<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 13, 1995
SECURITIES ACT FILE NO. 33-
INVESTMENT COMPANY ACT FILE NO. 811-5576
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
[_] PRE-EFFECTIVE AMENDMENT NO. [_] POST-EFFECTIVE AMENDMENT NO.
(CHECK APPROPRIATE BOX OR BOXES)
----------------
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
----------------
(609) 282-2800
(AREA CODE AND TELEPHONE NUMBER)
----------------
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES:
NUMBER, STREET, CITY, STATE, ZIP CODE)
----------------
ARTHUR ZEIKEL
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY 08536
MAILING ADDRESS: BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
----------------
COPIES TO:
THOMAS R. SMITH, JR., ESQ. MICHAEL J. HENNEWINKEL, ESQ.
BROWN & WOOD MERRILL LYNCH ASSET MANAGEMENT
ONE WORLD TRADE CENTER 800 SCUDDERS MILL ROAD
NEW YORK, NEW YORK 10048-0557 PLAINSBORO, NJ 08543-9011
----------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the Registration Statement becomes effective under the Securities Act of 1933.
----------------
No filing fee is required because an indefinite number of shares have
previously been registered pursuant to Rule 24f-2 under the Investment Company
Act of 1940 pursuant to a registration statement on Form N-1A (File No. 33-
22462). The notice required for such Rule for the Registrant's most recent
fiscal year end was filed on December 28, 1994. Pursuant to Rule 429, this
Registration Statement relates to shares previously registered on Form N-1A
(File No. 33-22462).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
CROSS REFERENCE SHEET
PURSUANT TO RULE 481(a) UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
FORM N-14 ITEM NO. PROXY STATEMENT AND PROSPECTUS CAPTION
------------------ --------------------------------------
<C> <S> <C>
PART A
Item 1. Beginning of
Registration Statement
and Outside Front Cover
Page of Prospectus..... Registration Statement Cover Page;
Prospectus Cover Page
Item 2. Beginning and Outside
Back Cover Page of
Prospectus............. Table of Contents
Item 3. Fee Table, Synopsis
Information and Risk
Factors................ Summary; Risk Factors and Special
Considerations
Item 4. Information About the
Transaction............ Summary; The Reorganization
Item 5. Information About the
Registrant............. Prospectus Cover Page; Summary; Comparison
of the Funds; Additional Information
Item 6. Information About the
Company Being Acquired. Prospectus Cover Page; Summary; Comparison
of the Funds; Additional Information
Item 7. Voting Information...... Notice of Special Meeting of Shareholders;
Introduction; Summary; Comparison of the
Funds; Information Concerning the Special
Meeting; Additional Information
Item 8. Interest of Certain
Persons and Experts.... Not Applicable
Item 9. Additional Information
Required for Reoffering
by Persons Deemed to be
Underwriters........... Not Applicable
PART B
Item 10. Cover Page.............. Cover Page
Item 11. Table of Contents....... Table of Contents
Item 12. Additional Information
About the Registrant... General Information
Item 13. Additional Information
About the Company Being
Acquired............... General Information
Item 14. Financial Statements.... Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
MERRILL LYNCH BALANCED FUND
FOR INVESTMENT AND RETIREMENT, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 21, 1995
TO THE SHAREHOLDERS OF MERRILL LYNCH BALANCED FUND FOR INVESTMENT AND
RETIREMENT, INC.:
NOTICE IS HEREBY GIVEN that a special meeting of shareholders (the "Meeting")
of Merrill Lynch Balanced Fund for Investment and Retirement, Inc. ("Balanced
Fund") will be held at the offices of Merrill Lynch Asset Management, L.P., 800
Scudders Mill Road, Plainsboro, New Jersey on December 21, 1995 at [9:00] A.M.,
New York time for the following purposes:
(1) To approve or disapprove an Agreement and Plan of Reorganization (the
"Agreement and Plan of Reorganization") providing for the acquisition of
substantially all of the assets of Balanced Fund by Merrill Lynch Global
Allocation Fund, Inc. ("Global Allocation"), and the assumption of
substantially all of the liabilities of Balanced Fund by Global Allocation,
in exchange solely for an equal aggregate value of shares of Global
Allocation. The Agreement and Plan of Reorganization also provides for
distribution of such shares of Global Allocation to shareholders of
Balanced Fund in liquidation of Balanced Fund. A vote in favor of this
proposal will constitute a vote in favor of the liquidation and dissolution
of Balanced Fund and a termination of its registration under the Investment
Company Act of 1940, as amended; and
(2) To transact such other business as properly may come before the
Meeting or any adjournment thereof.
The Board of Directors of Balanced Fund has fixed the close of business on
October 31, 1995 as the record date for the determination of shareholders
entitled to notice of, and to vote at, the Meeting or any adjournment thereof.
A complete list of the shareholders of Balanced Fund entitled to vote at the
Meeting will be available and open to the examination of any shareholders of
Balanced Fund for any purpose germane to the Meeting during ordinary business
hours from and after December 7, 1995 at the offices of Balanced Fund, 800
Scudders Mill Road, Plainsboro, New Jersey.
You are cordially invited to attend the Meeting. Shareholders who do not
expect to attend the Meeting in person are requested to complete, date and sign
the enclosed form of proxy and return it promptly in the envelope provided for
that purpose. The enclosed proxy is being solicited on behalf of the Board of
Directors of Balanced Fund.
By Order of the Board of Directors,
JERRY WEISS
Secretary
Plainsboro, New Jersey
Dated: , 1995
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROXY STATEMENT AND PROSPECTUS DATED OCTOBER 13, 1995
PROXY STATEMENT AND PROSPECTUS
MERRILL LYNCH BALANCED FUND FOR INVESTMENT AND RETIREMENT, INC.
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(609) 282-2800
SPECIAL MEETING OF SHAREHOLDERS
DECEMBER 21, 1995
This Proxy Statement and Prospectus is furnished in connection with the
solicitation of proxies on behalf of the Board of Directors of Merrill Lynch
Balanced Fund for Investment and Retirement, Inc., a Maryland corporation
("Balanced Fund"), for use at the Special Meeting of Shareholders of Balanced
Fund (the "Meeting") called to approve or disapprove the proposed
reorganization whereby Merrill Lynch Global Allocation Fund, Inc., a Maryland
corporation ("Global Allocation"), will acquire substantially all of the
assets, and will assume substantially all of the liabilities, of Balanced Fund,
in exchange solely for an equal aggregate value of newly-issued shares of
Global Allocation (the "Reorganization"). Immediately upon the receipt by
Global Allocation of Balanced Fund's assets and the assumption by Global
Allocation of Balanced Fund's liabilities, as described in the preceding
sentence, Corresponding Shares (defined below) of Global Allocation will be
distributed to Balanced Fund shareholders. Thereafter, Balanced Fund will
terminate its registration under the Investment Company Act of 1940, as amended
(the "Investment Company Act"), and will dissolve in accordance with the laws
of the State of Maryland.
Holders of shares in Balanced Fund will receive shares of that class of
shares of Global Allocation having the same letter designation (i.e., Class A,
Class B, Class C or Class D) and the same distribution fees, account
maintenance fees, and sales charges (including contingent deferred sales
charges ("CDSCs")), if any (the "Corresponding Shares"), as the shares of
Balanced Fund held by them immediately prior to the Reorganization. The
aggregate net asset value of the Corresponding Shares of Global Allocation to
be issued to the shareholders of Balanced Fund will equal the aggregate net
asset value of the outstanding shares of Balanced Fund as set forth in the
Agreement and Plan of Reorganization. Balanced Fund and Global Allocation
sometimes are referred to herein collectively as the "Funds" and individually
as a "Fund," as the context requires.
This Proxy Statement and Prospectus serves as a prospectus of Global
Allocation under the Securities Act of 1933, as amended (the "Securities Act"),
in connection with the issuance of shares of Global Allocation to Balanced Fund
pursuant to the terms of the Reorganization.
Both Balanced Fund and Global Allocation are open-end management investment
companies with similar, though not identical, investment objectives. Balanced
Fund seeks to provide shareholders with as high a level of total investment
return as is consistent with a reasonable and relatively low level of risk.
Global Allocation seeks to provide a high total investment return, consistent
with prudent risk. There can be no assurance that, after the Reorganization,
Global Allocation will achieve its investment objective.
The current prospectus relating to Global Allocation, dated February 27, 1995
(the "Global Allocation Prospectus"), and the current prospectus relating to
Balanced Fund, dated January 31, 1995 (the "Balanced Fund Prospectus"),
accompany this Proxy Statement and Prospectus and are incorporated herein by
reference. A statement of additional information relating to Global Allocation,
dated February 27, 1995 (the "Global Allocation Statement"), and a statement of
additional information relating to Balanced Fund, dated January 31, 1995 (the
"Balanced Fund Statement"), have been filed with the Securities and Exchange
Commission. Such Statements may be obtained, without charge, by writing either
Balanced Fund or Global Allocation at the address above, or by calling [1-800-
].
-----------
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 PROXY STATEMENT AND PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------
This Proxy Statement and Prospectus sets forth concisely the information
about Global Allocation that shareholders of Balanced Fund should know before
considering the Reorganization and should be retained for future reference.
Balanced Fund has authorized the solicitation of proxies in connection with the
Reorganization solely on the basis of this Proxy Statement and Prospectus and
the accompanying documents.
A statement of additional information relating to the Reorganization (the
"Statement of Additional Information"), including historical financial
statements of Balanced Fund and Global Allocation, is on file with the
Securities and Exchange Commission. It is available from Global Allocation
without charge, upon oral request by calling the toll free telephone number set
forth above or upon written request by writing Global Allocation at its
principal executive offices. The Statement of Additional Information, dated
, 1995, is incorporated by reference into this Proxy Statement and
Prospectus.
The address of the principal executive offices of both Balanced Fund and
Global Allocation is 800 Scudders Mill Road, Plainsboro, New Jersey 08536, and
the telephone number is (609) 282-2800.
-----------
THE DATE OF THIS PROXY STATEMENT AND PROSPECTUS IS , 1995.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTRODUCTION.............................................................. 3
SUMMARY................................................................... 3
RISK FACTORS AND SPECIAL CONSIDERATIONS................................... 11
COMPARISON OF THE FUNDS................................................... 13
Financial Highlights.................................................... 13
Investment Objectives and Policies...................................... 18
Other Investment Policies............................................... 22
Information Regarding Futures and Options Transactions.................. 22
Investment Restrictions................................................. 23
Management.............................................................. 23
Purchase of Shares...................................................... 24
Redemption of Shares.................................................... 24
Performance............................................................. 25
Voting Rights........................................................... 27
Dividends and Distributions............................................. 28
Tax Information......................................................... 28
Portfolio Transactions.................................................. 28
Portfolio Turnover...................................................... 28
Additional Information.................................................. 29
THE REORGANIZATION........................................................ 30
General................................................................. 30
Procedure............................................................... 30
Terms of the Agreement and Plan of Reorganization....................... 31
Potential Benefits to Balanced Fund Shareholders as a Result of the Re-
organization........................................................... 32
Tax Consequences of the Reorganization.................................. 33
Capitalization.......................................................... 34
INFORMATION CONCERNING THE SPECIAL MEETING................................ 34
Date, Time and Place of Meeting......................................... 34
Solicitation, Revocation and Use of Proxies............................. 34
Record Date and Outstanding Shares...................................... 35
Security Ownership of Certain Beneficial Owners and Management of Bal-
anced Fund and Global Allocation....................................... 35
Voting Rights and Required Vote......................................... 35
ADDITIONAL INFORMATION.................................................... 36
LEGAL PROCEEDINGS......................................................... 36
LEGAL OPINIONS............................................................ 36
EXPERTS................................................................... 37
SHAREHOLDER PROPOSALS..................................................... 37
EXHIBIT I-- AGREEMENT AND PLAN OF REORGANIZATION.......................... I-1
</TABLE>
2
<PAGE>
INTRODUCTION
This Proxy Statement and Prospectus is furnished in connection with the
solicitation of proxies on behalf of the Board of Directors of Balanced Fund
for use at the Meeting to be held at the offices of Merrill Lynch Asset
Management, L.P. ("MLAM"), 800 Scudders Mill Road, Plainsboro, New Jersey on
December 21, 1995, at [9:00] A.M., New York time. The mailing address for
Balanced Fund is P.O. Box 9011, Princeton, New Jersey 08543-9011. The
approximate mailing date of this Proxy Statement and Prospectus is November ,
1995.
Any person giving a proxy may revoke it at any time prior to its exercise by
executing a superseding proxy, by giving written notice of the revocation to
the Secretary of Balanced Fund, at the address indicated above or by voting in
person at the Meeting. All properly executed proxies received prior to the
Meeting will be voted at the Meeting in accordance with the instructions marked
thereon or otherwise as provided therein. Unless instructions to the contrary
are marked, executed proxies will be voted "FOR" the proposal to approve the
Agreement and Plan of Reorganization between Balanced Fund and Global
Allocation (the "Agreement and Plan of Reorganization").
Approval of the Agreement and Plan of Reorganization will require the
affirmative vote of Balanced Fund shareholders representing a majority of the
total number of votes entitled to be cast thereon. Shareholders will vote as a
single class on the proposal to approve the Agreement and Plan of
Reorganization. See "Information Concerning the Special Meeting."
The Board of Directors of Balanced Fund knows of no business other than that
discussed above which will be presented for consideration at the Meeting. If
any other matter is properly presented, it is the intention of the persons
named in the enclosed proxy to vote in accordance with their best judgment.
SUMMARY
The following is a summary of certain information contained elsewhere in this
Proxy Statement and Prospectus (including documents incorporated by reference)
and is qualified in its entirety by reference to the more complete information
contained in this Proxy Statement and Prospectus and in the Agreement and Plan
of Reorganization, attached hereto as Exhibit I.
In this Proxy Statement and Prospectus, the term "Reorganization" refers
collectively to the acquisition of substantially all of the assets and the
assumption of substantially all of the liabilities of Balanced Fund by Global
Allocation in exchange for the Corresponding Shares and the subsequent
distribution of Corresponding Shares of Global Allocation to the shareholders
of Balanced Fund.
THE REORGANIZATION
At a special meeting of the Board of Directors of Balanced Fund held on
September 29, 1995, the Board of Directors of Balanced Fund considered the
proposal that Global Allocation acquire substantially all of the assets, and
assume substantially all of the liabilities, of Balanced Fund in exchange
solely for shares of Global Allocation to be distributed to the shareholders of
Balanced Fund. The Board of Directors of Balanced Fund approved the
Reorganization at the regular meeting of the Board held on October 13, 1995.
Based upon their evaluation of all relevant information, the Directors of
Balanced Fund have determined that the Reorganization will potentially benefit
the shareholders of Balanced Fund. Specifically, after the Reorganization,
Balanced Fund shareholders will remain invested in an open-end fund that has an
investment objective similar to Balanced Fund, though not identical. In
addition, although after the Reorganization, on a pro forma combined basis,
Global Allocation will pay an advisory fee to MLAM at a higher annual effective
rate than that currently paid by Balanced Fund, MLAM anticipates that Balanced
Fund shareholders will
3
<PAGE>
nonetheless benefit from a reduced overall operating expense ratio as a result
of certain economies of scale expected after the Reorganization. See "The
Reorganization--Potential Benefits to Balanced Fund Shareholders as a Result of
the Reorganization."
The Board of Directors of Balanced Fund, including all of the Directors who
are not "interested persons," as defined in the Investment Company Act, have
determined that the Reorganization is in the best interests of Balanced Fund
and that the interests of existing Balanced Fund shareholders will not be
diluted as a result of effecting the Reorganization. If all requisite
shareholder and regulatory approvals are obtained, it is anticipated that the
Reorganization will occur as early as possible in calendar year 1996. However,
the Reorganization may be postponed or abandoned under certain conditions. See
"The Reorganization--Terms of the Agreement and Plan of Reorganization--
Postponement; Termination."
4
<PAGE>
PRO FORMA FEE TABLES
PRO FORMA FEE TABLE FOR CLASS A AND CLASS B SHAREHOLDERS OF BALANCED FUND,
GLOBAL ALLOCATION
AND THE COMBINED FUND AS OF AUGUST 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
CLASS A SHARES (A)
-----------------------------------------
ACTUAL
------------------------------- PRO FORMA
BALANCED FUND GLOBAL ALLOCATION COMBINED
------------- ----------------- ---------
<S> <C> <C> <C>
SHAREHOLDER TRANS-
ACTION EXPENSES:
Maximum Sales
Charge Imposed on
Purchases (as a
percentage of of-
fering price)..... 5.25%(c) 5.25%(c) 5.25%(c)
Sales Charge Im-
posed on Dividend
Reinvestments..... None None None
Deferred Sales
Charge (as a per-
centage of origi- None(d) None(d) None(d)
nal purchase price
or redemption pro-
ceeds, whichever
is lower).........
Exchange Fee...... None None None
ANNUAL FUND OPERAT-
ING EXPENSES (AS A
PERCENTAGE OF AVER-
AGE NET ASSETS):
Investment Advi-
sory Fees(e)...... 0.64% 0.69% 0.69%
12b-1 Fees(f):
Account Mainte-
nance Fees........ None None None
Distribution
Fees.............. None None None
Other Expenses:
Custodial Fees.... .02% .04% .03%
Shareholder Ser-
vicing Costs(g)... .26% .15% .14%
Other............. .09% .03% .04%
---- ---- ----
Total Other Ex- .37% .22% .21%
penses.......... ---- ---- ----
Total Fund Operat- 1.01% .91% .90%
ing Expenses....... ==== ==== ====
<CAPTION>
CLASS B SHARES (B)
--------------------------------------------------------------------
ACTUAL
--------------------------------------------- PRO FORMA
BALANCED FUND GLOBAL ALLOCATION COMBINED
---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
SHAREHOLDER TRANS-
ACTION EXPENSES:
Maximum Sales
Charge Imposed on
Purchases (as a
percentage of of-
fering price)..... None None None
Sales Charge Im-
posed on Dividend
Reinvestments..... None None None
Deferred Sales
Charge (as a per-
centage of origi- 4.0% during the first 4.0% during the first 4.0% during the first
nal purchase price year, decreasing 1.0% year, decreasing 1.0% year, decreasing 1.0%
or redemption pro- annually thereafter to annually thereafter to annually thereafter to
ceeds, whichever 0.0% after the fourth 0.0% after the fourth 0.0% after the fourth
is lower)......... year year year
Exchange Fee...... None None None
ANNUAL FUND OPERAT-
ING EXPENSES (AS A
PERCENTAGE OF AVER-
AGE NET ASSETS):
Investment Advi-
sory Fees(e)...... 0.64% 0.69% 0.69%
12b-1 Fees(f):
Account Mainte-
nance Fees........ 0.25% 0.25% 0.25%
Distribution
Fees.............. 0.75% 0.75% 0.75%
(Class B shares (Class B shares (Class B shares
convert to Class D convert to Class D convert to Class D
shares automatically shares automatically shares automatically
after approximately after approximately after approximately
eight years and cease eight years and cease eight years and cease
being subject to being subject to being subject to
distribution fees) distribution fees) distribution fees)
Other Expenses:
Custodial Fees.... .02% .04% .03%
Shareholder Ser-
vicing Costs(g)... .26% .15% .14%
Other............. .09% .03% .04%
---- ---- ----
Total Other Ex- .37% .22% .21%
penses.......... ---- ---- ----
Total Fund Operat- 2.01% 1.91% 1.90%
ing Expenses....... ==== ==== ====
</TABLE>
- ----
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and investment programs.
See "Comparison of the Funds--Purchase of Shares."
(b) Class B shares convert to Class D shares automatically approximately eight
years after initial purchase. See "Comparison of Funds--Purchase of
Shares."
(c) Reduced for Class A purchases of $25,000 and over, and waived for
purchases by certain retirement plans in connection with certain
investment programs. Purchases of $1,000,000 or more may not be subject to
an initial sales charge. See "Comparison of the Funds--Purchase of
Shares."
(d) Class A shares are not subject to a CDSC, except that certain purchases of
$1,000,000 or more which may not be subject to an initial sales charge
will instead be subject to a CDSC of 1.0% of amounts redeemed within the
first year of purchase.
(e) See "Comparison of the Funds--Management."
(f) See "Comparison of the Funds--Purchase of Shares."
(g) See "Comparison of the Funds--Additional Information--Transfer Agent,
Dividend Disbursing Agent and Registrar."
5
<PAGE>
PRO FORMA FEE TABLE FOR CLASS C AND CLASS D SHAREHOLDERS OF BALANCED FUND,
GLOBAL ALLOCATION
AND THE COMBINED FUND AS OF AUGUST 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
CLASS C SHARES CLASS D SHARES
----------------------------------------- -----------------------------------------
ACTUAL ACTUAL
------------------------------- PRO FORMA ------------------------------- PRO FORMA
BALANCED FUND GLOBAL ALLOCATION COMBINED BALANCED FUND GLOBAL ALLOCATION COMBINED
------------- ----------------- --------- ------------- ----------------- ---------
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES:
Maximum Sales Charge
Imposed on Purchases
(as a percentage of
offering price)........ None None None 5.25%(a) 5.25%(a) 5.25%(a)
Sales Charge Imposed on
Dividend Reinvestments. None None None None None None
Deferred Sales Charge
(as a percentage of
original purchase price
or redemption proceeds, 1.0% for 1.0% for 1.0% for
whichever is lower).... one year one year one year None(b) None(b) None(b)
Exchange Fee........... None None None None None None
ANNUAL FUND OPERATING
EXPENSES (AS A
PERCENTAGE OF AVERAGE
NET ASSETS)
Investment Advisory
Fees(c)................ 0.64% 0.69% 0.69% 0.64% 0.69% 0.69%
12b-1 Fees(d):
Account Maintenance
Fees................... 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Distribution Fees...... 0.75% 0.75% 0.75% None None None
Other Expenses
Custodial Fees......... .02% .04% .03% .02% .04% .03%
Shareholder Servicing
Costs(e)............... .26% .15% .14% .26% .15% .14%
Other.................. .09% .03% .04% .09% .03% .04%
---- ---- ---- ---- ---- ----
Total Other Expenses. .37% .22% .21% .37% .22% .21%
---- ---- ---- ---- ---- ----
Total Fund Operating 2.01% 1.91% 1.90% 1.26% 1.16% 1.15%
Expenses............. ==== ==== ==== ==== ==== ====
</TABLE>
- ----
(a) Reduced for Class D purchases of $25,000 and over. Like Class A purchases,
certain Class D purchases of $1,000,000 or more may not be subject to an
initial sales charge. See "Comparison of the Funds--Purchase of Shares."
(b) Like Class A shares, Class D shares are not subject to a CDSC, except that
purchases of $1,000,000 or more which may not be subject to an initial
sales charge may instead be subject to a CDSC of 1.0% of amounts redeemed
within the first year of purchase.
(c) See "Comparison of the Funds--Management."
(d) See "Comparison of the Funds--Purchase of Shares."
(e) See "Comparison of the Funds--Additional Information--Transfer Agent,
Dividend Disbursing Agent and Registrar."
6
<PAGE>
EXAMPLE:
CUMULATIVE EXPENSES PAID ON CLASS A, CLASS B, CLASS C AND CLASS D SHARES FOR
THE PERIODS INDICATED:
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
------------------------------- ------------------------------- -------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- -------- ------ ------- ------- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
An investor would
pay the following
expenses on a
$1,000 invest-
ment, including
the maximum sales
load of $52.50
(Class A and
Class D shares
only) and assum-
ing (1) the Total
Fund Operating
Expenses set
forth above for
the relevant
fund, (2) a 5%
annual return
throughout the
periods and (3)
redemption at the
end of the peri-
od:
Balanced Fund... $62 $83 $105 $170 $60 $83 $108 $214 $30 $63 $108 $234
Global Alloca-
tion............ 61 80 100 159 59 80 103 204 29 60 103 223
Combined Fund+.. 61 80 100 157 59 80 103 203 29 60 103 222
An investor would
pay the following
expenses on the
same $1,000
investment
assuming no
redemption at the
end of the
period:
Balanced Fund... $62 $83 $105 $170 $20 $63 $108 $214 $20 $63 $108 $234
Global Alloca-
tion............ 61 80 100 159 19 60 103 204 19 60 103 223
Combined Fund+.. 61 80 100 157 19 60 103 203 19 60 103 222
<CAPTION>
CLASS D SHARES
-------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would
pay the following
expenses on a
$1,000 invest-
ment, including
the maximum sales
load of $52.50
(Class A and
Class D shares
only) and assum-
ing (1) the Total
Fund Operating
Expenses set
forth above for
the relevant
fund, (2) a 5%
annual return
throughout the
periods and (3)
redemption at the
end of the peri-
od:
Balanced Fund... $65 $90 $118 $197
Global Alloca-
tion............ 64 87 113 186
Combined Fund+.. 64 87 112 185
An investor would
pay the following
expenses on the
same $1,000
investment
assuming no
redemption at the
end of the
period:
Balanced Fund... $65 $90 $118 $197
Global Alloca-
tion............ 64 87 113 186
Combined Fund+.. 64 87 112 185
</TABLE>
- ----
* Assumes conversion of Class B shares to Class D shares approximately eight
years after purchase.
+ Assuming the Reorganization had taken place on August 31, 1995.
The foregoing Fee Tables are intended to assist investors in understanding
the costs and expenses that a Balanced Fund or Global Allocation shareholder
will bear directly or indirectly as compared to the costs and expenses that
would be borne by such investors taking into account the Reorganization. The
Examples set forth above assume reinvestment of all dividends and distributions
and utilize a 5% annual rate of return as mandated by Securities and Exchange
Commission regulations. THE EXAMPLES 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 EXAMPLES. See "Summary," "The Reorganization--Potential Benefits to
Balanced Fund Shareholders as a Result of the Reorganization," "Comparison of
the Funds--Management," "--Purchase of Shares" and "--Redemption of Shares."
7
<PAGE>
BUSINESS OF BALANCED FUND
Balanced Fund was incorporated under the laws
of the State of Maryland on May 21, 1984 and
commenced operations on November 29, 1985.
Balanced Fund is a diversified, open-end
management investment company.
As of October 31, 1995, Balanced Fund had net
assets of approximately $ .
BUSINESS OF GLOBAL Global Allocation was incorporated under the
ALLOCATION laws of the State of Maryland on June 9, 1988
and commenced operations on February 3, 1989.
Global Allocation is a non-diversified, open-
end management investment company.
As of October 31, 1995, Global Allocation had
net assets of approximately $ .
COMPARISON OF THE FUNDS Investment Objectives. Balanced Fund's
investment objective is to provide shareholders
with as high a level of total investment return
as is consistent with a reasonable and
relatively low level of risk. Global
Allocation's investment objective is to seek a
high total investment return, consistent with
prudent risk.
Investment Policies. Balanced Fund seeks to
achieve its objective through a policy of
investing in common stocks and other types of
securities, including fixed income securities
and convertible securities. Global Allocation
seeks to achieve its objective 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.
In seeking to achieve its investment objective
in the equity markets, Balanced Fund invests
primarily in high quality large capitalization
stocks; Global Allocation seeks to identify the
securities of companies and industry sectors
which are expected to provide high total return
relative to alternative equity investments.
Generally, Balanced Fund's fixed income
investments must be rated "AA" or better by
Standard & Poor's Ratings Group ("S&P") or "Aa"
or better by Moody's Investors Service, Inc.
("Moody's"); Global Allocation generally may
invest in securities rated "BBB" or better by
S&P or "Baa" or better by Moody's, as well as
in high yield/high risk bonds (commonly known
as "junk bonds"). Each Fund may invest in
foreign securities. However, Balanced Fund's
investment in foreign securities is limited to
20% of total assets, while Global Allocation
may invest an unlimited percentage of its
assets in foreign securities. In addition,
although many investment techniques employed by
the Funds are identical, Global Allocation may
employ certain techniques that Balanced Fund
may not use (e.g., writing covered put options
and purchasing call options). See "Comparison
of the Funds--Investment Objectives and
Policies."
Advisory Fees. The investment adviser for both
Balanced Fund and Global Allocation is MLAM.
MLAM is responsible for the
8
<PAGE>
management of each Fund's investment portfolio
and for providing administrative services to
each Fund.
The portfolio manager of Balanced Fund is Denis
B. Cummings. Bryan N. Ison serves as portfolio
manager of Global Allocation.
Pursuant to separate investment advisory
agreements with MLAM, each Fund pays MLAM a
monthly fee. Balanced Fund pays MLAM a monthly
fee based on the following annual rates: 0.65%
of average daily net assets not exceeding $500
million; 0.60% of average daily net assets
exceeding $500 million but not exceeding $1.5
billion; 0.55% of average daily net assets
exceeding $1.5 billion but not exceeding $2.5
billion; 0.50% of average daily net assets
exceeding $2.5 billion but not exceeding $3.5
billion; and 0.45% of average daily net assets
exceeding $3.5 billion. Global Allocation's
investment advisory agreement with MLAM
provides that the Fund will pay MLAM a monthly
fee at the annual rate of 0.75% of average
daily net assets, a higher annual rate than
that paid by Balanced Fund. However, MLAM has
agreed to waive a portion of its management fee
payable by Global Allocation so that such fee
is equal to 0.75% of average daily net assets
not exceeding $2.5 billion; 0.70% of average
daily net assets exceeding $2.5 billion but not
exceeding $5.0 billion; 0.65% of average daily
net assets exceeding $5.0 billion but not
exceeding $7.5 billion; 0.625% of average daily
net assets exceeding $7.5 billion but not
exceeding $10 billion; and 0.60% of average
daily net assets exceeding $10 billion. Based
on the pro forma combined net assets of the
Funds at August 31, 1995, the effective annual
advisory fee payable by Global Allocation after
the Reorganization would be 0.69%, as compared
to 0.64% for Balanced Fund at that date. See
"Summary--Pro Forma Fee Tables" and "Comparison
of the Funds--Management."
MLAM has retained Merrill Lynch Asset
Management U.K. Limited ("MLAM U.K.") as sub-
adviser to Global Allocation. Pursuant to a
sub-advisory agreement between MLAM and MLAM
U.K. with respect to Global Allocation, MLAM
pays MLAM U.K. a fee computed at the rate of
0.10% of the average daily net assets of Global
Allocation for providing investment advisory
services to MLAM with respect to Global
Allocation. Balanced Fund has no sub-adviser.
Class Structure. Like Balanced Fund, Global
Allocation offers four classes of shares under
the Merrill Lynch Select Pricing SM System. The
Class A, Class B, Class C and Class D shares
issued by Global Allocation are identical in
all respects to the Class A, Class B, Class C
and Class D shares issued by Balanced Fund,
except that they represent ownership interests
in a different investment portfolio. See
"Comparison of the Funds--Purchase of Shares."
Overall Expense Ratio. The overall operating
expense ratio as of August 31, 1995 was 1.01%
for Balanced Fund and 0.91% for Global
Allocation. If the Reorganization had taken
place on August 31, 1995, the overall operating
expense ratio for the combined Funds on a pro
forma basis would have been 0.90%.
9
<PAGE>
The foregoing expense ratios do not take into
account class specific expenses resulting from
distribution and account maintenance of the
Class A, Class B, Class C or Class D shares.
See, "Summary--Pro Forma Fee Tables."
Purchase of Shares. Shares of Global Allocation
are offered continuously for sale to the public
in exactly the same manner as shares of
Balanced Fund. See "Comparison of the Funds--
Purchase of Shares."
Redemption of Shares. The redemption procedures
for shares of Global Allocation are the same as
the redemption procedures for shares of
Balanced Fund. For purposes of computing any
CDSC that may be payable upon disposition of
Corresponding Shares of Global Allocation
acquired by Balanced Fund shareholders in the
Reorganization, the holding period of Balanced
Fund shares outstanding on the date the
Reorganization takes place will be "tacked"
onto the holding period of the Corresponding
Shares of Global Allocation acquired in the
Reorganization. See "Comparison of the Funds--
Redemption of Shares."
Dividends and Distributions. Balanced Fund's
policies with respect to dividends and
distributions are identical to those of Global
Allocation, except that Balanced Fund is
required to pay dividends from net investment
income semi-annually, while Global Allocation
is required to pay dividends from net
investment income at least annually. As a
matter of practice, however, Global Allocation
has consistently paid dividends from net
investment income semi-annually since its
inception. See "Comparison of the Funds--
Dividends and Distributions."
Net Asset Value. Both Balanced Fund and Global
Allocation determine net asset value of each
class of its shares once daily 15 minutes after
the close of business on the New York Stock
Exchange (generally, 4:00 p.m. New York time),
on each day during which the New York Stock
Exchange is open for trading. Both Funds
compute net asset value per share in the same
manner. See "Comparison of the Funds--
Additional Information--Net Asset Value."
Other Significant Considerations. Shareholder
services, including exchange privileges,
available to Balanced Fund and Global
Allocation shareholders are identical. See
"Comparison of the Funds--Additional
Information--Shareholder Services."
TAX CONSIDERATIONS Balanced Fund and Global Allocation jointly
have requested a private letter ruling from the
Internal Revenue Service ("IRS") with respect
to the Reorganization. The consummation of the
Reorganization is subject to the receipt of
such ruling to the effect that, among other
things, neither Balanced Fund nor Global
Allocation will recognize gain or loss on the
transaction, and no shareholder of either Fund
will recognize taxable gain or loss upon the
issuance of Corresponding Shares of Global
Allocation to shareholders of Balanced Fund in
the Reorganization. The Reorganization will not
affect the status of Global Allocation as a
regulated investment company. See "The
Reorganization--Tax Consequences of the
Reorganization."
10
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
Many of the investment risks associated with an investment in Global
Allocation are substantially the same as those of Balanced Fund. A discussion
of certain principal differences in risks, as a result of the differing
techniques utilized by Balanced Fund and Global Allocation (described in
"Comparison of the Funds--Investment Objectives and Policies") follows.
Investments in Foreign and Emerging Markets. There are no restrictions on the
percentage of Global Allocation's total assets that may be invested in foreign
securities. Balanced Fund may not invest more than 20% of its total assets in
foreign securities. Therefore, the risks of investing in foreign securities may
be more pronounced for Global Allocation than for Balanced Fund. Foreign
companies are not generally subject to uniform accounting, auditing and
financial standards and requirements comparable to those applicable to U.S.
companies. Foreign securities exchanges, brokers and listed companies may be
subject to less government supervision and regulation than exists in the United
States. Dividend and interest income may be subject to withholding and other
foreign taxes which may adversely affect the net return on such investments. In
addition, with respect to certain countries, there are risks of expropriation,
confiscatory taxation, political or social instability or diplomatic
developments which could affect assets of a Fund held in foreign countries.
There may be less publicly available information about a foreign company than
a U.S. company. Foreign securities markets may have substantially less volume
than U.S. securities markets and some foreign company securities are less
liquid and more volatile than comparable securities of U.S. companies. A
portfolio of foreign securities may also be adversely affected by fluctuations
in the rates of exchange between the currencies of different nations and by
exchange control regulations. Foreign markets also have different clearance and
settlement procedures, and in certain markets there have been times when
settlements have failed 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 a Fund to make
intended securities purchases due to settlement problems could cause the Fund
to miss attractive investment opportunities. Inability to dispose of a
portfolio security due to settlement problems could result either in losses to
a Fund due to subsequent declines in value of such portfolio security or, if
the Fund has entered into a contract to sell the security, could result in
possible liability to the purchaser.
In addition, the operating expense ratios of Global Allocation and Balanced
Fund can be expected to be higher than that of investment companies investing
exclusively in U.S. securities because expenses of Funds, such as custodial
costs, are higher. To the extent Global Allocation may invest more of its
assets in foreign securities than does Balanced Fund, its operating expenses
directly related to such investments may, as a result, be higher than those of
Balanced Fund.
Fixed Income Securities. Securities rated in the top four ratings categories
by either Moody's or S&P (i.e., rated Aaa, Aa, A or Baa by Moody's or AAA, AA,
A or BBB by S&P) are considered to be "investment grade." Global Allocation is
authorized to invest in debt securities of governmental issuers and of
corporate issuers, including convertible debt securities, which are rated BBB
or better by S&P or Baa or better by Moody's or in unrated securities which, in
MLAM's judgment, possess similar credit characteristics. Balanced Fund may only
invest in fixed income securities rated Aa or better by Moody's or AA or better
by S&P, or determined by MLAM to be of comparable quality. Although debt
securities ranked in the fourth highest rating category by either S&P or
Moody's are considered to be investment grade, they have more speculative
characteristics and are more likely to be downgraded than securities rated in
the three highest rating categories.
Global Allocation is also authorized to invest up to 35% of its portfolio in
fixed income securities of governmental issuers and of corporate issuers rated
below investment grade by a nationally recognized statistical rating
organization or in unrated securities which, in MLAM's judgment, possess
similar credit
11
<PAGE>
characteristics ("high yield" or "junk" bonds). Balanced Fund may not invest in
high yield bonds. Investment in high yield bonds involves substantial risk.
These securities are predominantly speculative with respect to capacity to pay
interest and to repay principal in accordance with the terms of the security
and generally involve greater volatility of price than securities in higher
ratings categories. See "Comparison of the Funds--Investment Objectives and
Policies--Risks Associated with Investments in Certain Fixed Income
Securities."
Non-Diversified Status. Balanced Fund is organized as a diversified
investment company. Global Allocation is organized as a non-diversified
investment company. As a non-diversified investment company, Global Allocation
is not subject to the general limitation of diversified companies that, with
respect to 75% of its assets, it not invest more than 5% of its total assets in
the securities of any one issuer (excluding U.S. Government securities) or
purchase more than 10% of the voting securities of any one issuer (excluding
U.S. Government securities). To the extent Global Allocation may therefore make
additional investments in excess of 5% of its assets in particular issuers or
take greater than 10% voting positions in particular issuers, its exposure to
credit and market risks associated with such issuers may be greater than that
to which a more widely diversified fund such as Balanced Fund would be subject.
However, Global Allocation's investments will be limited so as to qualify for
the special tax treatment afforded "regulated investment companies" under the
Internal Revenue Code of 1986, as amended (the "Code"). See "Comparison of the
Funds--Other Investment Policies."
12
<PAGE>
COMPARISON OF THE FUNDS
FINANCIAL HIGHLIGHTS
Global Allocation. The financial information in the table below, except for
the nine months ended July 31, 1995 which is unaudited and has been provided by
MLAM, has been audited in conjunction with the annual audit of the financial
statements of the Fund by Deloitte & Touche LLP, independent auditors.
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------
FOR THE
NINE MONTHS FOR THE YEAR ENDED OCTOBER 31,
ENDED ------------------------------------------------ FOR THE PERIOD
JULY 31, 1995++ FEB. 3, 1989+
(UNAUDITED) 1994 1993 1992 1991 1990 TO OCT. 31, 1989
--------------- ---------- -------- -------- ------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE
(DECREASE) IN NET
ASSET VALUE:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period........... $ 13.07 $ 13.52 $ 11.92 $ 12.16 $ 10.37 $ 10.79 $ 10.00
---------- ---------- -------- -------- ------- ------- -------
Investment
income--net..... .60 .60 .39 .36 .55 .60 .45
Realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions--
net............. .90 (.31) 2.14 .89 2.24 (.16) .48
---------- ---------- -------- -------- ------- ------- -------
Total from
investment
operations....... 1.50 .29 2.53 1.25 2.79 .44 .93
---------- ---------- -------- -------- ------- ------- -------
Less dividends
and
distributions:
Investment
income--net..... (.39) (.51) (.81) (.89) (.45) (.66) (.14)
Realized gain on
investments--
net............. (.30) (.23) (.12) (.60) (.55) (.20) --
---------- ---------- -------- -------- ------- ------- -------
Total dividends
and
distributions.... (.69) (.74) (.93) (1.49) (1.00) (.86) (.14)
---------- ---------- -------- -------- ------- ------- -------
Net asset value,
end of period.... $ 13.88 $ 13.07 $ 13.52 $ 11.92 $ 12.16 $ 10.37 $ 10.79
========== ========== ======== ======== ======= ======= =======
TOTAL INVESTMENT
RETURN:**
Based on net
asset value per
share............ 12.15++ 2.14% 22.61% 11.78% 28.89% 3.91% 9.34%++
========== ========== ======== ======== ======= ======= =======
RATIOS TO AVERAGE
NET ASSETS:
Expenses,
excluding account
maintenance and
distribution
fees............. .90%* .89% .93% 1.07% 1.29% 1.29% 1.37%*
========== ========== ======== ======== ======= ======= =======
Expenses......... .90%* .89% .93% 1.07% 1.29% 1.29% 1.37%*
========== ========== ======== ======== ======= ======= =======
Investment
income--net...... 6.22%* 4.60% 3.90% 10.82% 8.96% 4.37% 5.31%*
========== ========== ======== ======== ======= ======= =======
SUPPLEMENTAL
DATA:
Net assets, end
of period (in
thousands)....... $1,472,359 $1,357,906 $917,806 $245,839 $72,702 $49,691 $47,172
========== ========== ======== ======== ======= ======= =======
Portfolio
turnover......... 27.84% 57.04% 50.35% 59.56% 81.21% 129.51% 88.59%
========== ========== ======== ======== ======= ======= =======
<CAPTION>
CLASS B
---------------------------------------------------------------------------------------
FOR THE
NINE MONTHS FOR THE YEAR ENDED OCTOBER 31,
ENDED ----------------------------------------------------- FOR THE PERIOD
JULY 31, 1995++ FEB. 3, 1989+
(UNAUDITED) 1994 1993 1992 1991 1990 TO OCT. 31, 1989
---------------- ----------- ----------- --------- --------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE
(DECREASE) IN NET
ASSET VALUE:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period........... $ 12.91 $ 13.38 $ 11.83 $ 12.10 $ 10.33 $ 10.73 $ 10.00
---------------- ----------- ----------- --------- --------- --------- ----------------
Investment
income--net..... .49 .46 .28 .22 .44 .49 .38
Realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions--
net............. .88 (.31) 2.11 .91 2.22 (.16) .47
---------------- ----------- ----------- --------- --------- --------- ----------------
Total from
investment
operations....... 1.37 .15 2.39 1.13 2.66 .33 .85
---------------- ----------- ----------- --------- --------- --------- ----------------
Less dividends
and
distributions:
Investment
income--net..... (.26) (.39) (.72) (.80) (.34) (.53) (.12)
Realized gain on
investments--
net............. (.30) (.23) (.12) (.60) (.55) (.20) --
---------------- ----------- ----------- --------- --------- --------- ----------------
Total dividends
and
distributions.... (.56) (.62) (.84) (1.40) (.89) (.73) (.12)
---------------- ----------- ----------- --------- --------- --------- ----------------
Net asset value,
end of period.... $ 13.72 $ 12.91 $ 13.38 $ 11.83 $ 12.10 $ 10.33 $ 10.73
================ =========== =========== ========= ========= ========= ================
TOTAL INVESTMENT
RETURN:**
Based on net
asset value per
share............ 11.19%++ 1.13% 21.42% 10.64% 27.48% 2.93% 8.50%++
================ =========== =========== ========= ========= ========= ================
RATIOS TO AVERAGE
NET ASSETS:
Expenses,
excluding account
maintenance and
distribution
fees............. .92%* .91% .95% 1.09% 1.31% 1.31% 1.40%*
================ =========== =========== ========= ========= ========= ================
Expenses......... 1.92%* 1.91% 1.95% 2.09% 2.31% 2.31% 2.40%*
================ =========== =========== ========= ========= ========= ================
Investment
income--net...... 5.19%* 3.58% 2.87% 11.95% 7.98% 3.35% 4.29%*
================ =========== =========== ========= ========= ========= ================
SUPPLEMENTAL
DATA:
Net assets, end
of period (in
thousands)....... $6,568,795 $6,457,130 $4,299,545 $958,949 $161,328 $115,682 $113,649
================ =========== =========== ========= ========= ========= ================
Portfolio
turnover......... 27.84% 57.04% 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.
++Based on average outstanding shares during the period.
13
<PAGE>
GLOBAL ALLOCATION--FINANCIAL HIGHLIGHTS (CONCLUDED)
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
CLASS C CLASS D
--------------------------------- ---------------------------------
FOR THE NINE FOR THE NINE
MONTHS ENDED FOR THE PERIOD MONTHS ENDED FOR THE PERIOD
JULY 31, 1995++ OCT. 21, 1994+ JULY 31, 1995++ OCT. 21, 1994+
(UNAUDITED) TO OCT. 31, 1994 (UNAUDITED) TO OCT. 31, 1994
--------------- ----------------- --------------- -----------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING PER-
FORMANCE:
Net asset value, begin-
ning of period......... $ 12.91 $12.91 $ 13.08 $13.07
------- ------ -------- ------
Investment income--net. .50 .01 .59 .01
Realized and unrealized
gain (loss) on
investments and
foreign currency
transactions--net..... .87 (.01) .87 --
------- ------ -------- ------
Total from investment
operations............. 1.37 -- 1.46 .01
------- ------ -------- ------
Less dividends and dis-
tributions:
Investment income--net. (.33) -- (.37) --
------- ------ -------- ------
Realized gain on in-
vestments--net........ (.30) -- (.30) --
------- ------ -------- ------
Total dividends and dis-
tributions............. (.63) -- (.67) --
------- ------ -------- ------
Net asset value, end of
period................. $ 13.65 $12.91 $ 13.87 $13.08
======= ====== ======== ======
TOTAL INVESTMENT RE-
TURN:**
Based on net asset value
per share.............. 11.22%++ .00%++ 11.85%++ .08%++
======= ====== ======== ======
RATIOS TO AVERAGE NET
ASSETS:
Expenses, excluding ac-
count maintenance and
distribution fees...... .94%* 1.44%* .90%* 1.44%*
======= ====== ======== ======
Expenses................ 1.94%* 2.44%* 1.15%* 1.69%*
======= ====== ======== ======
Investment income--net.. 5.16%* 3.71%* 5.95%* 4.46%*
======= ====== ======== ======
SUPPLEMENTAL DATA:
Net assets, end of pe-
riod (in thousands).... $73,767 $7,347 $213,093 $4,968
======= ====== ======== ======
Portfolio turnover...... 27.84% 57.04% 27.84% 57.04%
======= ====== ======== ======
</TABLE>
- --------
+ Commencement of Operations.
++ Aggregate total investment return.
* Annualized.
** Total investment returns exclude the effects of sales loads.
++Based on average shares outstanding during the period.
14
<PAGE>
Balanced Fund. The financial information in the table below has been audited
in conjunction with the annual audit of the financial statements of the Fund by
Deloitte & Touche LLP, independent auditors.
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------
FOR THE YEAR ENDED SEPTEMBER 30, FOR THE PERIOD
----------------------------------------------- OCT. 27, 1988+
1995 1994++ 1993 1992 1991 1990 TO SEPT. 30, 1989
---- ------- ------- ------- ------- ------ -----------------
<S> <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......... $ 13.02 $ 12.57 $ 11.94 $ 10.61 $11.93 $11.18
------- ------- ------- ------- ------ ------
Investment income--net. .32 .43 .47 .70 .64 .24
Realized and unrealized
gain (loss) on invest-
ments and foreign cur-
rency transactions--
net................... (.07) 1.29 .61 1.63 (1.41) 1.42
------- ------- ------- ------- ------ ------
Total from investment
operations............. .25 1.72 1.08 2.33 (.77) 1.66
------- ------- ------- ------- ------ ------
Less dividends and dis-
tributions:
Investment income--net. (.37) (.39) (.45) (.62) (.55) (.90)
Realized gain on in-
vestments--net........ (1.23) (.88) -- (.38) -- (.01)
------- ------- ------- ------- ------ ------
Total dividends and dis-
tributions............. (1.60) (1.27) (.45) (1.00) (.55) (.91)
------- ------- ------- ------- ------ ------
Net asset value, end of
period................. $ 11.67 $ 13.02 $ 12.57 $ 11.94 $10.61 $11.93
======= ======= ======= ======= ====== ======
TOTAL INVESTMENT RE-
TURN:**
Based on net asset value
per share.............. 1.81% 14.62% 9.23% 23.14% (6.86)% 15.54%++
======= ======= ======= ======= ====== ======
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ .83% .83% .81% .85% .83% .78%*
======= ======= ======= ======= ====== ======
Investment income--net.. 2.68% 3.09% 3.18% 3.64% 5.12% 4.23%*
======= ======= ======= ======= ====== ======
SUPPLEMENTAL DATA:
Net assets, end of pe-
riod (in thousands).... $39,963 $40,688 $20,320 $12,839 $4,511 $2,080
======= ======= ======= ======= ====== ======
Portfolio turnover...... 59.15% 79.55% 65.40% 173.76% 163.56% 175.47%
======= ======= ======= ======= ====== ======
</TABLE>
- --------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Aggregate total investment return.
++Based on average outstanding shares during the period.
