management of the Fund
Item 16. Investment Advisory and
Other Services.......... Management of the Fund; Purchase of Shares;
General Information
Item 17. Brokerage Allocation and
Other Practices......... Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other
Securities.............. General Information
Item 19. Purchase, Redemption and
Pricing of Securities
Being Offered........... Purchase of Shares; Redemption of Shares;
Determination of Net Asset Value;
Shareholder Services; General Information
Item 20. Tax Status.............. Dividends and Distributions; Taxes
Item 21. Underwriters............ Purchase of Shares
Item 22. Calculation of
Performance Data........ Performance Data
Item 23. Financial Statements.... Financial Statements
PART C
</TABLE>
Information required to be included in Part C is set forth under
the appropriate Item, so numbered, in Part C to this Registration
Statement.
<PAGE>
PROSPECTUS
FEBRUARY 24, 1994
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
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".
----------------
The Fund offers two classes of shares which may be purchased at a price equal
to the next determined net asset value per share, plus a sales charge which, at
the election of the purchaser, may be imposed (i) at the time of purchase (the
"Class A shares") or (ii) on a deferred basis (the "Class B shares"). The
original sales charges to which the Class B shares are subject shall consist of
a contingent deferred sales charge which may be imposed on redemptions made
within four years of purchase and an ongoing account maintenance fee and
distribution fee. These alternatives permit an investor to choose the method of
purchasing shares that is most beneficial given the amount of the purchase, the
length of time the investor expects to hold the shares, and other
circumstances. Investors should understand that the purpose and function of the
deferred sales charges with respect to the Class B shares are the same as those
of the initial sales charge with respect to the Class A shares. Investors
should also understand that over time the deferred sales charges related to
Class B shares may exceed the initial sales charge with respect to Class A
shares. See "Alternative Sales Arrangements" on page 3.
Each Class A share and Class B share represents identical interests in the
investment portfolio of the Fund and has the same rights, except that Class B
shares bear the expenses of the account maintenance fee and distribution fee
and certain other costs resulting from the deferred sales charge arrangement,
which will cause Class B shares to have a higher expense ratio and to pay lower
dividends than Class A shares and that Class B shares have exclusive voting
rights with respect to the account maintenance fee and distribution fee. The
two classes also have different exchange privileges.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), Box 9011, Princeton, New Jersey 08543-9011 [(609) 282-
2800], or from securities dealers which have entered into selected 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 $250, and the minimum subsequent purchase is
$1. Merrill Lynch may charge its customers a processing fee (presently $4.85)
for confirming purchases and repurchases. Purchases and redemptions directly
through the Fund's transfer agent are not subject to the processing fee. See
"Purchase of Shares" and "Redemption of Shares".
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
----------------
This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated February 24, 1994 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission and
is available, without charge, by calling or by writing the Fund at the above
telephone number or address. The Statement of Additional Information is hereby
incorporated by reference into this Prospectus.
----------------
MERRILL LYNCH ASSET MANAGEMENT--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to Class A shares and Class B shares follows.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
INITIAL SALES DEFERRED SALES
CHARGE CHARGE
ALTERNATIVE ALTERNATIVE
-------------- -----------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES:
Maximum Sales Charge
Imposed on Purchases
(as a percentage of
offering price)....... 6.50%(a) None
Sales Charge Imposed
on Dividend Reinvest-
ments................. None None
Deferred Sales Charge
(as a percentage of
original purchase
price or redemption
proceeds, whichever
is lower)............. None(f) 4.0% during the first year,
decreasing 1.0% annually to
0.0% after the fourth year(b)
Exchange Fee........... None None
ANNUAL FUND OPERATING
EXPENSES (AS A PERCENT-
AGE OF AVERAGE NET AS-
SETS):
Management Fees (after
any fee waivers)(c)... 0.74% 0.74%
Rule 12b-1 Fees........ None 1.00%(d)
Other Expenses
Custodial Fees....... 0.04% 0.04%
Shareholder Servicing
Costs(e)............ 0.08% 0.10%
Other................ 0.07% 0.07%
----- -----
Total Other Ex- 0.19% 0.21%
penses............ ---- ----
Total Fund Operat- 0.93% 1.95%
ing Expenses...... ==== ====
</TABLE>
- --------
(a) Reduced for purchases of $10,000 and over, decreasing to 0.75% for
purchases of $1,000,000 and over. Certain investors making purchases of
$1,000,000 and over may, however, pay a contingent deferred sales charge
ranging from a high of 1.00% to a low of 0.25% of amounts redeemed within
the first year after purchase in lieu of the 0.75% initial sales charge.
See "Purchase of Shares--Initial Sales Charge Alternative--Class A
Shares"--page 24.
(b) See "Purchase of Shares--Deferred Sales Charge Alternative--Class B
Shares"--page 25.
(c) See "Management of the Fund--Management and Advisory Arrangements"--page
21.
(d) See "Purchase of Shares--Deferred Sales Charge Alternative--Class B
Shares--Distribution Plan"--page 27. This amount represents the 0.25%
account maintenance fee and the 0.75% distribution fee applicable to Class
B shares of the Fund.
(e) See "Management of the Fund--Transfer Agency Services"--page 22.
(f) Certain investors making purchases of $1,000,000 and over may, however,
pay a contingent deferred sales charge ranging from a high of 1.00% to a
low of 0.25% of amounts redeemed within the first year after purchase in
lieu of the 0.75% initial sales charge. See "Purchase of Shares--Initial
Sales Charge Alternative--Class A Shares"--page 24.
2
<PAGE>
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID
FOR THE PERIOD OF:
-------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
An investor would pay the following expenses
on a $1,000 investment including, for Class A
shares, the maximum $65 front-end sales
charge and assuming (1) an operating expense
ratio of 0.93% for Class A shares and 1.95%
for Class B shares, (2) a 5% annual return
throughout the periods and (3) redemption at
the end of the period:
Class A...................................... $73.87 $92.72 $113.12 $171.87
Class B...................................... $59.80 $81.22 $105.21 $227.48
An investor would pay the following expenses
on the same $1,000 investment assuming no re-
demption at the end of the period:
Class A...................................... $73.87 $92.72 $113.12 $171.87
Class B...................................... $19.80 $61.22 $105.21 $227.48
</TABLE>
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Securities and Exchange Commission regulations. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL 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 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. 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". Absent a
fee waiver, management fees would have been 0.75%.
ALTERNATIVE SALES ARRANGEMENTS
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share, plus a sales charge which, at the election of the
purchaser, may be imposed either (i) at the time of the purchase (the "initial
sales charge alternative") or (ii) on a deferred basis (the "deferred sales
charge alternative").
Class A Shares. An investor who elects the initial sales charge alternative
acquires Class A shares. Although Class A shares incur a sales charge when they
are purchased, they enjoy the benefit of not being subject to any ongoing
account maintenance fee or distribution fee or any sales charge when they are
redeemed. Certain purchases of Class A shares qualify for reduced initial sales
charges. See "Purchase of Shares".
Class B Shares. An investor who elects the deferred sales charge alternative
acquires Class B shares. Class B shares do not incur a sales charge when they
are purchased, but they are subject to ongoing account maintenance and
distribution fees and a sales charge if they are redeemed within four years of
purchase. Class B shares provide the benefit of permitting all of the
investor's dollars to work from the time the investment is made. The ongoing
account maintenance and distribution fees paid by Class B shares will cause
such shares to have a higher expense ratio and to pay lower dividends than
Class A shares. Payment of the distribution fee is subject to certain limits as
set forth under "Purchase of Shares -- Deferred Sales Charge Alternative --
Class B Shares".
3
<PAGE>
As an illustration, investors who qualify for significantly reduced sales
charges might elect the initial sales charge alternative because similar sales
charge reductions are not available for purchases under the deferred sales
charge alternative. Moreover, shares acquired under the initial sales charge
alternative would not be subject to ongoing account maintenance and
distribution fees. However, because initial sales charges are deducted at the
time of purchase, such investors would not have all their funds invested
initially. Investors not qualifying for reduced initial sales charges who
expect to maintain their investment for an extended period of time might also
elect the initial sales charge alternative because over time the accumulated
continuing account maintenance and distribution fees may exceed the initial
sales charge. Again, however, such investors must weigh this consideration
against the fact that not all their funds will be invested initially.
Furthermore, the ongoing account maintenance and distribution fees will be
offset to the extent any return is realized on the additional funds initially
invested under the deferred sales charge alternative. However, there can be no
assurance as to the return, if any, which will be realized on such additional
funds. Certain other investors might determine it to be more advantageous to
have all their funds invested initially, although remaining subject to
continued account maintenance and distribution fees and, for a four-year period
of time, a contingent deferred sales charge.
The distribution expenses incurred by the Distributor and dealers (primarily
Merrill Lynch) in connection with the sale of the shares will be paid, in the
case of the Class A shares, from the proceeds of the initial sales charge and,
in the case of the Class B shares, from the proceeds of the ongoing account
maintenance and distribution fees and the contingent deferred sales charge
incurred on redemption within four years of purchase. Sales personnel may
receive different compensation for selling Class A or Class B shares. Investors
should understand that the purpose and function of the deferred sales charges
and account maintenance fee with respect to the Class B shares are the same as
those of the initial sales charge with respect to the Class A shares.
Dividends paid by the Fund with respect to Class A and Class B shares, to the
extent any dividends are paid, will be calculated in the same manner at the
same time on the same day and will be in the same amount, except that account
maintenance and distribution fees and any incremental transfer agency costs
relating to Class B shares will be borne exclusively by that class. See
"Additional Information -- Determination of Net Asset Value". Class A and Class
B shareholders of the Fund each have an exchange privilege for Class A and
Class B shares, respectively, of certain other mutual funds sponsored by
Merrill Lynch. Class A and Class B shareholders of the Fund also may exchange
their shares for shares of certain money market funds sponsored by Merrill
Lynch. See "Shareholder Services -- Exchange Privilege".
The Directors of the Fund have determined that currently no conflict of
interest exists between the Class A and Class B shares. On an ongoing basis,
the Directors of the Fund, pursuant to their fiduciary duties under the
Investment Company Act of 1940, as amended (the "Investment Company Act"), and
state laws, will seek to assure that no such conflict arises.
THE ALTERNATIVE SALES ARRANGEMENTS PERMIT AN INVESTOR TO CHOOSE THE
METHOD OF PURCHASING SHARES THAT IS MOST BENEFICIAL GIVEN THE AMOUNT OF
THE PURCHASE, THE LENGTH OF TIME THE INVESTOR EXPECTS TO HOLD THE SHARES
AND OTHER CIRCUMSTANCES. INVESTORS SHOULD DETERMINE WHETHER UNDER THEIR
PARTICULAR CIRCUMSTANCES IT IS MORE ADVANTAGEOUS TO INCUR AN INITIAL SALES
CHARGE AND NOT BE SUBJECT TO ONGOING ACCOUNT MAINTENANCE AND DISTRIBUTION
FEES OR TO HAVE THE ENTIRE INITIAL PURCHASE PRICE INVESTED IN THE FUND
WITH THE INVESTMENT THEREAFTER BEING SUBJECT TO ONGOING ACCOUNT
MAINTENANCE AND DISTRIBUTION FEES. TO ASSIST INVESTORS IN MAKING THIS
DETERMINATION, THE FEE TABLE ON PAGE 2 SETS FORTH THE CHARGES APPLICABLE
TO EACH CLASS OF SHARES, AND A DISCUSSION OF FACTORS RELEVANT TO MAKING
SUCH DETERMINATION IS SET FORTH UNDER "PURCHASE OF SHARES -- ALTERNATIVE
SALES ARRANGEMENTS" ON PAGE 23.
4
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in conjunction
with the annual audits of the financial statements of the Fund by Deloitte &
Touche, independent auditors. Financial statements for the fiscal year ended
October 31, 1993, and the independent auditors' report thereon are included in
the Statement of Additional Information. Further information about the
performance of the Fund is contained in the Fund's most recent annual report to
shareholders which may be obtained, without charge, by calling or by writing
the Fund at the telephone number or address on the front cover of this
Prospectus.
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
CLASS A CLASS B
---------------------------------------------- --------------------------------------------------
FOR THE FOR THE
PERIOD PERIOD
FEB. 3, FEB. 3,
FOR THE YEAR ENDED OCTOBER 31, 1989+ TO FOR THE YEAR ENDED OCTOBER 31, 1989+ TO
------------------------------------ OCT. 31, ---------------------------------------- OCT. 31,
1993 1992 1991 1990 1989 1993 1992 1991 1990 1989
-------- -------- ------- ------- -------- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING PER-
FORMANCE:
Net asset value, begin-
ning of period.......... $ 11.92 $ 12.16 $ 10.37 $ 10.79 $ 10.00 $ 11.83 $ 12.10 $ 10.33 $ 10.73 $ 10.00
-------- -------- ------- ------- ------- ---------- -------- -------- -------- --------
Investment income --
net................... .39 .36 .55 .60 .45 .28 .22 .44 .49 .38
Realized and unrealized
gain (loss) on
investments and foreign
currency transac-
tions -- net........... 2.14 .89 2.24 (.16) .48 2.11 .91 2.22 (.16) .47
-------- -------- ------- ------- ------- ---------- -------- -------- -------- --------
Total from investment
operations.............. 2.53 1.25 2.79 .44 .93 2.39 1.13 2.66 .33 .85
-------- -------- ------- ------- ------- ---------- -------- -------- -------- --------
Less dividends and dis-
tributions:
Investment income --
net................... (.81) (.89) (.45) (.66) (.14) (.72) (.80) (.34) (.53) (.12)
Realized gain on in-
vestments -- net....... (.12) (.60) (.55) (.20) -- (.12) (.60) (.55) (.20) --
-------- -------- ------- ------- ------- ---------- -------- -------- -------- --------
Total dividends and dis-
tributions.............. (.93) (1.49) (1.00) (.86) (.14) (.84) (1.40) (.89) (.73) (.12)
-------- -------- ------- ------- ------- ---------- -------- -------- -------- --------
Net asset value, end of
period.................. $ 13.52 $ 11.92 $ 12.16 $ 10.37 $ 10.79 $ 13.38 $ 11.83 $ 12.10 $ 10.33 $ 10.73
======== ======== ======= ======= ======= ========== ======== ======== ======== ========
TOTAL INVESTMENT RE-
TURN**
Based on net asset value
per share............... 22.61% 11.78% 28.89% 3.91% 9.34%++ 21.42% 10.64% 27.48% 2.93% 8.50%++
======== ======== ======= ======= ======= ========== ======== ======== ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses, excluding dis-
tribution fees.......... .93% 1.07% 1.29% 1.29% 1.37%* .95% 1.09% 1.31% 1.31% 1.40%*
======== ======== ======= ======= ======= ========== ======== ======== ======== ========
Expenses................ .93% 1.07% 1.29% 1.29% 1.37%* 1.95% 2.09% 2.31% 2.31% 2.40%*
======== ======== ======= ======= ======= ========== ======== ======== ======== ========
Investment income--net.. 3.90% 10.82% 8.96% 4.37% 5.31%* 2.87% 11.95% 7.98% 3.35% 4.29%*
======== ======== ======= ======= ======= ========== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of pe-
riod (in thousands)..... $917,806 $245,839 $72,702 $49,691 $47,172 $4,299,545 $958,949 $161,328 $115,682 $113,649
======== ======== ======= ======= ======= ========== ======== ======== ======== ========
Portfolio turnover...... 50.35% 59.56% 81.21% 129.51% 88.59% 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.
5
<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.
6
<PAGE>
The Fund may engage in various portfolio strategies to seek to increase its
return through the use of options on portfolio securities and to hedge its
portfolio against movements in the 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 Fund's manager,
Merrill Lynch Asset Management, L.P., doing business as Merrill Lynch Asset
Management (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 investments in equity securities in anticipation of
significant advances in stock markets and
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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 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
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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 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. 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 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 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 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.
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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).
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
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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 bonds.
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
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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 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.
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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 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".
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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 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
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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.
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
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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 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
16
<PAGE>
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 "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 Securities and Exchange
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 National
Association of Securities Dealers, Inc., 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
17
<PAGE>
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 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 and 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.
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. 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 accrued interest on the underlying
obligation; whereas, in the case of purchase and sale contracts, the prices
take into account accrued interest. Such agreements usually cover short
periods, such as under one week. Repurchase agreements may be construed to be
collateralized loans by the purchaser to the seller secured by the securities
transferred to the purchaser. In the case of a repurchase agreement, as a
purchaser, the Fund will require the seller to provide additional
18
<PAGE>
collateral if the market value of the securities falls below the repurchase
price at any time during the term of the repurchase agreement; the Fund does
not have the right to seek additional collateral in the case of purchase and
sale contracts. In the event of default by the seller under a repurchase
agreement construed to be a collateralized loan, the underlying securities are
not owned by the Fund but only constitute collateral for the seller's
obligation to pay the repurchase price. Therefore, the Fund may suffer time
delays and incur costs or possible losses in connection with disposition of the
collateral. A purchase and sale contract differs from a repurchase agreement in
that the contract arrangements stipulate that the securities are owned by the
Fund. In the event of a default under such a repurchase agreement or under a
purchase and sale contract, instead of the contractual fixed rate, the rate of
return to the Fund would be dependent upon 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. 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. The Fund may from time to time lend
securities from its portfolio with a value not exceeding 33 1/3 of its total
assets, to banks, brokers and other financial institutions and receive
collateral in cash or securities issued or guaranteed by the 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
19
<PAGE>
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 Securities and Exchange Commission staff of
its position regarding OTC options, as discussed above.
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.; 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.
20
<PAGE>
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 Merrill Lynch & Co.,
Inc., 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 90 other registered investment companies. The Manager
also offers portfolio management and portfolio analysis services to individuals
and institutions. As of December 31, 1993, the Manager and FAM had a total of
approximately $159.9 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 December
31, 1993, the net assets of the Fund aggregated approximately $5.9 billion. At
this asset level, the annual management fee would aggregate approximately $43.6
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 December
31, 1993, asset level, the annual fee paid by the Manager to MLAM U.K. would
aggregate approximately $5.9 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.
21
<PAGE>
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.
TRANSFER AGENCY SERVICES
Financial Data Services, Inc. (the "Transfer Agent"), which is a wholly-owned
subsidiary of Merrill Lynch & Co., Inc., acts as the Fund's transfer agent
pursuant to a Transfer Agency, Dividend Disbursing Agency 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 $7.00 per Class A shareholder account and $9.00
per Class B 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 December 31, 1993, the Fund had 73,780 Class
A shareholder accounts and 370,254 Class B shareholder accounts. At this level
of accounts, the annual fee payable to the Transfer Agent would aggregate
approximately $3,848,746, plus miscellaneous and out-of-pocket expenses.
PURCHASE OF SHARES
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), a subsidiary of
the Manager and an affiliate of 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 $250, and the minimum subsequent
purchase is $1.
The Fund is offering its shares at a public offering price equal to the next
determined net asset value per share plus sales charges which, at the option of
the purchaser, may be imposed either at the time of purchase (the "initial
sales charge alternative") or on a deferred basis (the "deferred sales charge
alternative"), as described below. 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 determined as 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. 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. If the purchase orders are not received by the
Distributor prior to 4:30 p.m., New York time, such orders shall be deemed
received on the next business day. Any order may be rejected by the Distributor
or the Fund. The Fund or the Distributor may suspend the continuous offering of
the Fund's shares at any time in response to
22
<PAGE>
conditions in the securities markets or otherwise and may thereafter resume
such offering from time to time. Neither the Distributor nor the dealers are
permitted to withhold placing orders to benefit themselves by a price change.
Merrill Lynch may charge its customers a processing fee (presently $4.85) to
confirm a sale of shares to such customers. Purchases directly through the
Transfer Agent are not subject to the processing fee.
The Fund issues two classes of shares: Class A shares are sold to investors
choosing the initial sales charge alternative, and Class B shares are sold to
investors choosing the deferred sales charge alternative. The two classes of
shares each represent interests in the same portfolio of investments of the
Fund, have the same rights and are identical in all respects, except that Class
B shares bear the expenses of the deferred sales arrangements, any expenses
(including incremental transfer agency costs) resulting from such sales
arrangements and the expenses paid by the account maintenance fee and have
exclusive voting rights with respect to the Rule 12b-1 distribution plan
pursuant to which the account maintenance and distribution fees are paid. The
two classes also have different exchange privileges. See "Shareholder
Services -- Exchange Privilege". The net income attributable to Class B shares
and the dividends payable on Class B shares will be reduced by the amount of
the account maintenance and distribution fees and incremental transfer agency
costs relating to Class B shares; accordingly, the net asset value of the Class
B shares will be reduced by such amount to the extent the Fund has
undistributed net income. Sales personnel may receive different compensation
for selling Class A or Class B shares. Investors are advised that only Class A
shares may be available for purchase through securities dealers, other than
Merrill Lynch, which are eligible to sell shares.
ALTERNATIVE SALES ARRANGEMENTS
The alternative sales arrangements of the Fund permit an investor to choose
the method of purchasing shares that is most beneficial given the amount of his
purchase, the length of time the investor expects to hold his shares and other
relevant circumstances. Investors should determine whether under their
particular circumstances it is more advantageous to incur an initial sales
charge and not be subject to ongoing charges, as discussed below, or to have
the entire initial purchase price invested in the Fund with the investment
thereafter being subject to ongoing charges.
As an illustration, investors who qualify for significantly reduced sales
charges, as described below, might elect the initial sales charge alternative
because similar sales charge reductions are not available for purchases under
the deferred sales charge alternative. Shares acquired under the initial sales
charge alternative would not be subject to an ongoing account maintenance fee
and distribution fee as described below. However, because initial sales charges
are deducted at the time of purchase, such investors would not have all their
funds invested initially.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time might also elect the
initial sales charge alternative because over time the accumulated continuing
account maintenance and distribution fees may exceed the initial sales charge.
Again, however, such investors must weigh this consideration against the fact
that not all their funds will be invested initially. Furthermore, the ongoing
account maintenance and distribution fees will be offset to the extent any
return is realized on the additional funds initially invested under the
deferred alternative. Another factor that may be applicable under certain
circumstances is that the payment of the Class B distribution fee and
contingent deferred sales charge is subject to certain limits as set forth
below under "Purchase of Shares -- Deferred Sales Charge Alternative -- Class B
Shares".
23
<PAGE>
Certain other investors might determine it to be more advantageous to have
all their funds invested initially, although remaining subject to continued
account maintenance and distribution fees and, for a four-year period of time,
a contingent deferred sales charge as described below. For example, an investor
subject to the 6.50% initial sales charge will have to hold his investment at
least 6 1/2 years for the ongoing 0.25% account maintenance fee and 0.75%
distribution fee to exceed the initial sales charge. This example does not take
into account the time value of money which further reduces the impact of the
ongoing account maintenance and distribution fees on the investment,
fluctuations in net asset value, the effect of the return on the investment
over this period of time or the effect of any limits that may be imposed upon
the payment of the distribution fee and the contingent deferred sales charge.
INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES
The public offering price of Class A shares for purchasers choosing the
initial sales charge alternative is the next determined net asset value plus
varying sales charges (i.e., sales loads), as set forth below.
<TABLE>
<CAPTION>
DISCOUNT TO
SALES CHARGE AS SELECTED DEALERS
SALES CHARGE AS PERCENTAGE++ OF AS PERCENTAGE OF
PERCENTAGE OF THE NET AMOUNT THE OFFERING
AMOUNT OF PURCHASE OFFERING PRICE INVESTED PRICE
- ------------------ --------------- --------------- ----------------
<S> <C> <C> <C>
Less than $10,000............. 6.50% 6.95% 6.25%
$10,000 but less than $25,000. 6.00 6.38 5.75
$25,000 but less than $50,000. 5.00 5.26 4.75
$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........... .75 .76 .65
</TABLE>
- --------
++ Rounded to the nearest one-hundredth percent.
Initial sales charges will be waived for shareholders purchasing $1 million
or more in a single transaction (other than an employer sponsored retirement or
savings plan, such as a tax qualified retirement plan under Section 401 of the
Internal Revenue Code of 1986, as amended (the "Code"), a deferred compensation
plan under Section 403(b) and Section 457 of the Code, other deferred
compensation arrangements, VEBA plans and non-qualified After Tax Savings and
Investment programs maintained on the Merrill Lynch Group Employee Services
system herein referred to as "Employer Sponsored Retirement or Savings Plans"),
or a purchase by a TMAsm Managed Trust, of Class A shares of the Fund. In
addition, purchases of Class A shares of the Fund made in connection with a
single investment of $1 million or more under the Merrill Lynch Mutual Fund
Adviser Program will not be subject to an initial sales charge. Purchases
described in this paragraph will be subject to a contingent deferred sales
charge if the shares are redeemed within one year after purchase at the
following rates:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE
AS A PERCENTAGE
OF DOLLAR AMOUNT
AMOUNT OF PURCHASE SUBJECT TO CHARGE
------------------ -------------------
<S> <C>
$1 million up to $2.5 million......................... 1.00%
Over $2.5 million up to $3.5 million.................. 0.60%
Over $3.5 million up to $5 million.................... 0.40%
Over $5 million....................................... 0.25%
</TABLE>
24
<PAGE>
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A shares
of the Fund will receive a concession equal to most of the sales charge, they
may be deemed to be underwriters under the Securities Act of 1933. 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
these shares were $13,935,192, of which $861,771 was received by the
Distributor and $13,073,421 was received by Merrill Lynch.
Reduced Initial Sales Charges. Sales charges are reduced under a Right of
Accumulation and a Letter of Intention. Class A shares of the Fund are offered
at net asset value to Directors of the Fund, to directors of Merrill Lynch &
Co., Inc., to directors and trustees of certain other Merrill Lynch sponsored
investment companies, to participants in certain benefit plans, to an investor
who has a business relationship with a financial consultant who joined Merrill
Lynch from another investment firm within six months prior to the date of
purchase if certain conditions set forth in the Statement of Additional
Information are met and to employees of Merrill Lynch & Co., Inc. and its
subsidiaries. Class A shares may be offered at net asset value in connection
with the acquisition of assets of other investment companies. No initial sales
charges are imposed upon Class A shares issued as a result of the automatic
reinvestment of dividends or capital gains distributions. Class A shares 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 A
shares of the Fund with proceeds from a redemption of shares of such other
mutual fund and such fund imposed a sales charge either at the time of purchase
or on a deferred basis; second, such purchase of Class A shares must be made
within 90 days after such notice of termination. Class A shares are offered
with reduced sales charges and, in certain circumstances, at net asset value,
to participants in the Merrill Lynch Blueprintsm Program. Class A shares are
offered at net asset value to (i) certain retirement plans, including eligible
401(k) plans, provided such plans meet the required minimum number of eligible
employees or required amount of assets advised by the Manager or its
subsidiary, FAM and (ii) certain Employer Sponsored Retirement or Savings
Plans, provided such plans meet the required minimum number of eligible
employees or required amount of assets advised by the Manager or any of its
affiliates. Class A shares of the Fund are also offered at net asset value to
shareholders of certain closed-end funds advised by the Manager or FAM who wish
to reinvest the net proceeds from a sale of their closed-end fund shares of
common stock in shares of the Fund, provided certain conditions are met. For
example, Class A shares of the Fund and certain other mutual funds advised by
the Manager or FAM are offered at net asset value to shareholders of Senior
Floating Rate Fund (formerly known as Merrill Lynch Prime Fund, Inc.) 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 such funds.
Additional information concerning these reduced initial sales charges is set
forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVE -- CLASS B SHARES
Investors choosing the deferred sales charge alternative purchase Class B
shares at net asset value per share without the imposition of a sales charge at
the time of purchase. The Class B shares are being sold
without an initial sales charge so that the Fund will receive the full amount
of the investor's purchase payment. Merrill Lynch compensates its financial
consultants for selling Class B shares at the time of
25
<PAGE>
purchase from its own funds. The proceeds of the contingent deferred sales
charge and the ongoing distribution fee discussed below are used to defray
Merrill Lynch's expenses, including compensating its financial consultants. The
proceeds from the ongoing account maintenance fee are used to compensate
Merrill Lynch for providing continuing account maintenance activities.
Proceeds from the contingent deferred sales charge are paid to the
Distributor and are used in whole or in part by the Distributor to defray the
expenses of dealers (including Merrill Lynch) related to providing
distribution-related services to the Fund in connection with the sale of the
Class B shares, such as the payment of compensation to financial consultants
for selling Class B shares. Payments by the Fund to the Distributor of the
distribution fee under the distribution plan described below also may be used
in whole or in part by the Distributor for this purpose. The combination of the
contingent deferred sales charge and the ongoing distribution fee facilitates
the ability of the Fund to sell the Class B shares without a sales charge being
deducted at the time of purchase. Class B shareholders of the Fund exercising
the exchange privilege described under "Shareholder Services--Exchange
Privilege" will continue to be subject to the Fund's contingent deferred sale
charge schedule if such schedule is higher than the deferred sales charge
schedule relating to the Class B shares acquired as a result of the exchange.
Contingent Deferred Sales Charge. Class B shares which are redeemed within
four years of purchase may be subject to a contingent deferred sales charge at
the rates set forth below charged as a percentage of the dollar amount subject
thereto. The charge will be assessed on an amount equal to the lesser of the
current market value or the cost of the shares being redeemed. Accordingly, no
sales charge will be imposed on increases in net asset value above the initial
purchase price. In addition, no charge will be assessed on shares derived from
reinvestment of dividends or capital gains distributions. For the fiscal year
ended October 31, 1993, the Distributor received contingent deferred sales
charges of $1,701,006 with respect to redemptions of Class B shares, all of
which was paid to Merrill Lynch.
The following table sets forth the rates of the contingent deferred sales
charge:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
------------------- -------------------
<S> <C>
0-1............................................. 4.0%
1-2............................................. 3.0%
2-3............................................. 2.0%
3-4............................................. 1.0%
4 and thereafter................................ None
</TABLE>
In determining whether a contingent deferred sales charge 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 purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12, and during such time, the investor
26
<PAGE>
has acquired 10 additional shares through dividend reinvestment. If at such
time the investor makes his first redemption of 50 shares (proceeds of $600),
10 shares will not be subject to the charge because of dividend reinvestment.
With respect to the remaining 40 shares, the charge is applied only to the
original cost of $10 per share and not to the increase in net asset value of $2
per share. Therefore, $400 of the $600 redemption proceeds will be charged at a
rate of 2.0% (the applicable rate in the third year after purchase).
The contingent deferred sales charge 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 Code) of a shareholder. The contingent deferred
sales charge also is waived on redemptions of shares by certain eligible 401(a)
and eligible 401(k) plans and in connection with certain group plans placing
orders through the Merrill Lynch BlueprintSM Program. The contingent deferred
sales charge is also waived for any Class B shares which are purchased by an
eligible 401(k) or eligible 401(a) plan which are rolled over into a Merrill
Lynch or Merrill Lynch Trust Company custodied IRA and held in such account at
the time of redemption. Additional information concerning the waiver of the
contingent deferred sales charge is set forth in the Statement of Additional
Information.
Distribution Plan. Pursuant to a distribution plan (the "Distribution Plan")
adopted by the Fund as of July 7, 1993, pursuant to Rule 12b-1 under the
Investment Company Act, the Fund pays the Distributor an ongoing account
maintenance fee and a 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 asset of the Class B shares of the Fund. Pursuant to a sub-agreement
with the Distributor, Merrill Lynch also provides account maintenance and
distribution services to the Fund. The ongoing account maintenance fee
compensates the Distributor and Merrill Lynch for providing account maintenance
services to Class B shareholders. The ongoing distribution fee compensates the
Distributor and Merrill Lynch for providing shareholder and distribution
services and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B shares of the
Fund.
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 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 Distribution Plan
(based on average net assets subject to the Prior Plan and the Distribution
Plan of $2.6 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. At December 31, 1993, the net assets of the
Fund subject to the Distribution Plan aggregated approximately $5.9 billion. At
this asset level, the annual fee payable pursuant to the Distribution Plan
would aggregate approximately $58.9 million. Both the Distribution Plan and the
Prior Plan were designed to permit an investor to purchase Class B shares
through dealers without the assessment of a front-end sales charge and at the
same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B shares. In this regard, the purpose and
function of the ongoing account maintenance and distribution fees under either
the Distribution Plan or the Prior Plan and the contingent deferred sales
charge are the same as those of the initial sales charge with respect to the
Class A shares of the Fund in that the deferred sales charges provide for the
financing of the distribution of the Fund's Class B shares.
27
<PAGE>
The payments under the Distribution Plan, as was the case with the Prior
Plan, are based upon a percentage of average daily net assets regardless of the
amount of expenses incurred, and accordingly, distribution-related revenues may
be more or less than distribution-related expenses. Information with respect to
the distribution-related revenues and expenses is presented to the Directors
for their consideration in connection with their deliberations as to the
continuance of the Distribution Plan. This information is presented annually as
of December 31 of each year on a "fully allocated accrual" basis and quarterly
on a "direct expense and revenue/cash" basis. On the fully allocated accrual
basis, revenues consist of the account maintenance fees, the distribution fees,
the contingent deferred sales charges 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, the distribution fees and contingent
deferred sales charges, and the expenses consist of financial consultant
compensation.
At December 31, 1992, the fully allocated accrual expenses incurred by the
Distributor and Merrill Lynch for the period since February 3, 1989
(commencement of operations) exceeded fully allocated accrual revenues by
approximately $20,995,000 (1.88% of Class B net assets at that date). As of
December 31, 1992, direct cash expenses for the period since February 3, 1989
(commencement of operations) exceeded direct cash revenues by $2,809,124 (0.25%
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).
The Fund has no obligation with respect to distribution-related expenses
incurred by the Distributor and Merrill Lynch in connection with the Class B
shares, and there is no assurance that the Board of Directors of the Fund will
approve the continuance of the Distribution Plan from year to year. However,
the Distributor intends to seek annual continuation of the Distribution Plan.
In their review of the Distribution Plan, the Directors will not be asked to
take into consideration expenses incurred in connection with the distribution
of Class A shares or of shares of other funds for which the Distributor acts as
distributor. The account maintenance fee, the distribution fee and the
contingent deferred sales charge in the case of Class B shares will not be used
to subsidize the sale of Class A shares.
Limitations on the Payment of Deferred Sales Charges. The maximum sales
charge rule in the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. ("NASD") imposes a limitation on certain asset-based
sales charges such as the Fund's distribution fee and the contingent deferred
sales charge but not the account maintenance fee. As applicable to the Fund,
the maximum sales charge rule limits the aggregate of distribution fee payments
and contingent deferred sales charges payable by the Fund to (1) 6 1/4% of
eligible gross sales of Class B shares (defined to exclude shares issued
pursuant to dividend reinvestments and exchanges) plus (2) interest on the
unpaid balance at the prime rate plus 1% (the unpaid balance being the maximum
amount payable minus amounts received from the payment of the distribution fee
and the contingent deferred sales charge). The Distributor has voluntarily
agreed to waive interest charges on the unpaid balance in excess of 0.50% of
eligible gross sales. Consequently, the maximum amount payable to the
Distributor (referred to as the "voluntary maximum") is 6.75% of eligible gross
sales. The Distributor retains the right to stop waiving interest charges at
any time. To the extent payments would exceed the voluntary maximum, the Fund
will not make further payments of the distribution fee and any contingent
deferred sales charges 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.
28
<PAGE>
The following table sets forth comparative information as of October 31,
1993, with respect to the Class B shares of the Fund indicating the maximum
allowable payments that can be made under the NASD maximum sales charge rule
and the Distributor's voluntary maximum for the fiscal period February 3, 1989
(commencement of operations) to October 31, 1993.
DATA CALCULATED AS OF OCTOBER 31, 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
ANNUAL
ALLOWABLE ALLOWABLE AMOUNTS DISTRIBUTION
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE FEE AT CURRENT
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
---------- --------- --------- -------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule As
Adopted................ $3,290,125 $205,633 $ 9,802(2) $215,435 $24,128 $191,307 $32,244
Under Distributor's
Voluntary Waiver....... $3,290,125 $205,633 $16,450 $222,083 $24,128 $197,955 $32,244
</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 contingent deferred sales charge payments, distribution fee
payments and accruals. Of the distribution fee payments made prior to July
7, 1993, under the Prior 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.
(4) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any contingent deferred sales
charge payments) is amortizing the unpaid balance. No assurance can be
given that payments of the distribution fee will reach either the
voluntary maximum or the NASD maximum.
REDEMPTION OF SHARES
The Fund is required to redeem for cash all full and fractional shares of
the Fund 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 contingent deferred
sales charge which may be applicable to Class B shares, there will be no
charge for redemption if the redemption request is sent directly to the
Transfer Agent. Shareholders liquidating their holdings will receive 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
29
<PAGE>
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 contingent
deferred sales charge in the case of Class B shares). 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 SHARES
Shareholders who have redeemed their Class A shares have a one-time privilege
to reinstate their accounts by purchasing Class A shares of the Fund at net
asset value without a sales charge up to the dollar amount redeemed. The
reinstatement privilege may be exercised by sending a notice of exercise along
with a check for the amount to be reinstated to the Transfer Agent within 30
days after the date the request for redemption was accepted by the Transfer
Agent or the Distributor. The reinstatement will be made at the net asset value
per share next determined after the notice of reinstatement is received and
cannot exceed the amount of the redemption proceeds. The reinstatement
privilege is a one-time privilege and may be exercised by the Class A
shareholder only the first time such shareholder makes a redemption.
30
<PAGE>
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below which are designed to facilitate investment in its shares.
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 semi-annual
statements from the Transfer Agent showing any reinvestments or dividends and
capital gains distributions and any other activity in the account since the
preceding statement. Shareholders also will receive separate confirmations for
each purchase or sale transaction other than reinvestment of dividends and
capital gains distributions. A shareholder may make additions to his Investment
Account at any time by mailing a check directly to the Transfer Agent.
Shareholders may also maintain their accounts through Merrill Lynch. Upon the
transfer of shares out of a Merrill Lynch brokerage account, an Investment
Account in the transferring shareholder's name will be opened automatically,
without charge, at the Transfer Agent. Shareholders considering transferring
their Class A shares from Merrill Lynch to another brokerage firm or financial
institution should be aware that, if the firm to which the Class A shares are
to be transferred will not take delivery of shares of the Fund, a shareholder
either must redeem the Class A shares so that the cash proceeds can be
transferred to the account at the new firm or such shareholder must continue to
maintain an Investment Account at the Transfer Agent for those Class A shares.
Shareholders interested in transferring their Class B shares from Merrill Lynch
and who do not wish to have an Investment Account maintained for such shares at
the Transfer Agent may request their new brokerage firm to maintain such shares
in an account registered in the name of the brokerage firm for the benefit of
the shareholder. If the new brokerage firm is willing to accommodate the
shareholder in this manner, the shareholder must request that he be issued
certificates for his shares and then must turn the certificates over to the new
firm for re-registration as described in the preceding sentence. 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 contingent
deferred sales charge) so that the cash proceeds can be transferred to the
account at the new firm, or such shareholder must continue to maintain a
retirement account at Merrill Lynch for those shares.
Exchange Privilege. U.S. Class A and Class B shareholders of the Fund each
have an exchange privilege with certain other mutual funds sponsored by Merrill
Lynch. There is currently no limitation on the number of times a shareholder
may exercise the exchange privilege. The exchange privilege may be modified or
terminated in accordance with the rules of the Securities and Exchange
Commission. Class A shareholders of the Fund may exchange their shares
("outstanding Class A shares") for Class A shares of another fund ("new Class A
shares") on the basis of relative net asset value per Class A share, plus an
amount equal to the difference, if any, between the sales charge previously
paid on the outstanding Class A shares and the sales charge payable at the time
of the exchange on the new Class A shares. The Fund's exchange privilege is
modified with respect to purchases of Class A shares under the Merrill Lynch
Mutual Fund Adviser program. First, the initial allocation of assets is made
under the program. Then, any subsequent exchange under the
31
<PAGE>
program of Class A shares of a fund for Class A shares of the Fund will be made
solely on the basis of the relative net asset values of the shares being
exchanged. Therefore, there will not be a charge for any difference between the
sales charge previously paid on the shares of the other fund and the sales
charge payable on the shares of the Fund being acquired in the exchange under
this program.