15
<PAGE>
BALANCED FUND--FINANCIAL HIGHLIGHTS (CONTINUED)
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
CLASS B
---------------------------------------------------------------------------------------------------------
FOR THE
FOR THE YEAR ENDED SEPTEMBER 30, PERIOD
--------------------------------------------------------------------------------------------- NOV. 29,
1985+ TO
SEPT. 30,
1995 1994++ 1993 1992 1991 1990 1989 1988 1987 1986
---- -------- -------- -------- -------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, be-
ginning of period.... $ 13.09 $ 12.62 $ 11.99 $ 10.60 $ 11.91 $ 10.94 $ 12.54 $ 11.17 $ 10.00
-------- -------- -------- -------- ---------- ---------- ---------- ---------- ----------
Investment income--
net................. .20 .24 .29 .39 .50 .53 .57 .39 .25
Realized and
unrealized gain
(loss) on invest-
ments and foreign
currency transac-
tions--net.......... (.07) 1.37 .66 1.83 (1.39) 1.25 (1.40) 1.64 .98
-------- -------- -------- -------- ---------- ---------- ---------- ---------- ----------
Total from investment
operations........... .13 1.61 .95 2.22 (.89) 1.78 (.83) 2.03 1.23
-------- -------- -------- -------- ---------- ---------- ---------- ---------- ----------
Less dividends and
distributions:
Investment income--
net................. (.24) (.26) (.32) (.45) (.42) (.80) (.55) (.38) (.06)
Realized gain on
investments--net.... (1.23) (.88) -- (.38) -- (.01) (.22) (.28) --
-------- -------- -------- -------- ---------- ---------- ---------- ---------- ----------
Total dividends and
distributions........ (1.47) (1.14) (.32) (.83) (.42) (.81) (.77) (.66) (.06)
-------- -------- -------- -------- ---------- ---------- ---------- ---------- ----------
Net asset value, end
of period............ $ 11.75 $ 13.09 $ 12.62 $ 11.99 $ 10.60 $ 11.91 $ 10.94 $ 12.54 $ 11.17
======== ======== ======== ======== ========== ========== ========== ========== ==========
TOTAL INVESTMENT RE-
TURN:**
Based on net asset
value per share...... .76% 13.49% 8.01% 21.91% (7.79)% 16.93% (6.36)% 18.98% 12.29%++
======== ======== ======== ======== ========== ========== ========== ========== ==========
RATIOS TO AVERAGE NET
ASSETS:
Expenses, excluding
account maintenance
and distribution
fees................. .86% .85% .85% .90% .86% .84% .82% .73% .82%*
======== ======== ======== ======== ========== ========== ========== ========== ==========
Expenses.............. 1.86% 1.85% 1.85% 1.90% 1.86% 1.84% 1.82% 1.73% 1.82%*
======== ======== ======== ======== ========== ========== ========== ========== ==========
Investment income--
net.................. 1.65% 1.99% 2.10% 3.37% 3.90% 3.73% 4.66% 3.60% 4.23%*
======== ======== ======== ======== ========== ========== ========== ========== ==========
SUPPLEMENTAL DATA:
Net assets, end of pe-
riod (in thousands).. $709,836 $830,955 $886,920 $986,895 $1,171,567 $1,735,873 $2,264,429 $3,384,647 $2,065,752
======== ======== ======== ======== ========== ========== ========== ========== ==========
Portfolio turnover.... 59.15% 79.55% 65.40% 173.76% 163.56% 175.47% 239.78% 145.17 % 143.78%
======== ======== ======== ======== ========== ========== ========== ========== ==========
</TABLE>
- --------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Aggregate total investment return.
++Based on average outstanding shares during the period.
16
<PAGE>
BALANCED FUND--FINANCIAL HIGHLIGHTS (CONCLUDED)
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
FOR THE PERIOD
OCT. 21, 1994+ TO
SEPT. 30, 1995++
-------------------
CLASS C CLASS D
-------- --------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.....................
-------- --------
Investment income--net..................................
Realized and unrealized loss on investments and foreign
currency transactions--net.............................
-------- --------
Total from investment operations.........................
-------- --------
Less dividends and distributions:
Investment income--net..................................
Realized gain on investments--net.......................
-------- --------
Total dividends and distributions........................
-------- --------
Net asset value, end of period...........................
======== ========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.......................
======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding account maintenance and distribution
fees....................................................
======== ========
Expenses.................................................
======== ========
Investment income--net...................................
======== ========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).................
======== ========
Portfolio turnover.......................................
======== ========
</TABLE>
- --------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Aggregate total investment return.
++Based on average shares outstanding during the period.
17
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Investment Objective. The investment objectives of Balanced Fund and Global
Allocation are similar, though not identical. Balanced Fund seeks to provide
shareholders with as high a level of total investment return as is consistent
with a reasonable and relatively low level of risk. Global Allocation seeks to
provide a high total investment return, consistent with prudent risk.
There can be no assurance that, after the Reorganization, Global Allocation
will achieve its investment objective.
Investment Policies Generally. Balanced Fund seeks to achieve its objective
through a policy of investing in common stocks and other types of securities,
including fixed income securities (preferred stock and debt securities) and
convertible securities. Global Allocation seeks to achieve its objective
through a fully-managed investment policy utilizing United States and foreign
equity, debt and money market securities.
It is anticipated that ordinarily, Balanced Fund's emphasis on current income
and capital appreciation will be relatively equal. However, Balanced Fund may
vary its emphasis between these two elements as market or economic conditions
change. Similarly, Global Allocation may vary its emphasis on current income
and capital appreciation by varying the combination of United States and
foreign equity, debt and money market securities in its portfolio in response
to changing market and economic trends. This approach provides Global
Allocation with the opportunity to benefit from unanticipated shifts in the
relative performance of different types of securities and different capital
markets. There are no restrictions on the investment ratio between debt, equity
and money market securities in which Global Allocation may invest. Except under
unusual circumstances, Balanced Fund will maintain at least 25% of the value of
its assets in fixed income senior securities.
To reduce overall exposure to risk, each Fund may spread its investments over
many different companies in a variety of industries. However, neither Fund may
invest more than 25% of its assets, taken at market value, in the securities of
any particular industry (excluding U.S. Government securities and its agencies
and instrumentalities).
A more specific comparison of the investment policies of Balanced Fund and
Global Allocation follows.
Equity Securities. The common stocks through which Balanced Fund seeks to
achieve its investment objective are high quality larger capitalization common
stocks. Common stock investments of Balanced Fund will emphasize issues with
relatively low price/earnings ratios, above average dividend yields, and
relatively low price to book value ratios, as compared to prevailing market
conditions. In seeking to identify "high quality" companies, particular
emphasis is placed by management on common stocks of companies which are
believed to have internal strengths, such as good financial resources,
satisfactory rate of return on capital, a good industry position and superior
management skills.
Within the portion of Global Allocation's portfolio allocated to equity
securities, MLAM seeks to identify the securities of companies and industry
sectors which are expected to provide high total return relative to alternative
equity investments. Global Allocation generally seeks to invest in securities
that MLAM believes to be undervalued. Such undervalued issues include (i)
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, (ii) securities selling at a discount from their historic price-to-
book value or price/earnings ratio, even though these ratios may be above the
ratios for the stock market averages, and (iii) securities offering dividend
yields higher than the yields for the relevant stock market averages or higher
than such securities' historic yield. Global Allocation may also invest in the
securities of small and emerging growth companies when such companies are
expected to provide a higher total return than other equity investments. Such
companies are characterized by rapid historical growth rates, above-average
returns on equity or special investment values in their products or services,
research capabilities or other attributes. MLAM will seek to identify for
18
<PAGE>
investment by Global Allocation those small and emerging growth companies that
possess superior management, marketing ability, research and product
development skills and sound balance sheets.
Fixed Income Securities. Like Balanced Fund, Global Allocation may invest in
both preferred stock and debt securities. The debt securities in which both
Global Allocation and Balanced Fund may invest include securities issued or
guaranteed by the U.S. Government and its agencies or instrumentalities, debt
obligations issued by U.S. and foreign entities, mortgage-backed securities
issued or guaranteed by governmental entities or by private issuers, securities
issued by foreign governments (including foreign states, provinces and
municipalities) and agencies or instrumentalities thereof and 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).
Balanced Fund and Global Allocation have different rating criteria for the
debt securities in which they may invest. Balanced Fund may only invest in
instruments which are rated in the top two categories by Moody's or S&P (i.e.,
rated Aa or better by Moody's or AA or better by S&P) or which are determined
by MLAM to be of quality comparable to instruments so rated. Global Allocation
is authorized to invest in debt securities of governmental issuers and of
corporate issuers including convertible debt securities, rated in the top four
categories by Moody's or S&P (i.e., rated BBB or better by S&P or Baa or better
by Moody's), or in unrated securities which, in MLAM's judgment, possess
similar credit characteristics. Global Allocation is also authorized to invest
up to 35% of its assets in fixed income securities of governmental issuers and
of corporate issuers rated below investment grade (i.e., rated below the top
four ratings categories) by a nationally recognized statistical rating
organization or in unrated securities which, in MLAM's judgment, possess
similar credit characteristics ("high yield" or "junk" bonds). Global
Allocation 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 MLAM 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.
It is anticipated that, except under unusual circumstances, Balanced Fund
will maintain at least 25% of the value of its assets in fixed income senior
securities. Global Allocation has no policy specifying that a percentage of its
assets must be invested in fixed income senior securities.
Risks Associated With Investments in Certain Fixed Income Securities. As
discussed above, Global Allocation is permitted to invest up to 35% of its
assets in high yield bonds. Such securities are considered 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.
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
19
<PAGE>
senior security holders. While the high yield bonds in which Global Allocation
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 Global Allocation 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 Global Allocation portfolio securities than in the case of
securities trading in a more liquid market.
As discussed above, each Fund may invest in mortgage-related securities and
obligations of foreign government entities. Investment in these securities
involves certain risks. For a discussion of these risks, see "Investment
Objective and Policies--Debt Securities" in the Global Allocation Prospectus.
To the extent each Fund invests in fixed income securities, its respective
net asset value will be affected by the general level of interest rates.
Foreign Securities. In furtherance of efforts to reduce overall exposure to
investment and income risk through adequate diversification of its portfolio,
Balanced Fund may invest up to 20% of its total assets in foreign securities.
Global Allocation may invest an unlimited amount of its assets in foreign
securities.
There are no prescribed limits on the geographical allocation of the foreign
assets held by either Balanced Fund or Global Allocation. Balanced Fund has
made substantial investments in securities of issuers in Latin America, the Far
East and lesser developed capital markets. It is anticipated that Global
Allocation will invest primarily in the securities of issuers domiciled or
located in the U.S., Canada, Western Europe and the Far East, and that a
portion of Global Allocation's assets normally will be invested in the U.S.
securities markets and the other major capital markets. Under normal
conditions, Global Allocation's investments will be denominated in at least
three currencies or multinational currency units. Global Allocation reserves
the right to invest substantially all of its assets in the U.S. market or U.S.
dollar-denominated obligations when MLAM believes market conditions warrant
such investment.
In selecting securities denominated in foreign currencies for investment by
Global Allocation, MLAM will consider, among other factors, the effect of
movement in currency exchange rates on the U.S. dollar value of such
securities.
Money Market Securities. Each Fund may invest in money market securities.
Balanced Fund reserves the right to invest all or a portion of its assets in
money market securities for purposes of enhancing liquidity and avoiding the
effects of declining securities prices when it seems advisable to do so in
light of prevailing market or economic conditions. Global Allocation may invest
in money market securities in furtherance of achieving its investment objective
of high total investment return.
Specifically, Balanced Fund may invest in high quality money market
securities (such as U.S. Treasury bills, certificates of deposit issued by U.S.
banks having more than $1 billion in assets, commercial paper and repurchase
agreements with respect to U.S. Government securities and U.S. Government
agency securities). In addition, Balanced Fund may invest only in commercial
paper that is rated A-1 or A-2 by S&P, or P-1 or
20
<PAGE>
P-2 by Moody's, or, if not rated, issued by companies having an outstanding
debt issue rated A or better by S&P, or A or better by Moody's.
Global Allocation may invest in 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 $1 billion. 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).
Real Estate-Related Securities. Global Allocation may invest in real estate-
related securities. Balanced Fund generally does not invest in such securities,
although it is not prohibited from doing so. Real estate-related securities
which are emphasized by Global Allocation are equity and convertible debt
securities of real estate investment trusts, which own income-producing
properties, and mortgage real estate investment trusts which make various types
of mortgage loans often combined with equity features. The securities of such
trusts generally pay above average dividends and may offer the potential for
capital appreciation. Such securities may be subject to the risks customarily
associated with the real estate 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.
Indexed and Inverse Securities. Global Allocation may invest in indexed and
inverse securities. Balanced Fund generally does not invest in such securities,
although it is not prohibited from doing so. Indexed securities are securities
whose potential investment return is based on the change in particular
measurements of value and/or rate (an "index"). As an illustration, the Fund
may invest in a security that pays interest and returns principal based on the
change in an index of interest rates or of the value of a precious or
industrial metal. Interest and principal payable on a security may also be
based on relative changes among particular indices. In addition, Global
Allocation may invest in securities whose potential investment return is
inversely based on the change in particular indices. For example, Global
Allocation may invest in securities that pay a higher rate of interest and
principal when a particular index decreases and pay a lower rate of interest
and principal when the value of the index increases. To the extent that Global
Allocation invests in such types of securities, it will be subject to the risks
associated with changes in the particular indices, which may include reduced or
eliminated interest payments and losses of invested principal.
Certain indexed securities, including certain inverse securities, may have
the effect of providing a degree of investment leverage, because they may
increase or decrease in value at a rate that is a multiple of the changes in
applicable indices. As a result, the market value of such securities will
generally be more volatile than the market values of fixed-rate securities.
MLAM believes that indexed securities, including inverse securities, represent
flexible portfolio management instruments that may allow Global Allocation to
seek potential investment rewards, hedge other portfolio positions, or vary the
degree of portfolio leverage relatively efficiently under different market
conditions.
Precious Metal-Related Securities. Global Allocation may invest in precious
metal-related securities. Balanced Fund generally does not invest in such
securities, although it is not prohibited from doing so. For a description of
precious metal-related securities, as well as a discussion of the risks
associated with investment therein, see "Investment Objective and Policies--
Equity Securities" in the Global Allocation Prospectus.
21
<PAGE>
OTHER INVESTMENT POLICIES
Both Balanced Fund and Global Allocation have adopted certain other
investment policies as set forth below:
Borrowings. Notwithstanding a less restrictive fundamental policy permitting
borrowings of up to 33 1/3% of total assets, as a matter of operating policy,
neither Fund is permitted to borrow amounts in excess of 10% of its total
assets, taken at market value. Furthermore such borrowings may be made only
from banks as a temporary measure for extraordinary or emergency purposes such
as redemption of Fund shares. Neither Fund will purchase securities while
borrowings exceed 5% (taken at market value) of its total assets.
Non-Diversified Status. Global Allocation 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 (i) the percentage of its total assets that it may
invest in securities of a single issuer (excluding U.S. Government securities)
or (ii) the amount of voting securities of a single issuer (excluding U.S.
Government securities) that it may purchase. However, the Fund's investments
will be limited so as to qualify for the special treatment afforded regulated
investment companies under the Code. To qualify, among other requirements,
Global Allocation 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, (a) not more
than 5% of the market value of its total assets will be invested in the
securities of a single issuer, and (b) the Fund will not own more than 10% of
the outstanding voting securities of a single issuer. As in the case of the
Investment Company Act requirements discussed above, investment in the
securities of the U.S. Government, its agencies and instrumentalities are not
included within the definition of "issuer" for purposes of the diversification
requirements of the Code. Balanced 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 Global Allocation 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.
Standby Commitment Agreements. Each Fund may from time to time enter into
standby commitment agreements. For a description of standby commitment
agreements and the risks associated with investment therein, see "Investment
Objective and Policies--Other Investment Policies and Practices" in the Global
Allocation Prospectus.
Repurchase Agreements. Each Fund may enter into repurchase agreements. For a
description of repurchase agreements and the risks associated with investment
therein, see "Investment Objective and Policies--Other Investment Policies and
Practices" in the Global Allocation Prospectus.
When-Issued Securities and Delayed Delivery Transactions. Each Fund may
purchase or sell securities on a delayed delivery basis or on a when-issued
basis at fixed purchase or sale terms. For a description of when-issued
securities and delayed delivery transactions, including the risks associated
with investment therein, see "Investment Objective and Policies--Other
Investment Policies and Practices" in the Global Allocation Prospectus.
Lending of Portfolio Securities. Each 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.
INFORMATION REGARDING FUTURES AND OPTIONS TRANSACTIONS
Each Fund may engage in various portfolio strategies to seek to increase its
return through the use of options on portfolio securities and to hedge its
portfolio against movements in the equity, debt and currency markets. Each Fund
has authority to write (i.e., sell) covered call options on its portfolio
securities, purchase
22
<PAGE>
put options on securities and engage in transactions in stock index options,
stock index futures and financial futures, and related options on such futures.
Each Fund may also deal in forward foreign exchange transactions and foreign
currency options and futures, and related options on such futures. In addition,
Global Allocation may write covered put options and purchase call options;
Balanced Fund may not engage in such transactions.
Certain differences exist with respect to each Fund's ability to engage in
the foregoing strategies. Specifically, Balanced Fund may not write covered
call options on underlying securities in an amount exceeding 25% of the market
value of its total assets. Global Allocation has no percentage limitation on
its ability to write covered call options.
The investment policies of each Fund with respect to futures and options
transactions are not fundamental policies and may be modified by the Board of
Directors of each Fund without the approval of the Fund's shareholders. Each
Fund is subject to the restrictions of the Commodity Futures Trading Commission
with respect to its investments in futures and options thereon.
For a detailed discussion of the Funds' investment policies regarding futures
and options, including the risks associated therewith, see "Investment
Practices and Restrictions--Portfolio Strategies Involving Options and Futures"
in the Balanced Fund Prospectus and "Investment Objective and Policies--
Portfolio Strategies Involving Options and Futures" in the Global Allocation
Prospectus.
INVESTMENT RESTRICTIONS
Other than as noted above under "Comparison of the Funds--Investment
Objectives and Policies," Balanced Fund and Global Allocation have identical
investment restrictions. See, "Investment Objective and Policies--Other
Investment Policies and Practices--Investment Restrictions" in the Global
Allocation Statement and "Investment Practices and Restrictions--Other
Investment Policies and Practices--Investment Restrictions" in the Balanced
Fund Statement.
MANAGEMENT
Directors. The Board of Directors of Global Allocation consists of six
individuals, five of whom are not "interested persons" as defined in the
Investment Company Act. The Directors are responsible for the overall
supervision of the operation of Global Allocation and perform the various
duties imposed on the directors of investment companies by the Investment
Company Act. Arthur Zeikel is a Director of both Global Allocation and Balanced
Fund. There is otherwise no overlap between the Boards of the Funds.
The Directors of Global Allocation are:
Arthur Zeikel*--President of MLAM and Fund Asset Management, L.P.; President
and Director of Princeton Services, Inc.; Executive Vice President of Merrill
Lynch & Co. Inc. ("ML & Co."); Executive Vice President of Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch"); Director of Merrill
Lynch Funds Distributor, Inc.
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.
23
<PAGE>
Richard R. West--Professor of Finance, and Dean from 1984 to 1993, New York
University Leonard N. Stern School of Business Administration.
Edward D. Zinbarg--Former Executive Vice President of The Prudential
Insurance Company of America.
Management and Advisory Arrangements. MLAM serves as the investment adviser
for both Balanced Fund and Global Allocation pursuant to separate investment
advisory agreements (each, an "Advisory Agreement") that, except for their fee
structures and certain minor differences, are identical.
MLAM is paid a monthly advisory fee by each Fund based upon the average
daily value of each Fund's net assets at the following annual rates:
BALANCED FUND GLOBAL ALLOCATION
0.65% of average daily net assets 0.75% of average daily net assets.
not exceeding $500 million; 0.60% of (However, MLAM has voluntarily
average daily net assets exceeding agreed to waive a portion of its
$500 million but not exceeding $1.5 management fee so that such fee is
billion; 0.55% of average daily net equal to 0.75% of average daily net
assets exceeding $1.5 billion but assets not exceeding $2.5 billion;
not exceeding $2.5 billion; 0.50% of 0.70% of average daily net assets
average daily net assets exceeding exceeding $2.5 billion but not
$2.5 billion but not exceeding $3.5 exceeding $5.0 billion; 0.65% of
billion; and 0.45% of average daily average daily net assets exceeding
net assets exceeding $3.5 billion. $5.0 billion but not exceeding $7.5
billion; 0.625% of average daily net
assets exceeding $7.5 billion but
not exceeding $10 billion; and 0.60%
of average daily net assets
exceeding $10 billion.)
MLAM has entered into a sub-advisory agreement (the "Sub-Advisory
Agreement") with MLAM U.K., an indirect, wholly-owned subsidiary of ML & Co.
and 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 Global Allocation for
providing investment advisory services to MLAM with respect to Global
Allocation. The address of MLAM U.K. is Milton Gate, 1 Moor Lane, London EC2Y
9HA, England. No sub-adviser has been retained in connection with management
of Balanced Fund's assets.
Although after the Reorganization on a pro forma combined basis, Global
Allocation will pay an advisory fee to MLAM at a higher annual effective rate
than that currently paid by Balanced Fund, given the economies of scale that
may result from the Reorganization and the overall lower expense ratio of
Global Allocation following the Reorganization (on a proforma basis) compared
to that of Balanced Fund, the Board of Directors of Balanced Fund has
determined that the Reorganization would be potentially beneficial to Balanced
Fund and its shareholders. See "The Reorganization--Potential Benefits to
Balanced Fund Shareholders as a Result of the Reorganization" and "Summary--
Pro Forma Fee Tables."
PURCHASE OF SHARES
The class structure and purchase and distribution procedures for shares of
Balanced Fund are identical to those of Global Allocation. For a complete
discussion of the four classes of shares and the purchase and distribution
procedures related thereto, see "Merrill Lynch Select Pricing SM System" and
"Purchase of Shares" in either the Global Allocation Prospectus or the
Balanced Fund Prospectus.
REDEMPTION OF SHARES
The procedure for redeeming shares of Global Allocation is identical to the
procedure for redeeming shares of Balanced Fund. For purposes of computing any
CDSC that may be payable upon disposition of Corresponding Shares of Global
Allocation acquired by Balanced Fund shareholders in the Reorganization, the
holding period of Balanced Fund shares outstanding on the date the
Reorganization takes place will be tacked onto the holding period of the
Corresponding Shares of Global Allocation acquired in the Reorganization.
24
<PAGE>
PERFORMANCE
General. The following tables provide performance information for each class
of shares of Balanced Fund and Global Allocation, including and excluding
maximum applicable sales charges, for the periods indicated. Past performance
is not indicative of future performance.
BALANCED FUND
AVERAGE ANNUAL TOTAL RETURN (%)
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES*** CLASS D SHARES***
--------------- --------------- ------------------- -------------------
WITHOUT WITH WITHOUT WITH WITHOUT WITH WITHOUT WITH
SALES SALES SALES SALES SALES SALES SALES SALES
PERIOD CHARGE CHARGE* CHARGE CHARGE* CHARGE CHARGE* CHARGE CHARGE*
- ------ ------- ------- ------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
11 months ended
8/31/95+............... 9.44 3.70 8.44 4.48 8.63 7.65 9.20 3.47
Year Ended 8/31/95...... 7.33 1.69 6.27 2.39 -- -- -- --
Five Years Ended
8/31/95................ 10.69 9.50 9.57 9.57 -- -- -- --
Inception** through
8/31/95................ 9.39 8.53 8.43 8.43 -- -- -- --
</TABLE>
- --------
* Assumes the maximum applicable sales charge. The maximum initial sales
charge on Class A and Class D shares is 5.25%. The maximum contingent
deferred sales charge ("CDSC") on Class B shares is 4% and is reduced to 0%
after 4 years. Class C shares are subject to a 1.0% CDSC for one year.
** Class A shares commenced operations on October 27, 1988. Class B shares
commenced operations on November 29, 1985. Class C and Class D shares
commenced operations on October 21, 1994.
*** Figures are since inception (October 21, 1994).
+ Aggregate total returns.
GLOBAL ALLOCATION
AVERAGE ANNUAL TOTAL RETURN (%)
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES*** CLASS D SHARES***
--------------- --------------- ------------------ -------------------
WITHOUT WITH WITHOUT WITH WITHOUT WITH WITHOUT WITH
SALES SALES SALES SALES SALES SALES SALES SALES
PERIOD CHARGE CHARGE* CHARGE CHARGE* CHARGE CHARGE* CHARGE CHARGE*
- ------ ------- ------- ------- ------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
10 months ended
8/31/95+............... 13.52 7.56 12.48 8.48 12.52 11.52 13.31 7.36
Year Ended 8/31/95...... 10.56 4.75 9.43 5.43 -- -- -- --
Five Years Ended
8/31/95................ 15.24 14.01 14.07 14.07 -- -- -- --
Inception** through
8/31/95................ 13.71 12.78 12.55 12.55 -- -- -- --
</TABLE>
- --------
* Assumes the maximum applicable sales charge. The maximum initial sales
charge on Class A and Class D shares is 5.25%. The maximum CDSC on Class B
shares is 4% and is reduced to 0% after 4 years. Class C shares are subject
to a 1.0% CDSC for one year.
** Class A and Class B shares commenced operations on February 3, 1989. Class
C and Class D shares commenced operations on October 21, 1994.
*** Figures are since inception (October 21, 1994).
+ Aggregate total returns.
[Balanced Fund--Management's Discussion of Fund Performance for the twelve
months ended September 30, 1995.]
[TO BE PROVIDED BY AMENDMENT WHEN AVAILABLE.]
25
<PAGE>
Global Allocation--Management's Discussion of Fund Performance.
For the Nine Months Ended July 31, 1995.
[TO BE PROVIDED BY AMENDMENT.]
For the Twelve Months Ended October 31, 1994. Perhaps the most significant
development during the fiscal year was the poor performance of the U.S. bond
market. Long-term Treasury bonds registered their worst total returns in more
than 50 years. With the widespread belief that inflationary pressures were
well-contained, the consensus outlook for lower short-term and long-term
interest rates was widely held for most of 1993. The lowest yields for long-
term bonds were set in mid-October 1993. Beginning in February 1994, a series
of Federal Reserve Board monetary policy tightenings brought the Federal Funds'
rate from 3% to 4.75% by October month-end.
As the U.S. central bank continued to raise short-term interest rates,
stronger-than-expected economic results increased inflationary fears in the
United States, and price weakness spread to bond markets worldwide. Investors
anticipated more short-term interest rate increases in the United States
because of the U.S. dollar's weakness. The long-term downtrend of the U.S.
dollar began to accelerate in mid-1994 and continued throughout the balance of
the fiscal year. In contrast to the fixed income markets, the U.S. and other
major world equity markets performed comparatively well over the course of the
fiscal year.
As the fiscal year began, Global Allocation had a 23.0% cash position,
because of the lack of attractively valued equity and fixed income investment
opportunities. At that time Global Allocation was underweighted in equities and
fixed income securities at 35.1% and 41.9% of net assets, respectively. With
the sharp decline in bond prices, we invested the cash reserves largely in
longer-term fixed income securities. MLAM believes that global bond markets
offer high real rates of return that are attractive to long-term investors. As
a result, by October 1994, Global Allocation had a very small 1.8% cash
position.
Global Allocation's substantial cash position insulated the portfolio from
stock and bond market volatility early in the fiscal year. MLAM's move to an
overweighting in bonds along with our underweighting of equities hampered
performance as the fiscal year progressed. The negative impact of declining
bond prices was mitigated somewhat by our focus on fixed income issues with
intermediate-term maturities which offered yields almost as high as long-term
bonds with much less price volatility. MLAM believes that on a risk-adjusted
basis these fixed-income securities offer attractive investment opportunities
and plan to continue to overweight the bond component of the Fund. Looking at
the equity market, we believe that since stocks have not declined significantly
despite higher interest rates, there are relatively fewer undervalued equity
investments available. Therefore, we expect to remain underweighted in
equities. Two areas that we identified as having attractively valued equities
were U.S. healthcare issues and European stocks. Global Allocation's
investments in both enhanced the portfolio's total return for the period.
Foreign exchange market developments did not aid performance, since the Fund
was overweighted in U.S. dollars during the fiscal year, both through
investment positions and also by hedging the portfolio's Yen-and Deutschemark-
denominated exposures back into U.S. dollars. The Fund's overweighted U.S.
dollar position remains in place because we continued to be concerned about the
foreign exchange risk inherent in owning non-U.S. dollar denominated assets
when the U.S. dollar is so deeply undervalued.
26
<PAGE>
Performance data for the Fund's Class A and Class B shares for the period
covered by the preceding discussion is set forth below. Additional performance
information is contained in "Comparison of the Funds--Performance--General" and
"--Global Allocation--Management's Discussion of Fund Performance--For the Nine
Months Ended July 31, 1995." None of the past results shown should be
considered a representation of future performance.
GLOBAL ALLOCATION
TOTAL RETURN BASED ON A $10,000 INVESTMENT
[CHART--TO BE PROVIDED BY AMENDMENT]
GLOBAL ALLOCATION
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
% RETURN
WITHOUT % RETURN WITH
SALES CHARGE SALES CHARGE**
------------ --------------
<S> <C> <C>
CLASS A SHARES*
Year Ended
9/30/94........ + 4.94% - 0.57%
Five Years Ended
9/30/94........ +13.35 +12.14
Inception
(2/3/89)
through
9/30/94........ +13.62 +12.54
</TABLE>
<TABLE>
<CAPTION>
% RETURN % RETURN
WITHOUT WITH
CDSC CDSC**
-------- --------
<S> <C> <C>
CLASS B SHARES*
Year Ended 9/30/94..... + 3.85% - 0.11%
Five Years Ended
9/30/94............... +12.17 +12.17
Inception (2/3/89)
through 9/30/94....... +12.46 +12.46
</TABLE>
--------
* Maximum contingent deferred sales
charge ("CDSC") is 4% and is
- -------- reduced to 0% after 4 years.
* Maximum sales charge is 5.25%. ** Assuming payment of applicable
** Assuming maximum sales charge. CDSC.
VOTING RIGHTS
Shareholders of Global Allocation 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.
Global Allocation 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 distribution arrangements; and
(iv) ratification of selection of independent accountants. Voting rights for
Directors are not cumulative. Shares of Global Allocation to be issued to
Balanced Fund shareholders in the Reorganization will be fully paid and non-
assessable, will have no preemptive rights, and will have the
27
<PAGE>
conversion rights described in this Prospectus and Proxy Statement and in the
Global Allocation Prospectus. Each share of Global Allocation 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 that Class B, Class C and Class
D shares bear certain additional expenses. Rights attributable to shares of
Balanced Fund are identical to those described above.
DIVIDENDS AND DISTRIBUTIONS
Balanced Fund's current policy with respect to dividends and distributions is
identical to Global Allocation's policy, except that Balanced Fund is required
to pay dividends from net investment income semi-annually and Global Allocation
is required to pay dividends from net investment income at least annually. As a
matter of practice, however, Global Allocation has paid dividends from net
investment income semi-annually since its inception. It is each Fund's
intention to distribute all of its net investment income, if any. In addition,
each Fund distributes all net realized long- or short-term capital gains, if
any, to shareholders at least annually.
TAX INFORMATION
The tax consequences associated with investment in shares of Balanced Fund
are substantially identical to the tax consequences associated with investment
in shares of Global Allocation. However, because there is no limitation on the
percentage of Global Allocation's total assets that may be invested in foreign
securities, shareholders of Global Allocation may be entitled to claim foreign
tax credits with respect to their share of foreign taxes paid by the Fund on
income from investments in foreign securities held by the Fund. In this regard,
if more than 50% of value of the Global Allocation'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 Fund shareholders generally will be required to
include their proportionate share of such withholding taxes in their U.S.
income tax returns as gross income, treat such proportionate share as taxes
paid by them, and deduct such proportionate share in computing their taxable
income 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.
Global Allocation will report annually to its shareholders the amount per share
of such withholding taxes. Because Balanced Fund limits its investment in
foreign securities to 20% of total assets, Balanced Fund shareholders are not
entitled to claim the foreign tax credits described above.
PORTFOLIO TRANSACTIONS
The procedures for engaging in portfolio transactions are generally the same
for both Balanced Fund and Global Allocation. For a discussion of these
procedures, see "Investment Objective and Policies--Other Investment Policies
and Practices" in the Global Allocation Prospectus and "Portfolio Transactions
and Brokerage" in the Global Allocation Statement.
Each Fund may effect portfolio transactions on foreign securities exchanges
and may incur settlement delays on certain of such exchanges. In addition,
costs associated with transactions in foreign securities are generally higher
than with transactions in U.S. securities. Accordingly, to the extent Global
Allocation may invest a greater percentage of its assets in foreign securities,
the effects of settlement delays and increased transaction costs may be more
pronounced for Global Allocation than for Balanced Fund.
PORTFOLIO TURNOVER
Generally, neither Balanced Fund nor Global Allocation purchases securities
for short-term trading profits. However, either Fund may dispose of securities
without regard to the time that they have been held
28
<PAGE>
when such action, for defensive or other reasons, appears advisable to MLAM.
Balanced Fund has no limit on its rate of portfolio turnover; Global Allocation
anticipates that its annual portfolio turnover rate should not exceed 200%
under normal conditions. The portfolio turnover rates for Balanced Fund for its
fiscal years ended September 30, 1994 and 1993 were 59.15% and 79.55%,
respectively; the portfolio turnover rates for Global Allocation for its fiscal
years ended October 31, 1994 and 1993 were 57.04% and 50.35%, respectively.
ADDITIONAL INFORMATION
Net Asset Value. Both Balanced Fund and Global Allocation determine net asset
value of each class of its shares once daily 15 minutes after the close of
business on the New York Stock Exchange (generally, 4:00 p.m. New York time),
on each day during which the New York Stock Exchange is open for trading. 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.
Shareholder Services. Global Allocation offers a number of shareholder
services and investment plans designed to facilitate investment in shares of
the Fund. In addition, U.S. shareholders of each class of shares of Global
Allocation have an exchange privilege with certain other MLAM-advised mutual
funds. Shareholder services, including exchange privileges, available to
Balanced Fund shareholders and Global Allocation are identical. For a
description of these services, see "Shareholder Services" in the Global
Allocation Prospectus.
Custodian. The Chase Manhattan Bank, N.A. ("Chase") acts as custodian of the
cash and securities of Balanced Fund. The principal business address of Chase
is 4 Chase MetroTech Center, 18th Floor, Brooklyn, New York 11245. Brown
Brothers Harriman & Co. ("Brown Brothers") acts as custodian for Global
Allocation. Brown Brothers' principal business address is 40 Water Street,
Boston, Massachusetts 02109.
Transfer Agent, Dividend Disbursing Agent and Registrar. Merrill Lynch
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484, serves as the transfer agent, dividend disbursing agent and
registrar with respect to each Fund (the "Transfer Agent"), at the same rate,
pursuant to separate registrar, transfer agency and service agreements with
each of the Funds.
Capital Stock. Balanced Fund has an authorized capital of 2,000,000,000
shares of common stock, par value $.01 per share, divided into four classes,
designated Class A, Class B, Class C and Class D common stock, each of which
consists of 500,000,000 shares. Global Allocation has an authorized capital of
2,200,000,000 shares of common stock, par value $0.10 per share, divided into
four classes, also designated Class A, Class B, Class C and Class D common
stock, of which Class A and Class C consist of 200,000,000 shares each and
Class B and Class D consist of 900,000,000 shares each. The rights, preferences
and expenses attributable to the Class A, Class B, Class C and Class D shares
of Balanced Fund are identical in all respects to those of the Class A, Class
B, Class C and Class D shares of Global Allocation.
Shareholder Inquiries. Shareholder inquiries with respect to Balanced Fund
and Global Allocation may be addressed to either Fund by telephone at (609)
282-2000 or at the address set forth on the cover page of this Proxy Statement
and Prospectus.
29
<PAGE>
THE REORGANIZATION
GENERAL
Under the Agreement and Plan of Reorganization (attached hereto as Exhibit
I), Global Allocation will acquire substantially all of the assets, and will
assume substantially all of the liabilities, of Balanced Fund, in exchange
solely for an equal aggregate value of shares to be issued by Global
Allocation. Upon receipt by Balanced Fund of such shares, Balanced Fund will
distribute the shares to the holders of shares of Balanced Fund, as described
below.
Generally, the assets transferred by Balanced Fund to Global Allocation will
equal all investments of Balanced Fund held in its portfolio as of the
Valuation Time (as defined in the Agreement and Plan of Reorganization) and all
other assets of Balanced Fund as of such time, except for any cash or cash
equivalents reserved by Balanced Fund to discharge its unpaid or contingent
liabilities existing at the Valuation Time. Any unexpended portion of the
foregoing funds retained by Balanced Fund will be disbursed by Balanced Fund
pro rata to the shareholders of Balanced Fund of record as of the date of the
Reorganization upon dissolution of the Fund as a final liquidating dividend.
Balanced Fund will distribute the shares of Global Allocation received by it
pro rata to its shareholders in exchange for such shareholders' proportional
interests in Balanced Fund. The shares of Global Allocation received by
Balanced Fund shareholders will be of the same class and have the same
aggregate net asset value as each such shareholder's interest in Balanced Fund
as of the Valuation Time (previously defined as the "Corresponding Shares").
(See, "The Agreement and Plan of Reorganization--Valuation of Assets and
Liabilities" for information concerning the calculation of net asset value.)
The distribution will be accomplished by opening new accounts on the books of
Global Allocation in the names of all shareholders of Balanced Fund, including
shareholders holding Balanced Fund shares in certificate form, and transferring
to each shareholder's account the Corresponding Shares of Global Allocation
representing such shareholder's interest previously credited to the account of
Balanced Fund. Shareholders holding Balanced Fund shares in certificate form
may receive certificates representing the Corresponding Shares of Global
Allocation credited to their account in respect of such Balanced Fund shares by
sending the certificates to the Transfer Agent accompanied by a written request
for such exchange.
Since the Corresponding Shares of Global Allocation would be issued at net
asset value in exchange for the net assets of Balanced Fund having a value
equal to the aggregate net asset value of those shares of Balanced Fund, the
net asset value per share of Global Allocation should remain virtually
unchanged solely as a result of the Reorganization. Thus, the Reorganization
should result in virtually no dilution of net asset value of Global Allocation
immediately following consummation of the Reorganization. However, as a result
of the Reorganization, a shareholder of Balanced Fund likely would hold a
reduced percentage of ownership in Global Allocation than he did in Balanced
Fund prior to the Reorganization.
PROCEDURE
On October 13, 1995, the Board of Directors of Balanced Fund, including all
of the Directors who are not "interested persons," as defined by the Investment
Company Act, approved the Agreement and Plan of Reorganization and the
submission of such Agreement and Plan to Balanced Fund shareholders for
approval. The Board of Directors of Global Allocation, including all of the
Directors who are not interested persons, approved the Agreement and Plan of
Reorganization on October 2, 1995.
If the shareholders of Balanced Fund approve the Reorganization and all
required regulatory approvals are obtained, the Reorganization will take place
as early as possible in calendar year 1996.
THE BOARD OF DIRECTORS OF BALANCED FUND RECOMMENDS THAT BALANCED FUND
SHAREHOLDERS APPROVE THE AGREEMENT AND PLAN OF REORGANIZATION.
30
<PAGE>
TERMS OF THE AGREEMENT AND PLAN OF REORGANIZATION
The following is a summary of the significant terms of the Agreement and Plan
of Reorganization. This summary is qualified in its entirety by reference to
the Agreement and Plan of Reorganization, attached hereto as Exhibit I.
Valuation of Assets and Liabilities. The respective assets of Balanced Fund
and Global Allocation will be valued as of the Valuation Time. The assets in
each Fund will be valued according to the procedures set forth under
"Additional Information--Determination of Net Asset Value" in the Global
Allocation Prospectus. Purchase orders for Balanced Fund shares which have not
been confirmed as of the Valuation Time will be treated as assets of Balanced
Fund for purposes of the Reorganization; redemption requests which have not
settled as of the Valuation Time will be treated as liabilities for purposes of
the Reorganization.
Distribution of Global Allocation Shares. On the next full business day
following the Valuation Time (the "Exchange Date"), Global Allocation will
issue to Balanced Fund a number of shares the aggregate net asset value of
which will equal the aggregate net asset value of shares of Balanced Fund as of
the Valuation Time. Each holder of Balanced Fund shares will receive, in
exchange for his proportionate interest in Balanced Fund, Corresponding Shares
of Global Allocation of the same class and having the same aggregate net asset
value as the Balanced Fund shares held by such shareholder as of the Valuation
Time.
Expenses. The expenses of the Reorganization that are directly attributable
to each Fund and the conduct of its business will be deducted from the assets
of that Fund as of the Valuation Time. These expenses are expected to include
the expenses incurred in preparing materials to be distributed to each Fund's
board, legal fees incurred in preparing each Fund's board materials, attending
each Fund's board meetings and preparing the minutes and accounting fees
associated with each Fund's financial statements. The expenses of the
Reorganization that are attributable to the transaction itself, including
expenses in connection with obtaining the IRS ruling, will be borne pro rata by
each Fund according to its net assets as of the Valuation Time. These expenses
are expected to include expenses incurred in connection with the preparation of
the Agreement and Plan of Reorganization and the Registration Statement on Form
N-14 (including the Prospectus and Proxy Statement), Securities and Exchange
Commission and state securities commission filing fees and legal and audit fees
in connection with the Reorganization. Expenses associated with the dissolution
of Balanced Fund under Maryland law and termination of its registration under
the Investment Company Act will be borne by Balanced Fund.
Required Approvals. Under Balanced Fund's Articles of Incorporation (as
amended to date) and relevant Maryland law, shareholder approval of the
Agreement and Plan of Reorganization requires the affirmative vote of Balanced
Fund shareholders representing a majority of the total number of votes entitled
to be cast thereon.
Deregistration and Dissolution. Following the transfer of the assets and
liabilities of Balanced Fund to Global Allocation and the distribution of
Corresponding Shares of Global Allocation to Balanced Fund shareholders,
Balanced Fund will terminate its registration under the Investment Company Act
and its incorporation under Maryland law and will withdraw its authority to do
business in any state where it is required to do so.
Amendments and Conditions. The Agreement and Plan of Reorganization may be
amended at any time prior to the Exchange Date with respect to any of the terms
therein. The obligations of Balanced Fund and Global Allocation pursuant to the
Agreement and Plan of Reorganization are subject to various conditions,
including a registration statement on Form N-14 being declared effective by the
Securities and Exchange Commission, approval of the Reorganization by Balanced
Fund shareholders, a favorable IRS ruling being received as to tax matters, an
opinion of counsel being received as to securities matters and the continuing
accuracy of various representations and warranties of Balanced Fund and Global
Allocation being confirmed by the respective parties.
31
<PAGE>
Postponement, Termination. Under the Agreement and Plan of Reorganization,
the Board of Directors of either Balanced Fund or Global Allocation may cause
the Reorganization to be postponed or abandoned should either Board determine
that it is in the best interests of the shareholders of either Balanced Fund or
Global Allocation, respectively, to do so. The Agreement and Plan of
Reorganization may be terminated, and the Reorganization abandoned at any time,
whether before or after adoption thereof by the Balanced Fund shareholders,
prior to the Exchange Date or the Exchange Date may be postponed: (i) by mutual
consent of the Boards of Directors of Balanced Fund and Global Allocation; (ii)
by the Board of Directors of Balanced Fund if any condition to Balanced Fund's
obligations has not been fulfilled or waived by such Board; or (iii) by the
Board of Directors of Global Allocation if any condition to Global Allocation's
obligations has not been fulfilled or waived by such Board.
POTENTIAL BENEFITS TO BALANCED FUND SHAREHOLDERS AS A RESULT OF THE
REORGANIZATION
The Board of Directors of Balanced Fund has identified certain potential
benefits to Balanced Fund shareholders that are likely to result from the
Reorganization. First, following the Reorganization, Balanced Fund shareholders
will remain invested in an open-end fund that has an investment objective
similar to that of Balanced Fund, although not identical. In addition, Balanced
Fund shareholders are likely to experience certain additional benefits,
including lower expenses per share, economies of scale and greater flexibility
in portfolio management.
Specifically, although after the Reorganization, on a pro forma combined
basis, Global Allocation will pay an advisory fee to MLAM at a higher annual
effective rate than that paid by Balanced Fund, the total operating expenses of
Global Allocation after the Reorganization, as a percentage of net assets,
would be less than the current operating expenses for Balanced Fund. This could
potentially result in higher earnings per share for Balanced Fund shareholders.
In particular, certain fixed costs, such as costs of printing shareholders
reports and proxy statements, legal expenses, audit fees, registration fees,
mailing costs and other expenses would be spread across a larger asset base,
thereby lowering the expense ratio borne by Balanced Fund shareholders. To
illustrate the potential economies of scale, on August 31, 1995, the total
operating expense ratio for Balanced Fund (excluding class specific
distribution and account maintenance fees) was 1.01% (based on net assets of
$647 million), and the total operating expense ratio for Global Allocation
(excluding class specific distribution and account maintenance fees) was 0.91%
(based on net assets of $8.4 billion). If the Reorganization had taken place on
that date, the total operating expense ratio on a pro forma basis for Global
Allocation (excluding class specific distribution and account maintenance fees)
would have been 0.90% (based on net assets of $9.1 billion).
The following table sets forth the net assets of Balanced Fund and Global
Allocation for each Fund's last three fiscal years and as of August 31, 1995.
<TABLE>
<CAPTION>
BALANCED FUND
-------------
PERIOD NET ASSETS
- ------ ------------
<S> <C>
Year ended 9/30/92...... $907,239,963
Year ended 9/30/93...... $871,642,908
Year ended 9/30/94...... $749,798,690
As of August 31, 1995... $647,471,791
</TABLE>
<TABLE>
<CAPTION>
GLOBAL ALLOCATION
-----------------
PERIOD NET ASSETS
- ------ --------------
<S> <C>
Year ended 10/31/92..... $1,204,787,694
Year ended 10/31/93..... $5,217,350,809
Year ended 10/31/94..... $7,827,351,042
As of August 31, 1995... $8,417,211,834
</TABLE>
The Board of Directors of Balanced Fund considered that Global Allocation's
net assets have been steadily increasing over the past several years, while
Balanced Fund's net assets have been decreasing over the same period. Were
these trends to continue, the Board considered that Global Allocation may
experience increasing economies of scale which, as a result, may have the
effect of reducing its overall operating expense ratio, while Balanced Fund may
experience the opposite result, that is, a higher operating expense ratio due
to a continuing reduction in assets. Although there can be no assurance that
the foregoing would in fact occur, the Board determined that the potential
economies of scale that may be realized as a result of the Reorganization would
be beneficial to Balanced Fund shareholders.
32
<PAGE>
In addition, the Board of Directors of Balanced Fund considered that the
Reorganization may potentially provide increased flexibility to MLAM in
managing Balanced Fund's assets as part of Global Allocation since Global
Allocation is organized as a non-diversified fund. As a non-diversified fund,
Global Allocation is not limited by the Investment Company Act in (i) the
proportion of its assets that it may invest in the securities of a single
issuer (excluding U.S. Government securities) or (ii) the amount of voting
securities of a single issuer (excluding U.S. Government securities) that it
may purchase. In this regard, the Board of Directors of Balanced Fund
considered it potentially advantageous that, unlike Balanced Fund, Global
Allocation does not have to forego attractive investment opportunities, or
alternatively liquidate existing positions prematurely to take advantage of
such opportunities, in order to stay within the diversification limits of the
Investment Company Act. Global Allocation would, however, continue to comply
with the diversification requirements under the Code. See "Comparison of
Funds--Other Investment Policies--Non-Diversified Status."
The Board of Directors of Balanced Fund also considered the difference in the
risks associated with certain of the investment strategies used by Global
Allocation which are not used by Balanced Fund.
Based on the foregoing, the Board concluded that the Reorganization presents
no significant risks or costs (including legal, accounting and administrative
costs) that would outweigh the benefits discussed above.
In approving the Reorganization, the Board of Directors of Balanced Fund
determined that the interests of existing shareholders of Balanced Fund would
not be diluted as a result of the Reorganization.