Class B shareholders of the Fund may exchange their shares ("outstanding
Class B shares") for Class B shares of another fund ("new Class B shares") on
the basis of relative net asset value per share without the payment of any
contingent deferred sales charge that might otherwise be due on redemption of
the outstanding Class B shares. Class B shareholders of the Fund exercising the
exchange privilege will continue to be subject to the Fund's contingent
deferred sales charge schedule if such schedule is higher than the deferred
sales charge schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's contingent deferred sales charge schedule if such
schedule is higher than the deferred sales charge schedule relating to the
Class B shares of the fund from which the exchange has been made. For purposes
of computing the contingent deferred sales charge that may be payable upon a
disposition of the new Class B shares, the holding period for the outstanding
Class B shares is "tacked" to the holding period of the new Class B shares.
Class A and Class B shareholders of the Fund may also exchange their shares for
shares of certain money market funds, but in the case of an exchange from Class
B shares, the period of time that shares are held in a money market fund will
not count toward satisfaction of the holding period requirement for purposes of
reducing the contingent deferred sales charge. 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.
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 telephone call (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. No contingent deferred sales charge will be imposed upon
redemption of shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. The Automatic Investment Program is
not available to shareholders whose shares are held in a brokerage account with
Merrill Lynch other than a CMA(R) account.
Systematic Withdrawal and Automatic Investment Plans. A Class A 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
shareholder whose shares are held within a CMA(R), CBA(R) or Retirement Account
may elect to have shares redeemed on a monthly, bimonthly, quarterly,
semiannual or annual basis through the Systematic Redemption Program, subject
to certain conditions. Regular additions of Class A 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 accounts may arrange to have
periodic investments made in the Fund in their CMA accounts or in certain
related accounts in amounts of $250 or more through the CMA Automatic
Investment Program. The Automatic Investment Program is not available to
shareholders whose shares are held in a brokerage account with Merrill Lynch
(other than a CMA account).
32
<PAGE>
PERFORMANCE DATA
From time to time the Fund may include its average annual total return for
various specified time periods in advertisements or information furnished to
present or prospective shareholders. Average annual total return is computed
separately for Class A and Class B shares in accordance with a formula
specified by the Securities and Exchange 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 the maximum sales charge in the case of Class A shares and the
contingent deferred sales charge that would be applicable to a complete
redemption of the investment at the end of the specified period in the case of
Class B shares. Dividends paid by the Fund with respect to Class A and Class B
shares, to the extent any dividends are paid, will be calculated in the same
manner at the same time on the same day and will be in the same amount, except
that account maintenance and distribution fees and any incremental transfer
agency costs relating to Class B shares will be borne exclusively by that
class. The Fund will include performance data for both Class A and Class B
shares of the Fund in any advertisement or information including performance
data of the Fund.
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return
calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return, and (2) the maximum applicable sales
charges will not be included with respect to 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 shares or waiver of the
contingent deferred sales charge 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
contingent deferred sales charge and therefore may reflect greater total return
since, due to the reduced sales charges or waiver of the contingent deferred
sales charge, 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,
33
<PAGE>
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.
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 Class B shares will be lower than the per share dividends and
distributions on Class A shares as a result of the account maintenance,
distribution and higher transfer agency fees applicable to the Class B shares.
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
Net asset value per share 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
34
<PAGE>
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 fees payable to the Manager and the account maintenance
and distribution fees payable to the Distributor, are accrued daily. The per
share net asset value of the Class B shares generally will be lower than the
per share net asset value of the Class A shares reflecting the daily expense
accruals of the account maintenance, distribution and higher transfer agency
fees applicable with respect to the Class B shares. It is expected, however,
that the per share net asset value of the two classes will tend to converge
immediately after the payment of dividends or distributions which will differ
by approximately the amount of the expense accrual differential between the
classes.
Portfolio securities which are traded on U.S. stock exchanges are valued at
the last sale price as of the close of business on the day the securities are
being valued or, lacking any sales, at the last available bid price. Portfolio
securities which are traded on European stock exchanges are valued at the
closing bid price on such exchange 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 the Fund's net asset value is determined. On certain European
exchanges there may be no separate reporting of bid and asked quotations, and
in such instances the Fund will use the closing price on such exchange, or the
last reported price if a closing price is unavailable. 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. Other investments, including futures
contracts and related options, are stated at market value. Securities and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith 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 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
35
<PAGE>
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 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 certain ordinary income dividends and capital gain
dividends and on redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Fund or who, to the Fund's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such investor is not otherwise subject to backup withholding.
Under Code Section 988, foreign currency gains or losses from certain debt
instruments, 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 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.
36
<PAGE>
If a Class A shareholder exercises the exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent the sales charge
paid to the Fund reduces any sales charge the shareholder would have owed upon
purchase of the new Class A shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new Class
A shares.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action
either prospectively or retroactively.
Ordinary income dividends 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 1,100,000,000 shares of Common Stock, par value $0.10 per
share, divided into two classes, designated Class A Common Stock and Class B
Common Stock, of which Class A consists of 200,000,000 shares, and Class B
consists of 900,000,000 shares. Both Class A Common Stock and Class B Common
Stock represent an interest in the same assets of the Fund and are identical in
all respects except that the Class B shares bear certain expenses related to
the account maintenance and distribution of such shares and have exclusive
voting rights with respect to matters relating to such account maintenance and
distribution expenditures. See "Purchase of Shares". The Fund has received an
order from the Securities and Exchange Commission permitting the issuance and
sale of two classes of Common Stock. The Board of Directors of the Fund may
classify and reclassify the shares of the Fund into additional classes of
Common Stock at a future date. The creation of additional classes would require
an additional order from the Securities and Exchange Commission. There is no
assurance that such an additional order would be issued.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other 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 or conversion rights. Each share of Class A
Common Stock and Class B Common Stock is entitled to participate equally in
dividends and distributions declared by the Fund and in the net assets of the
Fund on liquidation or dissolution after satisfaction of outstanding
liabilities, except as noted above, the Class B shares bear certain expenses
related to the distribution of such shares.
37
<PAGE>
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts, the shareholder should notify in writing:
Financial Data Services, Inc.
Attn: Document Evaluation Unit
P.O. Box 45290
Jacksonville, FL 32232-5290
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this,
please call your Merrill Lynch financial consultant or Financial Data Services,
Inc. at 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.
38
<PAGE>
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.--AUTHORIZATION FORM
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINTSM PROGRAM. YOU MAY REQUEST AN APPLICATION FOR PURCHASES THROUGH
MERRILL LYNCH BLUEPRINTSM PROGRAM BY CALLING TOLL FREE (800) 637-2434.
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase .................. Class A shares or
.................. Class B shares (choose one) of Merrill Lynch Global
Allocation Fund, Inc. and establish an Investment Account as described in the
Prospectus.
Basis for establishing an Investment Account:
A. I enclose a check for $...... payable to Financial Data Services, Inc.,
as an initial investment (minimum $1,000) (subsequent investments $50 or
more). I understand that this purchase will be executed at the applicable
offering price next to be determined after this Application is received by
you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information:
1. ................................ 4. ................................
2. ................................ 5. ................................
3. ................................ 6. ................................
(Please list all Funds. Use a separate sheet of paper if necessary.)
Until you are notified by me in writing, the following options with
respect to dividends and distributions are elected:
Distribution Options
ELECT[_] reinvest ELECT[_] reinvest
dividends capital gains
ONE[_] pay dividends in ONE[_] pay capital
cash gains in cash
If no election is made, dividends and capital gains will be reinvested
automatically at net asset value without a sales charge.
---------------
(Please Print)
Name ..........................................
First Name Initial Last Name [_][_][_][_][_][_]
Social Security
Name of Co-Owner (if any) ..................... No. or Taxpayer
First Name Initial Last Name Identification
No.
Address .......................................
............................................... ......., 19..
Date
.......................................
(Zip Code)
Occupation............................. Name and Address of Employer...........
.......................................
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security No. or Taxpayer Identification No. and (2) that I
am not subject to backup withholding (as discussed in the Prospectus 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) ..........
In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.
- -------------------------------------------------------------------------------
2. LETTER OF INTENTION--CLASS A SHARES ONLY (SEE TERMS AND CONDITIONS IN THE
STATEMENT OF ADDITIONAL INFORMATION)
.............., 19......
GENTLEMEN: 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:
$10,000 [_] $25,000 [_] $50,000 [_] $100,000
[_] $250,000 [_] $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch Global Allocation
Fund, Inc. prospectus.
I agree to the terms and conditions of the Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc. my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Global 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 ............................
39
<PAGE>
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.--AUTHORIZATION FORM
- --------------------------------------------------------------------------------
3. SYSTEMATIC WITHDRAWAL PLAN--CLASS A SHARES ONLY (See terms and conditions in
the Statement of Additional Information)
Minimum Requirements: $10,000 for monthly disbursements, $5,000 for quarterly,
of shares in Merrill Lynch Global Allocation Fund, Inc., at cost or current
offering price. Begin systematic withdrawal on ..., 19. . Withdrawals to be made
either (check one) [_] Monthly [_] Quarterly*
[Date]
*Quarterly withdrawals are made on the 24th day of March, June, September and
December.
Specify withdrawal amount (check one): [_] $....... or [_] .....% of the current
value of Class A shares in the account.
Specify withdrawal method: [_] check or [_] direct deposit to bank account
(check one and complete part (a) or (b) below:
- --------------------------------------------------------------------------------
(A) I HEREBY AUTHORIZE PAYMENT BY CHECK (B) I HEREBY AUTHORIZE PAYMENT BY
DIRECT DEPOSIT TO BANK ACCOUNT AND
Draw checks payable (IF NECESSARY) DEBIT ENTRIES AND
(check one) ADJUSTMENTS FOR ANY CREDIT ENTRIES
MADE IN ERROR TO MY ACCOUNT.
Specify type of account (check
[_] as indicated in Item 1. one): [_] checking [_] savings
I agree that this authorization
will remain in effect until I
provide written notification to
Financial Data Services, Inc.
amending or terminating this
service.
[_] to the order of ..................
Mail to (check one) Name on your Account................
Bank................................
[_] the address indicated in Item 1. Bank #.......... Account #..........
Bank Address........................
[_] Name (Please Print)............... Signature of Depositor..............
Date......
Signature of Depositor (if joint
Address................................. account)............................
NOTE: If Automatic Direct Deposit
Signature of Owner...................... is elected, your blank, unsigned
check marked "VOID" or a deposit
slip from your savings account
should accompany this Application.
Signature of Co-Owner (if any)..........
- --------------------------------------------------------------------------------
4. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Financial Data Services, Inc. draw a check or an
automated clearing house ("ACH") debit on my checking account as described
below each month to purchase ......... Class A shares or ......... Class B
shares (choose one) of Merrill Lynch Global Allocation Fund, Inc., subject to
the terms set forth below.
- --------------------------------------------------------------------------------
FINANCIAL DATA SERVICES, INC. AUTHORIZATION TO HONOR CHECKS OR ACH
DEBITS DRAWN BY FINANCIAL DATA
You are hereby authorized to draw a SERVICES, INC.
check or an ACH debit each month on my To ............................. Bank
bank account for investment in Merrill
Lynch Global Allocation Fund, Inc., as (Investor's Bank)
indicated below: Bank Address ........................
Amount of each check or ACH debit
$ ................................. City ..........
State Zip Code ....
Account No. .......................
As a convenience to me, I hereby
Please date and invest checks or request and authorize you to pay and
draw ACH debits on the 20th of charge to my account checks or ACH
each month beginning .............. debits drawn on my account by and
payable to Financial Data Services,
(Month) Inc., Transfer Agency Mutual Fund
or as soon thereafter as possible. Operations, Jacksonville, Florida
32232-5289. I agree that your rights
I agree that you are preparing these in respect to each such check or
checks or drawing these debits debit shall be the same as if it
voluntarily at my request and that you were a check drawn on you and signed
shall not be liable for any loss personally by me. This authority is
arising from any delay in preparing or to remain in effect until revoked
failure to prepare any such check or personally by me in writing. Until
debit. If I change banks or desire to you receive such notice, you shall
terminate or suspend this program, I be fully protected in honoring any
agree to notify you promptly in such check or debit. I further agree
writing. that if any such check or debit be
I further agree that if a check or dishonored, whether with or without
debit is not honored upon cause and whether intentionally or
presentation, Financial Data Services, inadvertently, you shall be under no
Inc. is authorized to discontinue liability.
immediately the Automatic Investment
Plan and to liquidate sufficient
shares held in my account to offset ............ .......................
the purchase made with the returned Date Signature of Depositor
check or dishonored debit.
............ .......................
Date Signature of Depositor ............ .......................
....................... Bank Signature of Depositor
Signature of Depositor Account (If joint account,
Number both must sign)
(If joint account, Note: If Automatic Investment Plan
both must sign) is elected, your blank, unsigned
check marked "VOID" should accompany
this Application.
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY We hereby authorize Merrill Lynch
Branch Office, Address, Stamp 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:
Merrill Lynch Global
Allocation Fund, Inc.
.....................................
Dealer Name and Address
c/o Financial Data
Services, Inc.
By ..................................
Authorized Signature of Dealer
[_] [_] [_] [_] [_][_] [_]
Branch-Code F/C No.
.............
F/C Last Name
[_] [_] [_] [_] [_] [_] [_] [_]
Transfer Agency Mutual
Fund Operations Dealer's Customer A/C No.
P.O. Box 45289
Jacksonville, Florida
32232-5289
40
<PAGE>
[This page is intentionally left blank.]
41
<PAGE>
[This page is intentionally left blank.]
42
<PAGE>
MANAGER
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
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:
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
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
Alternative Sales Arrangements............................................. 3
Financial Highlights....................................................... 5
Special Considerations..................................................... 6
Investment Objective and Policies.......................................... 7
Equity Securities......................................................... 8
Debt Securities........................................................... 10
Money Market Securities................................................... 12
Portfolio Strategies Involving Options and Futures........................ 12
Other Investment Policies and Practices................................... 17
Management of the Fund..................................................... 20
Board of Directors........................................................ 20
Management and Advisory Arrangements...................................... 21
Transfer Agency Services.................................................. 22
Purchase of Shares......................................................... 22
Alternative Sales Arrangements............................................ 23
Initial Sales Charge Alternative--
Class A Shares........................................................... 24
Deferred Sales Charge Alternative--
Class B Shares........................................................... 25
Redemption of Shares....................................................... 29
Redemption................................................................ 29
Repurchase................................................................ 30
Reinstatement Privilege--
Class A Shares........................................................... 30
Shareholder Services....................................................... 31
Performance Data........................................................... 33
Additional Information..................................................... 34
Dividends and Distributions............................................... 34
Determination of Net Asset Value.......................................... 34
Taxes..................................................................... 35
Organization of the Fund.................................................. 37
Shareholder Reports....................................................... 38
Shareholder Inquiries..................................................... 38
Authorization Form......................................................... 39
</TABLE>
Code # 10810
PROSPECTUS
- -------------------------------------------------------------------------------
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
February 24, 1994
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
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.
The Fund offers two classes of shares which may be purchased at a price equal
to the next determined net asset value per share, plus a sales charge which, at
the election of the purchaser, may be imposed (i) at the time of purchase (the
"Class A shares") or (ii) on a deferred basis (the "Class B shares"). These
alternatives permit an investor to choose the method of purchasing shares that
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other circumstances. Investors should
understand that the purpose and function of the deferred sales charges and
ongoing account maintenance fee with respect to the Class B shares are the same
as those of the initial sales charge with respect to the Class A shares. Each
Class A share and Class B share represents identical interests in the
investment portfolio of the Fund and has the same rights, except that Class B
shares bear the expenses of the account maintenance fee and distribution fee
and certain other costs resulting from the deferred sales charge arrangement
and have exclusive voting rights with respect to the account maintenance and
distribution fees. The two classes also have different exchange privileges.
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This Statement of Additional Information of the Fund is not a prospectus and
should be read in conjunction with the prospectus of the Fund, dated February
24, 1994 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission and can be obtained, without charge, by calling or by
writing the Fund at the above telephone number or address. This Statement of
Additional Information has been incorporated by reference into the Prospectus.
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MERRILL LYNCH ASSET MANAGEMENT--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
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The date of this Statement of Additional Information is February 24, 1994.
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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 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.
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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 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
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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.
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
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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 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.
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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 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
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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 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
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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. 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.
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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.
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. 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
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<PAGE>
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. 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. While the
substance of purchase and sale contracts is similar to repurchase agreements,
because of the different treatment with respect to accrued interest and
additional collateral, management believes that purchase and sale contracts are
not repurchase agreements as such term is understood in the banking and
brokerage community.
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 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
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<PAGE>
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.
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.
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
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<PAGE>
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 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.
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<PAGE>
(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.
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.
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<PAGE>
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of each executive officer and Director is Box
9011, Princeton, New Jersey 08543-9011.
Arthur Zeikel--President and Director(1)(2)--President of the Manager since
1977 and Chief Investment Officer of the Manager since 1976; President of Fund
Asset Management, L.P. ("FAM") since 1977 and Chief Investment Officer since
1976; 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. 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., Harman International Industries, Inc.
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, and Dean from 1984 to 1993, New York University Leonard
N. Stern School of Business Administration; Director of Bowne & Co., Inc.,
(financial printers), Vornado, Inc. (real estate holding company), Smith-Corona
Corporation (manufacturer of typewriters and word processors) and Alexander's,
Inc.
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 from 1982 to
1990.
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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 subsidiary
FAM, acts as investment adviser or manager.
At January 31, 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
Merrill Lynch & Co., Inc.
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.
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.
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<PAGE>
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.
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".
Merrill Lynch & Co., Inc., 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.
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<PAGE>
Duration and Termination. Unless earlier terminated as described below, 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.
ALTERNATIVE SALES ARRANGEMENTS
The Fund issues two classes of shares: Class A shares are sold to investors
choosing the initial sales charge alternative, and Class B shares are sold to
investors choosing the deferred sales charge alternative. The two classes of
shares each represent interests in the same portfolio of investments of the
Fund, have the same rights and are identical in all respects except that Class
B shares bear the expenses of the deferred sales arrangements, any expenses
(including incremental transfer agency costs) resulting from such sales
arrangements and the expenses of the account maintenance fee and have exclusive
voting rights with respect to the Rule 12b-1 distribution plan pursuant to
which the account maintenance and distribution fees are paid. The two classes
also have different exchange privileges. See "Shareholder Services--Exchange
Privilege".
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offering of Class A and Class B
shares of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the
offering of the Class A and Class B shares of the Fund. After the prospectuses,
statements of additional information and periodic reports have been prepared,
set in type and mailed to shareholders, the Distributor pays for the printing
and distribution of copies thereof used in connection with the offering to
dealers and investors. The Distributor also pays for other supplementary sales
literature and advertising costs. The Distribution Agreements are subject to
the same renewal requirements and termination provisions as the Management
Agreement described above.
INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES
The 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 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,
17
<PAGE>
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. The term "purchase" also includes purchases by employee
benefit plans not qualified under Section 401 of the Code, including purchases
by employees or by employers on behalf of employees, by means of a payroll
deduction plan or otherwise, of shares of the Fund. Purchases by such a company
or non-qualified employee benefit plan will qualify for the quantity discounts
discussed above only if the Fund and the Distributor are able to realize
economies of scale in sales effort and sales related expense by means of the
company, employer or plan making the Fund's Prospectus available to individual
investors or employees and forwarding investments by such persons to the Fund
and by any such employer or plan bearing the expense of any payroll deduction
plan.
REDUCED INITIAL SALES CHARGES -- CLASS A SHARES
Right of Accumulation. Reduced sales charges are applicable through a right
of accumulation under which eligible investors are permitted to purchase Class
A shares of the Fund at the offering price applicable to the total of (a) the
dollar amount then being purchased plus (b) an amount equal to the then current
net asset value or cost, whichever is higher, of the purchaser's combined
holdings of the Class A shares and Class B shares of the Fund and of any other
investment company with a sales charge for which the Distributor acts as the
distributor. For any such right of accumulation to be made available, the
Distributor must be provided at the time of purchase, by the purchaser or the
purchaser's securities dealer, with sufficient information to permit
confirmation of qualification. Acceptance of the purchase order is subject to
such confirmation. The right of accumulation may be amended or terminated at
any time.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $10,000 or more
of Class A shares of the Fund or any other investment company with an initial
sales charge or a deferred sales charge for which the Distributor acts as the
distributor made within a thirteen-month period starting with the first
purchase pursuant to a Letter of Intention in the form provided in the
Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at the Fund's transfer agent. The Letter of Intention
is not available to employee benefit plans for which Merrill Lynch provides
plan-participant record-keeping services. The Letter of Intention is not a
binding obligation to purchase any amount of Class A shares; however, its
execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intention may be included under a subsequent Letter of Intention
executed within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of Class A shares
of the Fund and of other investment companies with a sales charge for which the
Distributor acts as the distributor presently held, at cost or maximum offering
price (whichever is higher), on the date of the first purchase under the Letter
of Intention, may be included as a credit toward 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
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total amount of shares purchased does not equal the amount stated in the Letter
of Intention (minimum of $10,000), 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 shares purchased at the reduced rate and the sales
charge applicable to the shares actually purchased through the Letter. Class A
shares equal to five percent of the intended amount will be held in escrow
during the thirteen-month period (while remaining registered in the name of the
purchaser) for this purpose. The first purchase under the Letter of Intention
must be at least five percent of the dollar amount of such Letter. If 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 shares then being purchased under such Letter, but
there will be no retroactive reduction of the sales charges on any previous
purchase.
The value of any shares redeemed or otherwise disposed of by the purchaser
prior to termination or completion of the Letter of Intention will be deducted
from the total purchases made under such Letter. An exchange from Merrill Lynch
U.S. Treasury Money Fund, Merrill Lynch Ready Assets Trust, Merrill Lynch
Retirement Reserves Money Fund or Merrill Lynch U.S.A. Government Reserves into
the Fund that creates a sales charge will count toward completing a new or
existing Letter of Intention from the Fund.
Merrill Lynch BlueprintSM Program. Class A shares of the Fund are offered to
participants in the Merrill Lynch BlueprintSM Program ("Blueprint"). Blueprint
is directed to small investors, group IRAs and participants in certain affinity
groups such as credit unions, trade associations and benefit plans. Investors
placing orders to purchase Class A shares of the Fund through Blueprint will
acquire the Class A shares at net asset value plus a sales charge calculated in
accordance with the Blueprint sales charge schedule (i.e., up to $300 at 5.50%,
$300.01 to $5,000 at 4.50% plus $3.00 and $5,000.01 or more at the standard
sales charge rates disclosed in the Prospectus). Class A 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 shares through
Blueprint. Services, including the exchange privilege, available to Class A
investors through Blueprint, however, may differ from those available to other
investors in Class A shares.
Class A shares are offered at net asset value, with a waiver of the front-end
sales charge, to Blueprint participants through the Merrill Lynch Directed IRA
Rollover Program ("IRA Rollover Program") available from Merrill Lynch Business
Financial Services, a business unit of Merrill Lynch. The IRA Rollover Program
is available to custodian rollover assets from Eligible Retirement Plans (as
defined below) whose Trustee and/or Plan Sponsor offers the Merrill Lynch
Directed IRA Rollover Program. Eligible Retirement Plans include (a) plans
qualified under Section 401(k) of the Internal Revenue Code of 1986, as amended
(the "Code"), with a salary reduction feature offering a menu of investments to
plan participants, provided such plan initially has 1,000 or more employees
eligible to participate in the plan (employees eligible to participate in
retirement plans of the same sponsoring employer or its affiliates may be
aggregated); or (b) tax qualified retirement plans within the meaning of
Section 401(a) of the Code or deferred compensation plans within the meaning of
Section 403(b) of the Code, provided the plan (i) initially invested $5 million
or more in existing plan assets in portfolios, mutual funds or trusts advised
by the Manager or its subsidiaries or (ii) has accumulated $5 million or more
in existing plan assets invested in mutual funds advised by the Manager or its
subsidiaries, which charge a front-end sales charge or contingent deferred
sales charge (assets of retirement plans with the same sponsor or an affiliated
sponsor may be aggregated).
Orders for purchases and redemptions of Class A shares of the Fund may be
grouped for execution purposes which, in some circumstances, may involve the
execution of such orders two business days following the day such orders are
placed. The minimum initial purchase price is $100, with a $50 minimum for
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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.
Employer Sponsored Retirement and Savings Plans. Class A shares are offered
at net asset value to employer sponsored retirement or savings plans, such as
tax qualified retirement plans within the meaning of Section 401(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), deferred compensation
plans within the meaning of Sections 403(b) and 457 of the Code, other deferred
compensation arrangements, VEBA plans, and non-qualified After Tax Savings and
Investment programs, maintained on the Merrill Lynch Group Employee Services
system, herein referred to as "Employer Sponsored Retirement or Savings Plans",
provided the plan has $5 million or more in existing plan assets initially
invested in portfolios, mutual funds or trusts advised by the Manager either
directly or through an affiliate. Class A shares may also be offered at net
asset value to Employer Sponsored Retirement or Savings Plans, provided the
plan has accumulated $5 million or more in existing plan assets invested in
mutual funds advised by the Manager charging a front-end sales charge or
contingent deferred sales charge. Assets of Employer Sponsored Retirement or
Savings Plans sponsored by the same sponsor or an affiliated sponsor may be
aggregated. The Class A share reduced load breakpoints also apply to these
aggregated assets. Class A shares may be offered at net asset value to multiple
plans sponsored by the same sponsor or an affiliated sponsor provided that the
addition of one or more of the multiple plans results in aggregate assets of $5
million or more invested in portfolios, mutual funds or trusts advised by the
Manager either directly or through an affiliate. Employer Sponsored Retirement
or Savings Plans are also offered Class A shares at net asset value, provided
such plan initially has 1,000 or more employees eligible to participate in the
plan. Employees eligible to participate in Employer Sponsored Retirement or
Savings Plan of the same sponsoring employer or its affiliates may be
aggregated. Tax qualified retirement plans within the meaning of Section 401(a)
of the Code meeting any of the foregoing requirements and which are provided
specialized services (e.g. plans whose participants may direct on a daily basis
their plan allocations among a wide range of investments including individual
corporate equities and other securities in addition to mutual fund shares) by
the Merrill Lynch Blueprint(TM) Program, are offered Class A shares at a price
equal to net asset value per share plus a reduced sales charge of 0.50%. Any
Employer Sponsored Retirement or Savings Plan which does not meet the above
described qualifications to purchase Class A shares at net asset value has the
option of purchasing Class A shares at the sales charge schedule disclosed in
the Prospectus, or if the Employer Sponsored Retirement or Savings Plan is a
qualified retirement plan and meets the specified requirements, then it may
purchase Class B shares with a waiver of the contingent deferred sales charge
upon redemption. The minimum initial and subsequent purchase requirements are
waived in connection with all the above referenced Employer Sponsored
Retirement or Savings Plans.
Purchase Privilege of Certain Persons. Directors of the Fund, directors and
trustees of certain other Merrill Lynch sponsored investment companies,
directors of Merrill Lynch & Co., Inc., employees of Merrill Lynch & Co., Inc.
and its subsidiaries and any trust, pension, profit-sharing or other benefit
plan for such persons may purchase Class A shares of the Fund at net asset
value.
Class A 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.
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First, the investor must purchase Class A shares of the Fund with proceeds from
a redemption of shares of a mutual fund that was sponsored by the financial
consultant's previous firm and imposed a sales charge either at the time of
purchase or on a deferred basis. Second, such redemption must have been made
within 60 days prior to the investment in the Fund, and the proceeds from the
redemption must have been maintained in the interim in cash or a money market
fund.
Class A shares of the Fund are offered at net asset value to shareholders of
Senior Floating Rate Fund (formerly known as Merrill Lynch Prime Fund, Inc.)
who wish to reinvest the net proceeds from a sale of certain of their shares of
common stock of Senior Floating Rate Fund in shares of the Fund. In order to
exercise this investment option, Senior Floating Rate Fund shareholders must
sell their Senior Floating Rate Fund shares to the Senior Floating Rate Fund in
connection with a tender offer conducted by the Senior Floating Rate Fund and
reinvest the proceeds immediately in the Fund. This investment option is
available only with respect to the proceeds of Senior Floating Rate Fund shares
as to which no Early Withdrawal Charge (as defined in the Senior Floating Rate
Fund prospectus) is applicable. Purchase orders from Senior Floating Rate Fund
shareholders wishing to exercise this investment option will be accepted only
on the day that the related Senior Floating Rate Fund tender offer terminates
and will be effected at the net asset value of the Fund at such day.
Class A shares of the Fund are offered at net asset value to shareholders of
certain closed-end funds advised by the Manager or FAM who wish to reinvest the
net proceeds from a sale of their closed-end fund shares of common stock in
shares of the Fund. In order to exercise this investment option, closed-end
fund shareholders must (i) sell their closed-end fund shares through Merrill
Lynch and reinvest the proceeds immediately in the Fund, (ii) have acquired the
shares in the closed-end fund's initial public offering or through reinvestment
of dividends earned on shares purchased in such offering, (iii) have maintained
their closed-end fund shares continuously in a Merrill Lynch account, and (iv)
purchase a minimum of $250 worth of Fund shares.
Class A shares of the Fund are also offered at net asset value, without sales
charge, to an investor who has a business relationship with a 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 A shares of the Fund with proceeds from
a redemption of shares of such other mutual fund and such fund imposed a sales
charge either at the time of purchase or on a deferred basis; second, such
purchase of Class A shares must be made within 90 days after such notice of
termination.
Acquisition of Certain Investment Companies. The public offering price of
Class A shares may be reduced to the net asset value per Class A share in
connection with the acquisition of the assets of or merger or consolidation
with a 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.
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.
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DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
Distribution Plan. Reference is made to "Purchase of Shares -- Deferred Sales
Charge Alternative --Class B Shares -- Distribution Plan" in the Prospectus for
certain information with respect to the distribution plan of the Fund (the
"Distribution Plan").
The payment of the account maintenance and distribution fees is subject to
the provisions of Rule 12b-1 under the Investment Company Act. Among other
things, the Distribution Plan provides that the Distributor shall provide and
the Directors shall review quarterly reports of the disbursement of the account
maintenance and distribution fees paid to the Distributor. In their
consideration of the Distribution Plan, the Directors must consider all factors
they deem relevant, including information as to the benefits of the
Distribution Plan to the Fund and to its Class B shareholders. The Distribution
Plan further provides that, so long as the Distribution Plan remains in effect,
the selection and nomination of Directors who are not "interested persons" of
the Fund, as defined in the Investment Company Act (the "Independent
Directors"), shall be committed to the discretion of the Independent Directors
then in office. In approving the Distribution Plan in accordance with Rule 12b-
1, the Independent Directors concluded that there is reasonable likelihood that
the Distribution Plan will benefit the Fund and its Class B shareholders. The
Distribution Plan can be terminated at any time, without penalty, by the vote
of a majority of the Independent Directors or by the vote of the holders of a
majority of the outstanding Class B voting securities of the Fund. The
Distribution Plan cannot be amended to increase materially the amount to be
spent by the Fund without Class B shareholder approval, and all material
amendments are required to be approved by the vote of Directors, including a
majority of the Independent Directors who have no direct or indirect financial
interest in the Distribution Plan, cast in person at a meeting called for that
purpose. Rule 12b-1 further requires that the Fund preserve copies of the
Distribution Plan and any report made pursuant to such plan for a period of not
less than six years from the date of the Distribution Plan or such report, the
first two years in an easily accessible place.
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.
CONTINGENT DEFERRED SALES CHARGE -- CLASS B SHARES
As discussed in the Prospectus under "Purchase of Shares -- Deferred Sales
Charge Alternative -- Class B Shares", while Class B shares redeemed within
four years of purchase are subject to a contingent deferred sales charge under
most circumstances, the charge is waived on redemptions of Class B shares in
connection with certain post-retirement withdrawals from an Individual
Retirement Account ("IRA") or other retirement plan or following the death or
disability of a Class B shareholder. Redemptions for which the waiver applies
are: (a) any partial or complete redemption in connection with a tax-free
distribution following
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retirement under a tax-deferred retirement plan or attaining age 59 1/2 in the
case of an IRA or other retirement plan, 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 contingent
deferred sales charges of $313,780, $301,136 and $1,701,006, respectively, all
of which was paid to Merrill Lynch.
Merrill Lynch Blueprintsm 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
contingent deferred sales charge 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 shares at net asset value has the option of purchasing
Class A shares at the sales charge schedule disclosed in the Prospectus, or if
the Retirement Plan meets the following requirements, then it may purchase
Class B shares with a waiver of the contingent deferred sales charge upon
redemption. The contingent deferred sales charge is waived for any Eligible
401(k) Plan redeeming Class B shares. The contingent deferred sales charge is
also waived for redemptions from 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 a mutual fund
advised by the Manager or FAM ("Eligible 401(a) Plan"). The contingent deferred
sales charge is waived for any Class B shares which are purchased by an
Eligible 401(k) Plan or Eligible 401(a) Plan and are rolled over into a Merrill
Lynch or Merrill Lynch Trust Company custodied IRA and held in such account at
the time of redemption. The minimum initial and subsequent purchase
requirements are waived in connection with all the above referenced Retirement
Plans.
PORTFOLIO TRANSACTIONS AND BROKERAGE
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
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<PAGE>
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 National Association of Securities Dealers, Inc. and policies
established by the Directors of the Fund, the Manager may consider sales of
shares of the Fund as a factor in the selection of brokers or dealers to
execute portfolio transactions for the Fund. 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.
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.
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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 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 fees payable to the Manager
and the Distributor, are accrued daily. The per share net asset value of the
Class B shares generally will be lower than the per share net asset value of
the Class A shares reflecting the daily expense accruals of the account
maintenance, distribution and higher transfer agency fees applicable with
respect to the Class B shares. It is expected, however, that the per share net
asset value of the two classes will tend to converge immediately after the
payment of dividends or distributions, which will differ by approximately the
amount of the expense accrual differential between the classes.
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. 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 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
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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. Portfolio securities
which are traded on U.S. 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. Portfolio securities which are traded on European
stock exchanges are valued at the closing bid price on such an exchange 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 the Fund's net asset
value is determined. On certain European exchanges there may be no separate
reporting of bid and asked quotations, and in such instances the Fund will use
the closing price on such exchange or the last reported price if a closing
price is unavailable. 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. Other investments, including futures contracts
and related options, are stated at market value. Securities and assets for
which market quotations are not readily available are valued at fair value as
determined in good faith under the direction of the Board of Directors of the
Fund. Such valuations and procedures will be reviewed periodically by the Board
of Directors.
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 semi-annual statements from the transfer
agent showing any reinvestments of dividends and capital gains distributions
and any other activity in the account since the preceding statement.
Shareholders also will receive separate confirmations for each purchase or sale
transaction other than reinvestment of dividends and capital gains
distributions. A shareholder may make additions to his Investment Account at
any time by mailing a check directly to the transfer agent.
Share certificates are issued only for full shares and only upon the specific
request of the shareholder. 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 transfer agent.
AUTOMATIC INVESTMENT PLAN
A shareholder may make additions to an Investment Account at any time by
purchasing Class A or Class B shares at the applicable public offering price
either through the shareholder's securities dealer or by mail directly to the
transfer agent, acting as agent for such securities dealer. Voluntary
accumulation can also be made through a service known as the Automatic
Investment Plan whereby the Fund is authorized through pre-authorized checks of
$50 or more to charge the regular bank account of the shareholder on a regular
basis to provide systematic additions to the Investment Account of such
shareholder. 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
$250 or more through the CMA Automatic Investment Program. The Automatic
Investment Program is not available to shareholders whose shares are held in a
brokerage account with Merrill Lynch other than a CMA(R) account.
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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,
without sales charge, as of the close of business on the ex-dividend date of
the dividend or distribution. Shareholders may elect in writing to receive
either their dividends or capital gains distributions, or both, in cash, in
which event payment will be mailed on or about the payment date.
Shareholders may, at any time, notify the transfer agent in writing or by
telephone (1-800-MER-FUND) that they no longer wish to have their dividends
and/or 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.
SYSTEMATIC WITHDRAWAL PLANS--CLASS A SHARES
A Class A 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 shares of
the Fund having a value, based on cost or the current offering price, of $5,000
or more and monthly withdrawals for shareholders with Class A shares with such
a value of $10,000 or more.
At the time of each withdrawal payment, sufficient Class A shares are
redeemed from those on deposit in the shareholder's account to provide the
withdrawal payment specified by the shareholder. The shareholder may specify
either a dollar amount or a percentage of the value of his Class A shares.
Redemptions will be made at net asset value as determined at the close of
business of the New York Stock Exchange on the 24th day of each month or the
24th day of the last month of each quarter, whichever is applicable. If the
Exchange is not open for business on such date, the Class A 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 shares in the Investment Account are reinvested automatically in
Fund Class A shares. A shareholder's Systematic Withdrawal Plan may be
terminated at any time, without charge or penalty, by the shareholder, the
Fund, the transfer agent or the Distributor.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be reduced
correspondingly. Purchases of additional Class A shares concurrent with
withdrawals are ordinarily disadvantageous to the shareholder because of sales
charges and tax liabilities. The Fund will not knowingly accept purchase orders
for Class A shares of the Fund from investors who maintain a Systematic
Withdrawal Plan unless such purchase is equal to at least one year's scheduled
withdrawals or $1,200, whichever is greater. Periodic investments may not be
made into an Investment Account in which the shareholder has elected to make
systematic withdrawals.
A Class A shareholder whose shares are held within a CMA(R), CBA(R) or
Retirement Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the Systematic Redemption
Program. The minimum fixed dollar amount redeemable is $25. The proceeds of
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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.
EXCHANGE PRIVILEGE
U.S. Class A or Class B shareholders of the Fund may exchange their Class A
or Class B shares of the Fund for shares of the same class of Merrill Lynch
Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income Fund,
Inc., Merrill Lynch Arizona Limited Maturity Municipal Bond Fund, Merrill Lynch
Arizona Municipal Bond Fund, Merrill Lynch Balanced Fund for Investment and
Retirement, Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California
Insured Municipal Bond Fund, Merrill Lynch California Limited Maturity
Municipal Bond Fund, Merrill Lynch California Municipal Bond Fund, Merrill
Lynch Capital Fund, Inc., Merrill Lynch Colorado Municipal Bond Fund, Merrill
Lynch Corporate Bond Fund, Inc., Merrill Lynch Developing Capital Markets Fund,
Inc. (shares of which are deemed Class A shares for purposes of the exchange
privilege), Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill
Lynch Federal Securities Trust, Merrill Lynch Florida Limited Maturity
Municipal Bond Fund, Merrill Lynch Florida Municipal Bond Fund, Merrill Lynch
Fund For Tomorrow, Inc., Merrill Lynch Fundamental Growth Fund, Inc., Merrill
Lynch Global Bond Fund for Investment and Retirement, Merrill Lynch Global
Convertible Fund, Inc., Merrill Lynch Global Holdings (residents of Arizona
must meet investor suitability standards), Merrill Lynch Global Resources
Trust, Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Growth Fund for
Investment and Retirement, Merrill Lynch Healthcare Fund, Inc. (residents of
Wisconsin must meet investor suitability standards), Merrill Lynch
International Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill
Lynch Maryland Municipal Bond Fund, Merrill Lynch Massachusetts Limited
Maturity Municipal Bond Fund, Merrill Lynch Massachusetts Municipal Bond Fund,
Merrill Lynch Michigan Limited Maturity Municipal Bond Fund, Merrill Lynch
Michigan Municipal Bond Fund, Merrill Lynch Minnesota Municipal Bond Fund,
Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Municipal Intermediate
Term Fund, Merrill Lynch New Jersey Limited Maturity Municipal Bond Fund
Merrill Lynch New Jersey Municipal Bond Fund, Merrill Lynch New York Limited
Maturity Municipal Bond Fund, Merrill Lynch New York Municipal Bond Fund,
Merrill Lynch North Carolina Municipal Bond Fund, Merrill Lynch Ohio Municipal
Bond Fund, Merrill Lynch Oregon Municipal Bond Fund, Merrill Lynch Pacific
Fund, Inc., Merrill Lynch Pennsylvania Limited Maturity Municipal Bond Fund,
Merrill Lynch Pennsylvania Municipal Bond Fund, Merrill Lynch Phoenix Fund,
Inc., Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Special
Value Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch
Technology Fund, Inc., Merrill Lynch Texas Municipal Bond Fund, Merrill Lynch
Utility Income Fund, Inc. and Merrill Lynch World Income Fund, Inc. on the
basis described below. In addition, Class A shareholders of the Fund may
exchange their Class A shares for shares of Merrill Lynch U.S.A. Government
Reserves, Merrill Lynch Ready Assets Trust and Merrill Lynch U.S. Treasury
Money Fund (or Merrill Lynch Retirement Reserves Money Fund if the exchange
occurs within certain retirement plans) (together, the "Class A money market
funds"), and Class B shareholders of the Fund may exchange their Class B shares
for shares of Merrill Lynch Government Fund, Merrill Lynch Institutional Fund,
Merrill
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Lynch Institutional Tax-Exempt Fund and Merrill Lynch Treasury Fund (together,
the "Class B money market funds") on the basis described below. Shares with a
net asset value of at least $250 are required to qualify for the exchange
privilege, and any shares utilized in an exchange must have been held by the
shareholder for at least 15 days. Certain funds into which exchanges may be
made may impose a redemption fee (not in excess of 2.00% of the amount
redeemed) on shares purchased through the exchange privilege when such shares
are subsequently redeemed, including redemption through subsequent exchanges.