TAX CONSEQUENCES OF THE REORGANIZATION
General. The Reorganization has been structured with the intention that it
qualify for Federal income tax purposes as a tax-free reorganization under
Section 368(a)(1)(C) of the Code. Balanced Fund and Global Allocation have
elected and qualified for the special tax treatment afforded "regulated
investment companies" under the Code, and Global Allocation intends to continue
to so qualify after the Reorganization. Balanced Fund and Global Allocation
have jointly requested a private letter ruling from the IRS to the effect that
for Federal income tax purposes: (i) the Reorganization, as described, will
constitute a reorganization within the meaning of Section 368(a)(1)(C) of the
Code and Balanced Fund and Global Allocation will each be deemed a "party" to
the Reorganization within the meaning of Section 368(b); (ii) in accordance
with Section 354(a)(1) of the Code, no gain or loss will be recognized by the
shareholders of Balanced Fund upon the receipt of Corresponding Shares of
Global Allocation in the Reorganization solely in exchange for their shares of
Balanced Fund; (iii) in accordance with Section 358 of the Code, immediately
after the Reorganization, the tax basis of the Corresponding Shares of Global
Allocation received by the shareholders of Balanced Fund in the Reorganization
will be equal, in the aggregate, to the tax basis of the shares of Balanced
Fund surrendered in exchange; (iv) in accordance with Section 1223 of the Code,
the holding period of the Corresponding Shares of Global Allocation received by
shareholders of Balanced Fund in the Reorganization will include the holding
period of the shares of Balanced Fund immediately prior to the liquidation of
Balanced Fund (provided that at the time of the Reorganization the shares of
Balanced Fund were held as capital assets); (v) in accordance with Section
361(a) of the Code, no gain or loss will be recognized by Balanced Fund on the
asset transfer solely in exchange for Global Allocation shares or on the
distribution of Global Allocation shares to Balanced Fund shareholders under
Section 361(c)(1); (vi) under Section 1032 of the Code, no gain or loss will be
recognized by Global Allocation on the exchange of its shares for Balanced Fund
assets; (vii) in accordance with Section 362(b) of the Code, the tax basis of
the assets of Balanced Fund in the hands of Global Allocation will be the same
as the tax basis of such assets in the hands of Balanced Fund immediately prior
to the Reorganization; (viii) in accordance with Section 1223 of the Code, the
holding period of the transferred assets in the hands of Global Allocation will
include the holding period of such assets in the hands of Balanced Fund; and
(ix) the taxable year of Balanced Fund will end on the effective date of the
Reorganization and pursuant to Section 381(a) of the Code and regulations
thereunder, Global Allocation will succeed to and take into account certain tax
attributes of Balanced Fund, such as earnings and profits, capital loss
carryovers and method of accounting.
To the extent Global Allocation has unrealized capital gains at the time of
the Reorganization, Balanced Fund shareholders may incur taxable gains in the
year that Global Allocation realizes and distributes those
33
<PAGE>
gains. This will be true notwithstanding that the unrealized gains were
reflected in the price of Global Allocation shares at the time they were
exchanged for assets of Balanced Fund in the Reorganization. Conversely,
shareholders of Global Allocation will share in unrealized capital gains of
Balanced Fund after the Reorganization and bear a tax consequence on the
subsequent realization of such gains. Shareholders should consult their tax
advisers regarding the effect of the Reorganization in light of their
individual circumstances. As the foregoing relates only to Federal income tax
consequences, shareholders also should consult their tax advisers as to the
foreign, state and local tax consequences of the Reorganization.
Status as a Regulated Investment Company. Both Balanced Fund and Global
Allocation have elected to be taxed as regulated investment companies under
Sections 851-855 of the Code, and after the Reorganization Global Allocation
intends to continue to operate so as to qualify as a regulated investment
company.
CAPITALIZATION
The following table sets forth as of August 31, 1995: (i) the capitalization
of Balanced Fund, (ii) the capitalization of Global Allocation and (iii) the
pro forma capitalization of the Combined Fund as adjusted to give effect to the
Reorganization.
PRO FORMA CAPITALIZATION OF BALANCED FUND, GLOBAL ALLOCATION AND COMBINED FUND
AS OF AUGUST 31, 1995
<TABLE>
<CAPTION>
BALANCED FUND
------------------------------------------------------
CLASS A CLASS B CLASS C CLASS D
-------------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Total Net Assets:....... $ 29,857,290 $ 157,693,117 $ 1,055,190 $458,866,195
Shares Outstanding:..... 2,639,705 13,709,635 92,924 40,633,328
Net Asset Value Per
Share:................ $ 11.31 $ 11.50 $ 11.36 $ 11.29
<CAPTION>
GLOBAL ALLOCATION
------------------------------------------------------
CLASS A CLASS B CLASS C CLASS D
-------------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Total Net Assets:....... $1,482,057,759 $6,623,039,071 $84,122,546 $227,992,458
Shares Outstanding:..... 105,504,531 477,178,598 6,093,041 16,238,582
Net Asset Value Per
Share:................ $ 14.05 $ 13.88 $ 13.81 $ 14.04
<CAPTION>
COMBINED FUND
------------------------------------------------------
ADJUSTED* CLASS A CLASS B CLASS C CLASS D
- --------- -------------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Total Net Assets:....... $1,511,915,049 $6,780,732,188 $85,177,736 $686,858,653
Shares Outstanding:..... 107,630,008 488,540,116 6,169,469 48,920,962
Net Asset Value Per
Share:................ $ 14.05 $ 13.88 $ 13.81 $ 14.04
</TABLE>
- --------
* Total Net Assets and Net Asset Value Per Share includes the aggregate value
of Balanced Fund's net assets which would have been transferred to Global
Allocation had the Reorganization been consummated on August 31, 1995. Data
does not take into account expenses incurred in connection with the
Reorganization or the actual number of shares that would have been issued. No
assurance can be given as to how many shares of Global Allocation the
Balanced Fund shareholders will receive on the date the Reorganization takes
place, and the foregoing should not be relied upon to reflect the number of
shares of Global Allocation that actually will be received on or after such
date.
INFORMATION CONCERNING THE SPECIAL MEETING
DATE, TIME AND PLACE OF MEETING
The Meeting will be held on December 21, 1995, at the offices of Balanced
Fund, 800 Scudders Mill Road, Plainsboro, New Jersey at [9:00] A.M., New York
time.
SOLICITATION, REVOCATION AND USE OF PROXIES
A shareholder executing and returning a proxy has the power to revoke it at
any time prior to its exercise by executing a superseding proxy or by
submitting a notice of revocation to the Secretary of Balanced Fund.
34
<PAGE>
Although mere attendance at the Meeting will not revoke a proxy, a shareholder
present at the Meeting may withdraw his proxy and vote in person.
All shares represented by properly executed proxies, unless such proxies
previously have been revoked, will be voted at the Meeting in accordance with
the directions on the proxies; if no direction is indicated on a properly
executed proxy, such shares will be voted "FOR" the approval of the Agreement
and Plan of Reorganization.
It is not anticipated that any matters other than the adoption of the
Agreement and Plan of Reorganization will be brought before the Meeting. If,
however, any other business properly is brought before the Meeting, proxies
will be voted in accordance with the judgment of the persons designated on such
proxies.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of shares of Balanced Fund at the close of business on
October 31, 1995 (the "Record Date") are entitled to vote at the Meeting or any
adjournment thereof. At the close of business on the Record Date, there were
shares of Balanced Fund common stock issued and outstanding and entitled to
vote as follows: Class A shares, Class B shares, Class C shares and
Class D shares.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF BALANCED FUND
AND GLOBAL ALLOCATION
[To the knowledge of Balanced Fund, at the date hereof, no person or entity
owns beneficially or of record 5% or more of any class of shares of Balanced
Fund or of all classes of Balanced Fund shares in the aggregate.]
At August 31, 1995, the Directors and officers of Balanced Fund as a group
(11 persons) owned an aggregate of less than 1% of the outstanding shares of
Balanced Fund. At such date, Mr. Zeikel, a Director and officer of Balanced
Fund, and the other Directors and officers of Balanced Fund owned an aggregate
of less than 1% of the outstanding shares of common stock of ML & Co.
[To the knowledge of Global Allocation, at the date hereof, no person or
entity owns beneficially or of record 5% or more of any class of shares of
Global Allocation or of all classes of Global Allocation shares in the
aggregate.]
As of August 31, 1995, the officers and Directors of Global Allocation as a
group (12 persons) owned an aggregate of less than 1% of the outstanding shares
of Global Allocation. At such date, Mr. Zeikel, a Director and officer of
Global Allocation, and the other Directors and officers of Global Allocation
owned less than 1% of the outstanding shares of stock of ML & Co.
VOTING RIGHTS AND REQUIRED VOTE
For purposes of this Proxy Statement and Prospectus, each share of each class
of Balanced Fund is entitled to one vote. Approval of the Agreement and Plan of
Reorganization requires the affirmative vote of Balanced Fund shareholders
representing a majority of the total votes entitled to be cast thereon, with
all shares voting as a single class.
Under Maryland law, shareholders of a registered open-end investment company
such as Balanced Fund are not entitled to demand the fair value of their shares
upon a merger and will be bound by the terms of the Reorganization if approved
at the Meeting. However, any shareholder of Balanced Fund may redeem his
Balanced Fund shares prior to the Reorganization.
A quorum for purposes of the Meeting consists of 33 1/3% of the shares
entitled to vote at the Meeting, present in person or by proxy. If, by the time
scheduled for the Meeting, a quorum of Balanced Fund's shareholders is not
present or if a quorum is present but sufficient votes in favor of the
Agreement and Plan of Reorganization are not received from the shareholders of
Balanced Fund, the persons named as proxies may propose one or more
adjournments of the Meeting to permit further solicitation of proxies from
shareholders. Any such adjournment will require the affirmative vote of a
majority of the shares of Balanced Fund present in person or by proxy and
entitled to vote at the session of the Meeting to be adjourned. The persons
named as proxies will vote in favor of any such adjournment if they determine
that adjournment and additional solicitation are reasonable and in the
interests of the Fund's shareholders.
35
<PAGE>
ADDITIONAL INFORMATION
The expenses of preparation, printing and mailing of the enclosed form of
proxy, the accompanying Notice and this Proxy Statement and Prospectus will be
borne by Global Allocation and Balanced Fund pro rata according to the
aggregate net assets of each Fund's portfolio on the date of Reorganization.
Such expenses are currently estimated to be $ .
Global Allocation and Balanced Fund likewise will reimburse banks, brokers
and others for their reasonable expenses in forwarding proxy solicitation
materials to the beneficial owners of shares of Balanced Fund and certain
persons that Balanced Fund may employ for their reasonable expenses in
assisting in the solicitation of proxies from such beneficial owners of shares
of Balanced Fund.
In order to obtain the necessary quorum at the Meeting, supplementary
solicitation may be made by mail, telephone, telegraph or personal interview by
officers of the Fund. Balanced Fund and Global Allocation also may hire proxy
solicitors at their expense. It is expected that the cost of such supplementary
solicitation, if any, will be nominal. [Balanced Fund and Global Allocation
have retained, at their expense, Tritech Services, an affiliate of ML & Co.,
with offices at 4 Corporate Place, Piscataway, New Jersey, to aid in the
solicitation of proxies from holders of shares held in nominee or "street" name
at a cost of approximately [$ ], plus out-of-pocket expenses.]
Broker-dealer firms, including Merrill Lynch, holding Fund shares in "street
name" for the benefit of their customers and clients will request the
instructions of such customers and clients on how to vote their shares before
the Meeting. Broker-dealer firms, including Merrill Lynch, will not be
permitted to vote without instructions with respect to the approval of the
Agreement and Plan of Reorganization. Properly executed proxies which are
returned but which are marked "abstain" or with respect to which a broker-
dealer has received no instructions and therefore has declined to vote on the
proposal ("broker non-votes") will be counted as present for the purposes of
determining a quorum. However, abstentions and broker non-votes will have the
same effect as a vote against the Agreement and Plan of Reorganization.
This Proxy Statement and Prospectus does not contain all of the information
set forth in the registration statements and the exhibits relating thereto
which Balanced Fund and Global Allocation, respectively, have filed with the
Securities and Exchange Commission, under the Securities Act and the Investment
Company Act, to which reference is hereby made.
Balanced Fund and Global Allocation both are subject to the informational
requirements of the Securities Exchange Act of 1934, and in accordance
therewith, file reports and other information with the Securities and Exchange
Commission. Reports, proxy statements, registration statements and other
information filed by Balanced Fund and Global Allocation can be inspected and
copied at the public reference facilities of the Securities and Exchange
Commission in Washington, D.C. and at the New York Regional Office of the
Securities and Exchange Commission at Seven World Trade Center, New York, New
York 10048. Copies of such materials also can be obtained by mail from the
Public Reference Branch, Office of Consumer Affairs and Information Services,
Securities and Exchange Commission, Washington, D.C. 20549, at prescribed
rates.
LEGAL PROCEEDINGS
There are no material legal proceedings to which Balanced Fund or Global
Allocation is a party.
LEGAL OPINIONS
Certain legal matters in connection with the Reorganization will be passed
upon for Balanced Fund by Shereff, Friedman, Hoffman and Goodman, LLP, 919
Third Avenue, New York, New York ("Shereff, Friedman") and for Global
Allocation by Brown & Wood, One World Trade Center, New York, New York. Each of
Shereff, Friedman and Brown & Wood will rely as to matters of Maryland law on
the opinion of Galland, Kharasch, Morse & Garfinkle, P.C., Washington, D.C.
36
<PAGE>
EXPERTS
The financial highlights of Balanced Fund and Global Allocation included in
this Proxy Statement and Prospectus have been so included in reliance on the
reports of Deloitte & Touche LLP, independent auditors, given on their
authority as experts in auditing and accounting. The principal business address
of Deloitte & Touche LLP is 117 Campus Drive, Princeton, New Jersey 08540.
SHAREHOLDER PROPOSALS
A shareholder proposal intended to be presented at any subsequent meeting of
shareholders of Balanced Fund must be received by Balanced Fund in a reasonable
time before the Board of Directors solicitation relating to such meeting is to
be made in order to be considered in Balanced Fund's proxy statement and form
of proxy relating to the meeting.
By Order of the Board of Directors of
Balanced Fund,
Jerry Weiss
Secretary
37
<PAGE>
EXHIBIT I
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made as of
the day of , 1995, by and between Merrill Lynch Balanced Fund for
Investment and Retirement, Inc., a Maryland corporation ("Balanced Fund"), and
Merrill Lynch Global Allocation Fund, Inc., a Maryland corporation ("Global
Allocation").
PLAN OF REORGANIZATION
The reorganization will comprise the acquisition by Global Allocation of
substantially all of the assets, and the assumption of substantially all of the
liabilities, of Balanced Fund in exchange solely for an equal aggregate value
of newly issued shares of Global Allocation's common stock, with a par value of
$.10 per share, and the subsequent distribution of Corresponding Shares
(defined below) of Global Allocation to Balanced Fund shareholders in exchange
for their shares of common stock of Balanced Fund, with a par value of $.01 per
share, all upon and subject to the terms hereinafter set forth (the
"Reorganization").
In the course of the Reorganization, shares of Global Allocation will be
distributed to Balanced Fund shareholders as follows: each holder of Balanced
Fund shares will be entitled to receive shares of that class of shares of
Global Allocation having the same letter designation (e.g., Class A, Class B,
Class C or Class D), and the same distribution fees, account maintenance fees
and sales charges (including contingent deferred sales charges), if any
("Corresponding Shares"), as the shares of Balanced Fund owned by such
shareholder as of the Valuation Time (as defined in Section 3(c) of this
Agreement). The aggregate net asset value of the Corresponding Shares of Global
Allocation to be received by each shareholder of Balanced Fund will equal the
aggregate net asset value of the Balanced Fund shares owned by such shareholder
as of the Valuation Time. In consideration therefor, on the Exchange Date (as
defined in Section 7 of this Agreement), Global Allocation shall acquire
substantially all of the assets of Balanced Fund and assume substantially all
of Balanced Fund's obligations and liabilities then existing, whether absolute,
accrued, contingent or otherwise. It is intended that the Reorganization
described in this Plan shall be a reorganization within the meaning of Section
368(a)(1)(C) of the Internal Revenue Code of 1986, as amended (the "Code"), and
any successor provision.
As promptly as practicable after the liquidation of Balanced Fund pursuant to
the Reorganization, Balanced Fund shall be dissolved in accordance with the
laws of the State of Maryland and will terminate its registration under the
Investment Company Act of 1940, as amended (the "1940 Act").
AGREEMENT
In order to consummate the Reorganization and in consideration of the
premises and the covenants and agreements hereinafter set forth, and intending
to be legally bound, Balanced Fund and Global Allocation hereby agree as
follows:
1. Representations and Warranties of Balanced Fund.
Balanced Fund represents and warrants to, and agrees with, Global Allocation
that:
(a) Balanced Fund is a corporation duly organized, validly existing and
in good standing in conformity with the laws of the State of Maryland, and
has the power to own all of its assets and to carry out this Agreement.
Balanced Fund has all necessary Federal, state and local authorizations to
carry on its business as it is now being conducted and to carry out this
Agreement.
(b) Balanced Fund is duly registered under the 1940 Act as a diversified,
open-end management investment company (File No. 811-4035), and such
registration has not been revoked or rescinded and
I-1
<PAGE>
is in full force and effect. Balanced Fund has elected and qualified for
the special tax treatment afforded regulated investment companies ("RICs")
under Sections 851-855 of the Code at all times since its inception and
intends to continue to so qualify for its taxable year ending upon the
liquidation of Balanced Fund.
(c) As used in this Agreement, the term "Investments" shall mean (i) the
investments of Balanced Fund shown on the schedule of its investments as of
the Valuation Time furnished to Global Allocation, with such additions
thereto and deletions therefrom as may have arisen in the course of
Balanced Fund's business up to the Valuation Time; and (ii) all other
assets owned by Balanced Fund or liabilities incurred as of the Valuation
Time, except that Balanced Fund shall retain cash, bank deposits or cash
equivalent securities in an estimated amount necessary to (1) discharge its
unpaid liabilities on its books at the Valuation Time (including, but not
limited to, its income dividend and capital gains distributions, if any,
payable for the period prior to the Valuation Time), and (2) pay such
contingent and other liabilities as the Directors of Balanced Fund
reasonably shall deem to exist against the Fund, if any, at Valuation Time,
for which contingent and other appropriate liability reserves shall be
established on Balanced Fund's books. Balanced Fund also shall retain any
and all rights which it may have over and against any other person which
may have accrued up to the Valuation Time. Any unexpended portion of the
foregoing funds retained by Balanced Fund shall be disbursed by Balanced
Fund pro rata to its shareholders upon dissolution of the Fund as a final
liquidating dividend.
(d) Balanced Fund has full power and authority to enter into and perform
its obligations under this Agreement. The execution, delivery and
performance of this Agreement has been duly authorized by all necessary
action of its Board of Directors, and this Agreement constitutes a valid
and binding contract enforceable in accordance with its terms, subject to
the effects of bankruptcy, insolvency, moratorium, fraudulent conveyance
and similar laws relating to or affecting creditors' rights generally and
court decisions with respect thereto.
(e) Global Allocation has been furnished with a statement of assets and
liabilities and a schedule of investments of Balanced Fund, each as of
September 30, 1994, said financial statements having been examined by
Deloitte & Touche LLP, independent public accountants. An unaudited
statement of assets and liabilities of Balanced Fund and an unaudited
schedule of investments of Balanced Fund, each as of the Valuation Time,
will be furnished to Global Allocation at or prior to the Exchange Date for
the purpose of determining the number of shares of Global Allocation to be
issued pursuant to Section 4 of this Agreement; and each will fairly
present the financial position of Balanced Fund as of the Valuation Time in
conformity with generally accepted accounting principles applied on a
consistent basis.
(f) Global Allocation has been furnished with Balanced Fund's Semi-Annual
Report to Shareholders for the six months ended March 31, 1995, and the
unaudited financial statements appearing therein fairly present the
financial position of Balanced Fund as of the respective dates indicated,
in conformity with generally accepted accounting principles applied on a
consistent basis.
(g) Global Allocation has been furnished with the prospectus and
statement of additional information of Balanced Fund, dated January 31,
1995, said prospectus and statement of additional information do not
contain any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(h) There are no material legal, administrative or other proceedings
pending or, to the knowledge of Balanced Fund, threatened against Balanced
Fund which assert liability on the part of Balanced Fund or which
materially affect its financial condition or its ability to consummate the
Reorganization. Balanced Fund is not charged with or, to the best of its
knowledge, threatened with any violation or investigation of any possible
violation of any provisions of any Federal, state or local law or
regulation or administrative ruling relating to any aspect of its business.
I-2
<PAGE>
(i) There are no material contracts outstanding to which Balanced Fund is
a party that have not been disclosed in the N-14 Registration Statement (as
defined in subsection (o) below) or will not otherwise be disclosed to
Global Allocation prior to the Valuation Time.
(j) Balanced Fund is not a party to or obligated under any provision of
its Articles of Incorporation, as amended, or its by-laws, as amended, or
any contract or other commitment or obligation, and is not subject to any
order or decree which would be violated by its execution of or performance
under this Agreement.
(k) Balanced Fund has no known liabilities of a material amount,
contingent or otherwise, other than those shown on its statements of assets
and liabilities referred to above, those incurred in the ordinary course of
its business as an investment company since September 30, 1994, and those
incurred in connection with the Reorganization. As of the Valuation Time,
Balanced Fund will advise Global Allocation in writing of all known
liabilities, contingent or otherwise, whether or not incurred in the
ordinary course of business, existing or accrued as of such time.
(l) Balanced Fund has filed, or has obtained extensions to file, all
Federal, state and local tax returns which are required to be filed by it,
and has paid or has obtained extensions to pay, all Federal, state and
local taxes shown on said returns to be due and owing and all assessments
received by it, up to and including the taxable year in which the Exchange
Date occurs. All tax liabilities of Balanced Fund have been adequately
provided for on its books, and no tax deficiency or liability of Balanced
Fund has been asserted and no question with respect thereto has been raised
by the Internal Revenue Service or by any state or local tax authority for
taxes in excess of those already paid, up to and including the taxable year
in which the Exchange Date occurs.
(m) At both the Valuation Time and the Exchange Date, Balanced Fund will
have full right, power and authority to sell, assign, transfer and deliver
the Investments. At the Exchange Date, subject only to the delivery of the
Investments as contemplated by this Agreement, Balanced Fund will have good
and marketable title to all of the Investments, and Global Allocation will
acquire all of the Investments free and clear of any encumbrances, liens or
security interests and without any restrictions upon the transfer thereof
(except those imposed by the Federal or state securities laws and those
imperfections of title or encumbrances as do not materially detract from
the value or use of the Investments or materially affect title thereto).
(n) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by Balanced Fund of
the Reorganization, except such as may be required under the Securities Act
of 1933, as amended (the "1933 Act"), the Securities Exchange Act of 1934,
as amended (the "1934 Act"), and the 1940 Act or state securities laws
(which term as used herein shall include the laws of the District of
Columbia and Puerto Rico).
(o) The registration statement filed by Global Allocation on Form N-14
relating to the shares of Global Allocation to be issued pursuant to this
Agreement which includes the proxy statement of Balanced Fund and the
prospectus of Global Allocation with respect to the transaction
contemplated herein, and any supplement or amendment thereto or to the
documents therein (as amended, the "N-14 Registration Statement"), on the
effective date of the N-14 Registration Statement, at the time of the
shareholders' meeting referred to in Section 6(a) of this Agreement and on
the Exchange Date, insofar as it relates to Balanced Fund (i) complied or
will comply in all material respects with the provisions of the 1933 Act,
the 1934 Act and the 1940 Act and the rules and regulations thereunder, and
(ii) did not or will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary
to make the statements therein not misleading; and the prospectus included
therein did not or will not contain any untrue statement of a material fact
or omit to state any material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that the representations and warranties in
this subsection shall apply only to statements in or omissions from the N-
14 Registration Statement made in reliance upon and in conformity with
information furnished by Balanced Fund for use in the N-14 Registration
Statement as provided in Section 11 of this Agreement.
I-3
<PAGE>
(p) Balanced Fund is authorized to issue 2,000,000,000 shares of common
stock, par value $.01 per share, divided into four classes, designated
Class A, Class B, Class C and Class D Common Stock, each of which consists
of 500,000,000 shares, each outstanding share of which is fully paid, and
nonassessable and has full voting rights.
(q) The books and records of Balanced Fund made available to Global
Allocation and/or its counsel are substantially true and correct and
contain no material misstatements or omissions with respect to the
operations of Balanced Fund.
(r) Balanced Fund will not sell or otherwise dispose of any of the shares
of Global Allocation to be received in the Reorganization, except in
distribution to the shareholders of Balanced Fund.
2. Representations and Warranties of Global Allocation.
Global Allocation represents and warrants to, and agrees with, Balanced Fund
that:
(a) Global Allocation is a corporation duly organized, validly existing
and in good standing in conformity with the laws of the State of Maryland,
and has the power to own all of its assets and to carry out this Agreement.
Global Allocation has all necessary Federal, state and local authorizations
to carry on its business as it is now being conducted and to carry out this
Agreement.
(b) Global Allocation is duly registered under the 1940 Act as a non-
diversified, open-end management investment company (File No. 811-5576),
and such registration has not been revoked or rescinded and is in full
force and effect. Global Allocation has elected and qualified for the
special tax treatment afforded RICs under Sections 851-855 of the Code at
all times since its inception, and intends to continue to so qualify both
until consummation of the Reorganization and thereafter.
(c) Balanced Fund has been furnished with a statement of assets and
liabilities and a schedule of investments of Global Allocation, each as of
October 31, 1994, said financial statements having been examined by
Deloitte & Touche LLP, independent public accountants. An unaudited
statement of assets and liabilities of Global Allocation and an unaudited
schedule of investments of Global Allocation, each as of the Valuation
Time, will be furnished to Balanced Fund at or prior to the Exchange Date
for the purpose of determining the number of shares of Global Allocation to
be issued pursuant to Section 4 of this Agreement; and each will fairly
present the financial position of Global Allocation as of the Valuation
Time in conformity with generally accepted accounting principles applied on
a consistent basis.
(d) Balanced Fund has been furnished with the prospectus and statement of
additional information of Global Allocation, dated February 27, 1995, and
said prospectus and statement of additional information do not contain any
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
(e) Balanced Fund has been furnished with Global Allocation's Semi-Annual
Report to Shareholders for the six months ended April 30, 1995, and the
unaudited financial statements appearing therein fairly present the
financial position of Global Allocation as of the respective dates
indicated, in conformity with generally accepted accounting principles
applied on a consistent basis.
(f) Global Allocation has full power and authority to enter into and
perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement has been duly authorized by all necessary
action of its Board of Directors and this Agreement constitutes a valid and
binding contract enforceable in accordance with its terms, subject to the
effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and
similar laws relating to or affecting creditors' rights generally and court
decisions with respect thereto.
(g) There are no material legal, administrative or other proceedings
pending or, to the knowledge of Global Allocation, threatened against
Global Allocation which assert liability on the part of Global Allocation
or which materially affect its financial condition or its ability to
consummate the
I-4
<PAGE>
Reorganization. Global Allocation is not charged with or, to the best of
its knowledge, threatened with any violation or investigation of any
possible violation of any provisions of any Federal, state or local law or
regulation or administrative ruling relating to any aspect of its business.
(h) Global Allocation is not a party to or obligated under any provision
of its Articles of Incorporation, as amended, or its by-laws, as amended,
or any contract or other commitment or obligation, and is not subject to
any order or decree which would be violated by its execution of or
performance under this Agreement.
(i) There are no material contracts outstanding to which Global
Allocation is a party that have not been disclosed in the N-14 Registration
Statement or will not otherwise be disclosed to Balanced Fund prior to the
Valuation Time.
(j) Global Allocation has no known liabilities of a material amount,
contingent or otherwise, other than those shown on Global Allocation's
statements of assets and liabilities referred to above, those incurred in
the ordinary course of its business as an investment company since October
31, 1994 and those incurred in connection with the Reorganization. As of
the Valuation Time, Global Allocation will advise Balanced Fund in writing
of all known liabilities, contingent or otherwise, whether or not incurred
in the ordinary course of business, existing or accrued as of such time.
(k) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by Global
Allocation of the Reorganization, except such as may be required under the
1933 Act, the 1934 Act, the 1940 Act or state securities laws.
(l) The N-14 Registration Statement, on its effective date, at the time
of the shareholders' meeting referred to in Section 6(a) of this Agreement
and at the Exchange Date, insofar as it relates to Global Allocation (i)
complied or will comply in all material respects with the provisions of the
1933 Act, the 1934 Act and the 1940 Act and the rules and regulations
thereunder and (ii) did not or will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading; and the
prospectus included therein did not or will not contain any untrue
statement of a material fact or omit to state any material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading; provided, however, that the
representations and warranties in this subsection only shall apply to
statements in or omissions from the N-14 Registration Statement made in
reliance upon and in conformity with information furnished by Global
Allocation for use in the N-14 Registration Statement as provided in
Section 11 of this Agreement.
(m) Global Allocation is authorized to issue 2,200,000,000 shares of
common stock, par value $.10 per share, divided into four classes,
designated Class A, Class B, Class C and Class D Common Stock, of which
Class A and Class C each consist of 200,000,000 shares and Class B and
Class D each consist of 900,000,000 shares, each outstanding share of which
is fully paid and nonassessable and has full voting rights.
(n) The Global Allocation shares to be issued to Balanced Fund pursuant
to this Agreement will have been duly authorized and, when issued and
delivered pursuant to this Agreement, will be legally and validly issued
and will be fully paid and nonassessable and will have full voting rights,
and no shareholder of Global Allocation will have any preemptive right of
subscription or purchase in respect thereof.
(o) At or prior to the Exchange Date, the Global Allocation shares to be
transferred to Balanced Fund on the Exchange Date will be duly qualified
for offering to the public in all states of the United States in which the
sale of shares of Global Allocation presently are qualified, and there are
a sufficient number of such shares registered under the 1933 Act and with
each pertinent state securities commission to permit the transfers
contemplated by this Agreement to be consummated.
(p) At or prior to the Exchange Date, Global Allocation will have
obtained any and all regulatory, Director and shareholder approvals,
necessary to issue the shares of Global Allocation to Balanced Fund.
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<PAGE>
3. The Reorganization.
(a) Subject to receiving the requisite approval of the shareholders of
Balanced Fund, and to the other terms and conditions contained herein,
Balanced Fund agrees to convey, transfer and deliver to Global Allocation
for the benefit of Global Allocation, and Global Allocation agrees to
acquire from Balanced Fund for the benefit of Global Allocation, on the
Exchange Date all of the Investments (including interest accrued as of the
Valuation Time on debt instruments) of Balanced Fund, and assume
substantially all of the liabilities of Balanced Fund, in exchange solely
for that number of shares of Global Allocation provided in Section 4 of
this Agreement. Pursuant to this Agreement, as soon as practicable Balanced
Fund will distribute all Global Allocation shares received by it to its
shareholders in exchange for their corresponding Balanced Fund shares. Such
distribution shall be accomplished by the opening of shareholder accounts
on the stock ledger records of Global Allocation in the amounts due the
shareholders of Balanced Fund based on their respective holdings in
Balanced Fund as of the Valuation Time.
(b) Balanced Fund will pay or cause to be paid to Global Allocation any
interest it receives on or after the Exchange Date with respect to the
Investments transferred to Global Allocation hereunder.
(c) The Valuation Time shall be 15 minutes after the close of business on
the New York Stock Exchange (generally 4:00 p.m. New York time), on ,
1996, or such earlier or later day and time as may be mutually agreed upon
in writing (the "Valuation Time").
(d) Global Allocation will acquire substantially all of the assets of,
and assume all of the known liabilities of, Balanced Fund, except that
recourse for such liabilities will be limited to the net assets of Balanced
Fund acquired by Global Allocation. The known liabilities of Balanced Fund
as of the Valuation Time shall be confirmed in writing to Global Allocation
by Balanced Fund pursuant to Section 1(k) of this Agreement.
(e) Global Allocation and Balanced Fund will jointly file Articles of
Transfer with the State Department of Assessments and Taxation of Maryland
and any such other instrument as may be required by the State of Maryland
to effect the transfer of Investments of Balanced Fund to Global
Allocation.
(f) Balanced Fund will be dissolved following the Exchange Date by filing
Articles of Dissolution with the State Department of Assessments and
Taxation of Maryland.
4. Issuance and Valuation of Global Allocation Shares in the Reorganization.
Full Global Allocation shares, and to the extent necessary, a fractional
Global Allocation share, of an aggregate net asset value equal to the net asset
value of the assets of Balanced Fund acquired, determined as hereinafter
provided, reduced by the amount of liabilities of Balanced Fund assumed by
Global Allocation, shall be issued by Global Allocation in exchange for such
assets of Balanced Fund. The net asset value of each of Balanced Fund and
Global Allocation shall be determined in accordance with the procedures
described in the prospectus of Global Allocation dated February 27, 1995 as of
the Valuation Time. Such valuation and determination shall be made by Global
Allocation in cooperation with Balanced Fund. Global Allocation shall issue its
Class A, Class B, Class C and Class D shares to Balanced Fund in four
certificates or share deposit receipts (one in respect of each Class)
registered in the name of Balanced Fund. Balanced Fund shall distribute
Corresponding Shares of Global Allocation to its shareholders by redelivering
such certificates to Merrill Lynch Financial Data Services, Inc.
5. Payment of Expenses.
(a) With respect to expenses incurred in connection with the
Reorganization, (i) Global Allocation shall pay all expenses incurred which
are attributable solely to Global Allocation and the conduct of its
business, (ii) Balanced Fund shall pay all expenses incurred which are
attributable solely to Balanced Fund and the conduct of its business, and
(iii) Balanced Fund and Global Allocation shall pay, subsequent to the
Exchange Date and pro rata according to each Fund's net assets as of the
Valuation Time, all expenses incurred in connection with the
Reorganization, including, but not limited to, all costs
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<PAGE>
related to the preparation and distribution of the N-14 Registration
Statement and obtaining the private letter ruling from the Internal Revenue
Service. Such fees and expenses shall include legal, accounting and state
securities or blue sky fees, printing costs, filing fees, portfolio
transfer taxes (if any), and any similar expenses incurred in connection
with the Reorganization. Balanced Fund shall pay all expenses associated
with its dissolution under Maryland law and the termination of its
registration as an investment company under the 1940 Act.
(b) If for any reason the Reorganization is not consummated, no party
shall be liable to any other party for any damages resulting therefrom,
including, without limitation, consequential damages.
6. Covenants of Balanced Fund and Global Allocation.
(a) Balanced Fund agrees to call a special meeting of its shareholders as
soon as is practicable after the effective date of the N-14 Registration
Statement for the purpose of considering the Reorganization as described in
this Agreement, and it shall be a condition to the obligations of each of
the parties hereto that the holders of a majority of the shares of Balanced
Fund issued and outstanding and entitled to vote thereon, shall have
approved this Agreement at such a meeting at or prior to the Valuation
Time.
(b) Balanced Fund and Global Allocation each covenants to operate its
respective business as presently conducted between the date hereof and the
Exchange Date.
(c) Balanced Fund agrees that following the consummation of the
Reorganization, it will dissolve in accordance with the laws of the State
of Maryland and any other applicable law, it will not make any
distributions of any Global Allocation shares other than to the
shareholders of Balanced Fund and without first paying or adequately
providing for the payment of all of Balanced Fund's liabilities not assumed
by Global Allocation, if any, and on and after the Exchange Date it shall
not conduct any business except in connection with its dissolution.
(d) Balanced Fund undertakes that if the Reorganization is consummated,
it will file an application pursuant to Section 8(f) of the 1940 Act for an
order declaring that Balanced Fund has ceased to be a registered investment
company.
(e) Global Allocation will file the N-14 Registration Statement with the
Securities and Exchange Commission (the "Commission") and will use its best
efforts to provide that the N-14 Registration Statement becomes effective
as promptly as practicable. Balanced Fund and Global Allocation agree to
cooperate fully with each other, and each will furnish to the other the
information relating to itself to be set forth in the N-14 Registration
Statement as required by the 1933 Act, the 1934 Act, the 1940 Act, and the
rules and regulations thereunder and the state securities or blue sky laws.
(f) Global Allocation agrees to advise Balanced Fund promptly in writing
if at any time prior to the Valuation Time the assets of Balanced Fund
include any assets which Global Allocation is not permitted, or reasonably
believes to be unsuitable for it, to acquire, including without limitation
any security which, prior to its acquisition by Balanced Fund, Global
Allocation has informed Balanced Fund is unsuitable for Global Allocation
to acquire. Moreover, Global Allocation has no plan or intention to sell or
otherwise dispose of the assets of Balanced Fund to be acquired in the
Reorganization, except for dispositions made in the ordinary course of
business.
(g) Balanced Fund and Global Allocation each agrees that by the Exchange
Date all of its Federal and other tax returns and reports required to be
filed on or before such date shall have been filed and all taxes shown as
due on said returns either have been paid or adequate liability reserves
have been provided for the payment of such taxes. In connection with this
covenant, the funds agree to cooperate with each other in filing any tax
return, amended return or claim for refund, determining a liability for
taxes or a right to a refund of taxes or participating in or conducting any
audit or other proceeding in respect of taxes. Global Allocation agrees to
retain for a period of ten (10) years following the Exchange Date all
returns, schedules and work papers and all material records or other
documents relating to tax matters of Balanced Fund for its taxable period
first ending after the Exchange Date and for all prior taxable periods. Any
information obtained under this subsection shall be kept confidential
except as otherwise
I-7
<PAGE>
may be necessary in connection with the filing of returns or claims for
refund or in conducting an audit or other proceeding. After the Exchange
Date, Balanced Fund shall prepare, or cause its agents to prepare, any
Federal, state or local tax returns, including any Forms 1099, required to
be filed by Balanced Fund with respect to Balanced Fund's final taxable
year ending with its complete liquidation and for any prior periods or
taxable years and further shall cause such tax returns and Forms 1099 to be
duly filed with the appropriate taxing authorities. Notwithstanding the
aforementioned provisions of this subsection, any expenses incurred by
Balanced Fund (other than for payment of taxes) in connection with the
preparation and filing of said tax returns and Forms 1099 after the
Exchange Date shall be borne by Balanced Fund to the extent such expenses
have been accrued by Balanced Fund in the ordinary course without regard to
the Reorganization; any excess expenses shall be borne by Merrill Lynch
Asset Management, L.P. ("MLAM") at the time such tax returns and Forms 1099
are prepared.
(h) Balanced Fund agrees to mail to its shareholders of record entitled
to vote at the special meeting of shareholders at which action is to be
considered regarding this Agreement, in sufficient time to comply with
requirements as to notice thereof, a combined Proxy Statement and
Prospectus which complies in all material respects with the applicable
provisions of Section 14(a) of the 1934 Act and Section 20(a) of the 1940
Act, and the rules and regulations, respectively, thereunder.
(i) Following the consummation of the Reorganization, Global Allocation
expects to stay in existence and continue its business as an open-end
management investment company registered under the 1940 Act.
7. Exchange Date.
(a) Delivery of the assets of Balanced Fund to be transferred, together
with any other Investments, and the Global Allocation shares to be issued,
shall be made at the offices of Shereff, Friedman, Hoffman & Goodman, LLP,
919 Third Avenue, New York, New York 10048, at 10:00 A.M. on the next full
business day following the Valuation Time, or at such other place, time and
date agreed to by Balanced Fund and Global Allocation, the date and time
upon which such delivery is to take place being referred to herein as the
"Exchange Date." To the extent that any Investments, for any reason, are
not transferable on the Exchange Date, Balanced Fund shall cause such
Investments to be transferred to Global Allocation's account with Brown
Brothers Harriman & Co. at the earliest practicable date thereafter.
(b) Balanced Fund will deliver to Global Allocation on the Exchange Date
confirmations or other adequate evidence as to the tax basis of each of the
Investments delivered to Global Allocation hereunder, certified by Deloitte
& Touche LLP.
(c) As soon as practicable after the close of business on the Exchange
Date, Balanced Fund shall deliver to Global Allocation a list of the names
and addresses of all of the shareholders of record of Balanced Fund on the
Exchange Date and the number of shares of Balanced Fund owned by each such
shareholder, certified to the best of their knowledge and belief by the
transfer agent for Balanced Fund or by its President.
8. Balanced Fund Conditions.
The obligations of Balanced Fund hereunder shall be subject to the following
conditions:
(a) That this Agreement shall have been adopted, and the Reorganization
shall have been approved, by the affirmative vote of the holders of a
majority of the shares of Balanced Fund, issued and outstanding and
entitled to vote thereon, voting together as a single class, and by the
Board of Directors of Global Allocation; and that Global Allocation shall
have delivered to Balanced Fund a copy of the resolution approving this
Agreement adopted by Global Allocation's Board of Directors, certified by
the Secretary of Global Allocation.
(b) That Global Allocation shall have furnished to Balanced Fund a
statement of Global Allocation's assets and liabilities, with values
determined as provided in Section 4 of this Agreement,
I-8
<PAGE>
together with a schedule of its investments, all as of the Valuation Time,
certified on Global Allocation's behalf by its President (or any Vice
President) and its Treasurer, and a certificate signed by Global
Allocation's President (or any Vice President) and its Treasurer, dated as
of the Exchange Date, certifying that as of the Valuation Time and as of
the Exchange Date there has been no material adverse change in the
financial position of Global Allocation since October 31, 1994, other than
changes in its portfolio securities since that date or changes in the
market value of its portfolio securities.
(c) That Global Allocation shall have furnished to Balanced Fund a
certificate signed by Global Allocation's President (or any Vice President)
and its Treasurer, dated as of the Exchange Date, certifying that, as of
the Valuation Time and as of the Exchange Date all representations and
warranties of Global Allocation made in this Agreement are true and correct
in all material respects with the same effect as if made at and as of such
dates, and that Global Allocation has complied with all of the agreements
and satisfied all of the conditions on its part to be performed or
satisfied at or prior to each of such dates.
(d) That there shall not be any material litigation pending with respect
to the matters contemplated by this Agreement.
(e) That Balanced Fund shall have received an opinion of Galland,
Kharasch, Morse & Garfinkle, P.C., Maryland counsel to Global Allocation,
in form satisfactory to Balanced Fund and dated the Exchange Date, to the
effect that (i) Global Allocation is a corporation duly organized, validly
existing and in good standing in conformity with the laws of the State of
Maryland; (ii) the Corresponding Shares of Global Allocation to be
delivered to Balanced Fund shareholders as provided for by this Agreement
are duly authorized and, upon delivery, will be validly issued and
outstanding and fully paid and nonassessable by Global Allocation, and no
shareholder of Global Allocation has any preemptive right to subscription
or purchase in respect thereof (pursuant to the Articles of Incorporation,
as amended, or the by-laws of Global Allocation or, to the best of such
counsel's knowledge, otherwise); (iii) this Agreement has been duly
authorized, executed and delivered by Global Allocation, and represents a
valid and binding contract, enforceable in accordance with its terms,
subject to the effects of bankruptcy, insolvency, moratorium, fraudulent
conveyance and similar laws relating to or affecting creditors' rights
generally and court decisions with respect thereto; provided, that such
counsel shall express no opinion with respect to the application of
equitable principles in any proceeding, whether at law or in equity; (iv)
the execution and delivery of this Agreement does not, and the consummation
of the Reorganization will not, violate the Articles of Incorporation, as
amended, the by-laws of Global Allocation or Maryland law; (v) no consent,
approval, authorization or order of any Maryland court or governmental
authority is required for the consummation by Global Allocation of the
Reorganization, except such as have been obtained under Maryland law; and
(vi) such opinion is solely for the benefit of Balanced Fund and its
Directors and officers. In giving the opinion set forth above, Galland,
Kharasch, Morse & Garfinkle, P.C. may state that it is relying on
certificates of officers of Balanced Fund and Global Allocation with regard
to matters of fact and certain certificates and written statements of
government officials with respect to the good standing of Balanced Fund and
Global Allocation.
(f) That Balanced Fund shall have received an opinion of Brown & Wood, as
counsel to Global Allocation, in form satisfactory to Balanced Fund and
dated the Exchange Date, to the effect that (i) no consent, approval,
authorization or order of any United States Federal court or governmental
authority is required for the consummation by Global Allocation of the
Reorganization, except such as have been obtained under the 1933 Act, the
1934 Act and the 1940 Act and the published rules and regulations of the
Commission thereunder and under state securities or blue sky laws; (ii) the
N-14 Registration Statement has become effective under the 1933 Act, no
stop order suspending the effectiveness of the N-14 Registration Statement
has been issued and no proceedings for that purpose have been instituted or
are pending or contemplated under the 1933 Act, and the N-14 Registration
Statement, and each amendment or supplement thereto, as of their respective
effective dates, appear on their face to be appropriately responsive in all
material respects to the requirements of the 1933 Act, the 1934 Act and the
1940 Act and the published rules and regulations of the Commission
thereunder; (iii) the descriptions
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<PAGE>
in the N-14 Registration Statement of statutes, legal and governmental
proceedings and contracts and other documents are accurate and fairly
present the information required to be shown; and (iv) such counsel do not
know of any statutes, legal or governmental proceedings or contracts or
other documents related to the Reorganization of a character required to be
described in the N-14 Registration Statement which are not described
therein or, if required to be filed, filed as required; (v) the execution
and delivery of this Agreement does not, and the consummation of the
Reorganization will not, violate any material provision of any agreement
(known to such counsel) to which Global Allocation is a party or by which
Global Allocation is bound; (vi) Global Allocation, to the knowledge of
such counsel, is not required to qualify to do business as a foreign
corporation in any jurisdiction except as may be required by state
securities or blue sky laws, and except where each has so qualified or the
failure so to qualify would not have a material adverse effect on Global
Allocation, or its shareholders; (vii) such counsel does not have actual
knowledge of any material suit, action or legal or administrative
proceeding pending or threatened against Global Allocation, the unfavorable
outcome of which would materially and adversely affect Global Allocation;
and (viii) all corporate actions required to be taken by Global Allocation
to authorize this Agreement and to effect the Reorganization have been duly
authorized by all necessary corporate actions on the part of Global
Allocation. Such opinion also shall state that (x) while such counsel
cannot make any representation as to the accuracy or completeness of
statements of fact in the N-14 Registration Statement or any amendment or
supplement thereto, nothing has come to their attention that would lead
them to believe that, on the respective effective dates of the N-14
Registration Statement and any amendment or supplement thereto, (1) the N-
14 Registration Statement or any amendment or supplement thereto contained
any untrue statement of a material fact or omitted to state any material
fact required to be stated therein or necessary to make the statements
therein not misleading; and (2) the prospectus included in the N-14
Registration Statement contained any untrue statement of a material fact or
omitted to state any material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; and (y) such counsel do not express any opinion or belief as to
the financial statements or other financial or statistical data relating to
Global Allocation contained or incorporated by reference in the N-14
Registration Statement. In giving the opinion set forth above, Brown & Wood
may state that it is relying on certificates of officers of Global
Allocation with regard to matters of fact and certain certificates and
written statements of governmental officials with respect to the good
standing of Global Allocation and on the opinion of Galland, Kharasch,
Morse & Garfinkle, P.C. as to matters of Maryland law.
(g) That Balanced Fund shall have received a private letter ruling from
the Internal Revenue Service to the effect that for Federal income tax
purposes (i) the transfer of substantially all of the Investments of
Balanced Fund to Global Allocation in exchange solely for shares of Global
Allocation as provided in this Agreement will constitute a reorganization
within the meaning of Section 368(a)(1)(C) of the Code, and Balanced Fund
and Global Allocation will each be deemed to be a "party" to the
Reorganization within the meaning of Section 368(b); (ii) in accordance
with Section 361(a) of the Code, no gain or loss will be recognized to
Balanced Fund as a result of the asset transfer solely in exchange for
Global Allocation shares or on the distribution of the Global Allocation
stock to Balanced Fund shareholders under Section 361(c)(1); (iii) under
Section 1032 of the Code, no gain or loss will be recognized to Global
Allocation on the receipt of assets of Balanced Fund in exchange for Global
Allocation shares; (iv) in accordance with Section 354(a)(1) of the Code,
no gain or loss will be recognized to the shareholders of Balanced Fund on
the receipt of Corresponding Shares of Global Allocation in exchange for
their shares of Balanced Fund; (v) in accordance with Section 362(b) of the
Code, the tax basis of the Balanced Fund assets in the hands of Global
Allocation will be the same as the tax basis of such assets in the hands of
Balanced Fund immediately prior to the consummation of the Reorganization;
(vi) in accordance with Section 358 of the Code, immediately after the
Reorganization, the tax basis of the Corresponding Shares of Global
Allocation received by the shareholders of Balanced Fund in the
Reorganization will be equal, in the aggregate, to the tax basis of the
shares of Balanced Fund surrendered in exchange; (vii) in accordance with
Section 1223 of the Code, a shareholder's holding period for the
Corresponding Shares of Global Allocation will be determined by including
the period for which such shareholder held the shares of Balanced Fund
exchanged therefor,
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<PAGE>
provided, that such Balanced Fund shares were held as a capital asset;
(viii) in accordance with Section 1223 of the Code, Global Allocation's
holding period with respect to the Balanced Fund assets transferred will
include the period for which such assets were held by Balanced Fund; and
(ix) the taxable year of Balanced Fund will end on the effective date of
the Reorganization and pursuant to Section 381(a) of the Code and
regulations thereunder, Global Allocation will succeed to and take into
account certain tax attributes of Balanced Fund, such as earnings and
profits, capital loss carryovers and method of accounting.
(h) That all proceedings taken by Global Allocation and its counsel in
connection with the Reorganization and all documents incidental thereto
shall be satisfactory in form and substance to Balanced Fund.
(i) That the N-14 Registration Statement shall have become effective
under the 1933 Act, and no stop order suspending such effectiveness shall
have been instituted or, to the knowledge of Global Allocation,
contemplated by the Commission.