Such redemption fee would be in addition to any contingent deferred sales
charge otherwise applicable to a redemption of Class B shares. It is
contemplated that the exchange privilege may be applicable to other new mutual
funds whose shares may be distributed by the Distributor. The exchange
privilege available to participants in the Merrill Lynch Blueprintsm Program
may be different than that available to other investors.
Under the exchange privilege, each of the funds with Class A shares
outstanding offers to exchange its Class A shares ("new Class A shares") for
Class A shares ("outstanding Class A shares") of any of the other funds, on the
basis of relative net asset value per Class A share, plus an amount equal to
the difference, if any, between the sales charge previously paid on the
outstanding Class A shares and the sales charge payable at the time of the
exchange on the new Class A shares. With respect to outstanding Class A shares
as to which previous exchanges have taken place, the "sales charge previously
paid" shall include the aggregate of the sales charges paid with respect to
such Class A shares in the initial purchase and any subsequent exchange. Class
A shares issued pursuant to dividend reinvestment are sold on a no-load basis
in each of the funds offering Class A shares. For purposes of the exchange
privilege, Class A shares acquired through dividend reinvestment shall be
deemed to have been sold with a sales charge equal to the sales charge
previously paid on the Class A shares on which the dividend was paid. Based on
this formula, Class A shares of the Fund generally may be exchanged into the
Class A shares of the other funds or into shares of the Class A money market
funds with a reduced or without a sales charge.
In addition, each of the funds with Class B shares outstanding offers to
exchange its Class B shares ("new Class B shares") for Class B shares
("outstanding Class B shares") of any of the other funds on the basis of
relative net asset value per Class B share, without the payment of any
contingent deferred sales charge that might otherwise be due on redemption of
the outstanding shares. Class B shareholders of the Fund exercising the
exchange privilege will continue to be subject to the Fund's contingent
deferred sales charge schedule if such schedule is higher than the deferred
sales charge schedule relating to the new Class B shares acquired through use
of the exchange privilege. In addition, Class B shares of the Fund acquired
through use of the exchange privilege will be subject to the Fund's contingent
deferred sales charge schedule if such schedule is higher than the deferred
sales charge schedule relating to the Class B shares of the fund from which the
exchange has been made. For purposes of computing the sales charge that may be
payable on a disposition of the new Class B shares, the holding period for the
outstanding Class B shares is "tacked" to the holding period of the new Class B
shares. For example, an investor may exchange Class B shares of the Fund for
those of Merrill Lynch Global Resources Trust (formerly Merrill Lynch Natural
Resources Trust) after having held the Fund's Class B shares for two and a half
years. The 2% sales charge that generally would apply to a redemption would not
apply to the exchange. Three years later the investor may decide to redeem the
Class B shares of Merrill Lynch Global Resources Trust and receive cash. There
will be no contingent deferred sales charge due on this redemption, since by
"tacking" the two and a half year holding period of the Fund's Class B shares
to the three year holding period for the Merrill Lynch Global Resources Trust
Class B shares, the investor will be deemed to have held the new Class B shares
for more than five years.
Shareholders also may exchange Class A shares and Class B shares from any of
the funds into shares of the Class A money market funds and Class B money
market funds, respectively, but the period of time that Class B shares are held
in a Class B money market fund will not count towards satisfaction of the
holding
29
<PAGE>
period requirement for purposes of reducing the contingent deferred sales
charge. However, shares of a Class B money market fund which were acquired as a
result of an exchange for Class B shares of a fund may, in turn, be exchanged
back into Class B shares of any fund offering such shares, in which event the
holding period for Class B shares of the fund will be aggregated with previous
holding periods for purposes of reducing the contingent deferred sales charge.
Thus, for example, an investor may exchange Class B shares of the Fund for
shares of Merrill Lynch Institutional Fund after having held the Class B shares
for two and a half years and three years later decide to redeem the shares of
Merrill Lynch Institutional Fund for cash. At the time of this redemption, the
2% contingent deferred sales charge that would have been due had the Class B
shares of the Fund been redeemed for cash rather than exchanged for shares of
Merrill Lynch Institutional Fund will be payable. If, instead of such
redemption the shareholder exchanged such shares for Class B shares of a fund
which the shareholder continues to hold for an additional two and a half years,
any subsequent redemption will not incur a contingent deferred sales charge.
Below is a description of the investment objectives of the other funds into
which exchanges can be made:
High current income consistent with a policy
Merrill Lynch Adjustable Rate of limiting the degree of fluctuation in net
Securities Fund, Inc..... 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).
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 investors with as
high a level of income exempt from Federal
and Arizona income taxes as is consistent
with prudent investment management.
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.
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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 shareholders with 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.
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
shareholders with 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, who
objective is to provide investors with 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 as high a level of income
exempt from Federal and Colorado 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.
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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, other
than Japan, Australia and New Zealand.
Merrill Lynch Eurofund......... Capital appreciation primarily through
investment in equity securities of
corporations domiciled in Europe.
Merrill Lynch Federal
Securities Trust..............
High current return through investments in
U.S. Government and Government agency
securities, including GNMA mortgage-backed
certificates and other mortgage-backed
Government securities.
Merrill Lynch Florida Limited
Maturity Municipal Bond Fund..
A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is 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 as high a level of income
exempt from Federal income taxes as is
consistent with prudent investment
management, while seeking to offer
shareholders the opportunity to own
securities exempt from Florida intangible
personal property taxes.
Merrill Lynch Fund For
Tomorrow, Inc............ Long-term growth through investment in a
portfolio of good quality securities,
primarily common stock, potentially
positioned to benefit from demographic and
cultural changes as they affect consumer
markets.
Merrill Lynch Fundamental
Growth Fund, Inc......... Long-term growth through investment in a
diversified portfolio of equity securities
placing particular emphasis on companies
that have exhibited above-average growth
rate in earnings.
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<PAGE>
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.
Merrill Lynch Global Holdings
(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 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 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 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.
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<PAGE>
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 Institutional
Fund.......................... A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide maximum current
income consistent with liquidity and the
maintenance of a high quality portfolio of
money market securities.
Merrill Lynch Institutional
Tax-Exempt Fund...............
A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
exempt from Federal income taxes,
preservation of capital and liquidity
available from investing in a diversified
portfolio of short-term, high quality
municipal bonds.
Merrill Lynch International
Equity Fund..............
Capital appreciation and, secondarily, income
by investing in a diversified portfolio of
equity securities of issuers located in
countries other than the United States.
Merrill Lynch Latin America
Fund, Inc................
Capital appreciation by investing primarily
in Latin American equity and debt
securities.
Merrill Lynch Maryland
Municipal Bond Fund......
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is 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 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.
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<PAGE>
Merrill Lynch Massachusetts
Municipal Bond Fund...........
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is as high a level of income
exempt from Federal and Massachusetts income
taxes as is consistent with prudent
investment 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 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 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 as high a level of income
exempt from Federal and Minnesota income
taxes as is consistent with prudent
investment management.
Merrill Lynch Municipal Bond
Fund, Inc................
Tax-exempt income from three separate
diversified portfolios of municipal bonds.
Merrill Lynch Municipal
Intermediate Term Fund... Currently the only portfolio of Merrill Lynch
Municipal Series Trust, a series fund, whose
objective is to provide as high a level as
possible of income exempt from Federal
income taxes by investing in investment
grade obligations with a dollar weighted
average maturity of five to twelve years.
Merrill Lynch New Jersey
Limited Maturity Municipal
Bond Fund................ A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is 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.
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<PAGE>
Merrill Lynch New Jersey
Municipal Bond Fund...........
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is as high a level of income
exempt from Federal and New Jersey 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 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 as high a level of income
exempt from Federal, New York State and New
York City income taxes as is consistent with
prudent investment management.
Merrill Lynch North Carolina
Municipal Bond Fund...........
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is 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 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 as high a level of income
exempt from Federal and Oregon income taxes
as is consistent with prudent investment
management.
Capital appreciation by investing in equity
Merrill Lynch Pacific Fund, securities of corporations domiciled in Far
Inc...................... Eastern and Western Pacific countries,
including Japan, Australia, Hong Kong,
Singapore and the Philippines.
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<PAGE>
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 as high a level of income
exempt from Federal and Pennsylvania 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.
Merrill Lynch Ready Assets Preservation of capital, liquidity and the
Trust......................... highest possible current income consistent
with the foregoing objectives from the
short-term money market securities in which
the Trust invests.
Merrill Lynch Retirement
Reserves Money Fund
(available only if the
exchange occurs within
certain retirement plans).....
Currently the only portfolio of Merrill Lynch
Retirement Series Trust, a series fund,
whose objectives are current income,
preservation of capital and liquidity
available from investing in a diversified
portfolio of short-term money market
securities.
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.
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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 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 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.
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.
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>
Before effecting an exchange, shareholders of the Fund should obtain a
currently effective prospectus of the fund into which the exchange is to be
made. Exercise of the exchange privilege is treated as a sale for Federal
income tax purposes and, depending on the circumstances, a short- or long-term
capital gain or loss may be realized. In addition, a shareholder exchanging
shares of any of the funds may be subject to a backup withholding tax unless
such shareholder certifies under penalty of perjury that the taxpayer
identification number on file with any such fund is correct and that such
shareholder is not otherwise subject to backup withholding. See "Dividends,
Distributions and Taxes--Taxes" below.
To exercise the exchange privilege, shareholders should contact their Merrill
Lynch financial consultant, who will advise the Fund of the exchange, or if the
exchange does not involve a money market fund, shareholders may write to the
transfer agent requesting that the exchange be effected. Such letter must be
signed exactly as the account is registered with signatures guaranteed by an
"eligible guarantor institution" (including, for example, Merrill Lynch branch
offices and certain other financial institutions) as such is defined in Rule
17Ad-15 under the Securities Exchange Act of 1934, as amended, the existence
and validity of which may be verified by the transfer agent through the use of
industry publications. Shareholders of the Fund, and shareholders of the other
funds described above with shares for which certificates have not been issued,
may exercise the exchange privilege by wire through their securities dealers.
The Fund reserves the right to require a properly completed Exchange
Application. This exchange privilege may be modified or terminated in
accordance with the rules of the Commission. The Fund reserves the right to
limit the number of times an investor may exercise the exchange privilege.
Certain funds may suspend the continuous offering of their shares to the
general public at any time and may thereafter resume such offering from time to
time. The exchange privilege is available only to U.S. shareholders in states
where the exchange legally may be made.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
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 shares will be lower than the per share dividends and distributions on
Class A shares as a result of the account maintenance, distribution and higher
transfer agency fees applicable with respect to the Class B shares. See
"Determination of Net Asset Value".
39
<PAGE>
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 shareholders (together, the "shareholders"). The Fund
intends to distribute substantially all of such income.
Dividends paid by the Fund from its ordinary income and distributions of the
Fund's net realized short-term capital gains (together referred to hereafter as
"ordinary income dividends") are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
(including long-term gains from certain transactions in futures and options)
("capital gain dividends") are taxable to shareholders as long-term capital
gains, regardless of the length of time the shareholder has owned Fund shares.
Distributions in excess of the Fund's earnings and profits will first reduce
the adjusted tax basis of a holder's shares and, after such adjusted tax basis
is reduced to zero, will constitute capital gains to such holder (assuming the
shares are held as a capital asset). Any loss upon the sale or exchange of Fund
shares held for six months or less, however, will be treated as long-term
capital loss to the extent of any capital gain dividends received by the
shareholder.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income 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 between the Class A and
Class B shareholders according to a method (which it believes is consistent
with the Securities and Exchange Commission exemptive order permitting the
issuance and sale of two classes of stock) that is based on the gross income
allocable to Class A and Class B shareholders during the taxable year, or such
other method as the Internal Revenue Service may prescribe. If the Fund pays a
dividend in January 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 certain ordinary income dividends and capital gain
dividends and on redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Fund or who, to the Fund's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such investor is not otherwise subject to backup withholding.
40
<PAGE>
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. For this purpose, the Fund will
allocate foreign taxes and foreign source income between the Class A and Class
B shareholders according to a method similar to that described above for the
allocation of dividends eligible for the dividends received deduction.
If a Class A shareholder exercises the exchange privilege within 90 days of
acquiring 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 Class A shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new Class
A shares.
The 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 non-U.S. currency and the Fund elects to have gain or loss in connection with
the contract treated as ordinary gain or loss under Code Section 988 (as
described below), gain or loss from Section 1256 contracts will be 60% long-
term and 40% short-term capital gain or loss. The mark-to-market rules outlined
above, however, will not apply to certain transactions entered into by the Fund
solely to reduce the risk of changes in price or interest or currency exchange
rates with respect to its investments.
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The
Fund may, nonetheless, elect to treat the gain or loss from certain forward
foreign
41
<PAGE>
exchange contracts as capital. In this case, gain or loss realized in
connection with a forward foreign exchange contract that is a Section 1256
contract will be characterized as 60% long-term and 40% short-term capital gain
or loss.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's transactions in options and futures contracts. Under
Section 1092, the Fund may be required to postpone recognition for tax purposes
of losses incurred in certain closing transactions in options and futures
contracts.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income may be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the
Fund may be restricted in effecting closing transactions within three months
after entering into an options or futures contract.
Special Rules for Certain Foreign Currency Transactions. In general, gains
from "foreign currencies" and from foreign currency options, foreign currency
futures and forward foreign exchange contracts relating to investments in
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. The Fund may request a private letter
ruling from the Internal Revenue Service on some or all of these issues.
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 dividend distributions, and any distributions made before the losses
were realized but in the same taxable year would be recharacterized as a return
of capital to shareholders, thereby reducing the basis of each shareholder's
Fund shares. These rules and the mark-to-market rules described above, however,
will not apply to certain transactions entered into by the Fund solely to
reduce the risk of currency fluctuations with respect to its investments.
----------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action
either prospectively or retroactively.
Ordinary income dividends 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.
42
<PAGE>
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 and Class B
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 shares and the contingent deferred sales charge that would be
applicable to a complete redemption of the investment at the end of the
specified period in the case of Class B shares.
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.
43
<PAGE>
Set forth below is total return information for the Class A and Class B
shares of the Fund for the periods indicated:
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
---------------------------- ----------------------------
REDEEMABLE 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 October
31, 1993............... 14.65% $1,146.50 17.42% $1,174.20
Inception (February 3,
1989) to October 31,
1993................... 14.19% $1,876.60 14.65% $1,912.60
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
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 October 31,
1993................... 87.66% $1,876.60 91.26% $1,912.60
</TABLE>
In order to reflect the reduced sales charges, in the case of Class A shares,
or the waiver of the contingent deferred sales charge, in the case of Class B
shares, applicable to certain investors, as described under "Purchase of
Shares" and "Redemption of Shares", respectively, the total return data quoted
by the Fund in advertisements directed to such investors may take into account
the reduced, and not the maximum, sales charge or may not take into account the
contingent deferred sales charge and therefore may reflect greater total return
since, due to the reduced sales charges or the waiver of sales charges, a lower
amount of expenses 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 1,100,000,000 shares of Common Stock, par value $0.10 per
share, divided into two classes, designated Class A Common Stock and Class B
Common Stock, of which Class A consists of 200,000,000 shares, and Class B
consists of 900,000,000 shares. Both Class A Common Stock and Class B Common
Stock represent an interest in the same assets of the Fund and are identical in
all respects except that the Class B shares bear certain expenses related to
the account maintenance and distribution of such shares and that they have
exclusive voting rights with respect to matters relating to such account
maintenance and distribution expenditures. The Fund has received an order from
the Commission permitting the issuance and sale of two classes of Common Stock.
The Board of Directors of the Fund may classify and reclassify the shares of
the Fund into additional classes of Common Stock at a future date. The creation
of additional classes would require an additional order from the Commission.
There is no assurance that such an additional order would be issued.
44
<PAGE>
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 or conversion rights. Redemption 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
October 31, 1993, and its shares outstanding on that date is as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B
------------ --------------
<S> <C> <C>
Net Assets.................................... $917,805,991 $4,299,544,818
============ ==============
Number of Shares Outstanding.................. 67,887,067 321,429,250
============ ==============
Net Asset Value Per Share (net assets divided
by number of shares outstanding)............. $ 13.52 $ 13.38
Sales Charge (for Class A shares: 6.50% of of-
fering price (6.99%
of net amount invested))*.................... $ 0.94 **
------------ --------------
Offering Price................................ $ 14.46 $ 13.38
============ ==============
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge
is applicable.
** Class B shares are not subject to an initial sales charge but may be
subject to a contingent deferred sales charge on redemption of shares
within four years of purchase. See "Purchase of Shares--Deferred Sales
Charge Alternative--Class B Shares" in the Prospectus and "Redemption of
Shares--Contingent Deferred Sales Charge--Class B Shares" herein.
INDEPENDENT AUDITORS
Deloitte & Touche, 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.
45
<PAGE>
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 Securities and Exchange
Commission, Washington, D.C., under the Securities Act of 1933 and the
Investment Company Act, to which reference is hereby made.
Under a separate agreement, Merrill Lynch 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 January 31, 1994.
46
<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.
47
<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.
48
<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.
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.
49
<PAGE>
The debt rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform 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.
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.
</TABLE>
50
<PAGE>
<TABLE>
<C> <S>
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.
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-1
This 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.
51
<PAGE>
A-2 Capacity 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-3 Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations
carrying the higher designations.
B Issues rated "B" are regarded as having only 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.
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.
52
<PAGE>
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 Preferred stock rated "BB", "B", and "CCC" are regarded, on balance, as
predominately speculative with respect to the issuer's capacity to pay
B preferred stock obligations. "BB" indicates the lowest degree of
speculation and "CCC" the highest degree of speculation. While such issues
CCC 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.
53
<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
Princeton, New Jersey
December 17, 1993
54
<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>
55
<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>
56
<PAGE>
<TABLE>
<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>
57
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
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>
58
<PAGE>
<TABLE>
<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>
59
<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
-------------- -------------- -----
1,434,405 1,153,645 0.0
</TABLE>
60
<PAGE>
<TABLE>
<S> <C> <S> <C> <C> <C>
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>
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>
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>
62
<PAGE>
<TABLE>
<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>
63
<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>
64
<PAGE>
<TABLE>
<CAPTION>
Face Amount Fixed-Income Securities
<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>
65
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Value Percent of
Face Amount Fixed-Income Securities Cost (Note 1a) Net Assets
<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>
66
<PAGE>
<TABLE>
<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>
67
<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>
68
<PAGE>
<TABLE>
<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>
69
<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%
============== =====
<FN>
(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
(23) Electronics
(24) Metals
(25) Real Estate Investment Trust
(26) Energy Related
***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.
</TABLE>
70
<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
(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:
<TABLE>
<CAPTION>
Net Share Net Dividend
Industry Affiliate Activity Cost Income
<S> <C> <C> <C> <C>
Retail Stores Buttrey Food & Drug 274,700 $ 1,980,462 --
Banking Crossland Federal Savings Bank 760,000 18,250,000 --
</TABLE>
*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:
<TABLE>
<CAPTION>
Unrealized
Expiration Appreciation
Foreign Currency Sold Date (Depreciation)
<S> <C> <C>
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
===========
</TABLE>
+++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.