(j) That Balanced Fund shall have received from Deloitte & Touche LLP a
letter dated as of the effective date of the N-14 Registration Statement
and a similar letter dated within five days prior to the Exchange Date, in
form and substance satisfactory to Balanced Fund, to the effect that (i)
they are independent public accountants with respect to Global Allocation
within the meaning of the 1933 Act and the applicable published rules and
regulations thereunder; (ii) in their opinion, the financial statements and
supplementary information of Global Allocation included or incorporated by
reference in the N-14 Registration Statement and reported on by them comply
as to form in all material respects with the applicable accounting
requirements of the 1933 Act and the published rules and regulations
thereunder; and (iii) on the basis of limited procedures agreed upon by
Balanced Fund and Global Allocation and described in such letter (but not
an examination in accordance with generally accepted auditing standards)
consisting of a reading of any unaudited interim financial statements and
unaudited supplementary information of Global Allocation included in the N-
14 Registration Statement, and inquiries of certain officials of Global
Allocation responsible for financial and accounting matters, nothing came
to their attention that caused them to believe that (a) such unaudited
financial statements and related unaudited supplementary information do not
comply as to form in all material respects with the applicable accounting
requirements of the 1933 Act and the published rules and regulations
thereunder, (b) such unaudited financial statements are not fairly
presented in conformity with generally accepted accounting principles,
applied on a basis substantially consistent with that of the audited
financial statements, or (c) such unaudited supplementary information is
not fairly stated in all material respects in relation to the unaudited
financial statements taken as a whole; and (iv) on the basis of limited
procedures agreed upon by Balanced Fund and Global Allocation and described
in such letter (but not an examination in accordance with generally
accepted auditing standards), the information relating to Global Allocation
appearing in the N-14 Registration Statement, which information is
expressed in dollars (or percentages derived from such dollars) (with the
exception of performance comparisons, if any), if any, has been obtained
from the accounting records of Global Allocation or from schedules prepared
by officials of Global Allocation having responsibility for financial and
reporting matters and such information is in agreement with such records,
schedules or computations made therefrom.
(k) That the Commission shall not have issued an unfavorable advisory
report under Section 25(b) of the 1940 Act, nor instituted or threatened to
institute any proceeding seeking to enjoin consummation of the
Reorganization under Section 25(c) of the 1940 Act, and no other legal,
administrative or other proceeding shall be instituted or threatened which
would materially affect the financial condition of Global Allocation or
would prohibit the Reorganization.
(l) That Balanced Fund shall have received from the Commission such
orders or interpretations as Shereff, Friedman, Hoffman & Goodman, llp, as
counsel to Balanced Fund, deems reasonably necessary or desirable under the
1933 Act and the 1940 Act in connection with the Reorganization, provided,
that such counsel shall have requested such orders as promptly as
practicable, and all such orders shall be in full force and effect.
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<PAGE>
9. Global Allocation Conditions.
The obligations of Global Allocation hereunder shall be subject to the
following conditions:
(a) That this Agreement shall have been adopted, and the Reorganization
shall have been approved, by the Board of Directors of Balanced Fund and by
the affirmative vote of the holders of a majority of the shares of common
stock of Balanced Fund issued and outstanding and entitled to vote thereon,
voting together as a single class; and that Balanced Fund shall have
delivered to Global Allocation a copy of the resolution approving this
Agreement adopted by Balanced Fund's Board of Directors, and a certificate
setting forth the vote Balanced Fund shareholders obtained, each certified
by the Secretary of Balanced Fund.
(b) That Balanced Fund shall have furnished to Global Allocation a
statement of Balanced Fund's assets and liabilities, with values determined
as provided in Section 4 of this Agreement, together with a schedule of
investments with their respective dates of acquisition and tax costs, all
as of the Valuation Time, certified on Balanced Fund's behalf by its
President (or any Vice President) and its Treasurer, and a certificate of
both such officers, dated the Exchange Date, certifying that as of the
Valuation Time and as of the Exchange Date there has been no material
adverse change in the financial position of Balanced Fund since September
30, 1994, other than changes in the Investments since that date or changes
in the market value of the Investments.
(c) That Balanced Fund shall have furnished to Global Allocation a
certificate signed by Balanced Fund's President (or any Vice President) and
its Treasurer, dated the Exchange Date, certifying that as of the Valuation
Time and as of the Exchange Date all representations and warranties of
Balanced Fund made in this Agreement are true and correct in all material
respects with the same effect as if made at and as of such dates and
Balanced Fund has complied with all of the agreements and satisfied all of
the conditions on its part to be performed or satisfied at or prior to such
dates.
(d) That Balanced Fund shall have delivered to Global Allocation a letter
from Deloitte & Touche LLP, dated the Exchange Date, stating that such firm
has performed a limited review of the Federal, state and local income tax
returns of Balanced Fund for the period ended September 30, 1994 (which
returns originally were prepared and filed by Balanced Fund), and that
based on such limited review, nothing came to their attention which caused
them to believe that such returns did not properly reflect, in all material
respects, the Federal, state and local income taxes of Balanced Fund for
the period covered thereby; and that for the period from October 1, 1994,
to and including the Exchange Date and for any taxable year of Balanced
Fund ending upon the liquidation of Balanced Fund, such firm has performed
a limited review to ascertain the amount of applicable Federal, state and
local taxes, and has determined that either such amount has been paid or
reserves established for payment of such taxes, this review to be based on
unaudited financial data; and that based on such limited review, nothing
has come to their attention which caused them to believe that the taxes
paid or reserves set aside for payment of such taxes were not adequate in
all material respects for the satisfaction of Federal, state and local
taxes for the period from October 1, 1994, to and including the Exchange
Date and for any taxable year of Balanced Fund ending upon the liquidation
of Balanced Fund or that Balanced Fund would not continue to qualify as a
regulated investment company for Federal income tax purposes.
(e) That there shall not be any material litigation pending with respect
to the matters contemplated by this Agreement.
(f) That Global Allocation shall have received an opinion of Galland,
Kharasch, Morse & Garfinkle, P.C., Maryland counsel to Balanced Fund, in
form satisfactory to Global Allocation and dated the Exchange Date, to the
effect that (i) Balanced Fund is a corporation duly organized, validly
existing and in good standing in conformity with the laws of the State of
Maryland; (ii) this Agreement has been duly authorized, executed and
delivered by Balanced Fund, and represents a valid and binding contract,
enforceable in accordance with its terms, subject to the effects of
bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws
relating to or affecting creditors' rights generally
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and court decisions with respect thereto, provided, that such counsel shall
express no opinion with respect to the application of equitable principles
in any proceeding, whether at law or in equity; (iii) Balanced Fund has the
power to sell, assign, transfer and deliver the assets transferred by it
hereunder and, upon consummation of the Reorganization in accordance with
the terms of this Agreement, Balanced Fund will have duly transferred such
assets and liabilities in accordance with this Agreement; (iv) the
execution and delivery of this Agreement does not, and the consummation of
the Reorganization will not, violate the Articles of Incorporation, as
amended, the by-laws of Balanced Fund or Maryland law; (v) no consent,
approval, authorization or order of any Maryland court or governmental
authority is required for the consummation by Balanced Fund of the
Reorganization, except such as have been obtained under Maryland law; and
(vi) such opinion is solely for the benefit of Global Allocation and its
Directors and officers. In giving the opinion set forth above, Galland,
Kharasch, Morse & Garfinkle, P.C. may state that it is relying on
certificates of officers of Balanced Fund and Global Allocation with regard
to matters of fact and certain certificates and written statements of
government officials with respect to the good standing of Balanced Fund and
Global Allocation.
(g) That Global Allocation shall have received an opinion of Shereff,
Friedman, Hoffman & Goodman, LLP, as counsel to Balanced Fund, in form
satisfactory to Global Allocation and dated the Exchange Date, with respect
to the matters specified in Section 8(f) of this Agreement and such other
matters as Global Allocation reasonably may deem necessary or desirable.
(h) That Global Allocation shall have received a private letter ruling
from the Internal Revenue Service with respect to the matters specified in
Section 8(g) of this Agreement.
(i) That Global Allocation shall have received from Deloitte & Touche LLP
a letter dated as of the effective date of the N-14 Registration Statement
and a similar letter dated within five days prior to the Exchange Date, in
form and substance satisfactory to Global Allocation, to the effect that
(i) they are independent public accountants with respect to Balanced Fund
within the meaning of the 1933 Act and the applicable published rules and
regulations thereunder; (ii) in their opinion, the financial statements and
supplementary information of Balanced Fund included or incorporated by
reference in the N-14 Registration Statement and reported on by them comply
as to form in all material respects with the applicable accounting
requirements of the 1933 Act and the published rules and regulations
thereunder; (iii) on the basis of limited procedures agreed upon by
Balanced Fund and Global Allocation and described in such letter (but not
an examination in accordance with generally accepted auditing standards)
consisting of a reading of any unaudited interim financial statements and
unaudited supplementary information of Balanced Fund included in the N-14
Registration Statement, and inquiries of certain officials of Balanced Fund
responsible for financial and accounting matters, nothing came to their
attention that caused them to believe that (a) such unaudited financial
statements and related unaudited supplementary information do not comply as
to form in all material respects with the applicable accounting
requirements of the 1933 Act and the published rules and regulations
thereunder, (b) such unaudited financial statements are not fairly
presented in conformity with generally accepted accounting principles,
applied on a basis substantially consistent with that of the audited
financial statements, or (c) such unaudited supplementary information is
not fairly stated in all material respects in relation to the unaudited
financial statements taken as a whole; and (iv) on the basis of limited
procedures agreed upon by Global Allocation and Balanced Fund and described
in such letter (but not an examination in accordance with generally
accepted auditing standards), the information relating to Balanced Fund
appearing in the N-14 Registration Statement, which information is
expressed in dollars (or percentages derived from such dollars) (with the
exception of performance comparisons, if any), if any, has been obtained
from the accounting records of Balanced Fund or from schedules prepared by
officials of Balanced Fund having responsibility for financial and
reporting matters and such information is in agreement with such records,
schedules or computations made therefrom.
(j) That the Investments to be transferred to Global Allocation shall not
include any assets or liabilities which Global Allocation, by reason of
charter limitations or otherwise, may not properly acquire or assume.
I-13
<PAGE>
(k) That the N-14 Registration Statement shall have become effective
under the 1933 Act and no stop order suspending such effectiveness shall
have been instituted or, to the knowledge of Balanced Fund, contemplated by
the Commission.
(l) That the Commission shall not have issued an unfavorable advisory
report under Section 25(b) of the 1940 Act, nor instituted or threatened to
institute any proceeding seeking to enjoin consummation of the
Reorganization under Section 25(c) of the 1940 Act, and no other legal,
administrative or other proceeding shall be instituted or threatened which
would materially affect the financial condition of Balanced Fund or would
prohibit the Reorganization.
(m) That Global Allocation shall have received from the Commission such
orders or interpretations as Brown & Wood, as counsel to Global Allocation,
deems reasonably necessary or desirable under the 1933 Act and the 1940 Act
in connection with the Reorganization, provided, that such counsel shall
have requested such orders as promptly as practicable, and all such orders
shall be in full force and effect.
(n) That all proceedings taken by Balanced Fund and its counsel in
connection with the Reorganization and all documents incidental thereto
shall be satisfactory in form and substance to Global Allocation.
(o) That prior to the Exchange Date, Balanced Fund shall have declared a
dividend or dividends which, together with all such previous dividends,
shall have the effect of distributing to its shareholders all of its
investment company taxable income for the period from , 199 to and
including the Exchange Date, if any (computed without regard to any
deduction for dividends paid), and all of its net capital gain, if any,
realized for the period from , 199 to and including the Exchange Date.
10. Termination, Postponement and Waivers.
(a) Notwithstanding anything contained in this Agreement to the contrary,
this Agreement may be terminated and the Reorganization abandoned at any
time (whether before or after adoption thereof by the shareholders of
Balanced Fund) prior to the Exchange Date, or the Exchange Date may be
postponed, (i) by mutual consent of the Boards of Directors of Balanced
Fund and Global Allocation; (ii) by the Board of Directors of Balanced Fund
if any condition of Balanced Fund's obligations set forth in Section 8 of
this Agreement has not been fulfilled or waived by such Board; or (iii) by
the Board of Directors of Global Allocation if any condition of Global
Allocation's obligations set forth in Section 9 of this Agreement has not
been fulfilled or waived by such Board.
(b) If the transactions contemplated by this Agreement have not been
consummated by , 1996, this Agreement automatically shall terminate on
that date, unless a later date is mutually agreed to by the Boards of
Directors of Balanced Fund and Global Allocation.
(c) In the event of termination of this Agreement pursuant to the
provisions hereof, the same shall become void and have no further effect,
and there shall not be any liability on the part of either Balanced Fund or
Global Allocation or persons who are their directors, trustees, officers,
agents or shareholders in respect of this Agreement.
(d) At any time prior to the Exchange Date, any of the terms or
conditions of this Agreement may be waived by the Board of Directors of
either Balanced Fund or Global Allocation, respectively (whichever is
entitled to the benefit thereof), if, in the judgment of such Board after
consultation with its counsel, such action or waiver will not have a
material adverse effect on the benefits intended under this Agreement to
the shareholders of their respective fund, on behalf of which such action
is taken. In addition, the Boards of Directors of Balanced Fund and Global
Allocation have delegated to MLAM the ability to make non-material changes
to the transaction if it deems it to be in the best interests of Balanced
Fund and Global Allocation to do so.
I-14
<PAGE>
(e) The respective representations and warranties contained in Sections 1
and 2 of this Agreement shall expire with, and be terminated by, the
consummation of the Reorganization, and neither Balanced Fund nor Global
Allocation nor any of their officers, directors or trustees, agents or
shareholders shall have any liability with respect to such representations
or warranties after the Exchange Date. This provision shall not protect any
officer, director or trustee, agent or shareholder of Balanced Fund or
Global Allocation against any liability to the entity for which that
officer, director or trustee, agent or shareholder so acts or to its
shareholders, to which that officer, director or trustee, agent or
shareholder otherwise would be subject by reason of willful misfeasance,
bad faith, gross negligence, or reckless disregard of the duties in the
conduct of such office.
(f) If any order or orders of the Commission with respect to this
Agreement shall be issued prior to the Exchange Date and shall impose any
terms or conditions which are determined by action of the Boards of
Directors of Balanced Fund and Global Allocation to be acceptable, such
terms and conditions shall be binding as if a part of this Agreement
without further vote or approval of the shareholders of Balanced Fund
unless such terms and conditions shall result in a change in the method of
computing the number of shares of Global Allocation to be issued to
Balanced Fund in which event, unless such terms and conditions shall have
been included in the proxy solicitation materials furnished to the
shareholders of Balanced Fund prior to the meetings at which the
Reorganization shall have been approved, this Agreement shall not be
consummated and shall terminate unless Balanced Fund promptly shall call a
special meeting of shareholders at which such conditions so imposed shall
be submitted for approval.
11. Indemnification.
(a) Balanced Fund hereby agrees to indemnify and hold Global Allocation
harmless from all loss, liability and expense (including reasonable counsel
fees and expenses in connection with the contest of any claim) which Global
Allocation may incur or sustain by reason of the fact that (i) Global
Allocation shall be required to pay any corporate obligation of Balanced
Fund, whether consisting of tax deficiencies or otherwise, based upon a
claim or claims against Balanced Fund which were omitted or not fairly
reflected in the financial statements to be delivered to Global Allocation
in connection with the Reorganization; (ii) any representations or
warranties made by Balanced Fund in this Agreement should prove to be false
or erroneous in any material respect; (iii) any covenant of Balanced Fund
has been breached in any material respect; or (iv) any claim is made
alleging that (a) the N-14 Registration Statement included any untrue
statement of a material fact or omitted to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading or (b) the Proxy Statement and Prospectus delivered to the
shareholders of Balanced Fund and forming a part of the N-14 Registration
Statement included any untrue statement of a material fact or omitted to
state any material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading,
except insofar as such claim is based on written information furnished to
Balanced Fund by Global Allocation.
(b) Global Allocation hereby agrees to indemnify and hold Balanced Fund
harmless from all loss, liability and expenses (including reasonable
counsel fees and expenses in connection with the contest of any claim)
which Balanced Fund may incur or sustain by reason of the fact that (i) any
representations or warranties made by Global Allocation in this Agreement
should prove false or erroneous in any material respect, (ii) any covenant
of Global Allocation has been breached in any material respect, or (iii)
any claim is made alleging that (a) the N-14 Registration Statement
included any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the
statements therein, not misleading or (b) the Proxy Statement and
Prospectus delivered to shareholders of Balanced Fund and forming a part of
the N-14 Registration Statement included any untrue statement of a material
fact or omitted to state any material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, except insofar as such claim is based on written information
furnished to Global Allocation by Balanced Fund.
I-15
<PAGE>
(c) In the event that any claim is made against Global Allocation in
respect of which indemnity may be sought by Global Allocation from Balanced
Fund under Section 11(a) of this Agreement, or in the event that any claim
is made against Balanced Fund in respect of which indemnity may be sought
by Balanced Fund from Global Allocation under Section 11(b) of this
Agreement, then the party seeking indemnification (the "Indemnified
Party"), with reasonable promptness and before payment of such claim, shall
give written notice of such claim to the other party (the "Indemnifying
Party"). If no objection as to the validity of the claim is made in writing
to the Indemnified Party by the Indemnifying Party within thirty (30) days
after the giving of notice hereunder, then the Indemnified Party may pay
such claim and shall be entitled to reimbursement therefor, pursuant to
this Agreement. If, prior to the termination of such thirty-day period,
objection in writing as to the validity of such claim is made to the
Indemnified Party, the Indemnified Party shall withhold payment thereof
until the validity of such claim is established (i) to the satisfaction of
the Indemnifying Party, or (ii) by a final determination of a court of
competent jurisdiction, whereupon the Indemnified Party may pay such claim
and shall be entitled to reimbursement thereof, pursuant to this Agreement,
or (iii) with respect to any tax claims, within seven (7) calendar days
following the earlier of (A) an agreement between Balanced Fund and Global
Allocation that an indemnity amount is payable, (B) an assessment of a tax
by a taxing authority, or (c) a "determination" as defined in Section
1313(a) of the Code. For purposes of this Section 11, the term "assessment"
shall have the same meaning as used in Chapter 63 of the Code and Treasury
Regulations thereunder, or any comparable provision under the laws of the
appropriate taxing authority. In the event of any objection by the
Indemnifying Party, the Indemnifying Party promptly shall investigate the
claim, and if it is not satisfied with the validity thereof, the
Indemnifying Party shall conduct the defense against such claim. All costs
and expenses incurred by the Indemnifying Party in connection with such
investigation and defense of such claim shall be borne by it. These
indemnification provisions are in addition to, and not in limitation of,
any other rights the parties may have under applicable law.
12. Other Matters.
(a) Pursuant to Rule 145 under the 1933 Act, and in connection with the
issuance of any shares to any person who at the time of the Reorganization
is, to its knowledge, an affiliate of a party to the Reorganization
pursuant to Rule 145(c), Global Allocation will cause to be affixed upon
the certificate(s) issued to such person (if any) a legend as follows:
THESE SHARES ARE SUBJECT TO RESTRICTIONS ON TRANSFER UNDER THE
SECURITIES ACT OF 1933 AND MAY NOT BE SOLD OR OTHERWISE
TRANSFERRED EXCEPT TO MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
(OR ITS STATUTORY SUCCESSOR) (THE "FUND") OR ITS PRINCIPAL
UNDERWRITER UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT
THERETO IS EFFECTIVE UNDER THE SECURITIES ACT OF 1933 OR (2) IN
THE OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE FUND, SUCH
REGISTRATION IS NOT REQUIRED.
and, further, that stop transfer instructions will be issued to Global
Allocation's transfer agent with respect to such shares. Balanced Fund will
provide Global Allocation on the Exchange Date with the name of any
Balanced Fund shareholder who is to the knowledge of Balanced Fund an
affiliate of Balanced Fund on such date.
(b) All covenants, agreements, representations and warranties made under
this Agreement and any certificates delivered pursuant to this Agreement
shall be deemed to have been material and relied upon by each of the
parties, notwithstanding any investigation made by them or on their behalf.
(c) Any notice, report or demand required or permitted by any provision
of this Agreement shall be in writing and shall be made by hand delivery,
prepaid certified mail or overnight service, addressed to Balanced Fund or
Global Allocation, in either case at 800 Scudders Mill Road, Plainsboro,
New Jersey 08536, Attn: Arthur Zeikel, President.
I-16
<PAGE>
(d) This Agreement supersedes all previous correspondence and oral
communications between the parties regarding the Reorganization,
constitutes the only understanding with respect to the Reorganization, may
not be changed except by a letter of agreement signed by each party and
shall be governed by and construed in accordance with the laws of the State
of New York applicable to agreements made and to be performed in said
state.
(e) Copies of the Articles of Incorporation, as amended and supplemented,
of Balanced Fund and Global Allocation are on file with the Department of
Assessments and Taxation of the State of Maryland and notice is hereby
given that this instrument is executed on behalf of the Directors of each
fund.
This Agreement may be executed in any number of counterparts, each of which,
when executed and delivered, shall be deemed to be an original but all such
counterparts together shall constitute but one instrument.
Merrill Lynch Balanced Fund for
Investment and Retirement, Inc.
By: _________________________________
Attest:
_____________________________________
Merrill Lynch Global Allocation
Fund, Inc.
By: _________________________________
Attest:
_____________________________________
I-17
<PAGE>
Please fold at perforation before detaching
MERRILL LYNCH BALANCED FUND FOR INVESTMENT AND RETIREMENT, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
PROXY
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Arthur Zeikel, Terry K. Glenn and Jerry
Weiss as proxies, each with the power to appoint his substitute, and hereby
authorizes them to represent and to vote, as designated on the reverse hereof,
all of the shares of common stock of Merrill Lynch Balanced Fund for Investment
and Retirement, Inc. (the "Fund") held of record by the undersigned on October
31, 1995 at a Special Meeting of Shareholders of the Fund to be held on
December 21, 1995, or any adjournment thereof. Such proxies are also authorized
to vote in their discretion on such other matters as may properly come before
the Meeting or any adjournment thereof.
This proxy when properly executed will be voted in the manner herein directed by
the undersigned shareholder. IF EXECUTED AND NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED FOR PROPOSAL 1.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)
Page 1
<PAGE>
FOR [ ] AGAINST [ ] ABSTAIN [ ]
1. TO CONSIDER AND ACT UPON A PROPOSAL TO APPROVE THE AGREEMENT AND PLAN OF
REORGANIZATION BETWEEN THE FUND AND MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
Please be sure to sign and date this Proxy.
Shareholder sign here Date
- --- ---------------------- ----------
Joint owner sign here Date
- --- ---------------------- ----------
NOTE: Please sign exactly as the name appears hereon. When shares are held by
joint tenants, both should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by president or other authorized
officer. If a partnership, please sign in partnership name by authorized person.
YOUR VOTE IS IMPORTANT. Please complete, sign and return this card as soon
as possible. Mark with an X in the box in blue or black ink.
Page 2
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH BALANCED FUND FOR INVESTMENT AND RETIREMENT, INC.
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
(609) 282-2800
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Proxy Statement and Prospectus of Merrill Lynch
Balanced Fund for Investment and Retirement, Inc. ("Balanced Fund") and Merrill
Lynch Global Allocation Fund, Inc. ("Global Allocation") dated , 1995
(the "Proxy Statement and Prospectus"), which has been filed with the
Securities and Exchange Commission and can be obtained, without charge, by
calling Global Allocation at 1-800 or by writing to Global Allocation at the
above address. This Statement of Additional Information has been incorporated
by reference into the Proxy Statement and Prospectus.
Further information about Global Allocation is contained in and incorporated
by reference to its Prospectus, dated February 27, 1995, and its Statement of
Additional Information, dated February 27, 1995, which are incorporated by
reference into this Statement of Additional Information. Global Allocation's
Statement of Additional Information accompanies this Statement of Additional
Information.
Further information about Balanced Fund is contained in and incorporated by
reference to its Prospectus, dated January 31, 1995, and its Statement of
Additional Information, dated January 31, 1995, which are incorporated by
reference into this Statement of Additional Information. Balanced Fund's
Statement of Additional Information accompanies this Statement of Additional
Information.
THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS , 1995
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
General Information......................................................... 2
Financial Statements........................................................ 2
Global Allocation......................................................... F-1
Balanced Fund............................................................. F-
</TABLE>
GENERAL INFORMATION
The shareholders of Merrill Lynch Balanced Fund for Investment and
Retirement, Inc. ("Balanced Fund") are being asked to approve the acquisition
of substantially all of the assets of Balanced Fund, and the assumption of
substantially all of the liabilities of Balanced Fund, by Merrill Lynch Global
Allocation Fund, Inc. ("Global Allocation"), in exchange solely for an equal
aggregate value of shares of Global Allocation (the "Reorganization"). Global
Allocation is an open-end management investment company organized as a Maryland
corporation. A Special Meeting of Shareholders of Balanced Fund to consider the
Reorganization will be held at 800 Scudders Mill Road, Plainsboro, New Jersey,
on Thursday, December 21, 1995 at [9:00] A.M.
For detailed information about the Reorganization, shareholders of Balanced
Fund should refer to the Proxy Statement and Prospectus. For further
information about Global Allocation, Balanced Fund shareholders should refer to
the Global Allocation Statement of Additional Information, dated February 27,
1995, which accompanies this Statement of Additional Information and is
incorporated by reference herein. For further information about Balanced Fund,
shareholders should refer to the Balanced Fund Statement of Additional
Information, dated January 31, 1995, which accompanies this Statement of
Additional Information and is incorporated by reference herein.
FINANCIAL STATEMENTS
In accordance with Part B, Item 14(a) of Form N-14, pro forma financial
statements reflecting consummation of the Reorganization have not been prepared
since the net asset value of Balanced Fund does not exceed 10% of Global
Allocation's net asset value, as of September 29, 1995. Financial statements
for Balanced Fund and Global Allocation individually are set forth below.
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
Audited financial statements and accompanying notes for the year ended
October 31, 1994, and the independent auditors' report thereon, dated December
7, 1994, of Global Allocation are contained in its Statement of Additional
Information, dated February 27, 1995, which accompanies this Statement of
Additional Information and is incorporated by reference herein.
Unaudited financial statements and accompanying notes for Global Allocation
for the nine months ended July 31, 1995 are set forth below.
2
<PAGE>
THE FOLLOWING INTERIM FINANCIAL STATEMENTS FOR GLOBAL ALLOCATION FOR THE PERIOD
ENDED JULY 31, 1995 ARE UNAUDITED.
These unaudited interim financial statements reflect all adjustments which
are, in the opinion of management, necessary to a fair statement of the results
for the interim period presented. All such adjustments are of a recurring
nature.
F-1
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in US dollars)
COUNTRY
Shares Percent of
Industries Held Common Stocks Cost Value Net Assets
<S> <C> <S> <C> <C> <C>
Australia
Banking 2,645,800 Westpac Banking Corp. $ 5,614,396 $ 9,873,993 0.1%
Food 7,916,000 Goodman Fielder Wattie Ltd. 8,324,587 6,610,414 0.1
Insurance 1,557,557 GIO Australia Holdings, Ltd. 2,671,589 2,935,138 0.0
Multi-Industry 1,500,000 Pacific Dunlop, Ltd. 4,092,789 3,502,860 0.1
Tobacco 2,099,800 Rothmans Holdings, Ltd. 7,893,919 6,905,297 0.1
1,242,300 WD & HO Wills Holdings, Ltd. 1,389,502 1,927,925 0.0
-------------- -------------- ------
9,283,421 8,833,222 0.1
Total Common Stocks in Australia 29,986,782 31,755,627 0.4
Austria
Utilities--Electric 121,750 Oesterreichische Elektrizitats AG
(Verbund) 7,780,068 8,942,338 0.1
Total Common Stocks in Austria 7,780,068 8,942,338 0.1
Canada
Beverage 800,000 Cott Corp. (USD) 7,512,145 9,100,000 0.1
Metals 100,000 Inco Ltd. (USD) 2,132,000 3,387,500 0.0
Natural Resources 300,000 Canadian Pacific, Ltd. (USD) 3,503,161 5,362,500 0.1
440,000 Horsham Corp. (USD) 3,550,742 5,885,000 0.1
-------------- -------------- ------
7,053,903 11,247,500 0.2
Oil & Related 353,000 International Petroleum Corp. (USD) 1,000,196 1,081,063 0.0
Telecommunications 100,000 BCE Telecommunications, Inc. (USD) 3,375,484 3,112,500 0.0
Total Common Stocks in Canada 21,073,728 27,928,563 0.3
Denmark
Banking 53,500 Unidanmark A/S 1,870,730 2,769,646 0.0
Total Common Stocks in Denmark 1,870,730 2,769,646 0.0
Finland
Banking 4,194,000 Kansallis-Osake-Pankki 4,512,421 4,267,122 0.0
1,483,915 Unitas Bank Ltd. 4,285,282 4,571,890 0.1
-------------- -------------- ------
8,797,703 8,839,012 0.1
Machinery & Equipment 207,800 Rauma OY 3,747,774 4,332,682 0.1
Metals 432,500 Outokumpu OY 5,980,994 8,470,265 0.1
Paper & Forest 1,500,000 Enso-Gutzeit OY 12,019,454 14,294,244 0.2
Products 274,000 Kymmene OY 8,387,432 9,161,691 0.1
539,650 Metsa-Serla OY 22,185,795 25,132,971 0.3
560,700 Repola OY S 7,792,828 12,561,180 0.1
-------------- -------------- ------
50,385,509 61,150,086 0.7
Total Common Stocks in Finland 68,911,980 82,792,045 1.0
France
Automobiles 97,650 Peugeot S.A. 13,088,388 14,048,741 0.2
Banking 86,500 Societe Generale 9,605,405 10,397,680 0.1
Multi-Industry 26,432 EuraFrance 7,223,759 8,801,072 0.1
Total Common Stocks in France 29,917,552 33,247,493 0.4
Germany
Banking 55,680 Bayerische Vereinsbank AG 1,339,965 1,658,270 0.0
Capital Goods 369,636 Kloeckner Werke AG 17,229,762 25,468,153 0.3
Chemicals 34,000 Basf AG 6,821,542 7,881,740 0.1
32,000 Bayer AG 7,646,190 8,615,474 0.1
</TABLE>
F-2
<PAGE>
<TABLE>
<S> <C> <S> <C> <C> <C>
-------------- -------------- ------
14,467,732 16,497,214 0.2
Electronics 22,000 Siemens AG 11,059,372 11,631,324 0.2
Insurance 1,430 Munchener Ruckversich 2,688,495 3,177,318 0.0
Machinery & Equipment 36,579 Mannesmann AG 9,993,612 12,225,651 0.2
Utilities--Electric 440,000 Veba Vereinigte Elektriz 16,576,809 18,317,146 0.2
Total Common Stocks in Germany 73,355,747 88,975,076 1.1
Hong Kong
Utilities--Electric 460,300 China Light & Power Co., Ltd. 550,630 2,403,376 0.0
Total Common Stocks in Hong Kong 550,630 2,403,376 0.0
Indonesia
Paper & Pulp 2,060,000 Asia Pacific Resources International
Holdings Ltd. (USD) 15,467,500 19,312,500 0.2
1,715,000 Asia Pulp & Paper Company Ltd.
(ADR)++(USD) 19,722,500 21,866,250 0.3
Total Common Stocks in Indonesia 35,190,000 41,178,750 0.5
Ireland
Building & 1,065,600 CRH PLC 3,594,241 7,539,813 0.1
Construction
Miscellaneous-- 2,178,000 Waterford Wedgwood Units 1,080,827 1,971,144 0.0
Consumer Goods
Total Common Stocks in Ireland 4,675,068 9,510,957 0.1
Italy
Banking 533,400 IMI (Ordinary) 3,443,328 3,307,699 0.0
Building & 1,922,200 Filippo Fochi S.p.A. 6,101,165 823,731 0.0
Construction
Multi-Industry 9,117,595 Compagnie Industriali Riunite S.p.A.
(CIR) 7,816,550 7,843,154 0.1
Telecommunications 3,000,000 Societa Finanziaria Telefonica
S.p.A. (STET) 4,365,656 9,434,081 0.1
8,666,863 Societa Finanziaria Telefonica S.p.A.
(STET) RISP 16,268,796 21,820,089 0.3
3,958,000 Societa Italiana Esercizio Telecom
S.p.A. (S.I.P.) 3,323,376 6,846,931 0.1
3,958,000 Telecom Italia Mobile -- 4,976,185 0.1
-------------- -------------- ------
23,957,828 43,077,286 0.6
Total Common Stocks in Italy 41,318,871 55,051,870 0.7
</TABLE>
Portfolio
Abbreviations
To simplify the currency denominations
of Merrill Lynch Global Allocation Fund,
Inc.'s portfolio holdings in the Schedule
of Investments, we have abbreviated
the currencies according to the list
at right.
CAD Canadian Dollar
CHF Swiss Franc
DEM German Deutschemark
DKR Danish Kroner
ECU European Currency Unit
ESP Spanish Peseta
FRF French Franc
GBP Great Britain Pound
IEP Irish Punt
ITL Italian Lira
JPY Japanese Yen
MXN Mexican Peso
NLG Netherlands Guilder
NZD New Zealand Dollar
USD United States Dollar
F-3
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
COUNTRY
Shares Percent of
Industries Held Common Stocks Cost Value Net Assets
<S> <C> <S> <C> <C> <C>
Japan
Automobiles & 1,852,000 Suzuki Motor Corp. $ 16,952,079 $ 22,718,764 0.3%
Equipment
Beverage 947,000 Chukyo Coca-Cola Bottling Co., Ltd. 11,445,563 10,326,215 0.1
508,000 Hokkaido Coca-Cola Bottling Co., Ltd. 6,924,937 7,385,734 0.1
650,000 Kinki Coca-Cola Bottling Co., Ltd. 10,324,463 9,007,269 0.1
900,000 Mikuni Coca-Cola Bottling Co., Ltd. 13,165,497 12,062,699 0.1
838,400 Sanyo Coca-Cola Bottling Co., Ltd. 12,039,227 12,855,975 0.2
-------------- -------------- ------
53,899,687 51,637,892 0.6
Capital Goods 3,808,000 Mitsubishi Heavy Industries, Ltd. 23,136,107 27,552,204 0.3
Electric 435,000 Chudenko Corp. 13,597,049 16,700,363 0.2
Construction 31,000 Taihei Dengyo Kaisha Ltd. 638,911 489,437 0.0
-------------- -------------- ------
14,235,960 17,189,800 0.2
Electrical 650,000 Kinden Corporation 13,009,801 11,812,812 0.1
Engineering
Electrical 578,000 Murata Manufacturing Co., Ltd. 18,778,882 25,341,663 0.3
Equipment 1,360,000 Sumitomo Electric Industries 15,481,185 17,455,702 0.2
-------------- -------------- ------
34,260,067 42,797,365 0.5
Insurance 2,095,000 Dai-Tokyo Fire & Marine Insurance
Co., Ltd. 13,514,192 14,682,133 0.2
665,000 Fuji Fire & Marine Insurance Co., Ltd. 3,727,641 3,663,392 0.0
2,236,000 Koa Fire & Marine Insurance Co., Ltd. 12,691,892 13,867,060 0.2
620,000 Mitsui Marine & Fire Insurance
Co., Ltd. 5,004,638 4,359,155 0.0
1,669,000 Nichido Fire & Marine Insurance Co.,
Ltd. 10,892,520 13,895,695 0.2
1,351,000 Nippon Fire & Marine Insurance Co.,
Ltd. 6,970,280 8,255,770 0.1
2,408,000 Sumitomo Marine & Fire Insurance Co.,
Ltd. 18,939,904 19,911,677 0.2
2,075,000 Tokio Marine & Fire Insurance Co.,
Ltd. 22,188,264 24,747,274 0.3
1,130,000 Yasuda Fire & Marine Insurance Co.,
Ltd. 8,101,705 7,701,045 0.1
-------------- -------------- ------
102,031,036 111,083,201 1.3
Office Equipment 1,407,000 Canon, Inc. 19,624,604 25,570,195 0.3
Packaging & 901,000 Toyo Seikan Kaisha, Ltd. 23,045,380 30,906,633 0.4
Containers
Pharmaceuticals 1,061,000 Sankyo Pharmaceuticals Co., Ltd. 23,391,365 25,066,788 0.3
384,000 Taisho Pharmaceuticals Co. 7,984,458 7,153,112 0.1
-------------- -------------- ------
31,375,823 32,219,900 0.4
Restaurants 283,000 Mos Food Services, Inc. 7,699,427 7,714,675 0.1
226,000 Ohsho Food Service Corp. 5,101,983 5,082,690 0.1
-------------- -------------- ------
12,801,410 12,797,365 0.2
Retail Stores 448,000 Ito Yokado Co., Ltd. 20,618,869 24,781,463 0.3
100,000 Sangetsu Co., Ltd. 3,160,832 2,748,751 0.0
-------------- -------------- ------
23,779,701 27,530,214 0.3
Steel 250,000 Maruichi Steel Tube Ltd. 4,805,476 5,111,313 0.1
Total Common Stocks in Japan 372,957,131 418,927,658 5.0
Mexico
Foods 600,000 Grupo Industrial Maseca (ADR)++(USD) 7,107,853 6,750,000 0.1
Total Common Stocks in Mexico 7,107,853 6,750,000 0.1
Netherlands
Airlines 400,960 KLM Royal Dutch Airlines N.V. 8,407,677 15,132,522 0.2
Banking 897,150 ABN Amro Holdings N.V. 29,821,445 35,250,562 0.4
</TABLE>
F-4
<PAGE>
<TABLE>
<S> <C> <S> <C> <C> <C>
Chemicals 100,650 Akzo N.V. 9,758,201 13,269,097 0.2
217,870 European Vinyls Corp. International 9,491,849 10,461,252 0.1
-------------- -------------- ------
19,250,050 23,730,349 0.3
Electronics 500,600 Philips Electronics N.V. 16,584,619 24,683,844 0.3
Insurance 325,000 Aegon N.V. 7,013,035 11,866,680 0.1
346,700 Amev N.V. 13,640,015 19,940,739 0.2
800,965 Internationale Nederlanden Groep N.V. 30,066,279 46,482,265 0.6
-------------- -------------- ------
50,719,329 78,289,684 0.9
Miscellaneous- 10,000 Nijverdal Ten Cate V.V. 501,699 544,139 0.0
Manufacturing
Transportation 229,920 Koninklijke KNP (Warrants) (a) 793,687 922,711 0.0
Total Common Stocks in the Netherlands 126,078,506 178,553,811 2.1
Spain
Banking 587,481 Banco de Santander S.A. (Ordinary) 21,323,786 25,030,767 0.3
61,775 Banco Popular Espanol S.A. 6,511,311 10,034,016 0.1
83,000 Bank Intercontinental S.A. 4,607,612 7,520,040 0.1
-------------- -------------- ------
32,442,709 42,584,823 0.5
Energy & Petroleum 212,500 Repsol S.A. (ADR)++(USD) 6,126,375 7,092,188 0.1
618,500 Repsol S.A. 18,566,656 20,936,090 0.2
-------------- -------------- ------
24,693,031 28,028,278 0.3
Financial Services 326,000 Argentaria S.A. 12,974,203 12,434,995 0.2
Insurance 30,000 Mapfre S.A. 1,130,028 1,692,489 0.0
Manufacturing 195,000 Grupo Fosforera Espanola S.A. 1,696,601 722,465 0.0
Multi-Industry 45,750 Corporacion Financiera Alba S.A. 1,611,658 2,557,932 0.0
Real Estate 236,708 Metrovacesa 5,888,465 7,574,018 0.1
Toll Roads 144,375 Autopista Espana (ACESA) 1,363,246 1,404,119 0.0
144,375 Autopista Espana (ACESA) (Rights) (f) -- 94,824 0.0
-------------- -------------- ------
1,363,246 1,498,943 0.0
Utilities--Electric 100,000 Empresa Nacional de Electricidad S.A. 3,759,956 5,346,918 0.1
591,800 Iberdrola I S.A. 3,310,030 4,868,547 0.1
-------------- -------------- ------
7,069,986 10,215,465 0.2
Total Common Stocks in Spain 88,869,927 107,309,408 1.3
Sweden
Appliances 232,464 Electrolux AB 'B' Free 11,264,721 12,266,186 0.1
Automotive & 395,000 Volvo AB 8,006,793 7,843,972 0.1
Equipment
Banking 965,750 Stadshypotek AB 14,244,129 15,616,383 0.2
Electrical 120,000 ASEA AB 'B' Free 6,532,086 10,570,213 0.1
Equipment
Engineering &
Construction 186,010 Celsius Industrier AB 2,740,880 3,073,782 0.0
Industrial 200,000 SKF 'A' 3,713,376 4,397,163 0.1
458,500 SKF 'B' Free 8,471,575 10,275,603 0.1
-------------- -------------- ------
12,184,951 14,672,766 0.2
Multi-Industry 209,700 Svedala Industri AB Free 3,360,038 6,246,383 0.1
Total Common Stocks in Sweden 58,333,598 70,289,685 0.8
</TABLE>
F-5
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
COUNTRY
Shares Percent of
Industries Held Common Stocks Cost Value Net Assets
<S> <C> <S> <C> <C> <C>
Switzerland
Chemicals 33,040 Ciba-Geigy AG (Registered) $ 16,539,906 $ 24,538,075 0.3%
Electrical Equipment 9,335 BBC Brown Boveri & Cie (Bearer) 6,132,164 9,854,154 0.1
Financial Services 162,000 CS Holdings AG 15,391,757 14,050,732 0.2
Pharmaceuticals 1,260 Roche Holdings AG 8,104,008 8,605,387 0.1
Total Common Stocks in Switzerland 46,167,835 57,048,348 0.7
United Kingdom
Aerospace 1,377,751 Rolls Royce PLC 3,304,436 4,089,676 0.0
Automotive Parts 1,036,000 T & N PLC 2,948,994 2,868,006 0.0
Conglomerates 50,000 Hanson PLC Sponsored (ADR)++(USD) 947,577 862,500 0.0
Consumer Goods 733,600 Vendome Luxury Group (Units) 4,742,278 6,057,359 0.1
Environmental 940,000 Waste Management International PLC
(ADR)++(USD) 9,206,375 9,635,000 0.1
Food & Beverage 1,360,600 Grand Metropolitan PLC 8,858,753 8,186,393 0.1
35,000 Grand Metropolitan PLC (ADR)++(USD) 1,031,100 853,125 0.0
230,300 Tate & Lyle PLC 1,555,052 1,625,200 0.0
-------------- -------------- ------
11,444,905 10,664,718 0.1
Industrial--Other 1,148,000 Tomkins PLC 3,813,189 4,711,981 0.1
Insurance 773,800 Prudential Corp., PLC 3,735,406 4,117,131 0.1
Leisure & Entertainment 422,900 The Rank Organisation PLC 2,705,275 2,872,696 0.0
Oil/Integrated- 518,100 British Petroleum Company PLC (The) 3,783,528 3,925,616 0.0
International
Packaging & 1,179,300 Jefferson Smurfit Group PLC (IEP) 3,583,738 3,706,428 0.0
Containers
Pharmaceuticals 500,000 SmithKline Beecham Corp. PLC (ADR)++
(USD) 13,633,894 22,500,000 0.3
500,000 Zeneca Group PLC 4,710,464 8,917,115 0.1
-------------- -------------- ------
18,344,358 31,417,115 0.4
Retail Stores 4,300 Boots Co. PLC 28,682 37,742 0.0
Steel 1,500,000 British Steel PLC 4,081,599 4,512,564 0.1
Telecommunications 1,002,800 British Telecommunications PLC
(Ordinary) 6,088,156 6,386,629 0.1
646,300 NYNEX Cablecomms Group 1,420,036 1,344,472 0.0
290,300 Unilever Capital Corp. 4,372,100 5,946,087 0.1
84,600 Vodafone Group PLC 307,947 324,228 0.0
-------------- -------------- ------
12,188,239 14,001,416 0.2
Total Common Stocks in the
United Kingdom 84,858,579 103,479,948 1.2
United States
Apparel 155,000 Authentic Fitness Corp. 2,681,739 3,041,875 0.0
860,000 Fruit of the Loom, Inc. 23,555,786 19,887,500 0.3
373,900 Liz Claiborne, Inc. 8,022,626 8,552,963 0.1
-------------- -------------- ------
34,260,151 31,482,338 0.4
Automobiles 350,000 General Motors Corp. 13,282,191 17,062,500 0.2
Automotive 438,800 Collins & Aikman Group Inc. 3,416,149 3,729,800 0.0
284,900 Snap-On, Inc. 9,013,519 11,894,575 0.2
-------------- -------------- ------
12,429,668 15,624,375 0.2
Banking 300,000 Bank of New York 7,966,376 12,037,500 0.1
319,000 Bankers Trust Co. 7,620,125 7,815,500 0.1
129,500 Banknorth Group, Inc. 1,865,422 3,787,875 0.0
571,500 Barnett Banks Inc. 23,130,906 31,718,250 0.4
</TABLE>
F-6
<PAGE>
<TABLE>
<S> <C> <S> <C> <C> <C>
40,000 CalFed Goodwill (Part. Cert.) 210,000 200,000 0.0
400,000 California Federal Bank 3,600,000 5,550,000 0.1
496,700 Charter One Financial, Inc. 9,263,048 12,790,025 0.2
110,000 Chase Manhattan Corp. 3,423,214 5,898,750 0.1
1,002,300 Chemical Banking Corp. 37,278,417 51,743,738 0.6
1,372,900 City National Corp. 9,802,109 17,847,700 0.2
1,000,000 Comerica, Inc. 26,977,513 35,000,000 0.4
450,000 CoreStates Financial Corp. 12,110,483 16,425,000 0.2
980,000 First of America Bank 36,148,556 40,302,500 0.5
200,000 First Chicago Corp. 11,904,100 12,150,000 0.1
1,250,000 First Commerce Corp. 31,823,468 37,500,000 0.5
368,500 First Union Corp. 14,959,272 18,010,438 0.2
1,466,102 KeyCorp 43,401,543 46,915,264 0.6
747,900 Mellon Bank Corp. 26,731,868 30,009,488 0.4
112,950 Mercantile Bancorp., Inc. 2,920,618 5,096,869 0.1
450,000 NBD Bancorp, Inc. 13,768,555 15,300,000 0.2
700,000 Onbancorp, Inc. 19,596,626 20,475,000 0.2
294,400 Oriental Bank and Trust 5,050,248 6,182,400 0.1
45,000 Premier Bancorp. 708,437 843,750 0.0
1,100,000 Republic New York Corp. 49,526,909 61,600,000 0.7
233,500 Roosevelt Financial Group, Inc. 3,594,043 3,590,063 0.0
450,000 Southern National Corp. 8,670,728 10,800,000 0.1
-------------- -------------- ------
412,052,584 509,590,110 6.1
Communications 185,700 Comsat Corp. 4,308,767 4,294,313 0.1
104,500 GTE Corp. 3,514,166 3,709,750 0.0
-------------- -------------- ------
7,822,933 8,004,063 0.1
Computers 170,800 Boole & Babbage, Inc. 2,202,252 5,124,000 0.1
700,000 Borland International Corp. 8,054,338 8,662,500 0.1
150,000 International Business Machines Corp. 6,506,217 16,331,250 0.2
1,100,000 Unisys Corp. 12,291,367 9,762,500 0.1
-------------- -------------- ------
29,054,174 39,880,250 0.5
Conglomerates 125,000 ADT Limited 1,434,405 1,500,000 0.0
Construction & 153,800 Centex Corp. 3,880,118 4,306,400 0.1
Housing 500,000 K. Hovnanian Enterprises, Inc.
(Class A) 4,920,209 2,750,000 0.0
-------------- -------------- ------
8,800,327 7,056,400 0.1
Construction 700,000 TJ International, Inc. 12,547,379 14,525,000 0.2
Products
Electric 40,446 Great Bay Power Co. 2,549,753 313,457 0.0
</TABLE>
F-7
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
COUNTRY
Shares Held/ Percent of
Industries Face Amount Common Stocks Cost Value Net Assets
<S> <C> <S> <C> <C> <C>
United States
(continued)
Energy & Petroleum 163,900 Ashland Coal, Inc. $ 4,132,919 $ 4,691,637 0.1%
49,500 Cabot Oil & Gas Corp. (Class A) 529,030 693,000 0.0
34,600 Coastal Corp. 817,773 1,076,925 0.0
153,000 Coho Resources, Inc. 1,662,813 745,875 0.0
227,400 Gerrity Oil & Gas Corp. 2,934,073 852,750 0.0
130,000 Helmerich & Payne, Inc. 2,773,423 3,737,500 0.1
30,000 McMoRan Oil & Gas Co. 146,197 93,750 0.0
46,400 Mitchell Energy Development Corp.
(Class A) 675,717 788,800 0.0
174,350 Mitchell Energy Development Corp.