<TABLE>
<CAPTION>
Acquisition Value
Issue Date Cost (Note 1a)
<S> <C> <C> <C>
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
============ ============
</TABLE>
See Notes to Financial Statements.
71
<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>
72
<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>
73
<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>
74
<PAGE>
<TABLE>
<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>
75
<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
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
76
<PAGE>
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
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.
77
<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.
78
<PAGE>
[This page is intentionally left blank.]
79
<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
Investment Restrictions................................................... 11
Management of the Fund..................................................... 14
Directors and Officers.................................................... 14
Management and Advisory Arrangements...................................... 15
Purchase of Shares......................................................... 17
Alternative Sales Arrangements............................................ 17
Initial Sales Charge Alternative--Class A Shares.......................... 17
Reduced Initial Sales Charges--Class A Shares............................. 18
Deferred Sales Charge Alternative--Class B Shares......................... 22
Redemption of Shares....................................................... 22
Contingent Deferred Sales Charge--Class B Shares.......................... 22
Portfolio Transactions and Brokerage....................................... 23
Determination of Net Asset Value........................................... 25
Shareholder Services....................................................... 26
Investment Account........................................................ 26
Automatic Investment Plan................................................. 26
Automatic Reinvestment of Dividends and Capital Gains Distributions....... 27
Systematic Withdrawal Plans--Class A Shares............................... 27
Exchange Privilege........................................................ 28
Dividends, Distributions and Taxes......................................... 39
Dividends and Distributions............................................... 39
Taxes..................................................................... 40
Performance Data........................................................... 43
General Information........................................................ 44
Description of Shares..................................................... 44
Computation of Offering Price Per Share................................... 45
Independent Auditors....................................................... 45
Custodian.................................................................. 46
Transfer Agent............................................................. 46
Legal Counsel.............................................................. 46
Reports to Shareholders.................................................... 46
Additional Information..................................................... 46
Security Ownership of Certain Beneficial Owners............................ 46
Appendix................................................................... 47
Independent Auditors' Report............................................... 54
Financial Statements....................................................... 55
</TABLE>
Code # 10811
STATEMENT OF ADDITIONAL
INFORMATION
- -------------------------------------------------------------------------------
MERRILL LYNCH
GLOBAL ALLOCATION
FUND, INC.
February 24, 1994
Distributor: Merrill Lynch
Funds Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements
Contained in Part A:
Financial Highlights for the years ended October 31, 1993, 1992,
1991 and 1990 and the period February 3, 1989 (commencement of
operations) to October 31, 1989.
Contained in Part B:
Schedule of Investments, October 31, 1993.
Statement of Assets and Liabilities, October 31, 1993.
Statement of Operations for the year ended October 31, 1993.
Statements of Changes in Net Assets for the years ended October 31,
1993 and 1992.
Financial Highlights for the years ended October 31, 1993, 1992,
1991 and 1990 and the period February 3, 1989 (commencement of
operations) to October 31, 1989.
(b) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<S> <C>
1(a) --Articles of Incorporation of the Registrant.
(b) --Articles of Amendment to Articles of Incorporation of the Registrant.
(c) --Articles Supplementary to the Articles of Incorporation of the
Registrant.
2 --By-Laws of the Registrant. (a)
3 --None.
4 --Copies of instruments defining the rights of shareholders, including the
relevant portions of the Articles of Incorporation, as amended, and By-
Laws of Registrant.(d)
5(a) --Form of Management Agreement between Registrant and Merrill Lynch Asset
Management, Inc.(a)
(b) --Form of Sub-Advisory Agreement between Merrill Lynch Asset Management,
Inc. and Merrill Lynch Asset Management U.K., Limited.(a)
6(a) --Form of Class A Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc.(a)
(b) --Form of Class B Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (a)
(c) --Letter Agreement between the Registrant and Merrill Lynch Funds
Distributor, Inc. with respect to the Merrill Lynch Mutual Fund Advisor
Program.
7 --None.
8 --Form of Custodian Agreement between Registrant and Brown Brothers
Harriman & Co.(a)
9(a) --Form of Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between Registrant and Financial Data
Services, Inc.(a)
(b) --Form of Agreement between Merrill Lynch & Co., Inc. and the Registrant
relating to use by Registrant of Merrill Lynch name.(a)
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<S> <C>
10 --None.
11(a) --Consent of Deloitte & Touche, independent auditors for the Registrant.
(b) --Consent of Morningstar, Inc.(c)
12 --None.
13 --Certificate of Merrill Lynch Asset Management, Inc.(a)
14 --None.
15 --Amended and Restated Class B Distribution Plan of the Registrant and
Distribution Plan Sub-Agreement.
16(a) --Schedule of computation of each performance quotation relating to Class
A shares provided in the Registration Statement in response to Item
22.(b)
(b) --Schedule of computation of each performance quotation relating to Class
B shares provided in the Registration Statement in response to Item
22.(b)
</TABLE>
- --------
(a) Filed on December 15, 1988 as an exhibit to Pre-Effective Amendment No. 2
to Registrant's Registration Statement under the Securities Act of 1933 on
Form N-1A (the "Registration Statement").
(b) Filed as an exhibit to Post-Effective Amendment No. 1 to the Registration
Statement.
(c) Filed on December 17, 1992, as an exhibit to Post-Effective Amendment No. 5
to the Registration Statement.
(d) Reference is made to Article III (Sections 3 and 4), Article V, Article VI
(Section 3), Article V, Article VII, Article VIII and Article X of the
Registrant's Articles of Incorporation, filed as Exhibit (1)(a) to the
Registration Statement; amended and restated Article VI (Sections 2, 3, 5
and 6) contained in the Articles of Amendment filed as Exhibit (1)(b) to
the Registration Statement; the Articles Supplementary (increasing
authorized share capital) filed as Exhibit (1)(c) to the Registration
Statement; and Article II, Article III (Sections 1, 3, 5, 6 and 17),
Article IV (Section 1), Article V (Section 7), Article VI, Article VII,
Article XII, Article XIII, and Article XIV of the Registrant's By-Laws
previously filed as Exhibit (2) to the Registration Statement.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The Registrant is not controlled by or under common control with any other
person.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF RECORD
HOLDERS AT
TITLE OF CLASS JANUARY 31, 1994
-------------- ----------------
<S> <C>
Shares of Class A Common Stock, par value $0.10 per share...... 1,211
Shares of Class B Common Stock, par value $0.10 per share...... 6,790
</TABLE>
C-2
<PAGE>
ITEM 27. INDEMNIFICATION.
Reference is made to Article VI of Registrant's Articles of Incorporation,
Article VI of Registrant's By-Laws, Section 2-418 of the Maryland General
Corporation Law and Section 9 of the Class A and Class B Distribution
Agreements.
Article VI of the By-Laws provides that each officer and director of the
Registrant shall be indemnified by the Registrant to the full extent permitted
under the General Laws of the State of Maryland, except that such indemnity
shall not protect any such person against any liability to the Registrant or
any stockholder thereof to which such person would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office. Absent a court
determination that an officer or director seeking indemnification was not
liable on the merits or guilty of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office, the decision by the Registrant to indemnify such person must be based
upon the reasonable determination of independent counsel or non-party
independent directors, after review of the facts, that such officer or director
is not guilty of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office.
The Registrant may purchase insurance on behalf of an officer or director
protecting such person to the full extent permitted under the General Laws of
the State of Maryland from liability arising from his activities as officer or
director of the Registrant. The Registrant, however, may not purchase insurance
on behalf of any officer or director of the Registrant that protects or
purports to protect such person from liability to the Registrant or to its
stockholders to which such officer or director would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
Insofar as the conditional advancing of indemnification moneys for actions
based upon the Investment Company Act of 1940 may be concerned, such payments
will be made only on the following conditions: (i) the advances must be limited
to amounts used, or to be used, for the preparation or presentation of a
defense to the action, including costs connected with the preparation of a
settlement; (ii) advances may be made only upon receipt of a written promise
by, or on behalf of, the recipient to repay that amount of the advance which
exceeds the amount to which it is ultimately determined that he is entitled to
receive from the Registrant by reason of indemnification; and (iii) (a) such
promise must be secured by a surety bond, other suitable insurance or an
equivalent form of security which assures that any repayments may be obtained
by the Registrant without delay or litigation, which bond, insurance or other
form of security must be provided by the recipient of the advance, or (b) a
majority of a quorum of the Registrant's disinterested, non-party Directors, or
an independent legal counsel in a written opinion, shall determine, based upon
a review of readily available facts, that the recipient of the advance
ultimately will be found entitled to indemnification.
In Section 9 of the Class A and Class B Distribution Agreements relating to
the securities being offered hereby, the Registrant agrees to indemnify the
Distributor and each person, if any, who controls the Distributor within the
meaning of the Securities Act of 1933 (the "Act"), against certain types of
civil liabilities arising in connection with the Registration Statement or
Prospectus and Statement of Additional Information.
Insofar as indemnification for liabilities arising under the Act may be
permitted to Directors, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission
C-3
<PAGE>
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a Director, officer, or controlling person of the Registrant and the
principal underwriter in connection with the successful defense of any action,
suit or proceeding) is asserted by such Director, officer or controlling person
or the principal underwriter in connection with the shares being registered,
the Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
(a) Merrill Lynch Asset Management, L.P., doing business as Merrill Lynch
Asset Management (the 'Manager'), acts as investment adviser for the following
registered investment companies: Convertible Holdings, Inc., Merrill Lynch
Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income Fund,
Inc., Merrill Lynch Balanced Fund for Investment and Retirement, Merrill Lynch
Capital Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc.,
Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Fundamental Growth Fund, Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill
Lynch Global Bond Fund for Investment and Retirement, Merrill Lynch Global
Allocation Fund, Inc., Merrill Lynch Global Convertible Fund, Inc., Merrill
Lynch Global Holdings, Merrill Lynch Global Resources Trust, Merrill Lynch
Global Utility Fund, Inc., Merrill Lynch Growth Fund for Investment and
Retirement, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch High Income
Municipal Bond Fund, Inc., Merrill Lynch Institutional Intermediate Fund,
Merrill Lynch International Equity Fund, Merrill Lynch Latin America Fund,
Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund, Inc.,
Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Series Trust,
Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund,
Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund,
Inc., Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch Utility Income
Fund, Inc., Merrill Lynch Variable Series Funds, Inc. and Senior Floating Rate
Fund. Fund Asset Management, L.P. ("FAM"), an affiliate of the Manager, acts as
the investment adviser for the following investment companies: Apex Municipal
Fund, Inc., CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA
Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The
Corporate Fund Accumulation Program, Inc., Corporate High Yield Fund, Inc.,
Corporate High Yield Fund II, Inc., Financial Institutions Series Trust, Income
Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Federal Securities
Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch Multi-State
Municipal Series Trust, Merrill Lynch Multi-State Limited Maturity Municipal
Series Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix
Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch World Income
Fund, Inc., MuniAssets Fund, Inc., MuniBond Income Fund, Inc., The Municipal
Fund Accumulation Program, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund,
Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest California Insured
Fund, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc.,
MuniVest New Jersey Fund, Inc., MuniVest New York Insured Fund, Inc., MuniVest
Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc., MuniYield Arizona Fund
II, Inc., MuniYield California Fund, Inc., MuniYield California Insured Fund,
Inc., MuniYield California Insured Fund II, Inc., MuniYield Florida Fund,
MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund,
Inc., MuniYield Insured Fund II, Inc., MuniYield Michigan Fund, Inc., MuniYield
Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New
Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield
C-4
<PAGE>
New York Insured Fund II, Inc., MuniYield New York Insured Fund III, Inc.,
MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality
Fund II, Inc., Senior High Income Portfolio, Inc., Senior High Income Portfolio
II, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNew York Holdings,
Inc. and Worldwide DollarVest Fund, Inc. The address of each of these
investment companies is Box 9011, Princeton, New Jersey 08543-9011, except that
the address of Merrill Lynch Funds for Institutions Series and Merrill Lynch
Institutional Intermediate Fund is One Financial Center, 15th Floor, Boston,
Massachusetts 02111-2646. The address of the Manager and FAM is also Box 9011,
Princeton, New Jersey 08543-9011. The address of Merrill Lynch, Pierce, Fenner
& Smith Incorporated ("Merrill Lynch") and Merrill Lynch & Co., Inc. ("ML&Co.")
is World Financial Center, North Tower, 250 Vesey Street, New York, New York
10281.
Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
November 1, 1991, for his or its own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Zeikel is President, Mr. Richard
is Treasurer and Mr. Glenn is Executive Vice President of substantially all of
the investment companies described in the preceding paragraph, and Messrs.
Durnin, Giordano, Harvey, Kirstein and Monagle are directors, trustees or
officers of one or more of such companies.
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME POSITION(S) WITH THE MANAGER VOCATION OR EMPLOYMENT
---- ---------------------------- ---------------------------------------
<S> <C> <C>
ML & Co. ............... Limited Partner Financial Services Holding Company
Merrill Lynch Investment
Management, Inc........ Limited Partner Investment Advisory Services; Limited
Partner of FAM
Princeton Services, Inc.
("Princeton Services"). General Partner General Partner of FAM
Arthur Zeikel........... President President of FAM; President and
Director of Princeton Services;
Director of Merrill Lynch Funds
Distributor, Inc. ('MLFD'); Executive
Vice President of ML & Co.; Executive
Vice President of Merrill Lynch
Terry K. Glenn.......... Executive Vice Executive Vice President of FAM;
President Executive Vice President and Director
of Princeton Services; President and
Director of MLFD; Director of
Financial Data Services, Inc.
("FDS"); President of Princeton
Administrators
Bernard J. Durnin....... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Vincent R. Giordano..... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Elizabeth Griffin....... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Norman R. Harvey........ Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME POSITION(S) WITH THE MANAGER VOCATION OR EMPLOYMENT
---- ---------------------------- ---------------------------------------
<S> <C> <C>
N. John Hewitt.......... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Philip L. Kirstein...... Senior Vice Senior Vice President, General Counsel
President, General and Secretary of FAM; Senior Vice
Counsel and President, General Counsel, Director
Secretary and Secretary of Princeton Services;
Director of MLF
Ronald M. Kloss......... Senior Vice President Senior Vice President and Controller
and Controller of FAM; Senior Vice President and
Controller of Princeton Services
Stephen M.M. Miller..... Senior Vice President Executive Vice President of Princeton
Administrators; Senior Vice President
of Princeton Services
Joseph T. Monagle, Jr... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Gerald M. Richard....... Senior Vice President Senior Vice President and Treasurer of
and Treasurer FAM; Senior Vice President and
Treasurer of Princeton Services; Vice
President and Treasurer of MLFD
Richard L. Rufener...... Senior Vice President Vice President of MLFD; Senior Vice
President of Princeton Services
Ronald L. Welburn....... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Anthony Wiseman......... Senior Vice President Senior Vice President of Princeton
Services
</TABLE>
(b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as sub-
adviser for the following registered investment companies: Merrill Lynch
EuroFund, Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch
International Equity Fund and Merrill Lynch Short-Term Global Income Fund, Inc.
The address of each of these investment companies is Box 9011, Princeton, New
Jersey 08543-9011. The address of MLAM U.K. is Ropemaker Place, 25 Ropemaker
Street, 1st Floor, London EC24 9LY, England.
C-6
<PAGE>
Set forth below is a list of each executive officer and director of MLAM U.K.
indicating each business, profession, vocation or employment of a substantial
nature in which each such person has been engaged since November 1, 1991, for
his own account or in the capacity of director, officer, partner or trustee. In
addition, Messrs. Zeikel, Albert, Glenn, Harvey, Richard and Yardley are
officers of one or more of the registered investment companies listed in the
preceding paragraph:
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME MLAM U.K. VOCATION OR EMPLOYMENT
---- --------------------- ---------------------------------------
<S> <C> <C>
Arthur Zeikel........... Chairman President of the Manager and FAM;
President and Director of Princeton
Services; Director of MLFD; Executive
Vice President of ML & Co.; Executive
Vice President of Merrill Lynch
Alan J. Albert.......... Managing Director Vice President of the Manager
Terry K. Glenn.......... Managing Director Executive Vice President of the
Manager and FAM; Executive Vice
President and Director of Princeton
Services; President and Director of
MLFD; Director of FDS; President of
Princeton Administrators
Paul J. Sarosy.......... Managing Director None
Norman R. Harvey........ Senior Vice President Senior Vice President of the Manager
and FAM; Senior Vice President of
Princeton Services
Gerard M. Richard....... Senior Vice President Senior Vice President and Treasurer of
the Manager and FAM; Senior Vice
President and Treasurer of Princeton
Services; Vice President and
Treasurer of MLFD
Jeffrey Lawrence........ Vice President None
Adrian Holmes........... Vice President None
Steven J. Yardley....... Vice President None
Carol Ann Langham....... Company Secretary None
Debra Anne Searle....... Assistant Company None
Secretary
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and for each of
the investment companies referred to in the first paragraph of Item 28 except
Apex Municipal Fund, Inc., CBA Money Fund, CMA Government Securities Fund, CMA
Money Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA
Treasury Fund, Convertible Holdings, Inc., The Corporate Fund Accumulation
Program, Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund II,
Inc., Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000,
Inc., MuniAssets Fund, Inc., MuniBond Income Fund, Inc., The Municipal Fund
Accumulation Program, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc.,
MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest California Insured Fund,
Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New
Jersey Fund, Inc., MuniVest New York
C-7
<PAGE>
Insured Fund, Inc., MuniVest Pennsylvania Fund, MuniYield Arizona Fund,
MuniYield Arizona Fund II, Inc., MuniYield California Fund, Inc., MuniYield
California Insured Fund, Inc., MuniYield Florida Fund, MuniYield Florida
Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield
Insured Fund II, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan
Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey
Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New York
Insured Fund II, Inc., MuniYield New York Insured Fund III, Inc., MuniYield
Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality Fund II,
Inc., Senior High Income Portfolio, Inc., Senior High Income Portfolio II,
Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNew York Holdings, Inc.
and Worldwide DollarVest Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Crook,
Aldrich, Breen, Graczyk, Fatseas, and Wasel is One Financial Center, Boston,
Massachusetts 02111-2646.
<TABLE>
<CAPTION>
(2) (3)
POSITION(S) AND POSITION(S) AND
(1) OFFICE(S) OFFICE(S)
NAME WITH MLFD WITH REGISTRANT
---- --------------- ---------------
<S> <C> <C>
Terry K. Glenn............... President and Director Executive Vice President
Arthur Zeikel................ Director President and Director
Philip L. Kirstein........... Director None
William E. Aldrich........... Senior Vice President None
Robert W. Crook.............. Senior Vice President None
Michael J. Brady............. Vice President None
William M. Breen............. Vice President None
Sharon Creveling............. Vice President and None
Assistant Treasurer
Mark A. DeSario.............. Vice President None
James T. Fatseas............. Vice President None
Stanley Graczyk.............. Vice President None
Michelle T. Lau.............. Vice President None
Debra W. Landsman-Yaros...... Vice President None
Gerald M. Richard............ Vice President and Treasurer
Treasurer
Richard L. Rufener........... Vice President None
Salvatore Venezia............ Vice President None
William Wasel................ Assistant Vice President None
Robert Harris................ Secretary None
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940, as amended, and the rules
thereunder are maintained at the offices of the Registrant, 800 Scudders Mill
Road, Plainsboro, New Jersey 08536, and Financial Data Services, Inc., 4800
Deer Lake Drive East, Jacksonville, Florida 32246-6484.
C-8
<PAGE>
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the Fund --
Management and Advisory Arrangements" in the Prospectus constituting Part A of
the Registration Statement and under "Management of the Fund -- Management and
Advisory Arrangements" in the Statement of Additional Information constituting
Part B of the Registration Statement, Registrant is not a party to any
management related service contract.
ITEM 32. UNDERTAKINGS.