(Class B) 2,755,451 2,963,950 0.0
50,000 Murphy Oil Corp. 1,899,720 2,043,750 0.0
106,100 Nuevo Energy Co. 2,048,791 2,533,137 0.0
1,500,000 Occidental Petroleum Corp. 28,058,743 33,750,000 0.4
61,200 Pennzoil Co. 3,775,844 2,868,750 0.0
235,828 Plains Resources, Inc. 1,381,815 2,034,017 0.0
1,094,247 Santa Fe Energy Resources, Inc. 10,119,883 10,258,566 0.1
1,175,000 TransTexas Gas Corp. 14,200,000 17,478,125 0.2
211,514 Transamerica Refining Corp.
(Warrants) (a) 531,220 634,542 0.0
600,000 USX-Marathon Group 10,542,976 12,075,000 0.2
138,800 Unocal Corp. 3,272,336 3,903,750 0.1
-------------- -------------- ------
92,258,724 103,223,824 1.2
Engineering & 553,000 CBI Industries, Inc. 13,762,316 14,931,000 0.2
Construction
Financial Services 807,800 Student Loan Marketing Association 34,901,569 43,520,225 0.5
Food & Tobacco 400,000 Philip Morris Companies, Inc. 19,617,414 28,650,000 0.4
412,462 RJR Nabisco, Inc. 11,342,727 11,394,263 0.1
-------------- -------------- ------
30,960,141 40,044,263 0.5
Healthcare 360,000 Advocat, Inc. 3,422,500 4,590,000 0.1
Services 650,000 Baxter International, Inc. 13,870,330 24,212,500 0.3
400,000 Beverly Enterprises, Inc. 4,291,401 5,650,000 0.1
110,000 Hillhaven Corp. 1,972,850 3,176,250 0.0
546,500 US Surgical Corp. 11,871,438 13,116,000 0.1
-------------- -------------- ------
35,428,519 50,744,750 0.6
Index-Related USD 40,800 Republic of Austria Stock Index Growth
Notes due 8/15/1996 432,941 647,700 0.0
Industrial 915,000 BW/IP Holdings, Inc. 15,816,387 17,385,000 0.2
157,943 Cooper Cameron Corporation 2,529,415 3,514,232 0.0
179,803 Cooper Industries, Inc. 6,534,892 6,720,137 0.1
-------------- -------------- ------
24,880,694 27,619,369 0.3
Insurance 913,400 Ace, Ltd. 20,951,269 27,059,475 0.3
245,000 Aetna Life & Casualty Co. 12,939,855 15,159,375 0.2
200,000 Alexander & Alexander Services, Inc. 3,314,197 4,600,000 0.1
510,000 American General Corp. 13,187,448 18,551,250 0.2
571,000 Horace Mann Educators, Inc. 13,654,588 14,631,875 0.2
640,200 Lincoln National Corp. 23,466,317 26,328,225 0.3
680,000 PartnerRe Holdings, Ltd. 13,404,414 17,000,000 0.2
-------------- -------------- ------
100,918,088 123,330,200 1.5
Metals 140,000 Aluminum Co. of America 4,698,667 7,962,500 0.1
</TABLE>
F-8
<PAGE>
<TABLE>
<S> <C> <S> <C> <C> <C>
132,800 Reynolds Metals Co. 5,801,771 8,300,000 0.1
-------------- -------------- ------
10,500,438 16,262,500 0.2
Multi-Industry 340,000 Loews Corp. 31,080,454 40,927,500 0.5
Natural Resources 15,000 Freeport McMoRan Copper & Gold Inc. 327,957 399,375 0.0
210,520 Freeport McMoRan Copper & Gold Inc.
(Class B) 3,665,657 5,684,040 0.1
300,000 Freeport-McMoRan, Inc. 982,417 1,500,000 0.0
-------------- -------------- ------
4,976,031 7,583,415 0.1
Oil Services 375,000 Arethusa (Offshore) Ltd. 3,859,378 6,656,250 0.1
149,800 Atwood Oceanics, Inc. 1,238,663 2,733,850 0.0
3,614,375 Noble Drilling Corp. 25,124,880 23,493,437 0.3
-------------- -------------- ------
30,222,921 32,883,537 0.4
Pharmaceuticals/ 121,500 Alteon, Inc. 1,205,188 1,093,500 0.0
Biotechnology 435,000 Applied Immune Sciences, Inc. 6,160,143 3,208,125 0.0
600,000 Bristol-Myers Squibb Co. 33,254,124 41,550,000 0.5
450,000 Merck & Co., Inc. 15,115,266 23,231,250 0.3
-------------- -------------- ------
55,734,721 69,082,875 0.8
Pollution Control 646,900 WMX Technologies, Inc. 16,148,443 20,215,625 0.2
Publishing 175,000 Gannett Co., Inc. 8,375,486 9,581,250 0.1
301,500 New York Times Co. (Class A) 7,158,778 7,688,250 0.1
140,138 Times Mirror Co. (Class A) 3,016,629 4,028,967 0.1
-------------- -------------- ------
18,550,893 21,298,467 0.3
Real Estate 504,600 Carr Realty Corp. 10,031,714 9,335,100 0.1
Investment Trusts 500,000 First Union Real Estate Investments 3,764,840 3,750,000 0.0
661,300 Mid-America Realty Investments 6,616,640 5,621,050 0.1
100,000 Mid-Atlantic Realty Trust Co. 917,500 881,250 0.0
200,000 Nationwide Health Properties, Inc. 7,500,000 7,925,000 0.1
830,000 Prime Residential, Inc. 13,262,250 12,553,750 0.2
400,000 Taubman Centers, Inc. 3,807,537 3,950,000 0.1
-------------- -------------- ------
45,900,481 44,016,150 0.6
Restaurants 300,000 Buffets, Inc. 3,157,818 4,162,500 0.1
Retail Specialty 300,000 Toys R Us, Inc. 8,128,125 8,400,000 0.1
Retail Stores 608,500 Baker (J.), Inc. 10,187,765 5,932,875 0.1
643,200 Burlington Coat Factory Warehouse 7,035,315 8,281,200 0.1
516,900 Buttrey Food & Drug Stores Co. 4,084,486 3,489,075 0.0
105,000 Dayton-Hudson Corp. 6,995,242 7,940,625 0.1
100,000 Eagle Food Centers, Inc. 612,500 187,500 0.0
1,110,000 Filene's Basement Corp. 10,092,619 6,105,000 0.1
1,373,500 Payless Cashways, Inc. 17,027,625 10,129,562 0.1
1,292,800 Service Merchandise Co., Inc. 10,487,218 9,049,600 0.1
1,111,600 The Vons Companies, Inc. 18,500,110 24,733,100 0.3
-------------- -------------- ------
85,022,880 75,848,537 0.9
</TABLE>
F-9
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
COUNTRY
Shares Percent of
Industries Held Common Stocks Cost Value Net Assets
<S> <C> <S> <C> <C> <C>
United States
(concluded)
Savings Banks 106,000 Ahmanson (H.F.) & Co. $ 1,767,857 $ 2,371,750 0.0%
297,600 Bankers Corp. 1,688,842 5,319,600 0.1
695,000 Brooklyn Bancorp, Inc. (e) 16,888,752 23,630,000 0.3
1,700,768 Dime Bancorp, Inc. 11,647,480 18,070,660 0.2
196,400 Downey Savings & Loan Association 2,896,670 3,756,150 0.1
1,895,553 Glendale Federal Savings Bank 16,659,352 26,063,854 0.3
770,194 Glendale Federal Savings Bank
(Warrants) (a) -- 3,658,421 0.0
37,500 NS Bancorp, Inc. 300,000 1,279,687 0.0
204,000 Portsmouth Bank Shares, Inc. 1,396,014 2,499,000 0.0
-------------- -------------- ------
53,244,967 86,649,122 1.0
Specialty Retailing 400,000 Sotheby's Holdings, Inc. (Class A) 4,879,559 5,350,000 0.1
Telecommunications 123,057 Cox Communication, Inc. 1,820,315 2,491,904 0.0
Textiles 2,825,200 Burlington Industries, Inc. 37,451,653 35,315,000 0.4
Utilities-- 1,250,000 Allegheny Power System, Inc. 27,315,551 30,000,000 0.4
Electric & Gas 125,000 CMS Energy Corp. 2,290,025 3,125,000 0.0
2,486,200 Centerior Energy Corp. 35,099,397 25,794,325 0.3
150,000 Consolidated Edison Company, Inc. 4,390,815 4,350,000 0.1
1,780,000 Entergy Corp. 47,516,856 42,275,000 0.5
475,000 FPL Group, Inc. 14,363,265 18,168,750 0.2
300,000 General Public Utilities Corp. 8,663,891 8,662,500 0.1
1,757,900 Niagara Mohawk Power Corp. 28,627,702 24,610,600 0.3
844,600 Texas Utilities Co. 26,942,999 28,610,825 0.3
1,148,800 Unicom Corporation 27,549,620 31,879,200 0.4
-------------- -------------- ------
222,760,121 217,476,200 2.6
Utilities--Gas 115,650 Atmos Energy Corp. 1,445,257 2,313,000 0.0
Total Common Stocks in the
United States 1,498,801,634 1,739,376,156 20.9
Total Investments in Common Stocks 2,597,806,219 3,066,290,755 36.7
Equity Closed-End Funds
Austria
Financial Services 320,000 Austria Fund (USD) 2,642,432 2,680,000 0.0
Total Equity Closed-End Funds in
Austria 2,642,432 2,680,000 0.0
Ireland
Financial Services 150,000 Irish Investment Fund, Inc. (USD) 1,086,041 1,743,750 0.0
Total Equity Closed-End Funds in
Ireland 1,086,041 1,743,750 0.0
Italy
Financial Services 150,000 Italy Fund (USD) 1,198,520 1,200,000 0.0
Total Equity Closed-End Funds in Italy 1,198,520 1,200,000 0.0
Portugal
Financial Services 39,500 Capital Portugal Fund 2,052,116 3,832,551 0.1
25,600 Jakarta Growth Fund (USD) 158,080 252,800 0.0
40,000 Portugal Fund (USD) 360,368 545,000 0.0
Total Equity Closed-End Funds in
Portugal 2,570,564 4,630,351 0.1
Spain
Financial Services 300,100 Growth Fund of Spain, Inc. 2,630,827 3,263,587 0.1
Total Equity Closed-End Funds in Spain 2,630,827 3,263,587 0.1
</TABLE>
F-10
<PAGE>
<TABLE>
<CAPTION>
United States
<S> <C> <S> <C> <C> <C>
Financial Services 166,666 European Warrant Fund 1,363,723 1,416,661 0.0
11,700 Global Yield Fund 89,798 78,975 0.0
Total Equity Closed-End Funds in the
United States 1,453,521 1,495,636 0.0
Total Investments in Equity Closed-
End Funds 11,581,905 15,013,324 0.2
Preferred Stocks
Germany
Automobiles 70,550 Volkswagen of America, Inc. 16,036,436 17,513,679 0.2
Multi-Industry 45,000 R.W.E. AG 8,725,424 12,848,303 0.2
Total Preferred Stocks in Germany 24,761,860 30,361,982 0.4
New Zealand
Finance 5,585,700 Brierly Investments, Ltd. (9%
Convertible) 3,515,477 3,951,240 0.1
Total Preferred Stocks in New Zealand 3,515,477 3,951,240 0.1
Norway
Financial Services 175,000 A/S Eksportfinans (8.70%) (USD) 4,377,500 4,462,500 0.1
Total Preferred Stocks in Norway 4,377,500 4,462,500 0.1
Spain
Banking 225,000 Santander Overseas Bank (8%, Series D)
(USD) 5,463,250 5,484,375 0.1
Total Preferred Stocks in Spain 5,463,250 5,484,375 0.1
United Kingdom
Engineering 750,000 AMEC PLC (6.50% Convertible) 968,501 744,093 0.0
Retail Stores 545,000 Signet Group (Convertible) (ADR)++
(USD) 2,194,907 3,406,250 0.0
Total Preferred Stocks in the
United Kingdom 3,163,408 4,150,343 0.0
United States
Airlines 69,400 USAir Group, Inc. (Convertible $4.375,
Series B) 3,673,689 2,264,175 0.0
Automobiles & 20,000 Ford Motor Co. (8.40% Convertible,
Equipment Series A) 1,000,000 1,902,500 0.0
Banking 75,000 California Federal Bank (10.625%) 7,500,000 7,950,000 0.1
115,000 First Nationwide Bank (11.50%) 11,500,000 12,506,250 0.2
100,000 Fourth Financial Corp. (Convertible,
Class A) 2,500,000 3,125,000 0.0
130,300 Marine Midland Banks, Inc. (Adjustable
Rate, Series A) 5,219,925 5,602,900 0.1
100,000 Onbancorp, Inc. (6.75% Convertible,
Series B) 2,668,750 2,725,000 0.0
-------------- -------------- ------
29,388,675 31,909,150 0.4
Energy & Petroleum 150,000 Grant Tensor Corp. (9.75% Convertible) 1,853,375 2,250,000 0.0
64,219 Santa Fe Energy Resources, Inc. (7%) 954,075 1,139,887 0.0
460,000 Santa Fe Energy Resources, Inc.
(Convertible, Class A) 4,082,500 4,427,500 0.1
-------------- -------------- ------
6,889,950 7,817,387 0.1
Health Care 1,080,000 US Surgical Corp. (Convertible) 24,354,000 29,160,000 0.4
Natural Resources 85,000 Alumax Inc. (Convertible, Series A) 7,240,312 12,240,000 0.1
150,000 Cyprus Amax Minerals Co. (Convertible,
Series A) 9,188,313 9,252,000 0.1
348,700 Freeport-McMoRan Copper & Gold, Inc.
(Convertible Shares) 7,918,834 8,935,437 0.1
219,000 Freeport-McMoRan Inc. (Convertible
--Gold) 7,703,330 7,692,375 0.1
-------------- -------------- ------
32,050,789 38,119,812 0.4
Oil Service 447,200 Noble Drilling Corp. (Convertible) 10,745,382 10,062,000 0.1
</TABLE>
F-11
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
COUNTRY
Shares Percent of
Industries Held Common Stocks Cost Value Net Assets
<S> <C> <S> <C> <C> <C>
United States
(concluded)
Paper & Forest 200,000 Boise Cascade Corp. (Convertible,
Products Series G) $ 4,225,000 $ 7,175,000 0.1%
288,200 James River Corp. of Virginia
(9% Convertible, Series P) 4,971,450 8,429,850 0.1
-------------- -------------- ------
9,196,450 15,604,850 0.2
Publishing 59,862 Times Mirror Company (Convertible,
Series B) 1,340,838 1,481,584 0.0
Real Estate 658,000 Catellus Development Corp. (7.25%
Convertible Exchangeable, Series B) 30,686,250 26,978,000 0.3
Real Estate 666,000 National Health Investors, Inc.
Investment Trusts (8.50% Convertible) 16,650,000 17,149,500 0.2
700,000 Prime Retail, Inc. (10.50%) 16,712,575 13,300,000 0.2
-------------- -------------- ------
33,362,575 30,449,500 0.4
Savings Bank 619,900 Glendale Federal Savings Bank
(8.75% Convertible, Series E) 15,070,337 23,091,275 0.3
Total Preferred Stocks in the
United States 197,758,935 218,840,233 2.6
Total Investments in Preferred Stocks 239,040,430 267,250,673 3.3
Currency Face
Denomination Amount Fixed-Income Securities
Argentina
Banking USD 22,000,000 Banco de Galicia, 9% due 11/01/2003 21,506,460 16,500,000 0.2
Banco Rio de la Plata:
USD 47,500,000 (Class 3), 8.50% due 7/15/1998 47,908,125 44,887,500 0.5
USD 56,000,000 8.75% due 12/15/2003 47,165,825 42,840,000 0.5
-------------- -------------- ------
116,580,410 104,227,500 1.2
Government Republic of Argentina:
Obligations USD 145,000,000 Discount Notes, 6.875% due 3/31/2023 105,705,577 82,831,250 1.0
USD 126,000,000 Floating Rate Bonds, 7.312% due
3/31/2005, Series L 62,510,000 77,332,500 0.9
USD 22,500,000 Global Bonds, 8.375% due 12/20/2003 16,943,750 16,987,500 0.2
USD 324,000,000 Par Bonds, 5% due 3/31/2023 163,106,086 150,660,000 1.8
-------------- -------------- ------
348,265,413 327,811,250 3.9
Total Fixed-Income Securities in
Argentina 464,845,823 432,038,750 5.1
Australia
Food USD 14,000,000 Burns, Philp & Company Ltd.,
Processing Convertible Bonds, 5.50% due
4/30/2004 11,976,950 12,040,000 0.1
Industrial USD 26,410,000 Lend Lease Finance International
Corp., Ltd., Convertible Bonds,
4.75% due 6/01/2003 28,765,793 30,635,600 0.4
Total Fixed-Income Securities in
Australia 40,742,743 42,675,600 0.5
Brazil
Government USD 35,000,000 Brazil Exit Bonds, 6% due 9/15/2013 19,537,445 16,843,750 0.2
Obligations Republic of Brazil:
USD 37,050,000 4% due 1/01/2001 (d) 28,959,563 30,010,500 0.4
USD 5,000,000 Discount Notes, 6.688% due 4/15/2024 3,100,000 2,831,250 0.0
USD 150,000,000 Par Bonds, 4% due 4/15/2024
(Series YL3) 58,390,625 65,625,000 0.8
USD 60,000,000 Par Bonds, 4% due 4/15/2024
(Series YL4) 23,047,430 26,250,000 0.3
Total Fixed-Income Securities in
Brazil 133,035,063 141,560,500 1.7
Canada
Cable CAD 6,250,000 Rogers Cablesystems, 9.65% due 1/15/2014 3,588,228 3,920,496 0.0
</TABLE>
F-12
<PAGE>
<TABLE>
<S> <C> <S> <C> <C> <C>
Government CAD 20,000,000 Canadian Government Bonds, 9.50% due
Obligations 10/01/1998 15,417,349 15,288,111 0.2
CAD 2,000,000 Macmillan Bloedel Limited, Convertible
Bonds, 5% due 5/01/2007 1,024,416 1,196,207 0.0
-------------- -------------- ------
16,441,765 16,484,318 0.2
Hotel/ USD 23,500,000 Four Seasons Hotel, Inc., 9.125% due
Leisure 7/01/2000 23,401,875 22,971,250 0.3
Industrial USD 23,000,000 Call Net Enterprise, Inc., 13.07% due
12/01/2004 (b) 13,186,310 14,173,750 0.2
USD 12,500,000 Consoltex Group, Inc., 11% due
10/01/2003 12,530,000 11,500,000 0.1
USD 77,000,000 International Semi-Tech Microelectronics
Inc., 11.50% due 8/15/2000 (b) 43,821,759 39,270,000 0.5
-------------- -------------- ------
69,538,069 64,943,750 0.8
Oil & Related Mark Resources Inc., Convertible Bonds:
CAD 7,250,000 7% due 4/15/2002 5,052,564 4,547,775 0.1
CAD 1,250,000 8% due 11/30/2004 943,556 866,156 0.0
CAD 14,500,000 Talisman Energy Inc. (Ex-Warrants),
8.50% due 12/01/2000 11,040,982 10,523,341 0.1
-------------- -------------- ------
17,037,102 15,937,272 0.2
Real Estate Olympia & York Inc.:
CAD 57,194,000 Series 1, 10.70% due 11/04/1995 29,626,733 25,655,952 0.3
CAD 34,000,000 Series 2, 11% due 11/04/1998 18,060,242 15,251,641 0.2
-------------- -------------- ------
47,686,975 40,907,593 0.5
Resources USD 20,000,000 Crown Packaging Ltd., 10.75% due
11/01/2000 20,000,000 19,800,000 0.2
Sherritt, Inc.:
USD 4,000,000 9.75% due 4/01/2003 4,002,187 4,050,000 0.0
CAD 63,500,000 11% due 3/31/2004 45,931,085 46,663,931 0.6
USD 2,000,000 10.50% due 3/31/2014 2,060,000 2,060,000 0.0
USD 35,500,000 Sifto Canada, Inc., 8.50% due
7/15/2000 32,375,188 30,712,500 0.4
-------------- -------------- ------
104,368,460 103,286,431 1.2
Total Fixed-Income Securities in
Canada 282,062,474 268,451,110 3.2
France
Automobiles FRF 5,500 Peugeot, Convertible Bonds, 2% due
1/01/2001 992,341 1,096,499 0.0
Banking FRF 58,000 Societe Generale, Convertible Bonds
(New), 3.50% due 1/01/2000 7,499,838 8,684,453 0.1
Government ECU 2,000,000 Credit Local de France, 8.683% due
Obligations 10/16/2001 (b) 1,656,263 1,671,996 0.0
Government of France:
FRF 700,000,000 8.50% due 10/25/2019 132,737,864 155,283,548 1.9
ECU 175,000,000 8.25% due 4/25/2022 202,798,464 229,617,286 2.8
-------------- -------------- ------
337,192,591 386,572,830 4.7
Industrial FRF 30,000 Alcatel Alsthom, Convertible Bonds,
2.50% due 1/01/2004 3,926,887 4,718,127 0.1
Insurance FRF 35,500 Finaxa, Convertible Bonds, 3% due
1/01/2001 9,060,172 10,407,941 0.1
Multi-- FRF 8,713 Compagnie Generale des Eaux,
Industry Convertible Bonds, 6% due 1/01/1998 4,859,722 5,922,767 0.1
Total Fixed-Income Securities in
France 363,531,551 417,402,617 5.1
</TABLE>
F-13
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
COUNTRY
Currency Face Percent of
Industries Denomination Amount Fixed-Income Securities Cost Value Net Assets
<S> <S> <C> <S> <C> <C> <C>
Germany
Banking DEM 2,310,000 Commerzbank AG, Floating Rate
Convertible Bonds, 2% due 6/15/2001 $ 1,556,456 $ 2,499,421 0.0%
Government DEM 204,000,000 Bundesrepublic Deutscheland,
Obligations 7.75% due 10/01/2004 148,967,081 155,912,282 1.9
DEM 290,000,000 Treuhandanstalt, 7.50% due 9/09/2004 187,088,655 218,743,577 2.6
-------------- -------------- ------
336,055,736 374,655,859 4.5
Government DEM 64,000,000 Baden-Wuerttemberg, 6.20% due
Obligations-- 11/22/2013 37,148,769 44,351,162 0.5
Regional DEM 57,500,000 Freie Hansestadt Hamburg,
6.08% due 11/29/2018 33,152,404 38,431,823 0.5
DEM 168,000,000 Land Hessen, 6% due 11/29/2013 96,916,825 112,713,324 1.4
DEM 110,000,000 Mecklenberg Vorpommern, 6.15% due
6/16/2023 61,012,437 72,550,481 0.9
DEM 133,200,000 Nordrhein-Westfalen, 6.125% due
12/21/2018 76,238,083 90,088,587 1.1
Rheinland-Pfalz:
DEM 33,000,000 5.75% due 2/24/2014 18,324,663 21,674,387 0.3
DEM 64,000,000 6.08% due 11/29/2018 36,935,547 43,077,368 0.5
DEM 47,000,000 Sachsen-Anhalt, 6% due 1/10/2014 26,915,615 31,022,653 0.4
-------------- -------------- ------
386,644,343 453,909,785 5.6
Industrial USD 1,000,000 Siemens Corp. (with Warrants),
8% due 6/24/2002 (a) 1,318,750 1,375,700 0.0
USD 41,100,000 Tarkett International, 9% due
3/01/2002 39,413,750 41,819,250 0.5
-------------- -------------- ------
40,732,500 43,194,950 0.5
Utilities-- USD 5,875,000 Veba International Finance (Warrants),
Electric 6% due 4/06/2000 (a) 7,083,300 10,545,625 0.1
Total Fixed-Income Securities in
Germany 772,072,335 884,805,640 10.7
Hong Kong
Industrial USD 9,900,000 Johnson Electric Holdings Ltd.,
Convertible Bonds, 4.50% due
11/05/2000 8,844,404 8,786,250 0.1
Retail USD 11,500,000 Dairy Farm International Holdings
Ltd., 6.50% due 5/10/2049 9,118,375 8,625,000 0.1
Total Fixed-Income Securities in
Hong Kong 17,962,779 17,411,250 0.2
Indonesia
Industrial USD 2,000,000 PT Indorayon, Convertible Bonds,
5.50% due 10/01/2002 2,363,125 2,360,000 0.0
Total Fixed-Income Securities in
Indonesia 2,363,125 2,360,000 0.0
Italy
Telecommuni- Softe SA-LUX:
cations ITL 16,760,000,000 (Ex-Warrants), 8.75% due 3/24/1997 10,756,360 10,086,841 0.1
ITL 11,500,000,000 Convertible Bonds, 4.25% due
7/30/1998 7,894,814 8,624,275 0.1
Total Fixed-Income Securities in
Italy 18,651,174 18,711,116 0.2
Japan
Automobiles JPY 400,000,000 Toyota Motor Corp., Convertible Bonds,
& Equipment 1.20% due 1/28/1998 2,477,431 4,756,929 0.1
Electronics JPY 988,000,000 Matsushita Electric Works, Convertible
Bonds, 2.70% due 5/31/2002 9,691,544 12,299,500 0.2
Insurance JPY 13,000,000 Mitsui Marine & Fire Insurance Co.,
Ltd., 0.70% due 3/31/2003 118,211 135,552 0.0
JPY 8,000,000 Nichido Fire & Marine Insurance Co.,
Ltd., 1% due 3/31/2003 75,240 87,597 0.0
-------------- -------------- ------
193,451 223,149 0.0
</TABLE>
F-14
<PAGE>
<TABLE>
<S> <C> <S> <C> <C> <C>
Total Fixed-Income Securities in
Japan 12,362,426 17,279,578 0.3
Korea
Energy USD 6,250,000 Ssangyong Oil Corp., 3.75% due
12/31/2008 6,681,062 6,656,250 0.1
Total Fixed-Income Securities in
Korea 6,681,062 6,656,250 0.1
Mexico
Government USD 165,500,000 Banco Nacional (BNCE), 7.25% due
Obligations 2/02/2004 134,186,200 124,952,500 1.5
USD 32,500,000 Petroleos Mexicanos, 8.625% due
12/01/2023 15,772,500 22,750,000 0.3
United Mexican States:
USD 18,583,000 8.50% due 9/15/2002 15,096,445 15,609,720 0.2
USD 85,000,000 Floating Notes, Series A, 6.687%
due 12/31/2019 72,668,750 60,456,250 0.7
USD 38,000,000 Floating Notes, Series B, 6.765%
due 12/31/2019 32,676,004 27,027,500 0.3
USD 25,000,000 Par Bonds, Series B, 6.25%
due 12/31/2019 11,690,643 15,000,000 0.2
United Mexican States, Rights:
USD 130,764,000 (Series A) -- -- --
USD 83,460,000 (Series B) -- -- --
-------------- -------------- ------
282,090,542 265,795,970 3.2
Total Fixed-Income Securities in
Mexico 282,090,542 265,795,970 3.2
New Zealand
Utilities NZD 2,000,000 Natural Gas Corp. Holdings,
- --Gas Convertible Bonds, 10.50%
due 10/14/1997 1,186,318 2,425,320 0.0
Total Fixed-Income Securities in
New Zealand 1,186,318 2,425,320 0.0
Norway
Industrial USD 10,000,000 Wilrig AS, 11.25% due 3/15/2004 10,000,000 10,350,000 0.1
Total Fixed-Income Securities in
Norway 10,000,000 10,350,000 0.1
Portugal
Banking ECU 19,300,000 Banco Commercial Portuguese,
Convertible Bonds, 8.75% due
5/21/2002 26,468,747 27,224,001 0.3
Total Fixed-Income Securities in
Portugal 26,468,747 27,224,001 0.3
Spain
Government ESP 30,275,000,000 Government of Spain, 10% due
Obligations 2/28/2005 218,935,863 236,367,295 2.8
Total Fixed-Income Securities in
Spain 218,935,863 236,367,295 2.8
Sweden
Industrial ECU 7,000,000 SKF--AB Lyons, Convertible Bonds,
8.01% due 7/26/2002 (b) 5,313,058 5,360,166 0.1
Multi- ECU 1,000,000 Investor International Placements,
Industry Convertible Bonds, 7.25% due
6/21/2001 1,001,412 1,481,098 0.0
Total Fixed-Income Securities in
Sweden 6,314,470 6,841,264 0.1
Switzerland
Chemicals USD 24,945,000 Ciba-Geigy Corp., Convertible Bonds,
6.25% due 3/15/2016 25,632,050 24,446,100 0.3
Industrial CHF 1,401,000 Ciba-Geigy AG, Convertible Bonds,
2% due 8/09/1998 1,178,587 1,673,091 0.0
Newspaper/ CHF 3,020,000 News International PLC, 5.375%
Publishing due 4/30/1996 1,115,703 2,655,662 0.0
Total Fixed-Income Securities in
Switzerland 27,926,340 28,774,853 0.3
Taiwan
Agriculture USD 750,000 President Enterprises, 8.30% due
7/22/2001 (b) 746,250 907,500 0.0
Metals USD 2,220,000 Tung Ho Steel Enterprise, Convertible
Bonds, 4% due 7/26/2001 2,243,700 2,575,200 0.0
Total Fixed-Income Securities in Taiwan 2,989,950 3,482,700 0.0
</TABLE>
F-15
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
COUNTRY
Currency Face Percent of
Industries Denomination Amount Fixed-Income Securities Cost Value Net Assets
<S> <S> <C> <S> <C> <C> <C>
United Kingdom
Building GBP 3,250,000 Redland Capital PLC, Convertible
Materials Bonds, 7.25% due 1/28/2002 $ 5,382,804 $ 4,888,611 0.1%
Energy GBP 29,990,000 Elf Enterprises Finance PLC,
Convertible Bonds, 8.75% due
6/27/2006 48,109,352 47,390,123 0.6
Financial GBP 3,550,000 SG Warburg Group, Convertible Bonds,
Services 6.50% due 8/04/2008 5,416,350 4,828,603 0.1
GBP 11,600,000 TransAtlantic Holdings PLC, Convertible
Bonds, 5.50% due 4/30/2009 14,179,895 14,107,363 0.2
-------------- -------------- ------
19,596,245 18,935,966 0.3
Foods GBP 7,750,000 Tate & Lyle International, Convertible
Bonds, 5.75% due 3/21/2001 10,092,554 10,448,306 0.1
Food & GBP 750,000 Allied Domecq PLC, 6.75% due 7/07/2008 1,119,092 1,182,148 0.0
Beverage
Government GBP 32,000,000 U.K.T.N., Bond, 6.75% due 11/26/2004 47,194,258 46,277,784 0.6
Obligations
Industrial USD 1,890,000 HIH Capital Ltd., Convertible Bonds
(Bearer), 7.50% due 9/25/2006 1,005,400 1,379,700 0.0
USD 2,000,000 HIH Capital Ltd., Convertible Bonds,
7.50% due 9/25/2006 1,665,000 1,460,000 0.0
GBP 6,375,000 Hanson PLC, Convertible Bonds,
9.50% due 1/31/2006 11,769,997 10,354,294 0.1
-------------- -------------- ------
14,440,397 13,193,994 0.1
Multi-- GBP 4,875,000 English China Clays PLC, Convertible
Industry Bonds, 6.50% due 9/30/2003 8,364,034 7,820,477 0.1
Real Estate GBP 500,000 Land Securities PLC, Convertible Bonds,
6.75% due 12/31/2002 679,603 796,099 0.0
Retail GBP 8,350,000 Sainsbury (J.) PLC, Convertible Bonds,
8.50% due 11/19/2005 16,072,715 18,338,892 0.2
Utilities GBP 2,000,000 National Power PLC, Convertible Bonds,
6.25% due 9/23/2008 3,262,275 3,584,448 0.0
Total Fixed-Income Securities in the
United Kingdom 174,313,329 172,856,848 2.1
United States
Aerospace USD 3,500,000 Rohr Industries, Inc., Convertible
Bonds, 7.75% due 5/15/2004 3,500,000 5,425,000 0.1
Airlines USD 8,500,000 UAL Corporation, Convertible Bonds,
6.375% due 2/01/2025 7,631,506 8,797,500 0.1
USAir Inc.:
USD 11,000,000 10% due 7/01/2003 8,529,375 8,827,500 0.1
USD 4,337,927 9.33% due 1/01/2006 4,229,913 3,882,445 0.1
USD 19,300,000 10.375% due 3/01/2013 17,593,625 17,852,500 0.2
USD 7,500,000 USAir Pass Thru, 9.625% due
9/01/2003 (d) 7,495,625 6,900,000 0.1
-------------- -------------- ------
45,480,044 46,259,945 0.6
Automotive USD 22,000,000 AM General Corporation, 12.875%
due 5/01/2002 21,834,060 21,120,000 0.3
Banking USD 14,250,000 Berkely Federal Bank, 12% due
6/15/2005 14,250,000 14,285,625 0.2
USD 15,000,000 First City Bancorp of Texas Inc.,
9% due 9/30/1997 14,925,000 14,925,000 0.2
USD 3,000,000 Roosevelt Financial Group, Inc.,
9.50% due 8/01/2002 3,000,000 3,005,100 0.0
-------------- -------------- ------
32,175,000 32,215,725 0.4
</TABLE>
F-16
<PAGE>
<TABLE>
<S> <C> <S> <C> <C> <C>
Building & USD 39,250,000 United International Holdings, Inc.,
Construction 43.768% due 11/15/1999 (b) 21,962,824 24,138,750 0.3
Building USD 15,000,000 DalTile International, Inc., 11.955%
Materials due 7/15/1998 (b) 10,267,050 10,312,500 0.1
Chemicals USD 10,000,000 Laroche Industries Inc., 13% due
8/15/2004 10,325,000 10,300,000 0.1
Computers USD 15,000,000 Dell Computer Corp., 11% due
8/15/2000 15,077,500 16,387,500 0.2
Energy USD 12,374,000 Transamerican Refining Corp., 18.29%
due 2/15/2002(b) 7,394,649 8,228,710 0.1
USD 33,000,000 TransTexas Gas Corp., 11.50% due
6/15/2002 33,000,000 34,072,500 0.4
-------------- -------------- ------
40,394,649 42,301,210 0.5
Financial CHF 4,010,000 Chrysler Financial Corp.,
Services 5.75% due 6/18/1996 1,914,011 3,556,638 0.0
Lomas Mortgage USA, Inc.:
USD 11,000,000 9.75% due 10/01/1997 10,465,250 8,470,000 0.1
USD 7,500,000 10.25% due 10/01/2002 7,000,000 5,512,500 0.1
USD 2,008,000 US Trails, Senior Secured Notes,
12% due 7/15/1998 1,642,685 1,365,440 0.0
-------------- -------------- ------
21,021,946 18,904,578 0.2
Health Care USD 7,200,000 Cetus (Chiron) Corp., Convertible
Bonds, 5.25% due 5/21/2002 5,220,250 6,624,000 0.1
USD 8,500,000 Mediq/PRN, Senior Notes, 11.125%
due 7/01/1999 8,845,000 7,926,250 0.1
-------------- -------------- ------
14,065,250 14,550,250 0.2
Homebuilding & USD 31,950,000 Baldwin Co., 10.375% due 8/01/2003 30,215,562 18,531,000 0.2
Construction USD 37,500,000 Beazer Homes USA, Inc., 9% due
3/01/2004 35,597,000 34,406,250 0.4
USD 29,500,000 K. Hovnanian Enterprises, 9.75%
due 6/01/2005 28,874,300 23,157,500 0.3
USD 30,000,000 MDC Holdings Inc., 11.125% due
12/15/2003 28,916,500 27,375,000 0.3
USD 28,250,000 Presley Companies, Senior Notes,
12.50% due 7/01/2001 28,190,312 23,588,750 0.3
USD 10,000,000 Webb (Del E.) Corp., 9% due 2/15/2006 7,993,750 9,100,000 0.1
-------------- -------------- ------
159,787,424 136,158,500 1.6
Hospital USD 1,000,000 Novacare, Inc., Convertible Bonds,
Management 5.50% due 1/15/2000 857,500 860,000 0.0
Industrial USD 10,000,000 Easco Corp., 10% due 3/15/2001 10,005,000 10,100,000 0.1
USD 19,000,000 Envirotest Systems Corp.,
9.125% due 3/15/2001 18,412,210 15,960,000 0.2
USD 27,250,000 Genmar Holdings, Inc., 13.50% due
7/15/2001 27,127,100 27,045,625 0.3
USD 8,590,000 Hanson America, Convertible Bonds,
2.39% due 3/01/2001 6,592,268 6,786,100 0.1
USD 2,500,000 MDC Holdings, Inc., Convertible Bonds,
8.75% due 12/15/2005 2,150,000 2,600,000 0.0
USD 9,000,000 Merisel, Inc., 12.50% due 12/31/2004 9,000,000 7,920,000 0.1
USD 10,000,000 OSI Specialties Corp., 9.25% due
10/01/2003 10,000,000 10,250,000 0.1
USD 30,500,000 Plastic Specialties & Technology,
Inc., 11.25% due 12/01/2003 30,540,000 27,755,000 0.3
-------------- -------------- ------
113,826,578 108,416,725 1.2
Insurance USD 7,750,000 Horace Mann Educators, Inc.,
Convertible Bonds, 4% due
12/01/1999 (b) 7,682,500 7,682,187 0.1
USD 22,500,000 Mutual Life Insurance Co.,
11.25% due 8/15/2024 (b) 14,457,048 16,425,000 0.2
USD 12,500,000 Nacolah Holding Corp.,
9.50% due 12/01/2003 12,500,000 11,812,500 0.1
-------------- -------------- ------
34,639,548 35,919,687 0.4
</TABLE>
F-17
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
COUNTRY
Currency Face Percent of
Industries Denomination Amount Fixed-Income Securities Cost Value Net Assets
<S> <S> <C> <S> <C> <C> <C>
United States
(concluded)
Leisure & USD 5,000,000 Rio Hotel & Casino Inc., 10.625%
Tourism due 7/15/2005 $ 5,000,000 $ 5,012,500 0.1%
Merchandising USD 12,000,000 Price Club Co., Convertible Bonds,
5.50% due 2/28/2012 11,213,250 11,700,000 0.1
Oil & Related USD 1,500,000 Gerrity Oil & Gas Corp., 11.75%
due 7/15/2004 1,500,000 1,342,500 0.0
PDV America, Inc.:
USD 35,000,000 7.25% due 8/01/1998 34,856,150 33,600,000 0.4
USD 10,000,000 7.75% due 8/01/2000 10,062,500 9,412,500 0.1
USD 6,000,000 USX Marathon Oil Co., 7% due
6/15/2017 5,650,000 5,505,000 0.1
-------------- -------------- ------
52,068,650 49,860,000 0.6
Real Estate USD 24,500,000 Alexander Haagen Properties Inc.,
Exchangeable Debentures, 7.25% due
12/27/2003 24,348,750 22,754,375 0.3
USD 25,000,000 First Washington Realty, 8.25%
due 6/26/1999 25,000,000 24,750,000 0.3
USD 6,500,000 LTC Properties, Inc., Convertible Bonds,
9.75% due 7/01/2004 6,500,000 9,343,750 0.1
USD 27,000,000 Malan Realty Investors, Inc.,
Convertible Bonds, 8.50% due
7/01/2003 27,000,000 27,945,000 0.3
USD 9,545,000 Phoenix Home Life-Mutual Insurance Co.,
8% due 11/25/2023 9,545,000 9,091,612 0.1
USD 23,948,889 RTC Commercial Mortgage, Class E,
8.25% due 12/25/2020 (d) 23,582,172 22,212,595 0.3
-------------- -------------- ------
115,975,922 116,097,332 1.4
Real Estate USD 7,000,000 Centerpoint Properties Corp.,
Investment Convertible Bonds, 8.22% due
Trusts 1/15/2004 7,000,000 7,866,250 0.1
USD 30,000,000 First Union Real Estate, 8.875%
due 10/01/2003 29,756,100 27,225,000 0.3
USD 12,500,000 Liberty Property Trust, Convertible
Bonds, 8% due 7/01/2001 12,500,000 12,687,500 0.1
Meditrust, Convertible Bonds:
USD 6,000,000 7% due 3/01/1998 6,035,000 6,637,500 0.1
USD 5,000,000 8.549% due 2/01/2000 5,000,000 5,000,000 0.1
USD 18,500,000 7.50% due 3/01/2001 18,500,000 18,685,000 0.2
USD 5,000,000 Mid-Atlantic Realty Trust,
Convertible Bonds, 7.625% due
9/15/2003 4,875,000 4,125,000 0.1
USD 5,000,000 National Health Investors, Inc.,
Convertible Bonds, 7.375% due
4/01/1998 5,125,000 5,150,000 0.1
USD 14,500,000 Nationwide Health Properties Inc.,
Convertible Bonds, 6.25% due
1/01/1999 14,450,000 14,355,000 0.1
USD 5,500,000 Sizeler Property Investors, Inc.,
Convertible Bonds, 8% due
7/15/2003 5,505,000 4,867,500 0.1
-------------- -------------- ------
108,746,100 106,598,750 1.3
Resources USD 32,500,000 Freeport-McMoRan Resources,
8.75% due 2/15/2004 31,378,750 31,403,125 0.4
Savings Bank USD 15,000,000 Crossland Federal Savings Bank,
9% due 9/01/2003 15,634,250 15,150,000 0.2
USD 21,400,000 First Federal Financial Corporation,
11.75% due 10/01/2004 21,401,250 21,346,500 0.2
-------------- -------------- ------
37,035,500 36,496,500 0.4
Steel USD 23,625,000 NS Group, Inc., 13.50% due
7/15/2003 22,526,813 22,680,000 0.3
Supermarkets USD 39,650,000 Eagle Food Centers Inc., 8.625%
due 4/15/2000 36,095,837 18,040,750 0.2
USD 5,000,000 Pueblo Xtra International Inc.,
9.50% due 8/01/2003 4,588,750 4,500,000 0.1
-------------- -------------- ------
40,684,587 22,540,750 0.3
</TABLE>
F-18
<PAGE>
<TABLE>
<S> <C> <S> <C> <C> <C>
Telecommuni- USD 46,500,000 Cellnet Data Systems, 9.1479% due
cations 6/15/2005 (b) 25,166,686 25,691,250 0.3
USD 95,000,000 Geotek Communications Inc.,
14.975% due 7/15/2005 (b) 46,421,106 46,787,500 0.6
Nextel Communications, Inc. (b):
USD 3,000,000 11.21% due 9/01/2003 2,158,895 1,811,250 0.0
USD 33,500,000 9.96% due 8/15/2004 22,383,911 17,545,625 0.2
-------------- -------------- ------
96,130,598 91,835,625 1.1
Textiles & USD 23,500,000 Salant Corp., Secured, 10.50%
Apparel due 12/31/1998 23,030,000 18,330,000 0.2
USD 18,250,000 Texfi Industries, Inc., 8.75%
due 8/01/1999 17,930,300 13,961,250 0.2
-------------- -------------- ------
40,960,300 32,291,250 0.4
Trans- USD 8,500,000 Eletson Holdings Inc., 9.25% due
portation 11/15/2003 8,537,500 8,096,250 0.1
USD 22,000,000 OMI Corp., 10.25% due 11/01/2003 21,910,000 18,920,000 0.2
-------------- -------------- ------
30,447,500 27,016,250 0.3
Trans- USD 5,000,000 AMR Corp., 6.125% due 11/01/2024 4,074,641 5,200,000 0.1
portation/
Airline
Utilities-- CTC Mansfield Funding Corp.:
Electric USD 5,500,000 10.25% due 3/30/2003 5,620,000 5,610,000 0.1
USD 12,000,000 11.125% due 9/30/2016 12,820,000 12,300,000 0.2
USD 40,000,000 California Energy Co., Inc.,
10.25% due 1/15/2004 (b) 34,517,325 34,000,000 0.4
USD 8,000,000 Calpine Corp., Inc., 9.25% due
2/01/2004 7,277,500 6,960,000 0.1
Cleveland Electric Illuminating
Company Inc., First Mortgage:
USD 5,000,000 9.30% due 7/26/1999 5,437,500 4,981,250 0.1
USD 12,500,000 9.25% due 7/29/1999 13,562,500 12,437,500 0.2
USD 3,000,000 9.05% due 8/15/2001 3,093,750 2,955,000 0.0
USD 7,500,000 7.625% due 8/01/2002 7,462,500 6,768,750 0.1
USD 5,000,000 7.375% due 6/01/2003 4,700,000 4,387,500 0.0
El Paso Funding:
USD 4,050,000 9.20% due 7/02/1997 3,286,000 2,349,000 0.0
USD 25,000,000 10.375% due 1/02/2011 21,170,000 14,500,000 0.2
USD 62,040,000 10.75% due 4/01/2013 52,996,150 35,983,200 0.4
USD 7,500,000 Public Service Company of
New Mexico, First PV Funding,
10.30% due 1/15/2014 7,137,750 7,612,500 0.1
USD 23,000,000 Public Service Company of
New Mexico, EIP Funding, 10.25%
due 10/01/2012 23,000,000 23,230,000 0.3
Toledo Edison Co.:
USD 2,000,000 9.30% due 4/01/1998 2,130,000 1,990,000 0.0
USD 15,425,000 7.25% due 8/01/1999 15,425,000 14,248,844 0.2
USD 3,000,000 9.50% due 4/01/2001 3,221,250 2,985,000 0.0
USD 1,500,000 7.85% due 3/31/2003 1,296,450 1,353,750 0.0
USD 2,000,000 7.91% due 4/01/2003 1,992,500 1,807,500 0.0
-------------- -------------- ------
226,146,175 196,459,794 2.4
Total Fixed-Income Securities
in the United States 1,367,603,159 1,278,462,246 15.4
Total Investments in Fixed-Income
Securities 4,232,139,273 4,281,932,908 51.4
</TABLE>
F-19
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
COUNTRY
Currency Face Percent of
Denomination Amount Short-Term Securities Cost Value Net Assets
<S> <S> <C> <S> <C> <C> <C>
Canada
Foreign CAD 86,217,000 Canadian Treasury Bill, 6.347%
Government due 8/24/1995 $ 63,356,530 $ 62,634,670 0.8%
Obligations*
Total Short-Term Investments in Canada 63,356,530 62,634,670 0.8
Mexico
Foreign Mexican Cetes (Certificados de
Government la Tesoreria de la Federacion):
Obligations* MXN 42,000,000 30.064% due 8/03/1995 6,290,679 6,822,422 0.1
MXN 18,653,450 60.149% due 2/01/1996 2,251,725 2,518,674 0.0
MXN 82,186,000 26.249% due 2/15/1996 11,594,050 10,962,617 0.1
MXN 212,150,560 24.749% due 2/22/1996 28,534,315 28,124,706 0.3
Total Short-Term Investments in
Mexico 48,670,769 48,428,418 0.5
United States
Commercial USD 47,000,000 ABN-AMRO North America Finance, Inc.,
Paper* 5.70% due 9/01/1995 46,769,308 46,769,308 0.6
USD 50,000,000 Ciesco L.P., 5.70% due 8/23/1995 49,825,833 49,825,833 0.6
USD 40,000,000 Deutsche Bank Finance, 5.71% due
8/11/1995 39,936,556 39,936,556 0.5
Du Pont (E.I.) de Nemours & Co:
USD 50,000,000 5.69% due 8/02/1995 49,992,097 49,992,097 0.6
USD 50,000,000 5.70% due 8/22/1995 49,833,750 49,833,750 0.6
USD 18,694,000 General Electric Capital Corp.,
5.80% due 8/01/1995 18,694,000 18,694,000 0.2
USD 50,000,000 Goldman Sachs Group L.P.,
5.70% due 8/09/1995 49,936,667 49,936,667 0.6
USD 42,082,000 Sheffield Receivables Corp.,
5.87% due 8/01/1995 42,082,000 42,082,000 0.5
USD 100,000,000 UBS Finance (Delaware) Inc.,
5.88% due 8/01/1995 100,000,000 100,000,000 1.2
Total Investments in Commercial Paper 447,070,211 447,070,211 5.4
US Government USD 15,000,000 Federal Home Loan Mortgage Corporation,
Agency 5.81% due 8/02/1995 14,997,579 14,997,579 0.2
Obligations*
Total Investments in US Government
Agency Obligations 14,997,579 14,997,579 0.2
Total Short-Term Investments in the
United States 462,067,790 462,067,790 5.6
Total Investments in Short-Term
Securities 574,095,089 573,130,879 6.9
Total Investments $7,654,662,916 8,203,618,539 98.5
==============
Unrealized Depreciation on Forward Foreign Exchange Contracts** (13,880,557) (0.2)
Variation Margin on Futures Contracts*** 688,896 0.0
Other Assets Less Liabilities 137,587,677 1.7
-------------- ------
Net Assets $8,328,014,555 100.0%
============== ======
</TABLE>
F-20
<PAGE>
[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)Represents a zero coupon or step bond; the interest rate shown is the
effective yield at the time of purchase.
(c)Represents a pay-in-kind security.
(d)Subject to principal paydowns as a result of prepayments or refinancings of
the underlying mortgage instruments. As a result, the average life may be
less than the original maturity.
(e)Name changed from Crossland Federal Savings Bank.
(f)The rights may be exercised until 8/08/1995.
++American Depositary Receipt (ADR).
*Commercial Paper and certain US and Foreign Government and Agency
Obligations are traded on a discount basis. The interest rates
shown are the rates in effect on July 31, 1995.
**Forward Foreign Exchange Contracts as of July 31, 1995 were as follows:
Unrealized
Foreign Expiration Appreciation
Currency Sold Date (Depreciation)
CHF 3,000,000 August 1995 $ 612
CHF 55,000,000 September 1995 (39,618)
DEM 666,500,000 August 1995 (4,764,376)
DEM 325,000,000 September 1995 (1,430,984)
DEM 155,000,000 October 1995 285,222
DKR 7,000,000 August 1995 (6,715)
ECU 123,000,000 August 1995 (2,794,730)
ECU 30,000,000 September 1995 (752,970)
FRF 335,000,000 August 1995 (2,668,862)
FRF 200,000,000 September 1995 (828,614)
FRF 310,000,000 October 1995 (942,780)
GBP 102,000,000 August 1995 (967,613)
GBP 32,000,000 September 1995 (92,480)
NLG 108,000,000 August 1995 (409,013)
NLG 55,000,000 September 1995 (251,823)
ESP 12,500,000,000 August 1995 (1,474,604)
ESP 7,000,000,000 September 1995 (812,158)
ESP 4,500,000,000 October 1995 (594,852)
JPY 5,000,000,000 August 1995 1,713,682
JPY 24,000,000,000 September 1995 2,490,897
JPY 4,000,000,000 October 1995 461,222
Total Unrealized Depreciation--Net, on
Forward Foreign Exchange Contracts
(US$ Commitment--$2,149,759,277) $(13,880,557)
============
***Financial Futures Contracts purchased as of July 31, 1995 were as follows:
Number of Expiration
Contracts Issue Date Value
330 Standard & Poor's 500 Index September 1995 $(92,919,750)
700 US Treasury Notes September 1995 (76,234,375)
Total Financial Futures Contracts Purchased
(Total Contract Price--$167,728,750) $(169,154,125)
=============
F-21
<PAGE>
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
AS OF JULY 31, 1995
(UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--
$7,654,662,916) (Note 1a)......................... $8,203,618,539
Cash............................................... 6,788,215
Foreign cash (Note 1c) ............................ 4,993,020
Receivables:
Securities sold ................................. $202,946,283
Interest......................................... 125,774,426
Capital shares sold ............................. 14,100,893
Dividends........................................ 7,828,560
Variation margin (Note 1d) ...................... 688,896 351,339,058
------------
Prepaid registration fees and other assets (Note
1g)............................................... 696,869
--------------
Total assets....................................... 8,567,435,701
--------------
LIABILITIES:
Unrealized depreciation on forward foreign exchange
contracts (Note 1d) .............................. 13,880,557
Payables:
Securities purchased............................. 197,353,225
Capital shares redeemed ......................... 15,142,207
Distributor (Note 2)............................. 5,637,484
Investment adviser (Note 2) ..................... 4,871,486 223,004,402
------------
Accrued expenses and other liabilities ............ 2,536,187
--------------
Total liabilities.................................. 239,421,146
--------------
NET ASSETS:
Net assets......................................... $8,328,014,555
==============
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $0.10 par value,
200,000,000 shares authorized..................... $ 10,608,834
Class B Shares of Common Stock, $0.10 par value,
900,000,000 shares authorized..................... 47,860,816
Class C Shares of Common Stock, $0.10 par value,
200,000,000 shares authorized..................... 540,310
Class D Shares of Common Stock, $0.10 par value,
900,000,000 shares authorized..................... 1,535,855
Paid-in capital in excess of par .................. 7,610,282,943
Undistributed investment income--net .............. 235,282,298
Accumulated realized capital losses on investments
and foreign currency transactions--net............ (114,448,685)
Unrealized appreciation on investments and foreign
currency transactions--net........................ 536,352,184
--------------
Net assets......................................... $8,328,014,555
==============
NET ASSET VALUE:
Class A--Based on net assets of $1,472,359,175 and
106,088,337 shares outstanding ................... $ 13.88
==============
Class B--Based on net assets of $6,568,795,317 and
478,608,156 shares outstanding ................... $ 13.72
==============
Class C--Based on net assets of $73,766,684 and
5,403,105 shares outstanding ..................... $ 13.65
==============
Class D--Based on net assets of $213,093,379 and
15,358,550 shares outstanding .................... $ 13.87
==============
</TABLE>
See Notes to Financial Statements.
F-22
<PAGE>
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.,
STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED JULY 31, 1995
(UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1E & 1F):
Interest and discount earned (net of $30,235 foreign
withholding tax)................................... $336,000,180
Dividends (net of $3,203,775 foreign withholding
tax)............................................... 79,251,597
Other............................................... 501,615
------------
Total income........................................ 415,753,392
------------
EXPENSES:
Account maintenance and distribution fees--Class B
(Note 2)........................................... 46,881,433
Investment advisory fees (Note 2)................... 40,778,782
Transfer agent fees--Class B (Note 2)............... 7,236,243
Custodian fees...................................... 2,331,835
Transfer agent fees--Class A (Note 2)............... 1,329,603
Printing and shareholder reports.................... 715,077
Accounting services (Note 2)........................ 447,207
Registration fees (Note 1h)......................... 300,333
Account maintenance and distribution fees--Class C
(Note 2)........................................... 300,358
Account maintenance fees--Class D (Note 2).......... 252,621
Professional fees................................... 173,073
Transfer agent fees--Class D (Note 2)............... 133,347
Transfer agent fees--Class C (Note 2)............... 50,393
Directors' fees and expenses........................ 27,213
Pricing fees........................................ 11,591
Other............................................... 80,484
------------
Total expenses...................................... 101,049,593
------------
Investment income--net.............................. 314,703,799
------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS &
FOREIGN CURRENCY TRANSACTIONS--NET (NOTES 1C, 1D,
1F & 3):
Realized gain (loss) from:
Investments--net.................................. $ 170,896,774
Foreign currency transactions--net................ (126,736,459) 44,160,315
-------------
Change in unrealized appreciation/depreciation on:
Investments--net.................................. 478,482,590
Foreign currency transactions--net................ 21,861,880 500,344,470
------------- ------------
Net realized and unrealized gain on investments and
foreign currency transactions...................... 544,504,785
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERA-
TIONS.............................................. $859,208,584
============
</TABLE>
See Notes to Financial Statements.
F-23
<PAGE>
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS FOR THE YEAR
ENDED ENDED
JULY 31, 1995 OCTOBER 31, 1994
-------------- ----------------
(UNAUDITED)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Investment income--net.......................... $ 314,703,799 $ 261,655,320
Realized gain on investments and foreign cur-
rency transactions--net........................ 44,160,315 27,450,270
Change in unrealized appreciation/depreciation
on investments and foreign currency
transactions--net.............................. 500,344,470 (244,977,781)
-------------- --------------
Net increase in net assets resulting from opera-
tions.......................................... 859,208,584 44,127,809
-------------- --------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE
1H):
Investment income--net:
Class A....................................... (40,572,591) (42,294,885)
Class B....................................... (127,353,416) (157,338,890)
Class C....................................... (874,590) --
Class D....................................... (3,765,243) --
Realized gain on investments--net:
Class A....................................... (31,500,182) (16,636,230)
Class B....................................... (150,016,954) (80,810,426)
Class C....................................... (426,507) --
Class D....................................... (2,156,668) --
-------------- --------------
Net decrease in net assets resulting from divi-
dends and distributions to shareholders........ (356,666,151) (297,080,431)
-------------- --------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase (decrease) in net assets derived
from capital share transactions................ (1,878,920) 2,862,952,855
-------------- --------------
NET ASSETS:
Total increase in net assets.................... 500,663,513 2,610,000,233
Beginning of period............................. 7,827,351,042 5,217,350,809
-------------- --------------
End of period*.................................. $8,328,014,555 $7,827,351,042
============== ==============
*Undistributed investment income--net........... $ 235,282,298 $ 93,144,339
============== ==============
</TABLE>
See Notes to Financial Statements.
F-24
<PAGE>
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
FINANCIAL HIGHLIGHTS
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FROM INFORMATION
PROVIDED IN THE FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------
FOR THE FOR THE YEAR ENDED OCTOBER 31,
NINE MONTHS ENDED ---------------------------------------
JULY 31, 1995++ 1994 1993 1992 1991
----------------- ---------- -------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING PER-
FORMANCE:
Net asset value, begin-
ning of period......... $ 13.07 $ 13.52 $ 11.92 $ 12.16 $ 10.37
---------- ---------- -------- -------- -------
Investment income--net.. .60 .60 .39 .36 .55
Realized and unrealized
gain (loss) on
investments and foreign
currency transactions--
net.................... .90 (.31) 2.14 .89 2.24
---------- ---------- -------- -------- -------
Total from investment
operations............. 1.50 .29 2.53 1.25 2.79
---------- ---------- -------- -------- -------
Less dividends and dis-
tributions:
Investment income--
net.................. (.39) (.51) (.81) (.89) (.45)
Realized gain on
investments--net..... (.30) (.23) (.12) (.60) (.55)
---------- ---------- -------- -------- -------
Total dividends and dis-
tributions............. (.69) (.74) (.93) (1.49) (1.00)
---------- ---------- -------- -------- -------
Net asset value, end of
period................. $ 13.88 $ 13.07 $ 13.52 $ 11.92 $ 12.16
========== ========== ======== ======== =======
TOTAL INVESTMENT RE-
TURN:**
Based on net asset
value per share...... 12.15%# 2.14% 22.61% 11.78% 28.89%
========== ========== ======== ======== =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses.............. .90%* .89% .93% 1.07% 1.29%
========== ========== ======== ======== =======
Investment income--
net.................. 6.22%* 4.60% 3.90% 10.82% 8.96%
========== ========== ======== ======== =======
SUPPLEMENTAL DATA:
Net assets, end of
period
(in thousands)....... $1,472,359 $1,357,906 $917,806 $245,839 $72,702
========== ========== ======== ======== =======
Portfolio turnover.... 27.84% 57.04% 50.35% 59.56% 81.21%
========== ========== ======== ======== =======
</TABLE>
- --------
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
++ Based on average shares outstanding during the period.
See Notes to Financial Statements.
F-25
<PAGE>
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
FINANCIAL HIGHLIGHTS--(CONTINUED)
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FROM INFORMATION
PROVIDED IN THE FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
CLASS B
------------------------------------------------------------
FOR THE FOR THE YEAR ENDED OCTOBER 31,
NINE MONTHS ENDED ------------------------------------------
JULY 31, 1995++ 1994 1993 1992 1991
----------------- ---------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING PER-
FORMANCE:
Net asset value, begin-
ning of period......... $ 12.91 $ 13.38 $ 11.83 $ 12.10 $ 10.33
---------- ---------- ---------- -------- --------
Investment income--net.. .49 .46 .28 .22 .44
Realized and unrealized
gain (loss) on
investments and foreign
currency transactions--
net.................... .88 (.31) 2.11 .91 2.22
---------- ---------- ---------- -------- --------
Total from investment
operations............. 1.37 .15 2.39 1.13 2.66
---------- ---------- ---------- -------- --------
Less dividends and dis-
tributions:
Investment income--
net.................. (.26) (.39) (.72) (.80) (.34)
Realized gain on in-
vestments--net....... (.30) (.23) (.12) (.60) (.55)
---------- ---------- ---------- -------- --------
Total dividends and dis-
tributions............. (.56) (.62) (.84) (1.40) (.89)
---------- ---------- ---------- -------- --------
Net asset value, end of
period................. $ 13.72 $ 12.91 $ 13.38 $ 11.83 $ 12.10
========== ========== ========== ======== ========
TOTAL INVESTMENT RE-
TURN:**
Based on net asset
value per share...... 11.19%# 1.13% 21.42% 10.64% 27.48%
========== ========== ========== ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses, excluding
account maintenance
and distribution
fees................. .92%* .91% .95% 1.09% 1.31%
========== ========== ========== ======== ========
Expenses.............. 1.92%* 1.91% 1.95% 2.09% 2.31%
========== ========== ========== ======== ========
Investment income--
net.................. 5.19%* 3.58% 2.87% 11.95% 7.98%
========== ========== ========== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of
period (in
thousands)........... $6,568,795 $6,457,130 $4,299,545 $958,949 $161,328
========== ========== ========== ======== ========
Portfolio turnover.... 27.84% 57.04% 50.35% 59.56% 81.21%
========== ========== ========== ======== ========
</TABLE>
- --------
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
++ Based on average shares outstanding during the period.
See Notes to Financial Statements.
F-26
<PAGE>
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
FINANCIAL HIGHLIGHTS--(CONTINUED)
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FROM INFORMATION
PROVIDED IN THE FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
CLASS C
--------------------------------------
FOR THE FOR THE PERIOD
NINE MONTHS ENDED OCTOBER 21, 1994+ TO
JULY 31, 1995++ OCTOBER 31, 1994
----------------- --------------------
(UNAUDITED)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 12.91 $12.91
------- ------
Investment income--net.................. .50 .01
Realized and unrealized gain (loss) on
investments and foreign
currency transactions--net............. .87 (.01)
------- ------
Total from investment operations........ 1.37 --
------- ------
Less dividends and distributions:
Investment income--net................ (.33) --
Realized gain on investments--net..... (.30) --
------- ------
Total dividends and distributions....... (.63) --
------- ------
Net asset value, end of period.......... $ 13.65 $12.91
======= ======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.... 11.22%# .00%#
======= ======
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding account mainte-
nance and distribution fees.......... .94%* 1.44%*
======= ======
Expenses.............................. 1.94%* 2.44%*
======= ======
Investment income--net................ 5.16%* 3.71%*
======= ======
SUPPLEMENTAL DATA:
Net assets, end of period (in thou-
sands)............................... $73,767 $7,347
======= ======
Portfolio turnover.................... 27.84% 57.04%
======= ======
</TABLE>
- --------
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
+ Commencement of Operations.
++ Based on average shares outstanding during the period.
See Notes to Financial Statements.
F-27
<PAGE>
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
FINANCIAL HIGHLIGHTS--(CONCLUDED)
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FROM INFORMATION
PROVIDED IN THE FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
CLASS D
-------------------------------------
FOR THE FOR THE PERIOD
NINE MONTHS ENDED OCTOBER 21, 1994+
JULY 31, 1995++ TO OCTOBER 31, 1994
----------------- -------------------
(UNAUDITED)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..... $ 13.08 $13.07
-------- ------
Investment income--net................... .59 .01
Realized and unrealized gain on
investments and foreign currency
transactions--net....................... .87 --
-------- ------
Total from investment operations......... 1.46 .01
-------- ------
Less dividends and distributions:
Investment income--net................. (.37) --
Realized gain on investments--net...... (.30) --
-------- ------
Total dividends and distributions........ (.67) --
-------- ------
Net asset value, end of period........... $ 13.87 $13.08
======== ======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share..... 11.85%# .08%#
======== ======
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding account maintenance
fees.................................. .90%* 1.44%*
======== ======
Expenses............................... 1.15%* 1.69%*
======== ======
Investment income--net................. 5.95%* 4.46%*
======== ======
SUPPLEMENTAL DATA:
Net assets, end of period (in thou-
sands)................................ $213,093 $4,968
======== ======
Portfolio turnover..................... 27.84% 57.04%
======== ======
</TABLE>
- --------
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
+ Commencement of Operations.
++ Based on average shares outstanding during the period.
See Notes to Financial Statements.
F-28
<PAGE>
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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 Fund offers four classes of shares under the Merrill
Lynch Select Pricing SM System. Shares of Class A and Class D are sold with a
front-end sales charge. Shares of Class B and Class C may be subject to a
contingent deferred sales charge. All classes of shares have identical voting,
dividend, liquidation and other rights and the same terms and conditions,
except that Class B, Class C and Class D Shares bear certain expenses related
to the account maintenance of such shares, and Class B and Class C Shares also
bear certain expenses related to the distribution of such shares. Each class
has exclusive voting rights with respect to matters relating to its account
maintenance and distribution expenditures. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities which are traded on stock
exchanges are valued at the last sale price on the exchange on which such
securities are traded, as of the close of business on the day the securities
are being valued or, lacking any sales, at the last available bid price.
Securities traded in the over-the-counter market are valued at the last
available bid price prior to the time of valuation. In cases where securities
are traded on more than one exchange, the securities are valued on the
exchange designated by or under the authority of the Board of Directors as the
primary market. Securities which are traded both in the over-the-counter
market and on a stock exchange are valued according to the broadest and most
representative market. Options written are valued at the last sale price in
the case of exchange-traded options or, in the case of options traded in the
over-the-counter market, the last asked price. Options purchased are valued at
the last sale price in the case of exchange-traded options or, in the case of
options traded in the over-the-counter market, the last bid price. Short-term
securities are valued at amortized cost, which approximates market value.
Other investments, including futures contracts and related options, are stated
at market value. Securities and assets for which market value quotations are
not readily available are valued at their fair value as determined in good
faith by or under the direction of the Funds Board of Directors.
(b) Repurchase agreements--The Fund invests in US Government securities
pursuant to repurchase agreements with a member bank of the Federal Reserve
System or a primary dealer in US Government securities. Under such agreements,
the bank or primary dealer agrees to repurchase the security at a mutually
agreed upon time and price. The Fund takes possession of the underlying
securities, marks to market such securities and, if necessary, receives
additions to such securities daily to ensure that the contract is fully
collateralized.
(c) Foreign currency transactions--Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized.
Assets and liabilities denominated in foreign currencies are valued at the
exchange rate at the end of the period. Foreign currency transactions are the
result of settling (realized) or valuing (unrealized) receivables or payables
expressed in foreign currencies into US dollars. Realized and unrealized gains
or losses from investments include the effects of foreign exchange rates on
investments.
(d) Derivative financial instrument--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its portfolio
against adverse movements in the equity, debt, and currency markets. Losses
may arise due to changes in the value of the contract or if the counterparty
does not perform under the contract.
. Forward foreign exchange contracts--The Fund is authorized to enter into
forward foreign exchange contracts as a hedge against either specific
transactions or portfolio positions. Such contracts are not entered on
the Fund's records. However, the effect on operations is recorded from
the date the Fund enters into such contracts. Premium or discount is
amortized over the life of the contracts.
F-29
<PAGE>
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
. Foreign currency options and futures--The Fund may also purchase or sell
listed or over-the-counter foreign currency options, foreign currency
futures and related options on foreign currency futures as a short or
long hedge against possible variations in foreign exchange rates. Such
transactions may be effected with respect to hedges on non-US dollar
denominated securities owned by the Fund, sold by the Fund but not yet
delivered, or committed or anticipated to be purchased by the Fund.
. Options--The Fund is authorized to purchase and write covered call and
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.
. 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.
(e) Income taxes--It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends, and
capital gains at various rates.
(f) 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.
(g) Prepaid registration fees--Prepaid registration fees are charged to
expense as the related shares are issued.
(h) Dividends and distributions--Dividends and distributions paid by the Fund
are recorded on the ex- dividend dates.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Fund has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch &
Co., Inc. ("ML & Co."), which is the limited partner. The Fund has
F-30
<PAGE>
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
also entered into a Distribution Agreement and Distribution Plans with Merrill
Lynch Funds Distributor, Inc. ("MLFD" or "Distributor"), a wholly owned
subsidiary of Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and provides
the necessary personnel, facilities, equipment and certain other services
necessary to the operations of the Fund. For such services, the Fund pays a
monthly fee of 0.75%, on an annual basis, of the average daily value of the
Fund's net assets. MLAM has agreed to waive a portion of its fee payable by the
Fund so that such fee is reduced for average daily net assets of the Fund, in
excess of $2.5 billion from the annual rate of 0.75% to 0.70%, and further
reduced from 0.70% to 0.65% for average daily net assets in excess of $5
billion. MLAM has entered into a sub-advisory agreement with Merrill Lynch
Asset Management U.K., Ltd. ("MLAM U.K."), an 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 period ended July 31, 1995, MLAM paid MLAM
U.K. a fee of $5,774,203 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 next $70 million of average
daily net assets, and 1.5% of the average daily net assets in excess thereof.
MLAM's obligation to reimburse the Fund is limited to the amount of the
management fee. No fee payment will be made to MLAM during any fiscal year
which will cause such expenses to exceed the most restrictive expense
limitation at the time of such payment.
Pursuant to the distribution plans ("the Distribution Plans") adopted by the
Fund in accordance with Rule 12b-1 under the Investment Company Act of 1940,
the Fund pays the Distributor ongoing account maintenance and distribution
fees. The fees are accrued daily and paid monthly at annual rates based upon
the average daily net assets of the shares as follows:
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE FEE DISTRIBUTION FEE
--------------- ----------------
<S> <C> <C>
Class B................................... 0.25% 0.75%
Class C................................... 0.25% 0.75%
Class D................................... 0.25% --
</TABLE>
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce,
Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co., also provides account
maintenance and distribution services to the Fund. The ongoing account
maintenance fee compensates the Distributor and MLPF&S for providing account
maintenance services to Class B, Class C and Class D shareholders. The ongoing
distribution fee compensates the Distributor and MLPF&S for providing
shareholder and distribution-related services to Class B and Class C
shareholders.
For the period ended July 31, 1995, MLFD earned underwriting discounts and
MLPF&S earned dealer concessions on sales of the Fund's Class A and Class D
shares as follows:
<TABLE>
<CAPTION>
MLFD MLPF&S
------- --------
<S> <C> <C>
Class A................................................... $36,233 $609,811
Class D................................................... $60,604 $992,396
</TABLE>
For the period ended July 31, 1995, MLPF&S received contingent deferred sales
charges of $11,401,240 and $16,937 relating to transactions in Class B and
Class C Shares, respectively.
F-31
<PAGE>
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
In addition, MLPF&S received $108,540 in commissions on the execution of
portfolio security transactions for the Fund for the period ended July 31,
1995.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned
subsidiary of ML & Co. is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or directors
of MLAM, PSI, MLPF&S, MLFDS , MLFD and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the
period ended July 31, 1995, were $2,075,267,299 and $2,787,857,202
respectively.
Net realized and unrealized gains (losses) as of July 31, 1995 were as
follows:
<TABLE>
<CAPTION>
REALIZED UNREALIZED
GAINS (LOSSES) GAINS (LOSSES)
-------------- --------------
<S> <C> <C>
Long-term investments....................... $ 186,107,766 $549,919,833
Short-term investments...................... (5,576,988) (964,210)
Financial futures contracts................. (9,634,004) (1,425,375)
Forward foreign exchange contracts.......... (162,907,290) (13,880,557)
Foreign currency transactions............... 36,170,831 2,702,493
------------- ------------
Total....................................... $ 44,160,315 $536,352,184
============= ============
</TABLE>
As of July 31, 1995, net unrealized appreciation for Federal income tax
purposes aggregated $548,955,623 of which $857,331,802 related to appreciated
securities and $308,376,179 related to depreciated securities. At July 31,
1995, the aggregate cost of investments for Federal income tax purposes was
$7,654,662,916.
4. CAPITAL SHARE TRANSACTIONS:
Net increase (decrease) in net assets derived from capital share transactions
was $(1,878,920) and $2,862,952,855 for the nine months ended July 31, 1995 and
the year ended October 31, 1994, respectively.
Transactions in capital shares for each class were as follows:
<TABLE>
<CAPTION>
CLASS A SHARES FOR THE NINE MONTHS DOLLAR
ENDED JULY 31, 1995 SHARES AMOUNT
---------------------------------- ----------- -------------
<S> <C> <C>
Shares sold................................... 20,310,222 $ 259,610,075
Shares issued to shareholders in reinvestment
of dividends and distributions............... 5,067,208 63,395,842
----------- -------------
Total issued.................................. 25,377,430 323,005,917
Shares redeemed............................... (23,149,716) (297,393,479)
----------- -------------
Net increase.................................. 2,227,714 $ 25,612,438
=========== =============
</TABLE>
F-32
<PAGE>
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
<TABLE>
<CAPTION>
CLASS A SHARES FOR THE YEAR DOLLAR
ENDED OCTOBER 31, 1994 SHARES AMOUNT
--------------------------- ------------ ---------------
<S> <C> <C>
Shares sold................................ 51,696,255 $ 691,831,423
Shares issued to shareholders in
reinvestment of dividends and
distributions............................. 3,969,366 52,332,829
------------ ---------------
Total issued............................... 55,665,621 744,164,252
Shares redeemed............................ (19,692,065) (262,792,460)
------------ ---------------
Net increase............................... 35,973,556 $ 481,371,792
============ ===============
<CAPTION>
CLASS B SHARES FOR THE NINE MONTHS DOLLAR
ENDED JULY 31, 1995 SHARES AMOUNT
---------------------------------- ------------ ---------------
<S> <C> <C>
Shares sold................................ 53,600,075 $ 680,442,655
Shares issued to shareholders in
reinvestment of dividends and
distributions............................. 19,807,279 244,145,118
------------ ---------------
Total issued............................... 73,407,354 924,587,773
Automatic conversion of shares............. (1,408,932) (18,435,509)
Shares redeemed............................ (93,651,548) (1,187,253,604)
------------ ---------------
Net decrease............................... (21,653,126) $ (281,101,340)
============ ===============
<CAPTION>
CLASS B SHARES FOR THE YEAR DOLLAR
ENDED OCTOBER 31, 1994 SHARES AMOUNT
--------------------------- ------------ ---------------
<S> <C> <C>
Shares sold................................ 225,442,147 $ 2,984,209,294
Shares issued to shareholders in
reinvestment of dividends and
distributions............................. 16,263,879 212,326,903
------------ ---------------
Total issued............................... 241,706,026 3,196,536,197
Shares redeemed............................ (62,873,994) (827,228,356)
------------ ---------------
Net increase............................... 178,832,032 $ 2,369,307,841
============ ===============
<CAPTION>
CLASS C SHARES FOR THE NINE MONTHS DOLLAR
ENDED JULY 31, 1995 SHARES AMOUNT
---------------------------------- ------------ ---------------
<S> <C> <C>
Shares sold................................ 5,581,943 $ 70,620,108
Shares issued to shareholders in
reinvestment of dividends and
distributions............................. 91,498 1,150,744
------------ ---------------
Total issued............................... 5,673,441 71,770,852
Shares redeemed............................ (839,353) (10,583,243)
------------ ---------------
Net increase............................... 4,834,088 $ 61,187,609
============ ===============
<CAPTION>
CLASS C SHARES FOR THE PERIOD DOLLAR
OCTOBER 21, 1994+ TO OCTOBER 31, 1994 SHARES AMOUNT
------------------------------------- ------------ ---------------
<S> <C> <C>
Shares sold................................ 569,603 $ 7,333,052
Shares redeemed............................ (586) (7,533)
------------ ---------------
Net increase............................... 569,017 $ 7,325,519
============ ===============
</TABLE>
- --------
+ Commencement of Operations.
F-33
<PAGE>
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)--(CONCLUDED)
<TABLE>
<CAPTION>
CLASS D SHARES FOR THE NINE MONTHS DOLLAR
ENDED JULY 31, 1995 SHARES AMOUNT
---------------------------------- ----------- ---------------
<S> <C> <C>
Shares sold................................. 15,224,171 $ 195,184,002
Automatic conversion of shares.............. 1,392,236 18,435,509
Shares issued to shareholders in
reinvestment of dividends and
distributions.............................. 416,394 5,268,928
----------- ---------------
Total issued................................ 17,032,801 218,888,439
Shares redeemed............................. (2,054,154) (26,466,066)
----------- ---------------
Net increase................................ 14,978,647 $ 192,422,373
=========== ===============
<CAPTION>
CLASS D SHARES FOR THE PERIOD DOLLAR
OCTOBER 21, 1994+ TO OCTOBER 31, 1994 SHARES AMOUNT
------------------------------------- ----------- ---------------
<S> <C> <C>
Shares sold................................. 385,289 $ 5,017,907
Shares redeemed............................. (5,386) (70,204)
----------- ---------------
Net increase................................ 379,903 $ 4,947,703
=========== ===============
</TABLE>
- --------
+ Commencement of Operations.
5. COMMITMENTS:
At July 31, 1995 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 $1,900 and $11,828,000, respectively.
F-34
<PAGE>
MERRILL LYNCH BALANCED FUND FOR INVESTMENT AND RETIREMENT, INC.
The financial statements and accompanying notes for the year ended September
30, 1995, and the independent auditors' report thereon, dated October , 1995,
of Balanced Fund are set forth below.
[AUDITED 9/30/95 FISCAL YEAR END FINANCIALS AND ACCOMPANYING AUDITOR'S REPORT
WILL BE PROVIDED BY AMENDMENT, WHEN AVAILABLE.]
F-35
<PAGE>
PART C
OTHER INFORMATION
ITEM 15. 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 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 the vote of a
majority of a quorum of the directors who are neither "interested persons," as
defined in Section 2(a)(19) of the Investment Company Act of 1940, as amended,
nor parties to the proceeding ("the 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.
Article VI of the By-Laws further provides that 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.
Each officer and director of the Registrant claiming indemnification within
the scope of Article VI of Registrant's By-laws shall be entitled to advances
from the Registrant for payment of the reasonable expenses incurred by him in
connection with proceedings to which he is a party in the manner and to the
full extent permitted under the General Laws of the State of Maryland;
provided, however, that the person seeking indemnification shall provide to the
Registrant a written affirmation of his good faith belief that the standard of
conduct necessary for indemnification by the Registrant has been met and a
written undertaking to repay any such advance, if it should ultimately be
determined that the standard of conduct has not been met, and provided further
that at least one of the following additional conditions is met: (a) the person
seeking indemnification shall provide a security in form and amount acceptable
to the Registrant for his undertaking; (b) the Registrant is insured against
losses arising by reason of the advance; or (c) a majority of a quorum of non-
party independent directors, or legal counsel in a written opinion, shall
determine, based on a review of facts readily available to the Registrant at
the time the advance is proposed to be made, that there is reason to believe
that the person seeking indemnification will ultimately be found to be entitled
to indemnification.
The Registrant has purchased an insurance policy insuring its officers and
directors against liabilities, and certain costs of defending claims against
such officers and directors, to the extent such officers and directors are not
found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties.
Article IV of the Management Agreement between Registrant and Merrill Lynch
Asset Management, Inc. (now called Merrill Lynch Asset Management L.P.)
("MLAM") (Exhibit 5(a) to Registrant's Registration Statement on Form N-1A) and
Article IV of the Sub-Advisory Agreement between MLAM and Merrill Lynch Asset
Management U.K., Limited ("MLAM U.K.") (Exhibit 5(b) to Registrant's
Registration Statement on Form N-1A) limits the liability of MLAM and MLAM
U.K., respectively, to liabilities arising
C-1
<PAGE>
from willful misfeasance, bad faith or gross negligence in the performance of
their respective duties or from reckless disregard of their respective duties
and obligations.
In Section 9 of the 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 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 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
1.(a) Articles of Incorporation of the Registrant. (c)
(b) Articles of Amendment to Articles of Incorporation of the Registrant.
(c)
(c) Articles Supplementary to Articles of Incorporation of the Registrant.
(c)
(d) Articles of Amendment to the Articles of Incorporation dated October
19, 1994. (f)
(e) Articles Supplementary to the Articles of Incorporation dated October
21, 1994. (f)
2. By-Laws of the Registrant. (a)
3. Not Applicable.
4. Form of Agreement and Plan of Reorganization between Merrill Lynch
Balanced Fund for Investment and Retirement, Inc. and the Registrant.
(g)
5. Copies of instruments defining the rights of shareholders, including
the relevant portions of the Articles of Incorporation, as amended,
and By-Laws of Registrant. (b)
6.(a) Management Agreement between Registrant and Merrill Lynch Asset
Management, Inc. (a)
(b) Sub-Advisory Agreement between Merrill Lynch Asset Management, Inc.
and Merrill Lynch Asset Management U.K., Limited. (a)
(c) Supplement to Management Agreement between Registrant and Merrill
Lynch Asset Management L.P., dated January 3, 1994. (d)
7.(a) Class A Shares Distribution Agreement between Registrant and Merrill
Lynch Funds Distributor, Inc. (d)
(b) 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. (c)
(d) Class C Shares Distribution Agreement between Registrant and Merrill
Lynch Funds Distributor, Inc. (d)
(e) Class D Shares Distribution Agreement between Registrant and Merrill
Lynch Funds Distributor, Inc. (d)
</TABLE>
C-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
<S> <C>
8. None
9. Custodian Agreement between Registrant and Brown Brothers Harriman & Co. (a)
10.(a) Amended and Restated Class B Shares Distribution Plan and Class B Shares
Distribution Plan Sub-Agreement of the Registrant. (c)
(b) Form of Class C Shares Distribution Plan and Class C Shares Distribution Plan Sub-
Agreement of the Registrant. (d)
(c) Form of Class D Shares Distribution Plan and Class D Shares Distribution Plan Sub-
Agreement of the Registrant. (d)
11. Opinion of Brown & Wood as to legality (including consent of such firm).
12. Not Applicable.
13. Not Applicable.
14.(a) Consent of Deloitte & Touche LLP, Independent Auditors for the Registrant.
(b) Consent of Deloitte & Touche LLP, Independent Auditors for Merrill Lynch Balanced
Fund for Investment and Retirement, Inc.
15. Not Applicable.
16. Included on the signature page of this Registration Statement.
17.(a) Declaration pursuant to Rule 24f-2 under the Investment Company Act of 1940 of the
Registrant. (e)
(b) Prospectus dated February 27, 1995, and Statement of Additional Information dated
February 27, 1995, of the Registrant.
(c) Prospectus dated January 31, 1995, and Statement of Additional Information dated
January 31, 1995, of Merrill Lynch Balanced Fund for Investment and Retirement,
Inc.
</TABLE>
- --------
(a) Incorporated by reference to an exhibit to Pre-Effective Amendment No. 2 to
Registrant's Registration Statement under the Securities Act of 1933 on
Form N-1A filed on December 15, 1988 (File No. 33-22462) (the "Registration
Statement").
(b) Reference is made to Article III (Sections 3 and 4), Article V, Article VI
(Section 3), 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 filed as Exhibit (1)(c)
to the Registration Statement; Article V (Section 9) contained in the
Articles of Amendment filed as Exhibit (1)(d) to the Registration
Statement; the Articles Supplementary filed as Exhibit (1)(e) 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 Registration's By-
Laws filed as Exhibit (2) to the Registration Statement.
(c) Filed on February 24, 1994, as an exhibit to Post-Effective Amendment No. 7
to the Registration Statement.
(d) Filed on October 18, 1994, as an exhibit to Post-Effective Amendment No. 8
to the Registration Statement.
(e) Incorporated by reference to Pre-Effective Amendment No. 2 to Registrant's
Registration Statement.
(f) Incorporated by reference to Post-Effective Amendment No. 9 to Registrant's
Registration Statement, filed on February 25, 1995.
(g) Filed herewith as Exhibit I to the Proxy Statement and Prospectus.
C-3
<PAGE>
ITEM 17. UNDERTAKINGS
(1) The undersigned Registrant agrees that prior to any public reoffering of
the securities registered through use of a prospectus which is part of this
Registration Statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act of 1933, as
amended, the reoffering prospectus will contain information called for by the
applicable registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by other items of the
applicable form.
(2) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the Securities Act of 1933, as
amended, each post-effective amendment shall be deemed to be a new registration
statement for the securities offered thereon, and the offering of securities at
that time shall be deemed to be the initial bona fide offering of them.
C-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED ON BEHALF OF THE REGISTRANT, IN THE TOWNSHIP OF
PLAINSBORO, AND THE STATE OF NEW JERSEY, ON THE 12TH DAY OF OCTOBER 1995.
MERRILL LYNCH GLOBAL ALLOCATION
FUND, INC.
(Registrant)
/s/ Arthur Zeikel
By __________________________________
(ARTHUR ZEIKEL, PRESIDENT)
Each person whose signature appears below hereby authorizes Arthur Zeikel,
Terry K. Glenn, and Gerald M. Richard, or any of them, as attorney-in-fact, to
sign on his behalf, individually and in each capacity stated below, any
amendments to this Registration Statement (including post-effective amendments)
and to file the same, with all exhibits thereto, with the Securities and
Exchange Commission.
AS REQUIRED BY THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS
BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES
INDICATED.
SIGNATURE TITLE DATE
/s/ Arthur Zeikel President and October 12,
- ------------------------------------- Director (Principal 1995
(ARTHUR ZEIKEL) Executive Officer)
/s/ Gerald M. Richard Treasurer (Principal October 12,
- ------------------------------------- Financial and 1995
(GERALD M. RICHARD) Accounting Officer)
/s/ Donald Cecil Director October 12,
- ------------------------------------- 1995
(DONALD CECIL)
/s/ Edward H. Meyer Director October 12,
- ------------------------------------- 1995
(EDWARD H. MEYER)
/s/ Charles C. Reilly Director October 12,
- ------------------------------------- 1995
(CHARLES C. REILLY)
/s/ Richard R. West Director October 12,
- ------------------------------------- 1995
(RICHARD R. WEST)
/s/ Edward D. Zinbarg Director October 12,
- ------------------------------------- 1995
(EDWARD D. ZINBARG)
C-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
11 --Opinion of Brown & Wood as to legality (including consent of such
firm).
14(a) --Consent of Deloitte & Touche LLP, Independent Auditors for the
Registrant.
(b) --Consent of Deloitte & Touche LLP, Independent Auditors for Merrill
Lynch Balanced Fund for Investment and Retirement, Inc.
17(b) --Prospectus dated February 27, 1995, and Statement of Additional
Information dated
February 27, 1995, of the Registrant.
17(c) --Prospectus dated January 31, 1995, and Statement of Additional
Information dated January 31, 1995, of Merrill Lynch Balanced Fund
for Investment and Retirement Fund, Inc.
</TABLE>
<PAGE>
EXHIBIT 99.11
BROWN & WOOD
ONE WORLD TRADE CENTER
NEW YORK, NEW YORK 10048-0557
TELEPHONE: (212) 839-5300
FACSIMILE: (212) 839-5599
October 13, 1995
Merrill Lynch Global Allocation Fund, Inc.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Ladies and Gentlemen:
We have acted as counsel for Merrill Lynch Global Allocation Fund, Inc.
(the "Fund") in connection with the proposed acquisition by the Fund of
substantially all of the assets and the assumption of substantially all of the
liabilities of Merrill Lynch Balanced Fund for Investment and Retirement, Inc.
("Balanced Fund"), in exchange for newly-issued shares of common stock of the
Fund (the "Acquisition"). This opinion is furnished in connection with the
Fund's Registration Statement on Form N-14 under the Securities Act of 1933, as
amended (the "Registration Statement"), relating to shares of common stock, par
value $0.10 per share, of the Fund (the "Shares"), to be issued in the
Acquisition.
As counsel for the Fund, we are familiar with the proceedings taken by it
and to be taken by it in connection with the authorization, issuance and sale of
the Shares. In addition, we have examined and are familiar with the Articles of
Incorporation of the Fund, as amended and supplemented, the By-Laws of the Fund,
as amended, and such other documents as we have deemed relevant to the matters
referred to in this opinion.
Based upon the foregoing, we are of the opinion that subsequent to the
approval of the Agreement and Plan of Reorganization between the Fund and
Balanced Fund set forth in the proxy statement and prospectus constituting a
part of the Registration Statement (the "Proxy Statement and Prospectus"), the
Shares, upon issuance in the manner referred to in the Registration Statement,
for consideration not less than the par value thereof, will be legally issued,
fully paid and non-assessable shares of common stock of the Fund.
<PAGE>
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Proxy Statement and
Prospectus constituting parts thereof.
Very truly yours,
/s/ Brown & Wood
2
<PAGE>
EXHIBIT 14(a)
INDEPENDENT AUDITORS' CONSENT
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.:
We consent to the incorporation by reference in this Registration Statement
on Form N-14 of our report dated December 7, 1994 relating to the October 31,
1994 financial statements of Merrill Lynch Global Allocation Fund, Inc., and to
the reference to us under the captions "Financial Highlights" and "Experts"
appearing in the Proxy Statement and Prospectus, which is a part of such
Registration Statement.
Deloitte & Touche LLP
Princeton, New Jersey
October 12, 1995
<PAGE>
EXHIBIT 14(b)
INDEPENDENT AUDITORS' CONSENT
MERRILL LYNCH BALANCED FUND FOR INVESTMENT AND RETIREMENT, INC.:
We consent to the incorporation by reference in this Registration Statement
on Form N-14 of our report dated October 31, 1994 relating to the September 30,
1994 financial statements of Merrill Lynch Balanced Fund for Investment and
Retirement, Inc. and to the reference to us under the captions "Financial
Highlights" and "Experts" appearing in the Proxy Statement and Prospectus,
which is a part of such Registration Statement.
Deloitte & Touche LLP
Princeton, New Jersey
October 12, 1995
<PAGE>
EXHIBIT 99.17(B)
PROSPECTUS
FEBRUARY 27, 1995
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
Merrill Lynch Global Allocation Fund, Inc. (the "Fund") is a non-diversified
mutual fund seeking high total investment return, consistent with prudent
risk, through a fully-managed investment policy utilizing United States and
foreign equity, debt and money market securities, the combination of which
will be varied from time to time both with respect to types of securities and
markets in response to changing market and economic trends. Total investment
return is the aggregate of capital value changes and income. There can be no
assurance that the Fund's investment objective will be achieved. The Fund may
employ a variety of instruments and techniques to enhance income and to hedge
against market and currency risk. Investments on an international basis
involve special considerations. See "Special Considerations".
----------------
Pursuant to the Merrill Lynch Select Pricing SM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select Pricing SM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances. See
"Merrill Lynch Select Pricing SM System" on page 3.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9011, Princeton, New Jersey 08543-9011 [(609)
282-2800], or from securities dealers which have entered into selected dealers
agreements with the Distributor, including Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000,
and the minimum subsequent purchase is $50, except that for retirement plans
the minimum initial purchase is $100, and the minimum subsequent purchase is
$1. Merrill Lynch may charge its customers a processing fee (presently $4.85)
for confirming purchases and repurchases. Purchases and redemptions directly
through the Fund's transfer agent are not subject to the processing fee. See
"Purchase of Shares" and "Redemption of Shares".
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURI-
TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated February 27, 1995 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission and
is available, without charge, by calling or by writing the Fund at the above
telephone number or address. The Statement of Additional Information is hereby
incorporated by reference into this Prospectus.
----------------
MERRILL LYNCH ASSET MANAGEMENT--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C CLASS D
---------- ------------------------ -------- -------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES:
Maximum Sales Charge
Imposed on Purchases
(as a percentage of
offering price)....... 5.25%(c) None None 5.25%(c)
Sales Charge Imposed
on Dividend
Reinvestments......... None None None None
Deferred Sales Charge
(as a percentage of
original purchase None(d) 4.0% during the first 1% for None(d)
price or redemption year, one year
proceeds, whichever decreasing 1.0% annually
is lower)............. thereafter
to 0.0% after the fourth
year
Exchange Fee........... None None None None
ANNUAL FUND OPERATING
EXPENSES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)(E):
Investment Advisory
Fees(f)............... 0.71% 0.71% 0.71% 0.71%
12b-1 Fees(g):
Account Maintenance
Fees................ None 0.25% 0.25% 0.25%
Distribution Fees.... None 0.75% 0.75% None
(Class B shares convert
to Class D shares
automatically after
approximately eight
years and cease being
subject to distribution
fees)
Other Expenses:
Custodial Fees....... 0.04% 0.04% 0.04% 0.04%
Shareholder Servicing
Costs(h)............ 0.08% 0.10% 0.10% 0.08%
Other................ 0.06% 0.06% 0.06% 0.06%
---- ---- ---- ----
Total Other Expenses. 0.18% 0.20% 0.20% 0.18%
---- ---- ---- ----
Total Fund Operating 0.89% 1.91% 1.91% 1.14%
Expenses.............. ==== ==== ==== ====
</TABLE>
- --------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and investment programs.
See "Purchase of Shares--Initial Sales Charge Alternatives--Class A and
Class D Shares"--page 29.
(b) Class B shares convert to Class D shares automatically approximately eight
years after initial purchase. See "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares"--page 30.
(c) Reduced for purchases of $25,000 and over. Class A or Class D purchases of
$1,000,000 or more may not be subject to an initial sales charge. See
"Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class
D Shares"--page 29.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that purchases of $1,000,000 or more which may not
be subject to an initial sales charge may instead be subject to a CDSC of
1.0% of amounts redeemed within the first year of purchase.
(e) Information for Class A and Class B shares is stated for the fiscal year
ended October 31, 1994. Information under "Other Expenses" for Class C and
Class D shares is estimated for the fiscal year ending October 31, 1995.
(f) See "Management of the Fund--Management and Advisory Arrangements"--page
25.
(g) See "Purchase of Shares--Distribution Plans"--page 34.
(h) See "Management of the Fund--Transfer Agency Services"--page 26.
2
<PAGE>
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
---------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
An investor would pay the
following expenses on a
$1,000 investment including
the maximum $52.50 initial
sales charge (Class A and
Class D shares only) and
assuming (1) the Total Fund
Operating Expenses for each
Class set forth above, (2)
a 5% annual return through-
out the periods and (3) re-
demption at the end of the
period:
Class A................. $61 $79 $99 $156
Class B................. $59 $80 $103 $204*
Class C................. $29 $60 $103 $223
Class D................. $64 $87 $112 $184
An investor would pay the
following expenses on the
same $1,000 investment as-
suming no redemption at the
end of the period:
Class A................. $61 $79 $99 $156
Class B................. $19 $60 $103 $204*
Class C................. $19 $60 $103 $223
Class D................. $64 $87 $112 $184
</TABLE>
- --------
* Assumes conversion to Class D shares approximately eight years after
purchase.
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Securities and Exchange Commission ("Commission") regulations. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL
RATES OF RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. Class B and Class C
shareholders who hold their shares for an extended period of time may pay more
in Rule 12b-1 distribution fees than the economic equivalent of the maximum
front-end sales charges permitted under the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. ("NASD"). Merrill Lynch may
charge its customers a processing fee (presently $4.85) for confirming
purchases and redemptions. Purchases and redemptions directly through the
Fund's transfer agent are not subject to the processing fee. See "Purchase of
Shares" and "Redemption of Shares".
MERRILL LYNCH SELECT PRICING SM SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing SM System. The shares of each class may be purchased at a price equal
to the next determined net asset value per share subject to the sales charges
and ongoing fee arrangements described below. Shares of Class A and Class D
are sold to investors choosing the initial sales charge alternatives, and
shares of Class B and Class C are sold to investors choosing the deferred
sales charge alternatives. The Merrill Lynch Select Pricing SM System is used
by more than 50 mutual funds advised by Merrill Lynch Asset Management, L.P.
("MLAM" or the "Manager") or an affiliate of MLAM, Fund Asset Management, L.P.
("FAM"). Funds advised by MLAM or FAM are referred to herein as "MLAM-advised
mutual funds".
3
<PAGE>
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The deferred sales charges and account maintenance fees that are imposed on
Class B and Class C shares, as well as the account maintenance fees that are
imposed on the Class D shares, are imposed directly against those classes and
not against all assets of the Fund and, accordingly, such charges do not affect
the net asset value of any other class or have any impact on investors choosing
another sales charge option. Dividends paid by the Fund for each class of
shares are calculated in the same manner at the same time and will differ only
to the extent that account maintenance and distribution fees and any
incremental transfer agency costs relating to a particular class are borne
exclusively by that class. Each class has different exchange privileges. See
"Shareholder Services -- Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges with respect to the Class B and Class C
shares in that the sales charges applicable to each class provide for the
financing of the distribution of the shares of the Fund. The distribution-
related revenues paid with respect to a class will not be used to finance the
distribution expenditures of another class. Sales personnel may receive
different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements for
each class of shares under the Merrill Lynch Select PricingSM System, followed
by a more detailed description of each class and a discussion of the factors
that investors should consider in determining the method of purchasing shares
under the Merrill Lynch Select PricingSM System that the investor believes is
most beneficial under his particular circumstances. More detailed information
as to each class of shares is set forth under "Purchase of Shares".
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(/1/) FEE FEE CONVERSION FEATURE
- ----------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
A Maximum 5.25% initial No No No
sales charge(/2/)(/3/)
- ----------------------------------------------------------------------------------------
B CDSC for a period of 4 0.25% 0.75% B shares convert to D shares
years at a rate of 4.0% automatically after
during the first year, approximately eight
decreasing 1.0% years(/4/)
annually to 0.0%
- ----------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.75% No
- ----------------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(/3/)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. Contingent deferred sales charges ("CDSCs") are
imposed if the redemption occurs within the applicable CDSC time period.
The charge will be assessed on an amount equal to the lesser of the
proceeds of redemption or the cost of the shares being redeemed.
(footnotes continued on following page)
4
<PAGE>
(2) Offered only to eligible investors. See "Purchase of Shares -- Initial
Sales Charge Alternatives -- Class A and Class D Shares -- Eligible Class
A Investors".
(3) Reduced for purchases of $25,000 or more. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead will be subject to a 1.0% CDSC for one year. See "Class
A" and "Class D" below.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other MLAM-
advised mutual funds into which exchanges may be made have a ten year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares.