The Registrant undertakes to furnish to each person to whom a prospectus is
delivered a copy of the Registrant's annual report to shareholders, upon
request and without charge.
C-9
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE INVESTMENT
COMPANY ACT OF 1940, THE REGISTRANT CERTIFIES THAT IT MEETS ALL OF THE
REQUIREMENTS FOR EFFECTIVENESS OF THIS AMENDMENT TO ITS REGISTRATION STATEMENT
PURSUANT TO RULE 485(B) UNDER THE SECURITIES ACT OF 1933 AND HAS DULY CAUSED
THIS AMENDMENT TO ITS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE TOWNSHIP OF PLAINSBORO, AND THE
STATE OF NEW JERSEY, ON THE 23RD DAY OF FEBRUARY 1994.
Merrill Lynch Global Allocation
Fund, Inc.
(Registrant)
/s/ Arthur Zeikel
By __________________________________
(Arthur Zeikel, President)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT TO
REGISTRANT'S REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATE(S) INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Arthur Zeikel
- -------------------------------------------
(Arthur Zeikel) President and Director February 23, 1994
(Principal Executive
Officer)
/s/ Gerald M. Richard
- -------------------------------------------
(Gerald M. Richard) Treasurer (Principal February 23, 1994
Financial and
Accounting Officer)
Donald Cecil*
- -------------------------------------------
(Donald Cecil) Director February 23, 1994
Edward H. Meyer*
- -------------------------------------------
(Edward H. Meyer) Director February 23, 1994
Charles C. Reilly*
- -------------------------------------------
(Charles C. Reilly) Director February 23, 1994
Richard R. West*
- -------------------------------------------
(Richard R. West) Director February 23, 1994
</TABLE>
*By
/s/ Arthur Zeikel February 23,
_____________________________________ 1994
(Arthur Zeikel, Attorney-in-Fact)
C-10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER PAGE
------- ------------
<C> <S> <C>
1(a) --Articles of Incorporation of the Registrant.
(b) --Articles of Amendment to Articles of Incorporation
of the Registrant.
(c) --Articles Supplementary to the Articles of
Incorporation of the Registrant.
2 --By-Laws of the Registrant. (a)
3 --None.
4 --Copies of instruments defining the rights of
shareholders, including the relevant portions of the
Articles of Incorporation, as amended, and By-Laws
of Registrant.(d)
5(a) --Form of Management Agreement between Registrant and
Merrill Lynch Asset Management, Inc.(a)
(b) --Form of Sub-Advisory Agreement between Merrill
Lynch Asset Management, Inc. and Merrill Lynch Asset
Management U.K., Limited.(a)
6(a) --Form of Class A Shares Distribution Agreement
between Registrant and Merrill Lynch Funds
Distributor, Inc.(a)
(b) --Form of Class B Shares Distribution Agreement
between Registrant and Merrill Lynch Funds
Distributor, Inc. (a)
(c) --Letter Agreement between the Registrant and Merrill
Lynch Funds Distributor, Inc. with respect to the
Merrill Lynch Mutual Fund Advisor Program.
7 --None.
8 --Form of Custodian Agreement between Registrant and
Brown Brothers Harriman & Co.(a)
9(a) --Form of Transfer Agency, Dividend Disbursing Agency
and Shareholder Servicing Agency Agreement between
Registrant and Financial Data Services, Inc.(a)
(b) --Form of Agreement between Merrill Lynch & Co., Inc.
and the Registrant relating to use by Registrant of
Merrill Lynch name.(a)
10 --None.
11(a) --Consent of Deloitte & Touche, independent auditors
for the Registrant.
(b) --Consent of Morningstar, Inc.(c)
12 --None.
13 --Certificate of Merrill Lynch Asset Management,
Inc.(a)
14 --None.
15 --Amended and Restated Class B Distribution Plan of
the Registrant and Distribution Plan Sub-Agreement.
16(a) --Schedule of computation of each performance
quotation relating to Class A shares provided in the
Registration Statement in response to Item 22.(b)
(b) --Schedule of computation of each performance
quotation relating to Class B shares provided in the
Registration Statement in response to Item 22.(b)
</TABLE>
- --------
(a) Filed on December 15, 1988 as an exhibit to Pre-Effective Amendment No. 2
to Registrant's Registration Statement under the Securities Act of 1933 on
Form N-1A (the "Registration Statement").
<PAGE>
(b) Filed as an exhibit to Post-Effective Amendment No. 1 to the Registration
Statement.
(c) Filed on December 17, 1992, as an exhibit to Post-Effective Amendment No. 5
to the Registration Statement.
(d) Reference is made to Article III (Sections 3 and 4), Article V, Article VI
(Section 3), Article V, Article VII, Article VIII and Article X of the
Registrant's Articles of Incorporation, filed as Exhibit (1)(a) to the
Registration Statement; amended and restated Article VI (Sections 2, 3, 5
and 6) contained in the Articles of Amendment filed as Exhibit (1)(b) to
the Registration Statement; the Articles Supplementary (increasing
authorized share capital ) filed as Exhibit (1)(c) to the Registration
Statement; and Article II, Article III (Sections 1, 3, 5, 6 and 17),
Article IV (Section 1), Article V (Section 7), Article VI, Article VII,
Article XII, Article XIII, and Article XIV of the Registrant's By-Laws
previously filed as Exhibit (2) to the Registration Statement.
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents fair
and accurate narrative descriptions of graphic and image material omitted from
this EDGAR Submission File due to ASCII-inncompatibility and cross-references
this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
---------------------- -------------------
Artistic interpretation of earth
viewed from space. .................. Back cover of Prospectus and
back cover of Statement of
Additional Information
<PAGE>
EXHIBIT 99.1(a)
ARTICLES OF INCORPORATION
OF
MERRILL LYNCH GLOBAL INCOME FUND, INC.
* * * *
ARTICLE I
THE UNDERSIGNED, JONATHAN B. MILLER, whose post-office address is One World
Trade Center, New York, New York 10048, being at least eighteen years of age,
does hereby act as an incorporator, under and by virtue of the General Laws of
the State of Maryland authorizing the formation of corporations and the
intention of forming a corporation.
ARTICLE II
NAME
----
The name of the corporation is
MERRILL LYNCH GLOBAL INCOME FUND, INC.
ARTICLE III
PURPOSES AND POWERS
-------------------
The purpose or purposes for which the Corporation is formed and the
business or objects to be transacted, carried on and promoted by it are as
follows:
(1) To conduct and carry on the business of an investment company of the
management type.
<PAGE>
(2) To hold, invest and reinvest its assets in securities, and in
connection therewith to hold part or all of its assets in cash.
(3) To issue and sell shares of its own capital stock in such amounts and
on such terms and conditions, for such purposes and for such amount or kind of
consideration now or hereafter permitted by the General Laws of the State of
Maryland and by these Articles of Incorporation, as its Board of Directors may
determine; provided, however, that the value of the consideration per share to
be received by the Corporation upon the sale or other disposition of any shares
of its capital stock shall not be less than the net asset value per share of
such capital stock outstanding at the time of such event.
(4) To redeem, purchase or otherwise acquire, hold, dispose of, resell,
transfer, reissue or cancel (all without the vote or consent of the stockholders
of the Corporation) shares of its capital stock, in any manner and to the extent
now or hereafter permitted by the General Laws of the State of Maryland and by
these Articles of Incorporation.
(5) To do any and all such further acts or things and to exercise any and
all such further powers or rights as may be necessary, incidental, relative,
conducive, appropriate or desirable for the accomplishment, carrying out or
attainment of all or any of the foregoing purposes or objects.
2
<PAGE>
The Corporation shall be authorized to exercise and enjoy all of the
powers, rights and privileges granted to, or conferred upon, corporations by the
General Laws of the State of Maryland now or hereafter in force, and the
enumeration of the foregoing shall not be deemed to exclude any powers, rights
or privileges so granted or conferred.
ARTICLE IV
PRINCIPAL OFFICE AND RESIDENT AGENT
-----------------------------------
The post-office address of the principal office of the Corporation in the
State of Maryland is c/o The Corporation Trust Incorporated, 32 South Street,
Baltimore, Maryland 21202. The name of the resident agent of the Corporation in
this State is The Corporation Trust Incorporated, a corporation of this State,
and the post-office address of the resident agent is 32 South Street, Baltimore,
Maryland 21202.
ARTICLE V
CAPITAL STOCK
-------------
(1) The total number of shares of capital stock which the Corporation shall
have authority to issue is Two Hundred Million (200,000,000) shares, of the par
value of Ten Cents ($.10) per share and of the aggregate par value of Twenty
Million Dollars ($20,000,000). The capital stock initially is classified into
two
3
<PAGE>
classes, consisting of One Hundred Million (100,000,000) shares of Class A
Common Stock and One Hundred Million (100,000,000) shares of Class B Common
Stock.
(2) The Board of Directors may classify and reclassify any unissued shares
of capital stock into one or more additional or other classes or series as may
be established from time to time by setting or changing in any one or more
respects the designations, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications or terms or
conditions of redemption of such shares of stock and pursuant to such
classification or reclassification to increase or decrease the number of
authorized shares of any existing class or series.
(3) Unless otherwise expressly provided in the charter of the Corporation,
including any Articles Supplementary creating any class or series of capital
stock, the holders of each class or series of capital stock shall be entitled to
dividends and distributions in such amounts and at such times as may be
determined by the Board of Directors, and the dividends and distributions paid
with respect to the various classes or series of capital stock may vary among
such classes and series. Expenses related to the distribution of, and other
identified expenses that should properly be allocated to, the shares of a
particular class or series of capital stock may be charged to and borne solely
by such class or series and the bearing of expenses
4
<PAGE>
solely by a class or series of capital stock may be appropriately reflected (in
a manner determined by the Board of Directors) and cause differences in the net
asset value attributable to, and the dividend, redemption and liquidation rights
of, the shares of each class or series of capital stock.
(4) Unless otherwise expressly provided in the charter of the Corporation,
including any Articles Supplementary creating any class or series of capital
stock, on each matter submitted to a vote of stockholders, each holder of a
share of capital stock of the Corporation shall be entitled to one vote for each
share standing in such holder's name on the books of the Corporation,
irrespective of the class or series thereof, and all shares of all classes and
series shall vote together as a single class; provided, however, that (a) as to
any matter with respect to which a separate vote of any class or series is
required by the Investment Company At of 1940, as amended, and in effect from
time to time, or any rules, regulations or orders issued thereunder, or by the
Maryland General Corporation Law, such requirement as to a separate vote by that
class or series shall apply in lieu of a general vote of all classes and series
as described above, (b) in the event that the separate vote requirements
referred to in (a) above apply with respect to one or more classes or series,
then, subject to paragraph (c) below, the shares of all other classes and series
not entitled to a separate class vote shall vote as a single class, and (c) as
to
5
<PAGE>
any matter which does not affect the interest of a particular class or series,
such class or series shall not be entitled to any vote and only the holders of
shares of the one or more affected classes and series shall be entitled to vote.
(5) Notwithstanding any provision of the Maryland General Corporation Law
requiring a greater proportion than a majority of the votes of all classes or
series of capital stock of the Corporation (or of any class or series entitled
to vote thereon as a separate class or series) to take or authorize any action,
the Corporation is hereby authorized (subject to the requirements of the
Investment Company Act of 1940, as amended, and in effect from time to time, and
any rules, regulations and orders issued thereunder) to take such action upon
the concurrence of a majority of the aggregate number of shares of capital stock
of the Corporation entitled to vote thereon (or a majority of the aggregate
number of shares of a class or series entitled to vote thereon as a separate
class or series).
(6) Unless otherwise expressly provided in the charter of the Corporation,
including any Articles Supplementary creating any class or series of capital
stock, in the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the holders of all classes and
series of capital stock of the Corporation shall be entitled,
6
<PAGE>
after payment or provision for payment of the debts and other liabilities of the
Corporation, to share ratably in the remaining net assets of the Corporation.
(7) Any fractional shares shall carry proportionately all the rights of a
whole share, excepting any right to receive a certificate evidencing such
fractional share, but including, without limitation, the right to vote and the
right to receive dividends.
(8) All persons who shall acquire stock in the Corporation shall acquire
the same subject to the provisions of the charter and By-Laws of the
Corporation. As used in the charter of the Corporation, the terms "charter" and
"Articles of Incorporation" shall mean and include the Articles of Incorporation
of the Corporation as amended, supplemented and restated from time to time by
Articles of Amendment, Articles Supplementary, Articles of Restatement or
otherwise.
ARTICLE VI
PROVISIONS FOR DEFINING, LIMITING
AND REGULATING CERTAIN POWERS
OF THE CORPORATION AND OF THE DIRECTORS
AND STOCKHOLDERS
---------------------------------------
(1) The number of directors of the Corporation shall be three (3), which
number may be increased pursuant to the By-Laws of the Corporation but shall
never be less than three (3). The
7
<PAGE>
names of the directors who shall act until the first annual meeting or until
their successors are duly elected and qualify are:
Philip L. Kirstein
Mark B. Goldfus
Michael J. Hennewinkel
(2) The Board of Directors of the Corporation is hereby empowered to
authorize the issuance from time to time of shares of capital stock, whether now
or hereafter authorized, for such consideration as the Board of Directors may
deem advisable, subject to such limitations as may be set forth in these
Articles of Incorporation or in the By-Laws of the Corporation or in the General
Laws of the State of Maryland.
(3) No holder of stock of the Corporation shall, as such holder, have any
right to purchase or subscribe for any shares of the capital stock of the
Corporation or any other security of the Corporation which it may issue or sell
(whether out of the number of shares authorized by these Articles of
Incorporation, or out of any shares of the capital stock of the Corporation
acquired by it after the issue thereof, or otherwise) other than such right, if
any, as the Board of Directors, in its discretion, may determine.
(4) Each director and each officer of the Corporation shall be indemnified
by the Corporation to the full extent permitted by the General Laws of the State
of Maryland, subject to the requirements of the Investment Company Act of 1940,
as amended.
8
<PAGE>
(5) The Board of Directors of the Corporation may make, alter or repeal
from time to time any of the By-Laws of the corporation except any particular
By-Law which is specified as not subject to alteration or repeal by the Board of
Directors, subject to the requirements of the Investment Company Act of 1940, as
amended.
ARTICLE VII
REDEMPTION
----------
Each holder of shares of capital stock of the Corporation shall be entitled
to require the Corporation to redeem all or any part of the shares of capital
stock of the Corporation standing in the name of such holder on the books of the
Corporation, and all shares of capital stock issued by the Corporation shall be
subject to redemption by the Corporation, at the redemption price of such shares
as in effect from time to time as may be determined by the Board of Directors of
the Corporation in accordance with the provisions hereof, subject to the right
of the Board of Directors of the Corporation to suspend the right of redemption
of shares of capital stock of the Corporation or postpone the date of payment of
such redemption price in accordance with provisions of applicable law. The
redemption price of shares of capital stock of the Corporation shall be the net
asset value thereof as determined by the Board of Directors of the Corporation
from time to time in accordance with the provisions of
9
<PAGE>
applicable law, less such redemption fee or other charge, if any, as may be
fixed by resolution of the Board of Directors of the Corporation. Payment of
the redemption price shall be made in cash by the Corporation at such time and
in such manner as may be determined from time to time by the Board of Directors
of the Corporation.
ARTICLE VIII
DETERMINATION BINDING
---------------------
Any determination made in good faith, so far as accounting matters are
involved, in accordance with accepted accounting practice by or pursuant to the
direction of the Board of Directors, as to the amount of assets, obligations or
liabilities of the Corporation, as to the amount of net income of the
Corporation from dividends and interest for any period or amounts at any time
legally available for the payment of dividends, as to the amount of any reserves
or charges set up and the propriety thereof, as to the time of or purpose for
creating reserves or as to the use, alteration or cancellation of any reserves
or charges (whether or not any obligation or liability for which such reserves
or charges shall have been created, shall have been paid or discharged or shall
be then or thereafter required to be paid or discharged), as to the price of any
security owned by the Corporation or as to any other matters relating to the
issuance, sale, redemption or other acquisition or disposition of securi-
10
<PAGE>
ties or shares of capital stock of the Corporation, and any reasonable
determination made in good faith by the Board of Directors as to whether any
transaction constitutes a purchase of securities on "margin," a sale of
securities "short," or an underwriting of the sale of, or a participation in any
underwriting or selling group in connection with the public distribution of, any
securities, shall be final and conclusive, and shall be binding upon the
Corporation and all holders of its capital stock, past, present and future, and
shares of the capital stock of the Corporation are issued and sold on the
condition and understanding, evidenced by the purchase of shares of capital
stock or acceptance of share certificates, that any and all such determinations
shall be binding as aforesaid. No provision of these Articles of Incorporation
shall be effective to (a) require a waiver of compliance with any provision of
the Securities Act of 1933, as amended, or the Investment Company Act of 1940,
as amended, or of any valid rule, regulation or order of the Securities and
Exchange Commission thereunder or (b) protect or purport to protect any director
or officer of the Corporation against any liability to the Corporation or its
security holders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
11
<PAGE>
ARTICLE IX
PERPETUAL EXISTENCE
-------------------
The duration of the Corporation shall be perpetual.
ARTICLE X
AMENDMENT
---------
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in these Articles of Incorporation, in any manner now or
hereafter prescribed by statute, including any amendment which alters the
contract rights, as expressly set forth in the charter, of any outstanding stock
and substantially adversely affects the stockholder's rights, and all rights
conferred upon stockholders herein are granted subject to this reservation.
12
<PAGE>
IN WITNESS WHEREOF, the undersigned incorporator of MERRILL LYNCH GLOBAL
INCOME FUND, INC. hereby executes the foregoing Articles of Incorporation and
acknowledges the same to be his act and further acknowledges that, to the best
of his knowledge, the matters and facts set forth therein are true in all
material respects under the penalties of perjury.
Dated the 7th day of June, 1988.
/s/ Jonathan B. Miller
------------------------------
Jonathan B. Miller
13
<PAGE>
EXHIBIT 99.1(b)
MERRILL LYNCH GLOBAL INCOME FUND, INC.
ARTICLES OF AMENDMENT
MERRILL LYNCH GLOBAL INCOME FUND, INC., a Maryland corporation having its
principal office c/o The Corporation Trust Incorporated, 32 South Street,
Baltimore, Maryland 21202 (hereinafter called the Corporation), hereby certifies
to the State Department of Assessments and Taxation of Maryland, that:
FIRST: The charter of the Corporation is hereby amended by striking out
Article II of the Articles of Incorporation and inserting in lieu thereof the
following:
ARTICLE II
NAME
----
The name of the Corporation is
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
SECOND: The charter of the Corporation is hereby amended by striking out
Article VI of the Articles of Incorporation and inserting in lieu thereof the
following:
<PAGE>
ARTICLE VI
PROVISIONS FOR DEFINING, LIMITING AND
REGULATING CERTAIN POWERS OF THE
CORPORATION AND OF THE DIRECTORS
AND STOCKHOLDERS
--------------------------------------------
(1) The number of directors of the Corporation shall be three (3), which
number may be increased pursuant to the By-Laws of the Corporation but shall
never be less than three (3). The names of the directors who shall act until
the first annual meeting or until their successors are duly elected and qualify
are:
Philip L. Kirstein
Mark B. Goldfus
Michael J. Hennewinkel
(2) The Board of Directors of the Corporation is hereby empowered to
authorize the issuance from time to time of shares of capital stock, whether now
or hereafter authorized, for such consideration as the Board of Directors may
deem advisable, subject to such limitations as may be set forth in these
Articles of Incorporation or in the By-Laws of the Corporation or in the General
Laws of the State of Maryland.
(3) No holder of stock of the Corporation shall, as such holder, have any
right to purchase or subscribe for any shares of the capital stock of the
Corporation or any other security of the Corporation which it may issue or sell
(whether out of the number of shares authorized by these Articles of
Incorporation, or our of
2
<PAGE>
any shares of the capital stock of the corporation acquired by it after the
issue thereof, or otherwise) other than such right, if any, as the Board of
Directors, in its discretion, may determine.