Investors that currently own Class A shares in a shareholder account
are entitled to purchase additional Class A shares in that account.
Other eligible investors include certain retirement plans and
participants in certain investment programs. In addition, Class A
shares will be offered to Merrill Lynch & Co., Inc. ("ML&Co.") and
its subsidiaries (the term "subsidiaries" when used herein with
respect to ML&Co., includes MLAM, FAM and certain other entities
directly or indirectly wholly-owned and controlled by ML&Co.) and
their directors and employees and to members of the Boards of MLAM-
advised mutual funds. The maximum initial sales charge is 5.25%,
which is reduced for purchases of $25,000 and over. Purchases of
$1,000,000 or more may not be subject to an initial sales charge but
if the initial sales charge is waived such purchases will be subject
to a 1% CDSC if the shares are redeemed within one year after
purchase. Sales charges also are reduced under a right of
accumulation which takes into account the investor's holdings of all
classes of all MLAM-advised mutual funds. See "Purchase of Shares --
Initial Sales Charge Alternatives -- Class A and Class D Shares".
Class B: Class B shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.75% of the Fund's average net
assets attributable to the Class B shares, and a CDSC if they are
redeemed within four years of purchase. Approximately eight years
after issuance, Class B shares will convert automatically into Class
D shares of the Fund, which are subject to an account maintenance fee
but no distribution fee; Class B shares of certain other MLAM-advised
mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately ten years. If Class B shares
of the Fund are exchanged for Class B shares of another MLAM-advised
mutual fund, the conversion period applicable to the Class B shares
acquired in the exchange will apply, and the holding period for the
shares exchanged will be tacked onto the holding period for the
shares acquired. Automatic conversion of Class B shares into Class D
shares will occur at least once a month on the basis of the relative
net asset values of the shares of the two classes on the conversion
date, without the imposition of any sales load, fee or other charge.
Conversion of Class B shares to Class D shares will not be deemed a
purchase or sale of the shares for Federal income tax purposes.
Shares purchased through reinvestment of dividends on Class B shares
will also convert automatically to Class D shares. The conversion
period for dividend reinvestment shares and for certain retirement
plans is modified as described under "Purchase of Shares -- Deferred
Sales Charge Alternatives -- Class B and Class C Shares -- Conversion
of Class B Shares to Class D Shares".
5
<PAGE>
Class C: Class C shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.75% of the Fund's average net
assets attributable to Class C shares. Class C shares are also subject
to a CDSC if they are redeemed within one year of purchase. Although
Class C shares are subject to a 1.0% CDSC for only one year (as
compared to four years for Class B), Class C shares have no conversion
feature and, accordingly, an investor that purchases Class C shares
will be subject to distribution fees that will be imposed on Class C
shares for an indefinite period subject to annual approval by the
Fund's Board of Directors and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. Purchases of $1,000,000 or more may not be subject
to an initial sales charge but if the initial sales charge is waived,
such purchase will be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. The schedule of initial sales
charges and reductions for Class D shares is the same as the schedule
for Class A shares. Class D shares also will be issued upon conversion
of Class B shares as described above under "Class B". See "Purchase of
Shares -- Initial Sales Charge Alternatives -- Class A and Class D
Shares".
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
PricingSM System that the investor believes is most beneficial under his
particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because there is an account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative
particularly attractive because similar sales charge reductions are not
available with respect to the deferred sales charges imposed in connection with
purchases of Class B or Class C shares. Investors not qualifying for reduced
initial sales charges who expect to maintain their investment for an extended
period of time also may elect to purchase Class A or Class D shares, because
over time the accumulated ongoing account maintenance and distribution fees on
Class B or Class C shares may exceed the initial sales charge and, in the case
of Class D shares, the account maintenance fee. Although some investors that
previously purchased Class A shares may no longer be eligible to purchase Class
A shares of other MLAM-advised mutual funds, those previously purchased Class A
shares, together with Class B, Class C and Class D share holdings, will count
toward a right of accumulation which may qualify the investor for reduced
initial sales charges on new initial sales charge purchases. In addition, the
ongoing Class B and Class C account maintenance and distribution fees will
cause Class B and Class C shares to have higher expense ratios, pay lower
dividends and have lower total returns than the initial sales charge shares.
The ongoing Class D account maintenance fees will cause Class D shares to have
a higher expense ratio, pay lower dividends and have a lower total return than
Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the
benefit of putting all of the investor's dollars to work from the time the
investment is made. The deferred sales charge alternatives may be particularly
appealing to
6
<PAGE>
investors who do not qualify for a reduction in initial sales charges. Both
Class B and Class C shares are subject to ongoing account maintenance fees and
distribution fees; however, the ongoing account maintenance and distribution
fees potentially may be offset to the extent any return is realized on the
additional funds initially invested in Class B or Class C shares. In addition,
Class B shares will be converted into Class D shares of the Fund after a
conversion period of approximately eight years, and thereafter investors will
be subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend
to hold their shares for an extended period of time. Investors in Class B
shares should take into account whether they intend to redeem their shares
within the CDSC period and, if not, whether they intend to remain invested
until the end of the conversion period and thereby take advantage of the
reduction in ongoing fees resulting from the conversion into Class D shares.
Other investors, however, may elect to purchase Class C shares if they
determine that it is advantageous to have all their assets invested initially
and they are uncertain as to the length of time they intend to hold their
assets in MLAM-advised mutual funds. Although Class C shareholders are subject
to a shorter CDSC period at a lower rate, they forgo the Class B conversion
feature, making their investment subject to account maintenance and
distribution fees for an indefinite period of time. In addition, while both
Class B and Class C distribution fees are subject to the limitations on asset-
based sales charges imposed by the NASD, the Class B distribution fees are
further limited under a voluntary waiver of asset-based sales charges. See
"Purchase of Shares --Limitations on the Payment of Deferred Sales Charges".
7
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in conjunction
with the annual audits of the financial statements of the Fund by Deloitte &
Touche LLP, independent auditors. Financial statements for the fiscal year
ended October 31, 1994, with respect to Class A and Class B shares, and for
the fiscal period October 21, 1994, to October 31, 1994, with respect to Class
C and Class D shares, and the independent auditors' report thereon are
included in the Statement of Additional Information. The following per share
data and ratios have been derived from information provided in the financial
statements. 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.
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------
FOR THE
PERIOD
FEB. 3,
FOR THE YEAR ENDED OCTOBER 31, 1989+ TO
------------------------------------------------ OCT. 31,
1994 1993 1992 1991 1990 1989
---------- -------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DE-
CREASE) IN NET
ASSET VALUE:
PER SHARE OPERAT-
ING
PERFORMANCE:
Net asset value,
beginning
of period........ $ 13.52 $ 11.92 $ 12.16 $ 10.37 $ 10.79 $ 10.00
---------- -------- -------- ------- ------- -------
Investment in-
come -- net..... .60 .39 .36 .55 .60 .45
Realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions --
net............ (.31) 2.14 .89 2.24 (.16) .48
---------- -------- -------- ------- ------- -------
Total from in-
vestment
operations....... .29 2.53 1.25 2.79 .44 .93
---------- -------- -------- ------- ------- -------
Less dividends
and distribu-
tions:
Investment in-
come -- net..... (.51) (.81) (.89) (.45) (.66) (.14)
Realized gain on
investments --
net............ (.23) (.12) (.60) (.55) (.20) --
---------- -------- -------- ------- ------- -------
Total dividends
and
distributions.... (.74) (.93) (1.49) (1.00) (.86) (.14)
---------- -------- -------- ------- ------- -------
Net asset value,
end of period.... $ 13.07 $ 13.52 $ 11.92 $ 12.16 $ 10.37 $ 10.79
========== ======== ======== ======= ======= =======
TOTAL INVESTMENT
RETURN**
Based on net as-
set value per
share............ 2.14% 22.61% 11.78% 28.89% 3.91% 9.34%++
========== ======== ======== ======= ======= =======
RATIOS TO AVERAGE
NET ASSETS:
Expenses, exclud-
ing
distribution
fees............. .89% .93% 1.07% 1.29% 1.29% 1.37%*
========== ======== ======== ======= ======= =======
Expenses......... .89% .93% 1.07% 1.29% 1.29% 1.37%*
========== ======== ======== ======= ======= =======
Investment in-
come--net........ 4.60% 3.90% 10.82% 8.96% 4.37% 5.31%*
========== ======== ======== ======= ======= =======
SUPPLEMENTAL DA-
TA:
Net assets, end
of period (in
thousands)....... $1,357,906 $917,806 $245,839 $72,702 $49,691 $47,172
========== ======== ======== ======= ======= =======
Portfolio turn-
over............. 57.04% 50.35% 59.56% 81.21% 129.51% 88.59%
========== ======== ======== ======= ======= =======
<CAPTION>
CLASS B CLASS C CLASS D
----------------------------------------------------------------- ---------- ----------
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
FEB. 3, OCT. 21, OCT. 21,
FOR THE YEAR ENDED OCTOBER 31, 1989+ TO 1994+ TO 1994+ TO
----------------------------------------------------- OCT. 31, OCT. 31, OCT. 31,
1994 1993 1992 1991 1990 1989 1994 1994
----------- ----------- --------- --------- --------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DE-
CREASE) IN NET
ASSET VALUE:
PER SHARE OPERAT-
ING
PERFORMANCE:
Net asset value,
beginning
of period........ $ 13.38 $ 11.83 $ 12.10 $ 10.33 $ 10.73 $ 10.00 $12.91 $13.07
----------- ----------- --------- --------- --------- ----------- ---------- ----------
Investment in-
come -- net..... .46 .28 .22 .44 .49 .38 .01 .01
Realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions --
net............ (.31) 2.11 .91 2.22 (.16) .47 (.01) --
----------- ----------- --------- --------- --------- ----------- ---------- ----------
Total from in-
vestment
operations....... .15 2.39 1.13 2.66 .33 .85 -- .01
----------- ----------- --------- --------- --------- ----------- ---------- ----------
Less dividends
and distribu-
tions:
Investment in-
come -- net..... (.39) (.72) (.80) (.34) (.53) (.12) -- --
Realized gain on
investments --
net............ (.23) (.12) (.60) (.55) (.20) -- -- --
----------- ----------- --------- --------- --------- ----------- ---------- ----------
Total dividends
and
distributions.... (.62) (.84) (1.40) (.89) (.73) (.12) -- --
----------- ----------- --------- --------- --------- ----------- ---------- ----------
Net asset value,
end of period.... $ 12.91 $ 13.38 $ 11.83 $ 12.10 $ 10.33 $ 10.73 $12.91 $13.08
=========== =========== ========= ========= ========= =========== ========== ==========
TOTAL INVESTMENT
RETURN**
Based on net as-
set value per
share............ 1.13% 21.42% 10.64% 27.48% 2.93% 8.50%++ .00%++ .08%++
=========== =========== ========= ========= ========= =========== ========== ==========
RATIOS TO AVERAGE
NET ASSETS:
Expenses, exclud-
ing
distribution
fees............. .91% .95% 1.09% 1.31% 1.31% 1.40%* 1.44%* 1.44%*
=========== =========== ========= ========= ========= =========== ========== ==========
Expenses......... 1.91% 1.95% 2.09% 2.31% 2.31% 2.40%* 2.44%* 1.69%*
=========== =========== ========= ========= ========= =========== ========== ==========
Investment in-
come--net........ 3.58% 2.87% 11.95% 7.98% 3.35% 4.29%* 3.71%* 4.46%*
=========== =========== ========= ========= ========= =========== ========== ==========
SUPPLEMENTAL DA-
TA:
Net assets, end
of period (in
thousands)....... $6,457,130 $4,299,545 $958,949 $161,328 $115,682 $113,649 $7,347 $4,968
=========== =========== ========= ========= ========= =========== ========== ==========
Portfolio turn-
over............. 57.04% 50.35% 59.56% 81.21% 129.51% 88.59% 57.04% 57.04%
=========== =========== ========= ========= ========= =========== ========== ==========
</TABLE>
- ----
+Commencement of Operations.
++Aggregate total investment return.
*Annualized.
**Total investment returns exclude the effects of sales loads.
8
<PAGE>
SPECIAL CONSIDERATIONS
As a global fund, the Fund may invest in U.S. and foreign securities.
Investments in securities of foreign entities and securities denominated in
foreign currencies involve risks not typically involved in domestic investment,
including, but not limited to, 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 may 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 or other problems 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 United States.
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.
9
<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, interest rates and
exchange rates between currencies by the use of options, futures and options
thereon. Utilization of options and futures transactions involves the risk of
imperfect correlation in movements in the price of options and futures and
movements in the price of the securities, interest rates or currencies 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. However, the Fund's investments will be limited so as
to qualify for the special tax treatment afforded "regulated investment
companies" under the Internal Revenue Code of 1986, as amended. See "Additional
Information--Taxes".
INVESTMENT OBJECTIVE AND POLICIES
The Fund is a non-diversified, open-end management investment company. The
Fund's investment objective is to seek a high total investment return,
consistent with prudent risk, through a fully-managed investment policy
utilizing United States and foreign equity, debt and money market securities
the combination of which will be varied from time to time both with respect to
types of securities and markets in response to changing market and economic
trends. Total investment return is the aggregate of capital value changes and
income. This objective is a fundamental policy which the Fund may not change
without a vote of a majority of the Fund's outstanding voting securities. There
can be no assurance that the Fund's investment objective will be achieved. The
Fund may employ a variety of instruments and techniques to enhance income and
to hedge against market and currency risk, as described under "Portfolio
Strategies Involving Options and Futures" below.
The Fund will invest in a portfolio of U.S. and foreign equity, debt and
money market securities. The composition of the portfolio among these
securities and markets will be varied from time to time by the Manager, in
response to changing market and economic trends. This fully managed investment
approach
10
<PAGE>
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 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 the Manager believes market conditions warrant
such investment.
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 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
11
<PAGE>
price/earnings ratios, even though these ratios may be above the ratios for the
stock market averages. Securities offering dividend yields higher than the
yields for the relevant stock market averages or higher than such securities'
historic yield may also be considered to be undervalued. The Fund may also
invest in the securities of small and emerging growth companies when such
companies are expected to provide a higher total return than other equity
investments. Such companies are characterized by rapid historical growth rates,
above-average returns on equity or special investment value in terms of their
products or services, research capabilities or other unique attributes. The
Manager will seek to identify small and emerging growth companies that possess
superior management, marketing ability, research and product development skills
and sound balance sheets. Investment in the securities of small and emerging
growth companies involves greater risk than investment in larger, more
established companies. Such risks include the fact that securities of small or
emerging growth companies may be subject to more abrupt or erratic market
movements than larger, more established companies or the market average in
general. Also, these companies may have limited product lines, markets or
financial resources, or they may be dependent on a limited management group.
There may be periods when market and economic conditions exist that favor
certain types of tangible assets as compared to other types of investments. For
example, the value of precious metals can be expected to benefit from such
factors as rising inflationary pressures or other economic, political or
financial uncertainty or instability. Real estate values, which are influenced
by a variety of economic, financial and local factors, tend to be cyclical in
nature. During periods when the Manager believes that conditions favor a
particular real asset as compared to other investment opportunities, the Fund
may emphasize investments related to that asset such as investments in precious
metal-related securities or real estate-related securities as described below.
The Fund may invest up to 25% of its total assets in any particular industry
sector.
Precious Metal-Related Securities. Precious metal-related securities are
equity securities of companies that explore for, extract, process or deal in
precious metals, i.e., gold, silver and platinum, and asset-based securities
indexed to the value of such metals. Based on historical experience, during
periods of economic or financial instability the securities of such companies
may be subject to extreme price fluctuations, reflecting the high volatility of
precious metal prices during such periods. In addition, the instability of
precious metal prices may result in volatile earnings of precious metal-related
companies which, in turn, may affect adversely the financial condition of such
companies. Asset-based securities are debt securities, preferred stock or
convertible securities, the principal amount, redemption terms or conversion
terms of which are related to the market price of some precious metal such as
gold bullion. The Fund will purchase only asset-based securities which are
rated, or are issued by issuers that have outstanding debt obligations rated,
BBB or better by Standard & Poor's Ratings Group ("S&P") or Baa or better by
Moody's Investors Service, Inc. ("Moody's") or commercial paper rated A-1 by
S&P or Prime-1 by Moody's or of issuers that the Manager has determined to be
of similar creditworthiness. Securities rated BBB by S&P or Baa by Moody's,
while considered "investment grade", have certain speculative characteristics.
If the asset-based security is backed by a bank letter of credit or other
similar facility, the Manager may take such backing into account in determining
the creditworthiness of the issuer.
Real Estate-Related Securities. The real estate-related securities which will
be emphasized are equity and convertible debt securities of real estate
investment trusts, which own income-producing properties, and mortgage real
estate investment trusts which make various types of mortgage loans often
combined with equity features. The securities of such trusts generally pay
above average dividends and may offer the potential for capital appreciation.
Such securities may be subject to the risks customarily associated with the
real estate
12
<PAGE>
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.
Indexed and Inverse Securities. The Fund may invest in securities whose
potential investment return is based on the change in particular measurements
of value and/or rate (an "index"). As an illustration, the Fund may invest in a
security that pays interest and returns principal based on the change in an
index of interest rates or of the value of a precious or industrial metal.
Interest and principal payable on a security may also be based on relative
changes among particular indices. In addition, the Fund may invest in
securities whose potential investment return is inversely based on the change
in particular indices. For example, the Fund may invest in securities that pay
a higher rate of interest and principal when a particular index decreases and
pay a lower rate of interest and principal when the value of the index
increases. To the extent that the Fund invests in such types of securities, it
will be subject to the risks associated with changes in the particular indices,
which may include reduced or eliminated interest payments and losses of
invested principal.
Certain indexed securities, including certain inverse securities, may have
the effect of providing a degree of investment leverage, because they may
increase or decrease in value at a rate that is a multiple of the changes in
applicable indices. As a result, the market value of such securities will
generally be more volatile than the market values of fixed-rate securities. The
Fund believes that indexed securities, including inverse securities, represent
flexible portfolio management instruments that may allow the Fund to seek
potential investment rewards, hedge other portfolio positions, or vary the
degree of portfolio leverage relatively efficiently under different market
conditions.
DEBT SECURITIES
The debt securities in which the Fund may invest include securities issued or
guaranteed by the U.S. Government and its agencies or instrumentalities, by
foreign governments (including foreign states, provinces and municipalities)
and agencies or instrumentalities thereof and debt obligations issued by U.S.
and foreign entities. Such securities may include mortgage-backed securities
issued or guaranteed by governmental entities or by private issuers. In
addition, the Fund may invest in debt securities issued or guaranteed by
international organizations designed or supported by multiple governmental
entities (which are not obligations of the U.S. Government or foreign
governments) to promote economic reconstruction or development ("supranational
entities") such as the International Bank for Reconstruction and Development
(the "World Bank").
U.S. Government securities include: (i) U.S. Treasury obligations (bills,
notes and bonds), which differ in their interest rates, maturities and times of
issuance, all of which are backed by the full faith and credit of the U.S.; and
(ii) obligations issued or guaranteed by U.S. Government agencies or
instrumentalities, including government guaranteed mortgage-related securities,
some of which are backed by the full faith and credit of the U.S. Treasury
(e.g., direct pass-through certificates of the Government National Mortgage
Association), some of which are supported by the right of the issuer to borrow
from the U.S. Government (e.g., obligations of Federal Home Loan Banks) and
some of which are backed only by the credit of the issuer itself (e.g.,
obligations of the Student Loan Marketing Association).
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In the case of mortgage-related securities, prepayments occur when the holder
of an individual mortgage prepays the remaining principal before the mortgage's
scheduled maturity date. As a result of the pass-through of prepayments of
principal on the underlying securities, a mortgage-related security is often
subject to more rapid prepayment of principal than its stated maturity would
indicate. Because the prepayment characteristics of the underlying mortgages
vary, it is not possible to predict accurately the realized yield or average
life of a particular issue of pass-through certificates. Prepayment rates are
important because of their effect on the yield and price of the securities.
Accelerated prepayments adversely impact yields for pass-through securities
purchased at a premium (i.e., a price in excess of principal amount) and may
involve additional risk of loss of principal because the premium may not have
been fully amortized at the time the obligation is repaid. The opposite is true
for pass-through securities purchased at a discount. The Fund may purchase
mortgage-related securities at a premium or at a discount.
The obligations of foreign governmental entities have various kinds of
government support and include obligations issued or guaranteed by foreign
governmental entities with taxing power. These obligations may or may not be
supported by the full faith and credit of a foreign government. The Fund will
invest in foreign government securities of issuers considered stable by the
Manager. The Manager does not believe that the credit risk inherent in the
obligations of stable foreign governments is significantly greater than that of
U.S. Government securities.
The Fund is authorized to invest in debt securities of governmental issuers
and of corporate issuers, including convertible debt securities, rated BBB or
better by S&P or Baa or better by Moody's or which, in the Manager's judgment,
possess similar credit characteristics ("investment grade bonds"). Debt
securities ranked in the fourth highest rating category, while considered
"investment grade", have more speculative characteristics and are more likely
to be downgraded than securities rated in the three highest rating categories.
See the Statement of Additional Information for more information regarding
ratings of debt securities. The Manager considers the ratings assigned by S&P
and Moody's as one of several factors in its independent credit analysis of
issuers.
The Fund is also authorized to invest a portion of its debt portfolio in
fixed income securities of governmental issuers and of corporate issuers 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
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information regarding high yield bonds. Although the Fund may invest in
preferred stock rated below investment grade, an investment in an equity
security such as preferred stock is not subject to the above noted percentage
restriction applicable to the Fund's investments in non-investment grade debt
securities.
High yield bonds may be issued by less creditworthy companies or by larger,
highly leveraged companies and are frequently issued in corporate
restructurings such as mergers and leveraged buyouts. Such securities are
particularly vulnerable to adverse changes in the issuer's industry and in
general economic conditions. High yield bonds frequently are junior obligations
of their issuers, so that in the event of the issuer's bankruptcy, claims of
the holders of high yield bonds will be satisfied only after satisfaction of
the claims of senior securityholders. While the high yield bonds in which the
Fund may invest normally do not include securities which, at the time of
investment, are in default or the issuers of which are in bankruptcy, there can
be no assurance that such events will not occur after the Fund purchases a
particular security, in which case the Fund may experience losses and incur
costs.
High yield bonds tend to be more volatile than higher rated fixed income
securities so that adverse economic events may have a greater impact on the
prices of high yield bonds than on higher rated fixed income securities. Like
higher rated fixed income securities, high yield bonds are generally purchased
and sold through dealers who make a market in such securities for their own
accounts. However, there are fewer dealers in the high yield bond market which
may be less liquid than the market for higher rated fixed income securities
even under normal economic conditions. Also, there may be significant
disparities in the prices quoted for high yield bonds by various dealers.
Adverse economic conditions or investor perceptions (whether or not based on
economic fundamentals) may impair the liquidity of this market and may cause
the prices the Fund receives for its high yield bonds to be reduced, or the
Fund may experience difficulty in liquidating a portion of its portfolio. Under
such conditions, judgment may play a greater role in valuing certain of the
Fund's portfolio securities than in the case of securities trading in a more
liquid market.
The average maturity of the Fund's portfolio of debt securities will vary
based on the Manager's assessment of pertinent economic market conditions. As
with all debt securities, changes in market yields will affect the value of
such securities. Prices generally increase when interest rates decline and
decrease when interest rates rise. Prices of longer term securities generally
fluctuate more in response to interest rate changes than do shorter term
securities.
MONEY MARKET SECURITIES
Money market securities in which the Fund may invest consist of short-term
securities issued or guaranteed by the U.S. Government and its agencies and
instrumentalities; commercial paper, including variable amount master demand
notes, rated at least "A" by S&P or "Prime" by Moody's; and repurchase
agreements, purchase and sale contracts, and money market instruments issued by
commercial banks, domestic savings banks, and savings and loan associations
with total assets of at least one billion dollars. The obligations of
commercial banks may be issued by U.S. banks, foreign branches of U.S. banks
("Eurodollar" obligations) or U.S. branches of foreign banks ("Yankeedollar"
obligations).
PORTFOLIO STRATEGIES INVOLVING OPTIONS AND FUTURES
The Fund may engage in various portfolio strategies to seek to increase its
return through the use of options on portfolio securities and to hedge its
portfolio against adverse movements in the equity, debt and
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currency markets. The Fund has authority to write (i.e., sell) covered put and
call options on its portfolio securities, purchase put and call options on
securities and engage in transactions in stock index options, stock index
futures and financial futures, and related options on such futures. The Fund
may also deal in forward foreign exchange transactions and foreign currency
options and futures, and related options on such futures. Each of these
portfolio strategies is described below. Although certain risks are involved in
options and futures transactions (as discussed below and in "Risk Factors in
Options and Futures Transactions" further below), the Manager believes that,
because the Fund will (i) write only covered options on portfolio securities
and (ii) engage in other options and futures transactions only for hedging
purposes, the options and futures portfolio strategies of the Fund will not
subject the Fund to the risks frequently associated with the speculative use of
options and futures transactions. While the Fund's use of hedging strategies is
intended to reduce the volatility of the net asset value of its shares, the net
asset value of the Fund's shares will fluctuate. There can be no assurance that
the Fund's hedging transactions will be effective. Furthermore, the Fund will
only engage in hedging activities from time to time and may not necessarily be
engaging in hedging activities when movements in the equity, debt and currency
markets occur. Reference is made to the Statement of Additional Information for
further information concerning these strategies.
Writing Covered Options. The Fund is authorized to write (i.e., sell) covered
call options on the securities in which it may invest and to enter into closing
purchase transactions with respect to certain of such options. A covered call
option is an option where the Fund, in return for a premium, gives another
party a right to buy specified securities owned by the Fund at a specified
future date and price set at the time of the contract. The principal reason for
writing call options is to attempt to realize, through the receipt of premiums,
a greater return than would be realized on the securities alone. By writing
covered call options, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price. In addition, the Fund's ability to sell the underlying
security will be limited while the option is in effect unless the Fund effects
a closing purchase transaction. A closing purchase transaction cancels out the
Fund's position as the writer of an option by means of an offsetting purchase
of an identical option prior to the expiration of the option it has written.
Covered call options serve as a partial hedge against the price of the
underlying security declining.
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options which means that so
long as the Fund is obligated as the writer of the option it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S.
Government securities or other high grade liquid debt or equity securities
denominated in U.S. dollars or non-U.S. currencies with a securities depository
with a value equal to or greater than the exercise price of the underlying
securities. By writing a put, the Fund will be obligated to purchase the
underlying security at a price that may be higher than the market value of that
security at the time of exercise for as long as the option is outstanding. The
Fund may engage in closing transactions in order to terminate put options that
it has written.
Purchasing Options. The Fund is authorized to purchase put options to hedge
against a decline in the market value of its securities. By buying a put option
the Fund has a right to sell the underlying security at the stated exercise
price, thus limiting the Fund's risk of loss through a decline in the market
value of the security until the put option expires. The amount of any
appreciation in the value of the underlying security will be partially offset
by the amount of the premium paid for the put option and any related
transaction
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costs. Prior to its expiration, a put option may be sold in a closing sale
transaction and profit or loss from the sale will depend on whether the amount
received is more or less than the premium paid for the put option plus the
related transaction costs. A closing sale transaction cancels out the Fund's
position as the purchaser of an option by means of an offsetting sale of an
identical option prior to the expiration of the option it has purchased. In
certain circumstances, the Fund may purchase call options on securities held in
its portfolio on which it has written call options or on securities which it
intends to purchase. The Fund will not purchase options on securities
(including stock index options discussed below) if, as a result of such
purchase, the aggregate cost of all outstanding options on securities held by
the Fund would exceed 5% of the market value of the Fund's total assets.
Stock Index Options and Futures and Financial Futures. The Fund is authorized
to engage in transactions in stock index options and futures and financial
futures, and related options on such futures. The Fund may purchase or write
put and call options on stock indices to hedge against the risks of market-wide
stock price movements in the securities in which the Fund invests. Options on
indices are similar to options on securities except that, on settlement, the
parties to the contract pay or receive an amount of cash equal to the
difference between the closing value of the index on the relevant valuation
date 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 particular commodity for a set price on a future date. Unlike most
other futures contracts, a stock index futures contract does not require actual
delivery of a commodity, in this case securities, but results in cash
settlement based upon the difference in value of the stock index between the
time the contract was entered into and the time of its settlement. The Fund may
effect transactions in stock index futures contracts in connection with the
equity securities in which it invests and in financial futures contracts in
connection with the debt securities in which it invests. Transactions by the
Fund in stock index futures and financial futures are subject to limitations as
described below under "Restrictions on the Use of Futures Transactions".
The Fund may sell financial futures contracts in anticipation of an increase
in the general level of interest rates. Generally, as interest rates rise, the
market values of fixed-income securities which may be held by the Fund as a
temporary defensive measure will fall, thus reducing the net asset value of the
Fund. However, as interest rates rise, the value of the Fund's short position
in the futures contract will also tend to increase, thus offsetting all or a
portion of the depreciation in the market value of the Fund's investments which
are being hedged. While the Fund will incur commission expenses in selling and
closing out futures positions, these commissions are generally less than the
transaction expenses which the Fund would have incurred had the Fund sold
portfolio securities in order to reduce its exposure to increases in interest
rates. The Fund also may purchase financial futures contracts in anticipation
of a decline in interest rates when it is not fully invested in a particular
market in which it intends to make investments to gain market exposure that may
in part or entirely offset an increase in the cost of securities it intends to
purchase. It is anticipated that, in a substantial majority of these
transactions, the Fund will purchase securities upon termination of the futures
contract.
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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 the
Manager anticipates.
The Fund is also authorized to purchase or sell listed or over-the-counter
foreign currency options, foreign currency futures and related options on
foreign currency futures as a short or long hedge against possible variations
in foreign exchange rates. Such transactions may be effected with respect to
hedges on non-U.S. dollar denominated securities owned by the Fund, sold by the
Fund but not yet delivered, or
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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 an investment policy
pursuant to which it will not purchase or sell OTC options (including OTC
options on
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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 15% (10% to the extent
required by certain state laws) 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 the maximum number of
contracts which any person may trade on a particular trading day. The Manager
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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 Commission. Affiliated persons
of the Fund, and affiliated persons of such affiliated persons, may serve as
its broker in transactions conducted on an exchange and in over-the-counter
transactions conducted on an agency basis. In addition, consistent with the
Rules of Fair Practice of the NASD, the Fund may consider sales of shares of
the Fund as a factor in the selection of brokers or dealers to execute
portfolio transactions for the Fund. It is expected that the majority of the
shares of the Fund will be sold by Merrill Lynch. Costs associated with
transactions in foreign securities are generally higher than with transactions
in U.S. securities, although the Fund will endeavor to achieve the best net
results in effecting such transactions.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase securities on a when-issued basis, and it may purchase or sell
securities for delayed delivery. These transactions occur when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future to secure what is considered an advantageous yield and price to the Fund
at the time of entering into the transaction. Although the Fund has not
established any limit on the percentage of its assets that may be committed in
connection with such transactions, the Fund will maintain a segregated account
with its custodian of cash, cash equivalents, U.S. Government securities or
other high grade liquid debt or equity securities denominated
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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
15% (10% to the extent required by certain state laws) of its total assets
taken at the time of acquisition of such commitment or security. The Fund will
at all times maintain a segregated account with its custodian of cash, cash
equivalents, U.S. Government securities or other high grade liquid debt or
equity securities denominated in U.S. dollars or non-U.S. currencies in an
aggregate amount equal to the purchase price of the securities underlying the
commitment.
There can be no assurance that the securities subject to a standby commitment
will be issued and the value of the security, if issued, on the delivery date
may be more or less than its purchase price. Since the issuance of the security
underlying the commitment is at the option of the issuer, the Fund may bear the
risk of a decline in the value of such security and may not benefit from an
appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security can
reasonably be expected to be issued, and the value of the security will
thereafter be reflected in the calculation of the Fund's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment
fee. In the event the security is not issued, the commitment fee will be
recorded as income on the expiration date of the standby commitment.
Repurchase Agreements; Purchase and Sale Contracts. The Fund may invest in
securities pursuant to repurchase agreements or purchase and sale contracts.
Under a repurchase agreement, the seller agrees, upon entering into the
contract with the Fund, to repurchase a security (typically a security issued
or guaranteed by the U.S. Government) at a mutually agreed upon time and price,
thereby determining the yield during the term of the agreement. This insulates
the Fund from fluctuations in the market value of the underlying security
during such period, although, to the extent the repurchase agreement is not
denominated in U.S. dollars, the Fund's return may be affected by currency
fluctuations. Repurchase agreements may be entered into only with a member bank
of the Federal Reserve System, a primary dealer in U.S. government securities
or an affiliate thereof. A purchase and sale contract is similar to a
repurchase agreement, but purchase and sale contracts, unlike repurchase
agreements, allocate interest on the underlying security to the purchaser
during the term of the agreement. In all instances, the Fund takes possession
of the underlying securities when investing in repurchase agreements or
purchase and sale contracts. Nevertheless, if the seller were to default on its
obligation to repurchase a security under a repurchase agreement or purchase
and sale contract and the market value of the underlying security at such time
was less than the Fund had paid to the seller, the Fund would realize a loss.
The Fund may not invest more than 15% (10% to the extent required by
22
<PAGE>
certain state laws) of its total assets in repurchase agreements or purchase
and sale contracts maturing in more than seven days, together with all other
illiquid securities.
Lending of Portfolio Securities. The Fund may from time to time lend
securities from its portfolio with a value not exceeding 33 1/3% of its total
assets, to banks, brokers and other financial institutions and receive
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. 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 assets,
taken at market value, in the securities of issuers in any particular industry
(excluding the U.S. Government and its agencies and instrumentalities). Other
fundamental policies include policies which restrict the issuance of senior
securities and limit bank borrowings. In addition, the Fund has adopted non-
fundamental restrictions which may be changed by the Board of Directors. Among
its non-fundamental policies, the Fund may not:
--Purchase securities of other investment companies, except to the extent
such purchases are permitted by applicable law.
--Invest in securities which cannot be readily resold because of legal or
contractual restrictions or which cannot otherwise be marketed, redeemed or put
to the issuer or a third party, if at the time of acquisition more than 15% of
its total assets would be invested in such securities. This restriction shall
not apply to securities which mature within seven days or securities which the
Board of Directors of the Fund has otherwise determined to be liquid pursuant
to applicable law. As explained further in the Statement of Additional
Information, under state law the Fund is presently limited with respect to
investment in certain illiquid securities to 10% of its total assets.
--Notwithstanding the less restrictive fundamental investment restriction
recited in the Statement of Additional Information, borrow amounts in excess of
10% of its total assets, taken at market value, and then only from banks as a
temporary measure for extraordinary or emergency purposes such as the
redemption of Fund shares. The Fund will not purchase securities while
borrowings exceed 5% (taken at market value) of its total assets.
The Fund will include OTC options and the securities underlying such options
in calculating the amount of its total assets subject to the limitation
concerning investments in illiquid securities noted above. However, as
discussed further 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
23
<PAGE>
Fund will not change or modify this policy prior to the change or modification
by the Commission staff of its position regarding OTC options, as discussed
above.
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 six individuals, five of whom
are not "interested persons" of the Fund as defined in the Investment Company
Act. The Board of Directors of the Fund is responsible for the overall
supervision of the operations of the Fund and performs the various duties
imposed on the directors of investment companies by the Investment Company Act.
The Directors of the Fund are:
Arthur Zeikel* -- President and Chief Investment Officer of the Manager;
President and Director of Princeton Services, Inc.; Executive Vice President of
Merrill Lynch & Co., Inc. ("ML & Co."); Executive Vice President of Merrill
Lynch; Director of the Distributor.
Donald Cecil -- Special Limited Partner of Cumberland Partners (an investment
partnership).
Edward H. Meyer -- Chairman of the Board, President and Chief Executive
Officer of Grey Advertising Inc.
Charles C. Reilly -- Self-employed financial consultant; former President and
Chief Investment Officer of Verus Capital, Inc.; former Senior Vice President
of Arnhold and S. Bleichroeder, Inc.; Adjunct Professor, Columbia University
Graduate School of Business.
Richard R. West -- Professor of Finance, and Dean from 1984 to 1993, New York
University Leonard N. Stern School of Business Administration.
Edward D. Zinbarg -- Former Executive Vice President of The Prudential
Insurance Company of America.
- --------
* Interested person, as defined in the Investment Company Act, of the Fund.
24
<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 ML & Co., a
financial services holding company and the parent of Merrill Lynch. The Manager
provides the Fund with management and investment advisory services. The Manager
or an affiliate, Fund Asset Management, L.P. ("FAM"), acts as the manager for
more than 130 registered investment companies. The Manager also offers
portfolio management and portfolio analysis services to individuals and
institutions. As of January 31, 1995, the Manager and FAM had a total of
approximately $166.5 billion in investment company and other portfolio assets
under management, including accounts of certain affiliates of the Manager.
The management agreement with the Manager (the "Management Agreement")
provides that, subject to the direction of the 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, 1994, the Fund paid the
Manager a fee at the rate of 0.71% 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, 1994, the Manager received a
fee of $49,037,363 (based on average net assets of $6.9 billion). At January
31, 1995, the net assets of the Fund aggregated approximately $7.6 billion. At
this asset level, the annual management fee would aggregate approximately $53.4
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, 1994, the fee paid by the Manager to MLAM
U.K. pursuant to such agreement aggregated $6,509,464. At the Fund's January
31, 1995, asset level, the annual fee paid by the Manager to MLAM U.K. would
aggregate approximately $7.6 million. MLAM U.K. has offices at Ropemaker Place,
25 Ropemaker Street, 1st Floor, London EC24 9LY, England.
Bryan N. Ison, Vice President of the Fund, is the Fund's Portfolio Manager.
Mr. Ison has been a Portfolio Manager of the Manager since 1984 and a Vice
President of the Manager since 1985. Mr. Ison has been primarily responsible
for the management of the Fund's portfolio since it commenced operations.
25
<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, 1994, the Fund
reimbursed the Manager $570,246 for such accounting services. For the fiscal
year ended October 31, 1994, the ratio of total expenses to average net assets
was 0.89% for Class A shares and 1.91% for Class B shares. For the fiscal
period October 21, 1994 (commencement of operations for Class C and Class D
shares) to October 31, 1994, the ratio of total expenses to average net assets
was 2.44% (annualized) for Class C shares and 1.69% (annualized) for Class D
shares.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-1 of the Investment Company Act which incorporates the Code of Ethics of
the Manager (together, the "Codes"). The Codes significantly restrict the
personal investing activities of all employees of the Manager and, as described
below, impose additional, more onerous, restrictions on fund investment
personnel.
The Codes require that all employees of the Manager preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Manager include a ban on acquiring any securities in a "hot" initial public
offering and a prohibition from profiting on short-term trading in securities.
In addition, no employee may purchase or sell any security which at the time is
being purchased or sold (as the case may be), or to the knowledge of the
employee is being considered for purchase or sale, by any fund advised by the
Manager. Furthermore, the Codes provide for trading "blackout periods" which
prohibit trading by investment personnel of the Fund within periods of trading
by the Fund in the same (or equivalent) security (15 or 30 days depending upon
the transaction).
TRANSFER AGENCY SERVICES
Financial Data Services, Inc. (the "Transfer Agent"), which is a wholly-owned
subsidiary of ML & Co., acts as the Fund's transfer agent pursuant to a
Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement ( the "Transfer Agency Agreement"). Pursuant to the Transfer Agency
Agreement, the Transfer Agent is responsible for the issuance, transfer and
redemption of shares and the opening and maintenance of shareholder accounts.
Pursuant to the Transfer Agency Agreement, the Transfer Agent receives an
annual fee of $11.00 per Class A or Class D shareholder account and $14.00 per
Class B or Class C shareholder account, nominal miscellaneous fees (e.g.,
account closing fees) and is entitled to reimbursement for out-of-pocket
expenses incurred by it under the Transfer Agency Agreement. For the fiscal
year ended October 31, 1994, the Fund paid $6,956,192 to the Transfer Agent
pursuant to the Transfer Agency Agreement. At January 31, 1995, the Fund had
102,810 Class A shareholder accounts, 519,272 Class B shareholder accounts,
3,992 Class C shareholder accounts and 13,961 Class D shareholder accounts. At
this level of accounts, the annual fee payable to the Transfer Agent would
aggregate approximately $8.6 million, plus miscellaneous and out-of-pocket
expenses.
26
<PAGE>
PURCHASE OF SHARES
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), an affiliate of
both the Manager and Merrill Lynch, acts as the distributor of shares of the
Fund. Shares of the Fund are offered continuously for sale by the Distributor
and other eligible securities dealers (including Merrill Lynch). Shares of the
Fund may be purchased from securities dealers or by mailing a purchase order
directly to the Transfer Agent. The minimum initial purchase is $1,000, and
the minimum subsequent purchase is $50, except that for retirement plan, the
minimum initial purchase is $100 and the minimum subsequent purchase is $1.
The Fund is offering its shares in four classes at a public offering price
equal to the next determined net asset value per share plus sales charges
imposed either at the time of purchase or on a deferred basis depending upon
the class of shares selected by the investor under the Merrill Lynch Select
PricingSM System, as described below. The applicable offering price for
purchase orders is based upon the net asset value of the Fund next determined
after receipt of the purchase orders by the Distributor. As to purchase orders
received by securities dealers prior to the close of business on the New York
Stock Exchange (generally, 4:00 p.m., New York time), which includes orders
received after the close of business on the previous day, the applicable
offering price will be based on the net asset value determined as of 15
minutes after the close of business on the New York Stock Exchange on that
day, provided the Distributor in turn receives the orders from the securities
dealer prior to 30 minutes after the close of business on the New York Stock
Exchange on that day. If the purchase orders are not received prior to 30
minutes after the close of business on the New York Stock Exchange, such
orders shall be deemed received on the next business day. The Fund or the
Distributor may suspend the continuous offering of the Fund's shares of any
class at any time in response to conditions in the securities markets or
otherwise and may thereafter resume such offering from time to time. Any order
may be rejected by the Distributor or the Fund. Neither the Distributor nor
the dealers are permitted to withhold placing orders to benefit themselves by
a price change. Merrill Lynch may charge its customers a processing fee
(presently $4.85) to confirm a sale of shares to such customers. Purchases
directly through the Transfer Agent are not subject to the processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
PricingSM System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. Shares of Class A and Class D are
sold to investors choosing the initial sales charge alternatives and shares of
Class B and Class C are sold to investors choosing the deferred sales charge
alternatives. Investors should determine whether under their particular
circumstances it is more advantageous to incur an initial sales charge or to
have the entire initial purchase price invested in the Fund with the
investment thereafter being subject to a contingent deferred sales charge and
ongoing distribution fees. A discussion of the factors that investors should
consider in determining the method of purchasing shares under the Merrill
Lynch Select PricingSM System is set forth under "Merrill Lynch Select
PricingSM System" on page 3.
Each Class A, Class B, Class C and Class D share of the Fund represents
identical interests in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The deferred sales charges and account maintenance fees that are imposed on
Class B and Class C shares, as well as the account maintenance fees that are
imposed on Class D
27
<PAGE>
shares, are imposed directly against those classes and not against all assets
of the Fund and, accordingly, such charges do not affect the net asset value
of any other class or have any impact on investors choosing another sales
charge option. Dividends paid by the Fund for each class of shares are
calculated in the same manner at the same time and will differ only to the
extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Class B, Class C and Class D shares each have exclusive voting
rights with respect to the Rule 12b-1 distribution plan adopted with respect
to such class pursuant to which account maintenance and/or distribution fees
are paid. See "Distribution Plans" below. Each class has different exchange
privileges. See "Shareholder Services -- Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges with respect to Class B and Class C shares in
that the sales charges applicable to each class provide for the financing of
the distribution of the shares of the Fund. The distribution-related revenues
paid with respect to a class will not be used to finance the distribution
expenditures of another class. Sales personnel may receive different
compensation for selling different classes of shares. Investors are advised
that only Class A and Class D shares may be available for purchase through
securities dealers, other than Merrill Lynch, which are eligible to sell
shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select PricingSM System.
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(/1/) FEE FEE CONVERSION FEATURE
- ---------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
A Maximum 5.25% initial No No No
sales
charge(/2/)(/3/)
- ---------------------------------------------------------------------------------
B CDSC for a period of 4 0.25% 0.75% B shares convert to D
years, at a rate of shares automatically
4.0% during the after approximately
first year, decreasing eight years(/4/)
1.0% annually to 0.0%
- ---------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.75% No
- ---------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(/3/)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs may be imposed if the redemption occurs
within the applicable CDSC time period. The charge will be assessed on an
amount equal to the lesser of the proceeds of redemption or the cost of
the shares being redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives -- Class A and Class D Shares -- Eligible Class A Investors".
(3) Reduced for purchases of $25,000 or more. Class A and Class D share
purchases of $1,000,000 or more will not be subject to an initial sales
charge but instead will be subject to a 1.0% CDSC for one year.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other MLAM-
advised mutual funds into which exchanges may be made have a ten-year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
28
<PAGE>
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible to
purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternatives is the next determined net
asset value plus varying sales charges (i.e., sales loads), as set forth
below.
<TABLE>
<CAPTION>
SALES LOAD AS DISCOUNT TO
SALES LOAD AS PERCENTAGE* OF SELECTED DEALERS
PERCENTAGE OF THE NET AMOUNT AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE INVESTED THE OFFERING PRICE
- ------------------ -------------- -------------- ------------------
<S> <C> <C> <C>
Less than $25,000............. 5.25% 5.54% 5.00%
$25,000 but less than $50,000. 4.75 4.99 4.50
$50,000 but less than
$100,000..................... 4.00 4.17 3.75
$100,000 but less than
$250,000..................... 3.00 3.09 2.75
$250,000 but less than
$1,000,000................... 2.00 2.04 1.80
$1,000,000 and over**......... 0.00 0.00 0.00
</TABLE>
- --------
*Rounded to the nearest one-hundredth percent.
** Class A and Class D purchases of $1,000,000 or more made on or after
October 21, 1994, will be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. Class A purchases made prior to
October 21, 1994, may be subject to a CDSC if the shares are redeemed
within one year of purchase at the following annual rates: 1.00% on
purchases of $1,000,000 to $2,500,000; 0.60% on purchases of $2,500,001 to
$3,500,000; 0.40% on purchases of $3,500,001 to $5,000,000; and 0.25% on
purchases of more than $5,000,000 in lieu of paying an initial sales
charge. The charge will be assessed on an amount equal to the lesser of the
proceeds of redemption or the cost of the shares being redeemed. A sales
charge of 0.75% will be charged on purchases of $1 million or more of Class
A or Class D shares by certain Employer Sponsored Retirement or Savings
Plans.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and
Class D shares of the Fund will receive a concession equal to most of the
sales charge, they may be deemed to be underwriters under the Securities Act.
During the fiscal year ended October 31, 1994, the Fund sold 51,696,255 Class
A shares for aggregate net proceeds of $691,831,423. The gross sales charges
for the sale of Class A shares of the Fund for that year were $10,514,692, of
which $623,860 and $9,890,832 were received by the Distributor and Merrill
Lynch, respectively. For the fiscal year ended October 31, 1994, the
Distributor received CDSCs of $77,685, all of which were paid to Merrill
Lynch, with respect to redemption within one year after purchase of Class A
shares purchased subject to front-end sales charge waivers. During the fiscal
period October 21, 1994 (commencement of operations for Class D shares) to
October 31, 1994, the Fund sold 385,289 Class D shares for aggregate net
proceeds of $5,017,907. The gross sales charges for the sale of Class D shares
of the Fund for that year were $95,875, of which $5,131 and $90,744 were
received by the Distributor and Merrill Lynch, respectively. For the fiscal
period October 21, 1994 (commencement of operations for Class D shares) to
October 31, 1994, the Distributor did not receive CDSCs with respect to
redemption within one year after purchase of Class D shares purchased subject
to front-end sales charge waivers.
Eligible Class A Investors. Class A shares are offered to a limited group of
investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors that currently own Class A
29
<PAGE>
shares in a shareholder account, including participants in the Merrill Lynch
Blueprint SM Program, are entitled to purchase additional Class A shares in
that account. Certain employer sponsored retirement or savings plans,
including eligible 401(k) plans, may purchase Class A shares at net asset
value provided such plans meet the required minimum number of eligible
employees or required amount of assets advised by MLAM or any of its
affiliates. Class A shares are available at net asset value to corporate
warranty insurance reserve fund programs provided that the program has $3
million or more initially invested in MLAM-advised mutual funds. Also eligible
to purchase Class A shares at net asset value are participants in certain
investment programs including TMA SM Managed Trusts to which Merrill Lynch
Trust Company provides discretionary trustee services and certain purchases
made in connection with the Merrill Lynch Mutual Fund Adviser program. In
addition, Class A shares are offered at net asset value to ML & Co. and its
subsidiaries and their directors and employees and to members of the Boards of
MLAM-advised investment companies, including the Fund. Certain persons who
acquired shares of certain MLAM-advised closed-end funds who wish to reinvest
the net proceeds from a sale of their closed-end fund shares of common stock
in shares of the Fund also may purchase Class A shares of the Fund if certain
conditions set forth in the Statement of Additional Information are met for
closed-end funds that commenced operations prior to October 21, 1994. For
example, Class A shares of the Fund and certain other MLAM-advised mutual
funds are offered at net asset value to shareholders of Merrill Lynch Senior
Floating Rate Fund, Inc. who wish to reinvest the net proceeds from a sale of
certain of their shares of common stock of Merrill Lynch Senior Floating Rate
Fund, Inc. in shares of such funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges
also may be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under "Eligible Class A Investors".