(4) Each director and each officer of the Corporation shall be indemnified
by the Corporation to the full extent permitted by the General Laws of the State
of Maryland, subject to the requirements of the Investment Company Act of 1940,
as amended. No amendment of these Articles of Incorporation or repeal of any
provision hereof shall limit or eliminate the benefits provided to directors and
officers under this provision in connection with any act or omission that
occurred prior to such amendment or repeal.
(5) To the fullest extent permitted by the General Laws of the State of
Maryland, subject to the requirements of the Investment Company Act of 1940, as
amended, no director or officer of the Corporation shall be personally liable to
the Corporation or its security holders for money damages. No amendment of
these Articles of Incorporation or repeal of any provision hereof shall limit or
eliminate the benefits provided to directors and officers under this provision
in connection with any act or omission that occurred prior to such amendment or
repeal.
(6) The Board of Directors of the Corporation may make, alter or repeal
from time to time any of the By-Laws of the Corporation except any particular
By-Law which is specified as not
3
<PAGE>
subject to alteration or repeal by the Board of Directors, subject to the
requirements of the Investment Company Act of 1940, as amended.
THIRD: The foregoing amendments do not increase the authorized capital
stock of the Corporation.
FOURTH: The amendments to the charter of the Corporation herein made were
duly approved by unanimous written consent of the board of directors on November
28, 1988; and that at the time of the approval by the directors there were no
shares of stock of the Corporation entitled to vote on the matter either
outstanding or subscribed for.
IN WITNESS WHEREOF, Merrill Lynch Global Income Fund, Inc. has caused these
articles to be signed in its name and on its behalf by its President and
attested by its Secretary on November 28, 1988.
MERRILL LYNCH GLOBAL INCOME FUND, INC.
By /s/ Philip L. Kirstein
----------------------------------
Philip L. Kirstein, President
Attest:
/s/ Michael J. Hennewinkel
- ---------------------------------
Michael J. Hennewinkel, Secretary
4
<PAGE>
THE UNDERSIGNED, President of MERRILL LYNCH GLOBAL INCOME FUND, INC., who
executed on behalf of said corporation the foregoing Articles of Amendment, of
which this certificate is made a part, hereby acknowledges, in the name and on
behalf of said corporation, the foregoing Articles of Amendment to be the
corporate act of said corporation and further certifies that, to the best of his
knowledge, information and belief, the matters and facts set forth therein with
respect to the approval thereof are true in all material respects, under the
penalties of perjury.
/s/ Philip L. Kirstein
------------------------------
Philip L. Kirstein
5
<PAGE>
EXHIBIT 99.1(c)
ARTICLES SUPPLEMENTARY TO THE
ARTICLES OF INCORPORATION OF
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. (hereinafter called the
"Corporation"), a Maryland corporation, registered as an open-end investment
company under the Investment Company Act of 1940 and having its principal office
in the City of Baltimore, Maryland, hereby certifies to the State Department of
Assessments and Taxation of Maryland that:
FIRST: The Board of Directors of the Corporation by means of a duly
executed Unanimous Consent of Directors dated as of November 18, 1993, adopted a
resolution in accordance with Section 2-105(c) of the General Corporation Law of
Maryland, to increase the total number of shares of capital stock of the
Corporation. The capital stock shall be classified into two classes, consisting
of TWO HUNDRED MILLION (200,000,000) shares of Class A Common Stock with the par
value of Ten Cents ($0.10) per share and of the aggregate par value of Twenty
Million Dollars ($20,000,000) and NINE HUNDRED MILLION (900,000,000) shares of
Class B Common Stock with the par value of Ten Cents ($0.10) per share and of
the aggregate par value of Ninety Million Dollars ($90,000,000).
SECOND: The total number of shares of all classes of capital stock of the
corporation heretofore authorized, and the number and par value of the shares of
each class, are as follows:
Six Hundred Million (600,000,000) shares of capital stock of the par value
of Ten Cents ($0.10) per share and of the aggregate par value of Sixty
Million Dollars ($60,000,000), classified into two classes consisting of
TWO HUNDRED MILLION (200,000,000) shares of Class A Common Stock with the
par value of Ten Cents ($0.10) per share and of the aggregate par value of
Twenty Million Dollars ($20,000,000) and FOUR HUNDRED MILLION (400,000,000)
shares of Class B Common Stock with the par value of Ten Cents ($0.10) per
share and of the aggregate par value of Forty Million Dollars
($40,000,000).
THIRD: The total number of shares of all classes of capital stock of the
Corporation as increased, and the number and par value of the shares of each
class, are as follows:
The total number of shares of capital stock which the Corporation shall
have the authority to issue shall consist of ONE BILLION ONE HUNDRED
MILLION (1,100,000,000) shares of the par value of Ten Cents
<PAGE>
($0.10) per share and of the aggregate par value of One Hundred Ten Million
Dollars divided into TWO HUNDRED MILLION (200,000,000) shares of Class A
Common Stock with the par value of Ten Cents ($0.10) per share and of the
aggregate par value of Twenty Million Dollars ($20,000,000) and NINE
HUNDRED MILLION (900,000,000) shares of Class B Common Stock with the par
value of Ten Cents ($0.10) per share and of the aggregate par value of
Ninety Million Dollars ($90,000,000).
FOURTH: The aforesaid action by the Board of Directors was taken pursuant
to authority and power contained in the Amended and Restated Articles of
Incorporation of the Corporation.
IN WITNESS WHEREOF, MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. has caused
these presents to be signed in its name and on its behalf by its President and
attested by its Secretary on December 16, 1993.
MERRILL LYNCH GLOBAL
ALLOCATION FUND, INC.
By: /s/ Arthur Zeikel
--------------------
Arthur Zeikel
President
Attest:
/s/ Michael J. Hennewinkel
- --------------------------
Michael J. Hennewinkel
Secretary
2
<PAGE>
The undersigned, President of MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.,
who executed on behalf of said Corporation the foregoing Articles Supplementary,
of which this certificate is made a part, hereby acknowledges, in the name and
on behalf of said Corporation, the foregoing Articles Supplementary to be the
corporate act of said corporation and further certifies that, to the best of his
knowledge, information and belief, the matters and facts set forth therein with
respect to the approval thereof are true in all material respects, under the
penalties of perjury.
/s/ Arthur Zeikel
------------------
Arthur Zeikel
President
3
<PAGE>
EXHIBIT 99.6(c)
September 15, 1993
Merrill Lynch Funds Distributor, Inc.
Post Office Box 9011
Princeton, New Jersey 08543-9011
Each of the undersigned open-end investment companies (the "Funds") has
entered into a Distribution Agreement with Merrill Lynch Funds Distributor, Inc.
(the "Distributor"). Under the terms of such agreements, the Distributor is
authorized to offer shares of each Fund and to purchase, as principal, such
number of shares from each of the Funds as are needed to fill unconditional
orders for shares of such Fund placed with the Distributor by investors or by
securities dealers.
This letter confirms the agreement by each Fund with the Distributor that,
in connection with the Merrill Lynch Mutual Fund Adviser program, the
Distributor and its affiliate, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, are also authorized
<PAGE>
to offer and sell shares of such Fund, as agent for the Fund, to participants in
such program. This letter further confirms that the terms of the Distribution
Agreement between each Fund and the Distributor shall apply to such sales,
including terms as to the offering price of shares, the proceeds to be paid to
each Fund, the duties of the Distributor, the payment of expenses and
indemnification obligations of each Fund and the Distributor.
If the foregoing is consistent with your understanding of our agreement,
please sign and return one copy of the enclosed agreement.
Very truly yours,
The Investment Companies listed
on Schedule A hereto
By: /s/ Terry K. Glenn
-------------------------
Authorized Signatory
Accepted as of the date
set forth above
Merrill Lynch Funds Distributor, Inc.
By: /s/ Gerald M. Richard
-------------------------------
Authorized Signatory
2
<PAGE>
The Declaration of Trust establishing each investment company listed on
Schedule A hereto which has been organized as a Massachusetts trust (each, a
"Fund"), a copy of which, together with all amendments thereto, is on file in
the office of the Secretary of the Commonwealth of Massachusetts, provides that
the name of the Fund refers to the Trustees under the Declaration collectively
as Trustees, but not as individuals or personally; and no Trustee, shareholder,
officer, employee or agent of the Fund shall be held to any personal liability,
nor shall resort be had to their private property for the satisfaction of any
obligation or claim or otherwise in connection with the affairs of the Fund, but
the Fund estate only shall be liable.
3
<PAGE>
SCHEDULE A
----------
EQUITY FUNDS:
Merrill Lynch Balanced Fund for Investment and Retirement
Merrill Lynch Basic Value Fund, Inc.
Merrill Lynch Capital Fund, Inc.
Merrill Lynch Developing Capital Markets Fund, Inc.
Merrill Lynch Dragon Fund, Inc.
Merrill Lynch EuroFund
Merrill Lynch Fundamental Growth Fund, Inc.
Merrill Lynch Fund for Tomorrow, Inc.
Merrill Lynch Global Allocation Fund, Inc.
Merrill Lynch Global Utility Fund, Inc.
Merrill Lynch Growth Fund for Investment and Retirement
Merrill Lynch Healthcare Fund, Inc.
Merrill Lynch International Equity Fund
Merrill Lynch International Holdings, Inc.
Merrill Lynch Latin America Fund, Inc.
Merrill Lynch Natural Resources Trust
Merrill Lynch Pacific Fund, Inc.
Merrill Lynch Phoenix Fund, Inc.
Merrill Lynch Special Value Fund, Inc.
Merrill Lynch Strategic Dividend Fund
Merrill Lynch Technology Fund, Inc.
FIXED INCOME FUNDS:
Merrill Lynch Adjustable Rate Securities Fund, Inc.
Merrill Lynch Americas Income Fund, Inc.
Merrill Lynch Corporate Bond Fund, Inc.
Merrill Lynch Federal Securities Trust
Merrill Lynch Global Bond Fund for Investment and Retirement
Merrill Lynch Global Convertible Fund, Inc.
Merrill Lynch Short-Term Global Income Fund, Inc.
Merrill Lynch World Income Fund, Inc.
TAX-EXEMPT FIXED INCOME FUNDS:
Merrill Lynch Arizona Municipal Bond Fund
Merrill Lynch California Municipal Bond Fund
Merrill Lynch California Insured Municipal Bond Fund
Merrill Lynch Florida Municipal Bond Fund
Merrill Lynch Massachusetts Municipal Bond Fund
Merrill Lynch Michigan Municipal Bond Fund
Merrill Lynch Minnesota Municipal Bond Fund
Merrill Lynch Municipal Bond Fund, Inc.
A-1
<PAGE>
Merrill Lynch Municipal Income Fund
Merrill Lynch New Jersey Municipal Bond Fund
Merrill Lynch New York Municipal Bond Fund
Merrill Lynch North Carolina Municipal Bond Fund
Merrill Lynch Ohio Municipal Bond Fund
Merrill Lynch Pennsylvania Municipal Bond Fund
Merrill Lynch Texas Municipal Bond Fund
INSTITUTIONAL MONEY MARKET FUNDS:
Merrill Lynch Institutional Fund
Merrill Lynch Government Fund
Merrill Lynch Treasury Fund
Merrill Lynch Institutional Tax-Exempt Fund
A-2
<PAGE>
EXHIBIT 99.11(a)
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Global Allocation Fund, Inc.:
We consent to the use in Post-Effective Amendment No. 7 to Registration
Statement No. 33-22462 of our report dated December 17, 1993 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
DELOITTE & TOUCHE
Princeton, New Jersey
February 24, 1994
<PAGE>
EXHIBIT 99.15
AMENDED AND RESTATED
CLASS B DISTRIBUTION PLAN
OF
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
PURSUANT TO RULE 12b-1
DISTRIBUTION PLAN made as of the 13th day of December 1988, and amended and
restated as of July 7, 1993, by and between Merrill Lynch Global Allocation
Fund, Inc., a Maryland corporation (the "Fund"), and Merrill Lynch Funds
Distributor, Inc., a Delaware corporation ("MLFD").
W I T N E S S E T H :
--------------------
WHEREAS, the Fund engages in business as an open-end investment company
registered under the Investment Company Act of 1940, as amended (the "Investment
Company Act");
WHEREAS, MLFD is a securities firm engaged in the business of selling
shares of investment companies either directly to purchasers or through other
securities dealers;
WHEREAS, the Fund has entered into a Class B Shares Distribution Agreement
with MLFD, pursuant to which MLFD acts as the exclusive distributor and
representative of the Fund in the offer and sale of Class B shares (the "Class B
shares") of the Fund to the public;
WHEREAS, the Fund has entered into a Class B Distribution Plan (the "Prior
Plan") pursuant to Rule l2b-1 under the Investment Company Act;
WHEREAS, the Fund desires to adopt this Amended and Restated Class B
Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment
Company Act, pursuant to which the Fund will pay an account maintenance fee and
a distribution fee to MLFD with respect to the Fund's Class B shares; and
WHEREAS, the Directors of the Fund have determined that there is a
reasonable likelihood that adoption of the Plan will benefit the Fund and its
shareholders;
NOW, THEREFORE, the Fund hereby adopts, and MLFD hereby agrees to the terms
of, the Plan in accordance with Rule 12b-1 under the Investment Company Act on
the following terms and conditions:
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1. The Fund shall pay MLFD an account maintenance fee under the Plan at
the end of each month at the annual rate of 0.25% of average daily net assets of
the Fund relating to Class B shares to compensate MLFD and securities firms with
which MLFD enters into related agreements pursuant to Paragraph 3 hereof ("Sub-
Agreements") for account maintenance activities with respect to Class B
shareholders of the Fund.
2. The Fund shall pay MLFD a distribution fee under the Plan at the and of
each month at the annual rate of 0.75% of average daily net assets of the Fund
relating to Class B shares to compensate MLFD and securities firms with which
MLFD enters into related Sub-Agreements for providing sales and promotional
activities and services. Such activities and services will relate to the sale,
promotion and marketing of the Class B shares of the Fund. Such expenditures
may consist of sales commissions to financial consultants for selling Class B
shares of the Fund, compensation, sales incentives and payments to sales and
marketing personnel, and the payment of expenses incurred in its sales and
promotional activities, including advertising expenditures related to the Fund
and the costs of preparing and distributing promotional materials. The
distribution fee may also be used to pay the financing costs of carrying the
unreimbursed expenditures described in this Paragraph 2. Payment of the
distribution fee described in this Paragraph 2 shall be subject to any
limitations set forth in any applicable regulation of the National Association
of Securities Dealers, Inc.
3. The Fund hereby authorizes MLFD to enter into Sub-Agreements with
certain securities firms ("Securities Firms"), including Merrill Lynch, Pierce,
Fenner & Smith Incorporated, to provide compensation to such Securities Firms
for activities and services of the type referred to in Paragraphs 1 and 2
hereof. MLFD may reallocate all or a portion of its account maintenance fee or
distribution fee to such Securities Firms as compensation for the above-
mentioned activities and services. Such Sub-Agreement shall provide that the
Securities Firms shall provide MLFD with such information as is reasonably
necessary to permit MLFD to comply with the reporting require-ments set forth in
Paragraph 4 hereof.
4. MLFD shall provide the Fund for review by the Board of Directors, and
the Directors shall review, at least quarterly, a written report complying with
the requirements of Rule 12b-1 regarding the disbursement of the account
maintenance fee and the distribution fee during such period.
5. The Prior Plan has been approved by a vote of at least a majority, as
defined in the Investment Company Act, of the outstanding Class B voting
securities of the Fund. The Plan has
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<PAGE>
not been submitted to the Class B shareholders because the amendments do not
materially increase the rate of payments by the Fund provided for in the Prior
Plan.
6. The Plan shall not take effect until it has been approved, together
with any related agreements, by votes of a majority of both (a) the Directors of
the Fund and (b) those Directors of the Fund who are not "interested persons" of
the Fund, as defined in the Investment Company Act, and have no direct or
indirect financial interest in the operation of this Plan or any agreements
related to it (the "Rule 12b-1 Directors"), cast in person at a meeting or
meetings called for the purpose of voting on the Plan and such related
agreements.
7. The Plan shall continue in effect for so long as such continuance is
specifically approved at least annually in the manner provided for approval of
the Plan in Paragraph 6.
8. The Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Directors, or by vote of a majority of the outstanding Class B voting
securities of the Fund.
9. The Plan may not be amended to increase materially the rate of payments
provided for herein unless such amendment is approved by at least a majority, as
defined in the Investment Company Act, of the outstanding Class B voting
securities of the Fund, and by the Directors of the Fund in the manner provided
for in Paragraph 6 hereof, and no material amendment to the Plan shall be made
unless approved in the manner provided for approval and annual renewal in
Paragraph 6 hereof.
10. While the Plan is in effect, the selection and nomination of Directors
who are not interested persons, as defined in the Investment Company Act, of the
Fund shall be committed to the discretion of the Directors who are not
interested persons.
11. The Fund shall preserve copies of the Plan and any related agreements
and all reports made pursuant to Paragraph 4 hereof, for a period of not less
than six years from the date of the Plan, or the agreements or such report, as
the case may be, the first two years in an easily accessible place.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Plan as of the
date first above written.
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
By /s/ Arthur Zeikel
---------------------------------------
Title: President
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By /s/ Gerald M. Richard
----------------------------------------
Title: Treasurer
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<PAGE>
CLASS B SHARES DISTRIBUTION PLAN SUB-AGREEMENT
AGREEMENT made as of the 7th day of July 1993, by and between Merrill Lynch
Funds Distributor, Inc., a Delaware corporation ("MLFD"), and Merrill Lynch,
Pierce, Fenner & Smith Incorporated, a Delaware corporation (the "Securities
Firm").
W I T N E S S E T H :
--------------------
WHEREAS, MLFD has entered into an agreement with Merrill Lynch Global
Allocation Fund, Inc., a Maryland corporation (the "Fund"), pursuant to which it
acts as the exclusive distributor for the sale of Class B shares (the "Class B
shares"), of the Fund;
WHEREAS, MLFD and the Fund have entered into an Amended and Restated Class
B Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment
Company Act of 1940, as amended (the "Act"), pursuant to which MLFD receives an
account maintenance fee from the Fund at the annual rate of 0.25% of average
daily net assets of the Fund relating to Class B shares for account maintenance
activities related to Class B shares of the Fund and a distribution fee from the
Fund at the annual rate of 0.75% of average daily net assets of the Fund
relating to Class B shares for providing sales and promotional activities and
services related to the distribution of Class B shares; and
WHEREAS, MLFD desires the Securities Firm to perform certain account
maintenance activities and sales and promotional activities and services for the
Fund's Class B shareholders and the Securities Firm is willing to perform such
activities and services;
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties hereby agree as follows:
1. The Securities Firm shall provide account maintenance activities with
respect to the Class B shares of the Fund of the types referred to in Paragraph
1 of the Plan.
2. The Securities Firm shall provide sales and promotional activities and
services with respect to the sale of the Class B shares of the Fund, and incur
distribution expenditures, of the types referred to in Paragraph 2 of the Plan.
3. As compensation for its activities and services performed under this
Agreement, MLFD shall pay the Securities Firm an account maintenance fee and a
distribution fee at the end
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of each calendar month in an amount agreed upon by the parties hereto.
4. The Securities Firm shall provide MLFD, at least quarterly, such
information as reasonably requested by MLFD to enable MLFD to comply with the
reporting requirements of Rule 12b-1 regarding the disbursement of the account
maintenance fee and the distribution fee during such period referred to in
Paragraph 4 of the Plan.
5. This Agreement shall not take effect until it has been approved by
votes of a majority of both (a) the Directors of the Fund and (b) those
Directors of the Fund who are not "interested persons" of the Fund, as defined
in the Act, and have no direct or indirect financial interest in the operation
of the Plan, this Agreement or any agreements related to the Plan or this
Agreement (the "Rule 12b-1 Directors"), cast in person at a meeting or meetings
called for the purpose of voting on this Agreement.
6. This Agreement shall continue in effect for as long as such continuance
is specifically approved at least annually in the manner provided for approval
of the Plan in Paragraph 6.
7. This Agreement shall automatically terminate in the event of its
assignment or in the event of the termination of the Plan or any amendment to
the Plan that requires such termination.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By /s/ Gerald M. Richard
----------------------------------
Title: Treasurer
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By /s/ David C. Conine
-----------------------------------
Title: Vice President
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