Class D shares are offered at net asset value without sales charge to an
investor who has a business relationship with a Merrill Lynch financial
consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Class D shares are offered with reduced sales charges and, in certain
circumstances, at net asset value, to participants in the Merrill Lynch
Blueprint SM Program.
Additional information concerning these reduced initial sales charges,
including information regarding investments by Employee Sponsored Retirement
or Savings Plans, is set forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES -- CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the
30
<PAGE>
time of purchase. As discussed below, Class B shares are subject to a four year
CDSC, while Class C shares are subject only to a one year 1.0% CDSC. On the
other hand, approximately eight years after Class B shares are issued, such
Class B shares, together with shares issued upon dividend reinvestment with
respect to those shares, are automatically converted into Class D shares of the
Fund and thereafter will be subject to lower continuing fees. See "Conversion
of Class B Shares to Class D Shares" below. Both Class B and Class C shares are
subject to an account maintenance fee of 0.25% of net assets and a distribution
fee of 0.75% of net assets as discussed below under "Distribution Plans". The
proceeds from the account maintenance fees are used to compensate Merrill Lynch
for providing continuing account maintenance activities.
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of the Class B and Class C
shares, such as the payment of compensation to financial consultants for
selling Class B and Class C shares, from its own funds. The combination of the
CDSC and the ongoing distribution fee facilitates the ability of the Fund to
sell the Class B and Class C shares without a sales charge being deducted at
the time of purchase. Approximately eight years after issuance, Class B shares
will convert automatically into Class D shares of the Fund, which are subject
to an account maintenance fee but no distribution fee; Class B shares of
certain other MLAM-advised mutual funds into which exchanges may be made
convert into Class D shares automatically after approximately ten years. If
Class B shares of the Fund are exchanged for Class B shares of another MLAM-
advised mutual fund, the conversion period applicable to Class B shares
acquired in the exchange will apply, and the holding period for the shares
exchanged will be tacked onto the holding period for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C shares
is limited by the NASD asset-based sales charge rule. See "Limitations on the
Payment of Deferred Charges" below. The proceeds from the ongoing account
maintenance fee are used to compensate Merrill Lynch for providing continuing
account maintenance activities. Class B shareholders of the Fund exercising the
exchange privilege described under "Shareholder Services -- Exchange Privilege"
will continue to be subject to the Fund's CDSC schedule if such schedule is
higher than the CDSC schedule relating to the Class B shares acquired as a
result of the exchange.
Contingent Deferred Sales Charges -- Class B Shares. Class B shares which are
redeemed within four years of purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. Accordingly, no CDSC will
be imposed on increases in net asset value above the initial purchase price. In
addition, no CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
31
<PAGE>
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B CDSC
AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
------------------- -----------------
<S> <C>
0-1........................................................ 4.00%
1-2........................................................ 3.00
2-3........................................................ 2.00
3-4........................................................ 1.00
4 and thereafter........................................... 0.00
</TABLE>
For the fiscal year ended October 31, 1994, the Distributor received CDSCs of
$6,842,598 with respect to redemptions of Class B shares, all of which were
paid to Merrill Lynch. For the fiscal period October 21, 1994 (commencement of
operations for Class C shares) to October 31, 1994, the Distributor received
no CDSCs with respect to the redemption of Class C shares.
In determining whether a CDSC is applicable to a redemption, the calculation
will be determined in the manner that results in the lowest possible rate
being charged. Therefore, it will be assumed that the redemption is first of
shares held for over four years or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the four-
year period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of
shares from a shareholder's account to another account will be assumed to be
made in the same order as a redemption.
To provide an example, assume an investor purchases 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net
asset value per share is $12 and, during such time, the investor has acquired
10 additional shares through dividend reinvestment. If at such time the
investor makes his or her first redemption of 50 shares (proceeds of $600), 10
shares will not be subject to a CDSC because of dividend reinvestment. With
respect to the remaining 40 shares, the CDSC is applied only to the original
cost of $10 per share and not to the increase in net asset value of $2 per
share. Therefore, $400 of the $600 redemption proceeds will be charged at a
rate of 2.0% (the applicable rate in the third year after purchase for shares
purchased on or after October 21, 1994).
The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended) of a shareholder.
The Class B CDSC also is waived on redemptions of shares by certain eligible
401(a) and eligible 401(k) plans and in connection with certain group plans
placing orders through the Merrill Lynch Blueprint SM Program. The CDSC also
is waived for any Class B shares which are purchased by eligible 401(k) or
eligible 401(a) plans which are rolled over into a Merrill Lynch or Merrill
Lynch Trust Company custodied IRA and held in such account at the time of
redemption. The Class B CDSC also is waived for any Class B shares which are
purchased by a Merrill Lynch rollover IRA that was funded by a rollover from a
terminated 401(k) plan managed by the MLAM Private Portfolio Group and held in
such account at the time of redemption. Additional information concerning the
waiver of the Class B CDSC is set forth in the Statement of Additional
Information.
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<PAGE>
Contingent Deferred Sales Charges -- Class C Shares. Class C shares which are
redeemed within one year after purchase may be subject to a 1.0% CDSC charged
as a percentage of the dollar amount subject thereto. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed
on increases in net asset value above the initial purchase price. In addition,
no Class C CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible rate being charged. Therefore, it will be assumed that the redemption
is first of shares held for over one year or shares acquired pursuant to
reinvestment of dividends or distributions and then of shares held longest
during the one-year period. The charge will not be applied to dollar amounts
representing an increase in the net asset value since the time of purchase. A
transfer of shares from a shareholder's account to another account will be
assumed to be made in the same order as a redemption.
Conversion of Class B Shares to Class D Shares. After approximately eight
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
"Conversion Date") on the basis of the relative net asset values of the shares
of the two classes on the Conversion Date, without the imposition of any sales
load fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class
D shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert
approximately ten years after initial purchase. If, during the Conversion
Period, a shareholder exchanges Class B shares with an eight-year Conversion
Period for Class B shares with a ten-year Conversion Period, or vice versa, the
Conversion Period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked onto
the holding period for the shares acquired.
33
<PAGE>
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the
CDSC normally imposed on purchases of Class B shares ("Class B Retirement
Plans"). When the first share of any MLAM-advised mutual fund purchased by a
Class B Retirement Plan has been held for ten years (i.e., ten years from the
date the relationship between MLAM-advised mutual funds and the Class B
Retirement Plan was established), all Class B shares of all MLAM-advised mutual
funds held in that Class B Retirement Plan will be converted into Class D
shares of the appropriate funds. Subsequent to such conversion, that Class B
Retirement Plan will be sold Class D shares of the appropriate funds at net
asset value.
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or
distribution fees paid by the Fund to the Distributor with respect to such
classes. The Class B and Class C Distribution Plans provide for the payment of
account maintenance fees and distribution fees, and the Class D Distribution
Plan provides for the payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual
rate of 0.25% of the average daily net assets of the Fund attributable to
shares of the relevant class in order to compensate the Distributor and Merrill
Lynch (pursuant to a sub-agreement) in connection with account maintenance
activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.75% of
the average daily net assets of the Fund attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services, and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C
shares through dealers without the assessment of an initial sales charge and at
the same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this regard, the
purpose and function of the ongoing distribution fees and the CDSC are the same
as those of the initial sales charge with respect to the Class A and Class D
shares of the Fund in that the deferred sales charges provide for the financing
of the distribution of the Fund's Class B and Class C shares.
For the fiscal year ended October 31, 1994, the Fund paid the Distributor
$57,576,817 pursuant to the Class B Distribution Plan (based on average net
assets subject to the Class B Distribution Plan of approximately $5.7 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.
For the fiscal period October 21, 1994 (commencement of operations for Class C
shares) to October 31, 1994, the Fund paid the Distributor $1,216 pursuant to
the Class C Distribution Plan (based on average net assets subject to the Class
C Distribution Plan of approximately $4.4 million), all of which was paid to
Merrill Lynch for providing account maintenance and distribution-related
activities and services in connection with Class C shares. For the fiscal
period October 21, 1994 (commencement of operations for Class D shares) to
October 31, 1994, the
34
<PAGE>
Fund paid the Distributor $216 pursuant to the Class D Distribution Plan (based
on average net assets subject to such Distribution Plan of approximately $3.2
million), all of which was paid to Merrill Lynch for providing account
maintenance services in connection with Class D shares. At January 31, 1995,
the net assets of the Fund subject to the Class B Distribution Plan aggregated
approximately $6.2 billion. At this asset level, the annual fee payable
pursuant to the Class B Distribution Plan would aggregate approximately $61.7
million. At January 31, 1995, the net assets of the Fund subject to the Class C
Distribution Plan aggregated approximately $30.3 million. At this asset level,
the annual fee payable pursuant to the Class C Distribution Plan would
aggregate approximately $303,000. At January 31, 1995, the net assets of the
Fund subject to the Class D Distribution Plan aggregated approximately $111.6
million. At this asset level, the annual fee payable pursuant to the Class D
Distribution Plan would aggregate approximately $279,000.
The payments under the Distribution Plans are based upon a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred, and accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Directors for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information is presented annually as of December 31 of each year on
a "fully allocated accrual" basis and quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated accrual basis, revenues consist of
the account maintenance fees, distribution fees, CDSCs and certain other
related revenues, and expenses consist of financial consultant compensation,
branch office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing expenses, corporate
overhead and interest expense. On the direct expense and revenue/cash basis,
revenues consist of the account maintenance fees, distribution fees and CDSCs,
and the expenses consist of financial consultant compensation.
At December 31, 1993, the fully allocated accrual expenses incurred by the
Distributor and Merrill Lynch with respect to Class B shares for the period
since February 3, 1989 (commencement of operations) exceeded fully allocated
accrual revenues by approximately $87,524,000 (1.80% of Class B net assets at
that date). As of December 31, 1993, for Class B shares, direct cash expenses
for the period since February 3, 1989 (commencement of operations) exceeded
direct cash revenues by $17,461,314 (0.36% of Class B net assets at that date).
As of December 31, 1994, for Class B shares, direct cash revenues for the
period since February 3, 1989 (commencement of operations) exceeded direct cash
expenses by $7,777,834 (0.12% of Class B net assets at that date). Similar
fully allocated accrual data is not yet available with respect to Class C
shares which the Fund commenced offering to the public on October 21, 1994. As
of December 31, 1994, for Class C shares, direct cash expenses for the period
since October 21, 1994 (commencement of public offering) exceeded direct cash
revenues by $11,048 (0.15% of Class C net assets at that date).
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Directors of the Fund will approve the continuance of the Distribution
Plans from year to year. However, the Distributor intends to seek annual
continuation of the Distribution Plans. In their review of the Distribution
Plans, the Directors will be asked to take into consideration expenses incurred
in connection with the account maintenance and/or distribution of each class of
shares separately. The initial sales charges, the account maintenance fee, the
distribution fee and/or the CDSCs received with respect to
35
<PAGE>
one class will not be used to subsidize the sale of shares of another class.
Payments of the distribution fee on Class B shares will terminate upon
conversion of those Class B shares into Class D shares as set forth under
"Deferred Sales Charge Alternatives -- Class B and Class C Shares -- Conversion
of Class B Shares to Class D Shares".
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the NASD
imposes a limitation on certain asset-based sales charges such as the Fund's
distribution fee and the CDSC but not the account maintenance fee. The maximum
sales charge rule is applied separately to each class. As applicable to the
Fund, the maximum sales charge rule limits the aggregate of distribution fee
payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of
Class B shares and Class C shares, computed separately (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges) plus (2)
interest on the unpaid balance for the respective class, computed separately,
at the prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from the payment of the distribution fee and the CDSC).
In connection with the Class B shares, the Distributor has voluntarily agreed
to waive interest charges on the unpaid balance in excess of 0.50% of eligible
gross sales. Consequently, the maximum amount payable to the Distributor
(referred to as the "voluntary maximum") in connection with the Class B shares
is 6.75% of eligible gross sales. The Distributor retains the right to stop
waiving interest charges at any time. To the extent payments would exceed the
voluntary maximum, the Fund will not make further payments of the distribution
fee with respect to Class B shares, and any CDSCs will be paid to the Fund
rather than to the Distributor; however, the Fund will continue to make
payments of the account maintenance fee. In certain circumstances the amount
payable pursuant to the voluntary maximum may exceed the amount payable under
the NASD formula. In such circumstances payment in excess of the amount payable
under the NASD formula will not be made.
REDEMPTION OF SHARES
The Fund is required to redeem for cash all shares of the Fund upon receipt
of a written request in proper form. The redemption price is the net asset
value per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC which may be applicable, there will be no
charge for redemption if the redemption request is sent directly to the
Transfer Agent. Shareholders liquidating their holdings will receive upon
redemption all dividends reinvested through the date of redemption. The value
of shares at the time of redemption may be more or less than the shareholder's
cost, depending on the market value of the securities held by the Fund at such
time.
REDEMPTION
A shareholder wishing to redeem shares may do so 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
36
<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 30 minutes after the close of
business on the New York Stock Exchange (generally, 4:00 p.m., New York time)
on the same day. Dealers have the responsibility of submitting such repurchase
requests to the Fund not later than 30 minutes after the close of business on
the New York Stock Exchange in order to obtain that day's closing price.
The foregoing repurchase arrangements are for the convenience of shareholders
and do not involve a charge by the Fund (other than any applicable CDSC).
Securities firms which do not have selected dealer agreements with the
Distributor, however, may impose a transaction charge on the shareholder for
transmitting the notice of repurchase to the Fund. Merrill Lynch may charge its
customers a processing fee (presently $4.85) to confirm a repurchase of shares
to such customers. Redemptions directly through the Transfer Agent are not
subject to the processing fee. The Fund reserves the right to reject any order
for repurchase, which right of rejection might adversely affect shareholders
seeking redemption through the repurchase procedure. A shareholder whose order
for repurchase is rejected by the Fund, however, may redeem shares as set forth
above.
REINSTATEMENT PRIVILEGE -- CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a one-
time privilege to reinstate their accounts by purchasing Class A or Class D
shares, as the case may be, of the Fund at net asset value without a sales
charge up to the dollar amount redeemed. The reinstatement privilege may be
exercised by sending a notice of exercise along with a check for the amount to
be reinstated to the Transfer Agent within 30 days after the date the request
for redemption was accepted by the Transfer Agent or the Distributor. The
37
<PAGE>
reinstatement will be made at the net asset value per share next determined
after the notice of reinstatement is received and cannot exceed the amount of
the redemption proceeds. The reinstatement privilege is a one-time privilege
and may be exercised by the Class A or Class D shareholder only the first time
such shareholder makes a redemption.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below which are designed to facilitate investment in shares of the
Fund. Certain of such services are not available to investors who place
purchase orders for the Fund's shares through the Merrill Lynch BlueprintSM
Program. Full details as to each of such services, copies of the various plans
described below and instructions as to how to participate in the various plans
and services, or to change options with respect thereto, can be obtained from
the Fund by calling the telephone number on the cover page hereof or from the
Distributor or Merrill Lynch. Certain of these services are available only to
U.S. investors.
Investment Account. Each shareholder whose account is maintained at the
Transfer Agent has an Investment Account and will receive statements, at least
quarterly, from the Transfer Agent. These statements will serve as transaction
confirmations for automatic investment purchases and the reinvestment of
ordinary income dividends and long-term capital gain distributions. The
statements will also show any other activity in the account since the preceding
statement. Shareholders will receive separate transaction confirmations for
each purchase or sale transaction other than automatic investment purchases and
the reinvestment of ordinary income dividends and long-term capital gain
distributions. A shareholder may make additions to his Investment Account at
any time by mailing a check directly to the Transfer Agent. Shareholders also
may maintain their accounts through Merrill Lynch. Upon the transfer of shares
out of a Merrill Lynch brokerage account, an Investment Account in the
transferring shareholder's name will be opened automatically, without charge,
at the Transfer Agent. Shareholders considering transferring their Class A or
Class D shares from Merrill Lynch to another brokerage firm or financial
institution should be aware that, if the firm to which the Class A or Class D
shares are to be transferred will not take delivery of shares of the Fund, a
shareholder either must redeem the Class A or Class D shares (paying any
applicable CDSC) so that the cash proceeds can be transferred to the account at
the new firm or such shareholder must continue to maintain an Investment
Account at the Transfer Agent for those Class A or Class D shares. Shareholders
interested in transferring their Class B or Class C shares from Merrill Lynch
and who do not wish to have an Investment Account maintained for such shares at
the Transfer Agent may request their new brokerage firm to maintain such shares
in an account registered in the name of the brokerage firm for the benefit of
the shareholder. If the new brokerage firm is willing to accommodate the
shareholder in this manner, the shareholder must request that he be issued
certificates for his shares and then must turn the certificates over to the new
firm for re-registration as described in the preceding sentence. Shareholders
considering transferring a tax-deferred retirement account such as an
individual retirement account from Merrill Lynch to another brokerage firm or
financial institution should be aware that, if the firm to which the retirement
account is to be transferred will not take delivery of shares of the Fund, a
shareholder must either redeem the shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm, or such
shareholder must continue to maintain a retirement account at Merrill Lynch for
those shares.
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<PAGE>
Exchange Privilege. U.S. shareholders of each class of shares of the Fund
have an exchange privilege with certain other MLAM-advised mutual funds. There
is currently no limitation on the number of times a shareholder may exercise
the exchange privilege. The exchange privilege may be modified or terminated in
accordance with the rules of the Commission.
Under the Merrill Lynch Select PricingSM System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund in
his account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class
A shareholder wants to exchange Class A shares for shares of a second MLAM-
advised mutual fund, and the shareholder does not hold Class A shares of the
second fund in his account at the time of the exchange and is not otherwise
eligible to acquire Class A shares of the second fund, the shareholder will
receive Class D shares of the second fund as a result of the exchange. Class D
shares also may be exchanged for Class A shares of a second MLAM-advised mutual
fund at any time as long as, at the time of the exchange, the shareholder holds
Class A shares of the second fund in the account in which the exchange is made
or is otherwise eligible to purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the relative
net asset values per Class A or Class D share, respectively, plus an amount
equal to the difference, if any, between the sales charge previously paid on
the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the same
class of other MLAM-advised mutual fund.
Shares of the Fund which are subject to a CDSC are exchangeable on the basis
of relative net asset value per share without the payment of any CDSC that
might otherwise be due upon redemption of the shares of the Fund. For purposes
of computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares of
the Fund is "tacked" to the holding period of the newly acquired shares of the
other Fund.
Class A, Class B, Class C and Class D shares also are exchangeable for shares
of certain MLAM-advised money market funds specifically designated as available
for exchange of holders of Class A, Class B, Class C or Class D shares. The
period of time that Class A, Class B, Class C or Class D shares are held in a
money market fund, however, will not count toward satisfaction of the holding
period requirement for reduction of any CDSC imposed on such shares, if any,
and with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange privilege is treated as a sale for Federal income
tax purposes. For further information, see "Shareholder Services -- Exchange
Privilege" in the Statement of Additional Information.
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<PAGE>
The Fund's exchange privilege is modified with respect to purchases of Class
A and Class D shares under the Merrill Lynch Mutual Fund Adviser ("MFA")
program. First, the initial allocation of assets is made under the MFA program.
Then, any subsequent exchange under the MFA program of Class A or Class D
shares of a MLAM-advised mutual fund for Class A or Class D shares of the Fund
will be made solely on the basis of the relative net asset values of the shares
being exchanged. Therefore, there will not be a charge for any difference
between the sales charge previously paid on the shares of the other MLAM-
advised mutual fund and the sales charge payable on the shares of the Fund
being acquired in the exchange under the MFA program.
Automatic Reinvestment of Dividends and Capital Gains Distributions. All
dividends and capital gains distributions are reinvested automatically in full
and fractional shares of the Fund at the net asset value per share next
determined on the ex-dividend date of such dividend or distribution. A
shareholder may at any time, by written notification to Merrill Lynch if the
shareholder's account is maintained with Merrill Lynch or by written
notification or by telephone (1-800-MER-FUND) to the Transfer Agent if the
shareholder's account is maintained with the Transfer Agent, elect to have
subsequent dividends or capital gains distributions, or both, paid in cash,
rather than reinvested, in which event payment will be mailed on or about the
payment date. Cash payments can also be directly deposited to the shareholder's
bank account. No CDSC will be imposed upon redemption of shares issued as a
result of the automatic reinvestment of dividends or capital gains
distributions.
Systematic Withdrawal Plan. A Class A or Class D shareholder may elect to
receive systematic withdrawal payments from his Investment Account in the form
of payments by check or through automatic payment by direct deposit to his bank
account on either a monthly or quarterly basis. A Class A or Class D
shareholder whose shares are held within a CMA(R), CBA(R) or Retirement Account
may elect to have shares redeemed on a monthly, bimonthly, quarterly,
semiannual or annual basis through the CMA(R)/CBA(R) Systematic Redemption
Program, subject to certain conditions.
Automatic Investment Plans. Regular additions of Class A, Class B, Class C
and Class D shares may be made to an investor's Investment Account by
prearranged charges of $50 or more to his regular bank account. Investors who
maintain CMA(R) or CBA(R) accounts may arrange to have periodic investments
made in the Fund in their CMA(R) or CBA(R) accounts or in certain related
accounts in amounts of $100 or more through the CMA(R)/CBA(R) Automated
Investment Program.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return for
various specified time periods in advertisements or information furnished to
present or prospective shareholders. Average annual total return is computed
separately for Class A, Class B, Class C and Class D shares in accordance with
a formula specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any capital gains or losses on portfolio investments over
such periods) that would equate the initial amount invested to the redeemable
value of such investment at the end of each period. Average annual total return
will be computed assuming all dividends and distributions are reinvested and
taking into account all applicable recurring and nonrecurring expenses,
including any CDSC that would be applicable to a complete redemption of the
40
<PAGE>
investment at the end of the specified period such as in the case of Class B
and Class C shares and the maximum sales charge in the case of Class A and
Class D shares. Dividends paid by the Fund with respect to all shares, to the
extent any dividends are paid, will be calculated in the same manner at the
same time on the same day and will be in the same amount, except that account
maintenance and distribution fees and any incremental transfer agency costs
relating to each class of shares will be borne exclusively by that class. The
Fund will include performance data for all classes of shares of the Fund in any
advertisement or information including performance data of the Fund.
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return
calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return, and (2) the maximum applicable sales
charges will not be included with respect to annualized rates of return
calculations. Aside from the impact on the performance data calculations of
including or excluding the maximum applicable sales charges, actual annual or
annualized total return data generally will be lower than average annual total
return data since the average annual rates of return reflect compounding;
aggregate total return data generally will be higher than average annual total
return data since the aggregate rates of return reflect compounding over longer
periods of time. In advertisements directed to investors whose purchases are
subject to reduced sales charges in the case of Class A and Class D shares or
waiver of the CDSC in the case of Class B shares (such as investors in certain
retirement plans), performance data may take into account the reduced, and not
the maximum, sales charge or may not take into account the CDSC and therefore
may reflect greater total return since, due to the reduced sales charges or
waiver of the CDSC, a lower amount of expenses may be deducted. See "Purchase
of Shares". The Fund's total return may be expressed either as a percentage or
as a dollar amount in order to illustrate the effect of such total return on a
hypothetical $1,000 investment in the Fund at the beginning of each specified
period.
Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate, and an investor's shares, when redeemed, may be worth more
or less than their original cost.
On occasion, the Fund may compare its performance to the Standard & Poor's
500 Composite Stock Price Index, the Dow Jones Industrial Average, or
performance data published by Lipper Analytical Services, Inc., Morningstar
Publications, Inc., Money Magazine, U.S. News & World Report, Business Week,
CDA Investment Technology, Inc., Forbes Magazine, Fortune Magazine or other
industry publications. In addition, from time to time the Fund may include the
Fund's risk-adjusted performance ratings assigned by Morningstar Publications,
Inc. in advertising or supplemental sales literature. As with other performance
data, performance comparisons should not be considered indicative of the Fund's
relative performance for any future period.
41
<PAGE>
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all of its net investment income, if
any. Dividends from such net investment income are paid at least annually. All
net realized long- or short-term capital gains, if any, are distributed to the
Fund's shareholders at least annually. The per share dividends and
distributions on each class of shares will be reduced as a result of any
account maintenance, distribution and transfer agency fees applicable to that
class. See "Additional Information -- Determination of Net Asset Value".
Dividends and distributions may be reinvested automatically in shares of the
Fund, at net asset value without a sales charge. Shareholders may elect in
writing to receive any such dividends or distributions, or both, in cash.
Dividends and distributions are taxable to shareholders as described below
whether they are reinvested in shares of the Fund or received in cash. From
time to time, the Fund may declare a special distribution at or about the end
of the calendar year in order to comply with a Federal income tax requirement
that certain percentages of its ordinary income and capital gains be
distributed during the calendar year.
Certain gains or losses attributable to foreign currency related gains or
losses from certain of the Fund's investments may increase or decrease the
amount of the Fund's income available for distribution to shareholders. If such
losses exceed other income during a taxable year, (a) the Fund would not be
able to make any ordinary dividend distributions, and (b) distributions made
before the losses were realized would be recharacterized as returns of capital
to shareholders, rather than as ordinary dividends, reducing each shareholder's
tax basis in his Fund shares for Federal income tax purposes. For a detailed
discussion of the Federal tax considerations relevant to foreign currency
transactions, see "Additional Information -- Taxes". If in any fiscal year the
Fund has net income from certain foreign currency transactions, such income
will be distributed annually.
All net realized long- or short-term capital gains, if any, are declared and
distributed to the Fund's shareholders annually after the close of the Fund's
fiscal year. Capital gains distributions will be automatically reinvested in
shares unless the shareholder elects to receive such distributions in cash.
See "Shareholder Services -- Automatic Reinvestment of Dividends and Capital
Gains Distributions" for information as to how to elect either dividend
reinvestment or cash payments. Dividends and distributions are taxable to
shareholders as described below whether they are reinvested in shares of any
portfolio or received in cash.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of the Fund is determined
once daily as of 15 minutes after the close of business on the New York Stock
Exchange (generally, 4:00 p.m., New York time), on each day during which the
New York Stock Exchange is open for trading. Any assets or liabilities
initially expressed in terms of non-U.S. dollar currencies are translated into
U.S. dollars at the prevailing market rates as quoted by one or more banks or
dealers on the day of valuation. The net asset value is computed by dividing
the market value of the securities held by the Fund plus any cash or other
assets (including interest and dividends accrued but not yet received) minus
all liabilities (including accrued expenses) by the total number of shares
outstanding at such time. Expenses, including the management fees payable to
the Manager and any account maintenance and/or distribution fees payable to the
Distributor, are accrued daily. The per share net asset value of Class A shares
generally will be higher than the per share net asset value of shares of the
42
<PAGE>
other classes, reflecting the daily expense accruals of the account
maintenance, distribution and higher transfer agency fees applicable with
respect to Class B and Class C shares and the daily expense accruals of the
account maintenance fees applicable with respect to Class D shares; moreover,
the per share net asset value of Class D shares generally will be higher than
the per share net asset value of Class B and Class C shares, reflecting the
daily expense accruals of the distribution and the higher transfer agency fees
applicable with respect to Class B and Class C shares. It is expected, however,
that the per share net asset value of the classes will tend to converge
(although not necessarily meet) immediately after the payment of dividends or
distributions which will differ by approximately the amount of the expense
accrual differentials between the classes.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the over-the-counter market are valued
at the last available bid price in the over-the-counter market prior to the
time of valuation. When the Fund writes an option, the amount of the premium
received is recorded on the books of the Fund as an asset and an equivalent
liability. The amount of the liability is subsequently valued to reflect the
current market value of the option written, based upon the last sale price in
the case of exchange-traded options or, in the case of options traded in the
over-the-counter market, the last asked price. Options purchased by the Fund
are valued at their last sale price in the case of exchange-traded options or,
in the case of options traded in the over-the-counter market, the last bid
price.
Securities and assets for which market quotations are not readily available
are valued at fair value as determined in good faith under the direction of the
Board of Directors of the Fund.
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (the "Code"). If it so qualifies, the Fund (but not
its shareholders) will not be subject to Federal income tax on the part of its
net ordinary income and net realized capital gains which it distributes to
Class A, Class B, Class C and Class D shareholders (together, the
"shareholders"). The Fund intends to distribute substantially all of such
income.
Dividends paid by the Fund from its ordinary income and distributions of the
Fund's net realized short-term capital gains (together referred to hereafter as
"ordinary income dividends") are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
(including long-term gains from certain transactions in futures and options)
("capital gain dividends") are taxable to shareholders as long-term capital
gains, regardless of the length of time the shareholder has owned Fund shares.
Distributions in excess of the Fund's earnings and profits will first reduce
the adjusted tax basis of a holder's shares and, after such adjusted tax basis
is reduced to zero, will constitute capital gains to such holder (assuming the
shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. A portion of the Fund's ordinary income dividends may be eligible
for the dividends received deduction allowed to corporations under the Code, if
certain requirements are met. If the Fund pays a dividend in January that
43
<PAGE>
was declared in the previous October, November or December to shareholders of
record on a specified date in one of such months, then such dividend will be
treated for tax purposes as being paid by the Fund and received by its
shareholders on December 31 of the year in which such dividend was declared.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% U.S.
withholding tax under existing provisions of the Code applicable to foreign
individuals and entities unless a reduced rate of withholding or a withholding
exemption is provided under applicable treaty law. Nonresident shareholders are
urged to consult their own tax advisers concerning the applicability of the
U.S. withholding tax.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes. Shareholders may be
able to claim U.S. foreign tax credits with respect to such taxes, subject to
certain conditions and limitations contained in the Code. For example, certain
retirement accounts cannot claim foreign tax credits on investments in foreign
securities held in the Fund. If more than 50% in value of the Fund's total
assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible, and intends, to file an election with
the Internal Revenue Service pursuant to which shareholders of the Fund will be
required to include their proportionate shares of such withholding taxes in
their U.S. income tax returns as gross income, treat such proportionate shares
as taxes paid by them, and deduct such proportionate shares in computing their
taxable incomes or, alternatively, use them as foreign tax credits against
their U.S. income taxes. No deductions for foreign taxes, however, may be
claimed by noncorporate shareholders who do not itemize deductions. A
shareholder that is a nonresident alien individual or a foreign corporation may
be subject to U.S. withholding tax on the income resulting from the Fund's
election described in this paragraph but may not be able to claim a credit or
deduction against such U.S. tax for the foreign taxes treated as having been
paid by such shareholder. The Fund will report annually to its shareholders the
amount per share of such withholding taxes.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
Under Code Section 988, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that are
not "regulated futures contracts" and from unlisted options will generally be
treated as ordinary income or loss. Such Code Section 988 gains or losses will
generally increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company
taxable income during a taxable year, the Fund would not be able to make any
ordinary income dividend distributions, and any distributions made before the
losses were realized but in the same taxable year would be recharacterized as a
return of capital to shareholders, thereby reducing the basis of each
shareholder's Fund shares and resulting in a capital gain for any shareholder
who received a distribution greater than the shareholder's tax basis in Fund
shares (assuming the shares were held as a capital asset).
44
<PAGE>
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period of the acquired Class D shares will
include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of acquiring
the shares, then the loss the shareholder can recognize on the exchange will be
reduced (or the gain increased) to the extent the sales charge paid to the Fund
on the exchanged shares reduces any sales charge the shareholder would have
owed upon purchase of the new shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new
shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action
either prospectively or retroactively.
Ordinary income 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 2,200,000,000 shares of Common Stock, par value $0.10 per
share, divided into four classes, designated Class A, Class B, Class C and
Class D Common Stock, of which Class A and Class C consists of 200,000,000
shares, and Class B and Class D consists of 900,000,000 shares. Shares of Class
A, Class B, Class C and Class D Common Stock represent interests in the same
assets of the Fund and are identical in all respects except that Class B, Class
C and Class D shares bear certain expenses related to the account maintenance
associated with such shares, and Class B and Class C shares bear certain
expenses related to the distribution of such shares. Each class has exclusive
voting rights with respect to matters relating to account maintenance and
distribution expenditures, as applicable. See "Purchase of Shares". The Fund
has received an order from the Securities and Exchange Commission permitting
the issuance and sale of multiple classes of Common Stock. The Board of
Directors of the Fund may classify and reclassify the shares of the Fund into
additional classes of Common Stock at a future date.
45
<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 matters submitted to a shareholder vote. The Fund does not intend to
hold meetings of shareholders in any year in which the Investment Company Act
does not require shareholders to act on any of the following matters: (i)
election of Directors; (ii) approval of an investment advisory agreement; (iii)
approval of a distribution agreement; and (iv) ratification of selection of
independent auditors. Also, the by-laws of the Fund require that a special
meeting of stockholders be held upon the written request of at least 10% of the
outstanding shares of the Fund entitled to vote at such meeting. Voting rights
for Directors are not cumulative. Shares issued are fully paid and non-
assessable and have no preemptive rights. Shares have the conversion rights
disclosed in this Prospectus. Each share of Common Stock is entitled to
participate equally in dividends and distributions declared by the Fund and in
the net assets of the Fund on liquidation or dissolution after satisfaction of
outstanding liabilities, except, as noted above, Class B, Class C and Class D
shares bear certain additional expenses.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts, the shareholder should notify in writing:
Financial Data Services, Inc.
Attn: TAMFO
P.O. Box 45289
Jacksonville, FL 32232-5289
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this,
please call your Merrill Lynch financial consultant or Financial Data Services,
Inc. at 1-800-637-3863.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
46
<PAGE>
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.--AUTHORIZATION FORM (PART 1)
- -------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINT SM PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINT SM
PROGRAM APPLICATION BY CALLING (800) 637-3766.
- -------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
[_] Class A shares [_] Class B shares [_] Class C shares [_] Class D shares
of Merrill Lynch Global Allocation Fund, Inc., and establish an Investment
Account as described in the Prospectus. In the event that I am not eligible to
purchase Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $............ payable to Financial Data Services,
Inc. as an initial investment (minimum $1,000). I understand that this
purchase will be executed at the applicable offering price next to be
determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the Right of Accumulation as outlined in the Statement of
Additional Information: Please list all funds. (Use a separate sheet of
paper if necessary.)
1. .................................. 4. ..................................
2. .................................. 5. ..................................
3. .................................. 6. ..................................
Name...........................................................................
First Name Initial Last Name
Name of Co-Owner (if any)......................................................
First Name Initial Last Name
Address........................................................................
................................................. Date........................
(Zip Code)
Occupation........................... Name and Address of Employer ........
..................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
(In the case of co-owner, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- -------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
Ordinary Income Dividends Long-term Capital Gains
Select [_] Reinvest Select [_] Reinvest
One: [_] Cash One: [_] Cash
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: [_] CHECK
OR [_] DIRECT DEPOSIT TO BANK ACCOUNT
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by
direct deposit to my bank account and, if necessary, debit entries and
adjustments for any credit entries made to my account in accordance with the
terms I have selected on the Merrill Lynch Global Allocation Fund, Inc.
Authorization Form.
SPECIFY TYPE OF ACCOUNT (CHECK ONE) [_] CHECKING [_] SAVINGS
Name on your account ..........................................................
Bank Name .....................................................................
Bank Number ...................... Account Number ............................
Bank Address ..................................................................
I agree that this authorization will remain in effect until I provide written
notification to Financial Data Services, Inc. amending or terminating this
service.
Signature of Depositor ........................................................
Signature of Depositor ............................... Date...................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED
CHECK MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD
ACCOMPANY THIS APPLICATION.
- -------------------------------------------------------------------------------
A-1
<PAGE>
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.--AUTHORIZATION FORM (PART 1) --
(CONTINUED)
3. SOCIAL SECURITY OR TAXPAYER IDENTIFICATION NUMBER
-----------------------------------------------------
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security Number or Taxpayer Identification Number and (2)
that I am not subject to backup withholding (as discussed under "Additional
Information--Taxes") either because I have not been notified that I am subject
thereto as a result of a failure to report all interest or dividends, or the
Internal Revenue Service ("IRS") has notified me that I am no longer subject
thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDER-REPORTING AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS
BEEN TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS
CERTIFICATION TO OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
..................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
- -------------------------------------------------------------------------------
4. LETTER OF INTENTION--CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
Dear Sir/Madam:
..................., 19......
Date of Initial Purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Global Allocation Fund, Inc. or any other investment company with an
initial sales charge or deferred sales charge for which Merrill Lynch Funds
Distributor, Inc. acts as distributor over the next 13 month period which will
equal or exceed:
[_] $25,000 [_] $50,000 [_] $100,000 [_] $250,000 [_] $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Fund's prospectus.
I agree to the terms and conditions of this Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Global Allocation Fund, Inc. held as security.
By .................................. .....................................
Signature of Owner Signature of Co-Owner
(If registered in joint names,
both must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name............................. (2) Name.............................
Account Number....................... Account Number.......................
- -------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp We hereby authorize Merrill Lynch
Funds Distributor, Inc. to act as
- - - our agent in connection with
transactions under this
authorization form and agree to
notify the Distributor of any
purchases made under a Letter of
Intention or Systematic Withdrawal
Plan. We guarantee the shareholder's
- - - signature.
This form when completed should be .....................................
mailed to: Dealer Name and Address
Merrill Lynch Global Allocation By ..................................
Fund, Inc. Authorized Signature of Dealer
c/o Financial Data Services, Inc.
Transfer Agency Mutual Fund Operations [_][_][_] [_][_][_][_] ..............
P.O. Box 45289 Branch F/C No. F/C Last Name
Jacksonville, FL 32232-5289 Code
[_][_][_] [_][_][_][_][_]
Dealer's Customer Account No.
A-2
<PAGE>
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.--AUTHORIZATION FORM (PART 2)
- -------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR
AUTOMATIC INVESTMENT PLANS ONLY.
- -------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
Name of Owner......................
-------------------------
Name of Co-Owner (if any).......... Social Security Number or
Taxpayer Identification
Number
Address............................ Account Number ....................
(if existing account)
...................................
- -------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN--CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of [_] Class A or [_] Class D shares in Merrill Lynch Global
Allocation Fund, Inc., at cost or current offering price. Withdrawals to be
made either (check one) [_] Monthly on the 24th day of each month, or
[_] Quarterly on the 24th day of March, June, September and December. If the
24th falls on a weekend or holiday, the next succeeding business day will be
utilized. Begin systematic withdrawal on . . . . . . . . . .(month), or as
soon as possible thereafter.
SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE): [_] $ _____
or [_] _____% of the current value of [_] Class A or [_] Class D shares in the
account.
SPECIFY WITHDRAWAL METHOD: [_] check or [_] direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a) I hereby authorize payment by check
[_] as indicated in Item 1.
[_] to the order of........................................................
Mail to (check one)
[_] the address indicated in Item 1.
[_] Name (Please Print)....................................................
Address .......................................................................
..........................................................................
Signature of Owner................................ Date..................
Signature of Co-Owner (if any)............................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO BANK ACCOUNT AND IF
NECESSARY DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO FINANCIAL DATA SERVICES, INC. AMENDING OR TERMINATING
THIS SERVICE.
Specify type of account (check one): [_] checking [_] savings
Name on your Account...........................................................
Bank Name......................................................................
Bank Number........................ Account Number............................
Bank Address...................................................................
...............................................................................
Signature of Depositor................................. Date..................
Signature of Depositor.........................................................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID"
OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHALL ACCOMPANY THIS APPLICATION.
A-3
<PAGE>
- -------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Financial Data Services, Inc. draw an automated
clearing house ("ACH") debit on my checking account described below each month
to purchase: (choose one)
[_] Class A shares [_] Class B shares [_] Class C shares [_] Class D shares
of Merrill Lynch Global Allocation Fund, Inc., subject to the terms set forth
below. In the event that I am not eligible to purchase Class A shares, I
understand that Class D shares will be purchased.
AUTHORIZATION TO HONOR ACH DEBITS
FINANCIAL DATA SERVICES, INC. DRAWN BY FINANCIAL DATA SERVICES,
INC.
You are hereby authorized to draw an To...............................Bank
ACH debit each month on my bank (Investor's Bank)
account for investment in Merrill
Lynch Global Allocation Fund, Inc. Bank Address.........................
as indicated below:
City...... State...... Zip Code......
Amount of each ACH debit $........
Account Number ................... As a convenience to me, I hereby
request and authorize you to pay and
Please date and invest ACH debits on charge to my account ACH debits
the 20th of each month beginning drawn on my account by and payable
to Financial Data Services, Inc., I
..................................... agree that your rights in respect to
each such debit shall be the same as
................(month) if it were a check drawn on you and
signed personally by me. This
or as soon thereafter as possible. authority is to remain in effect
I agree that you are drawing these until revoked by me in writing.
ACH debits voluntarily at my request Until you receive such notice, you
and that you shall not be liable for shall be fully protected in honoring
any loss arising from any delay in any such debit. I further agree that
preparing or failure to prepare any if any such debit be dishonored,
such debit. If I change banks or whether with or without cause and
desire to terminate or suspend this whether intentionally or
program, I agree to notify you inadvertently, you shall be under no
promptly in writing. I hereby liability.
authorize you to take any action to
correct erroneous ACH debits of my ............ .....................
bank account or purchases of fund Date Signature of
shares including liquidating shares Depositor
of the Fund and crediting my bank
account. I further agree that if a ............ .....................
debit is not honored upon Bank Signature of Depositor
presentation, Financial Data Account (If joint account,
Services, Inc. is authorized to Number both must sign)
discontinue immediately the Automatic
Investment Plan and to liquidate
sufficient shares held in my account
to offset the purchase made with the
returned dishonored debit.
............ .....................
Date Signature of
Depositor
......................
Signature of Depositor
(If joint account,
both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" SHOULD ACCOMPANY THIS APPLICATION.
A-4
<PAGE>
MANAGER
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
TRANSFER AGENT
Financial Data Services, Inc.
Administrative Offices:
Transfer Agency Mutual Fund Operations
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
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 REPRESEN-
TATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE
OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMA-
TION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE FUND, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table.................................................................. 2
Merrill Lynch Select PricingSM System...................................... 3
Financial Highlights....................................................... 8
Special Considerations..................................................... 9
Investment Objective and Policies.......................................... 10
Equity Securities......................................................... 11
Debt Securities........................................................... 13
Money Market Securities................................................... 15
Portfolio Strategies Involving Options and Futures........................ 15
Other Investment Policies and Practices................................... 21
Management of the Fund..................................................... 24
Board of Directors........................................................ 24
Management and Advisory Arrangements...................................... 25
Code of Ethics............................................................ 26
Transfer Agency Services.................................................. 26
Purchase of Shares......................................................... 27
Initial Sales Charge Alternatives--
Class A and Class D Shares.............................................. 29
Deferred Sales Charge Alternatives--
Class B and Class C Shares.............................................. 30
Distribution Plans........................................................ 34
Limitations on the Payment of Deferred Sales Charges...................... 36
Redemption of Shares....................................................... 36
Redemption................................................................ 36
Repurchase................................................................ 37
Reinstatement Privilege--
Class A and Class D Shares.............................................. 37
Shareholder Services....................................................... 38
Performance Data........................................................... 40
Additional Information..................................................... 42
Dividends and Distributions............................................... 42
Determination of Net Asset Value.......................................... 42
Taxes..................................................................... 43
Organization of the Fund.................................................. 45
Shareholder Reports....................................................... 46
Shareholder Inquiries..................................................... 46
Authorization Form......................................................... A-1
</TABLE>
Code # 10810-0295
Merrill Lynch
Global Allocation
Fund, Inc.
PROSPECTUS
February 27, 1995
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
----------------
Merrill Lynch Global Allocation Fund, Inc. (the "Fund") is a non-diversified
mutual fund seeking high total investment return, consistent with prudent
risk, through a fully-managed investment policy utilizing United States and
foreign equity, debt and money market securities, the combination of which
will be varied from time to time both with respect to types of securities and
markets in response to changing market and economic trends. Total investment
return is the aggregate of capital value changes and income. There can be no
assurance that the Fund's investment objective will be achieved. The Fund may
employ a variety of instruments and techniques to enhance income and to hedge
against market and currency risk.
----------------
Pursuant to the Merrill Lynch Select Pricing SM System, the Fund offers four
classes of shares each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select Pricing SM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances.
----------------
This Statement of Additional Information of the Fund is not a prospectus and
should be read in conjunction with the prospectus of the Fund, dated February
27, 1995 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission and can be obtained, without charge, by calling or by
writing the Fund at the above telephone number or address. This Statement of
Additional Information has been incorporated by reference into the Prospectus.
----------------
MERRILL LYNCH ASSET MANAGEMENT--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
----------------
The date of this Statement of Additional Information is February 27, 1995.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to seek a high total investment return,
consistent with prudent risk, through a fully-managed investment policy
utilizing United States and foreign equity, debt and money market securities
the combination of which will be varied from time to time both with respect to
types of securities and markets in response to changing market and economic
trends. Reference is made to "Investment Objective and Policies" in the
Prospectus for a discussion of the investment objective and policies of the
Fund.
While it is the policy of the Fund generally not to engage in trading for
short-term gains, Merrill Lynch Asset Management, L.P., doing business as
Merrill Lynch Asset Management (the "Manager"), will effect portfolio
transactions without regard to holding period if, in its judgment, such
transactions are advisable in light of a change in circumstances of a
particular company or within a particular industry or due to general market,
economic or financial conditions. Accordingly, while the Fund anticipates that
its annual turnover rate should not exceed 200% under normal conditions, it is
impossible to predict portfolio turnover rates. The portfolio turnover rate is
calculated by dividing the lesser of the Fund's annual sales or purchases of
portfolio securities (exclusive of purchases or sales of securities whose
maturities at the time of acquisition were one year or less) by the monthly
average value of the securities in the portfolio during the year. The portfolio
turnover rates for the fiscal years ending October 31, 1993, and 1994 were
50.35% and 57.04%, respectively. The Fund is subject to the Federal income tax
requirement that less than 30% of the Fund's gross income be derived from gains
from the sale or other disposition of securities held for less than three
months.
The U.S. Government has from time to time in the past imposed restrictions,
through taxation and otherwise, on foreign investments by U.S. investors such
as the Fund. If such restrictions should be reinstituted, it might become
necessary for the Fund to invest all or substantially all of its assets in U.S.
securities. In such event, the Fund would review its investment objective and
investment policies to determine whether changes are appropriate. Any changes
in the investment objective or fundamental policies set forth under "Investment
Restrictions" below would require the approval of the holders of a majority of
the Fund's outstanding voting securities.
The Fund's ability and decisions to purchase or sell portfolio securities may
be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are redeemable on a
daily basis on each day the Fund determines its net asset value in U.S.
dollars, the Fund intends to manage its portfolio so as to give reasonable
assurance that it will be able to obtain U.S. dollars to the extent necessary
to meet anticipated redemptions. See "Redemption of Shares". Under present
conditions, the Fund does not believe that these considerations will have any
significant effect on its portfolio strategy, although there can be no
assurance in this regard.
PRECIOUS METAL-RELATED SECURITIES
The Fund may invest in the equity securities of companies that explore for,
extract, process or deal in precious metals, i.e., gold, silver and platinum,
and in asset-based securities indexed to the value of such metals. Such
securities may be purchased when they are believed to be attractively priced in
relation to the value of a company's precious metal-related assets or when the
value of precious metals are expected to benefit from inflationary pressure or
other economic, political or financial uncertainty or instability. The prices
of precious metals and of the securities of precious metal-related companies
historically have been subject to
2
<PAGE>
high volatility. In addition, the earnings of precious metal-related companies
may be adversely affected by volatile metals prices which may adversely affect
the financial condition of such companies.
The major producers of gold include the Republic of South Africa, Russia,
Canada, the United States, Brazil and Australia. Sales of gold by Russia 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 herein 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 Ratings Group ("S&P") or Baa or better by Moody's Investors Service,
Inc. ("Moody's") or commercial paper rated A-1 by S&P or Prime-1 by Moody's or
of issuers that the Manager has determined to be of similar creditworthiness.
If the asset-based security is backed by a bank letter of credit or other
similar facility, the Manager may take such backing into account in determining
the creditworthiness of the issuer. While the market prices for an asset-based
security and the related natural resource asset generally are expected to move
in the same direction, there may not be perfect correlation in the two price
movements. Asset-based securities may not be secured by a security interest in
or claim on the underlying natural resource asset. The asset-based securities
in which the Fund may invest may bear interest or pay preferred dividends at
below market (or even at relatively nominal) rates. As an example, assume gold
is selling at a market price of $300 per ounce and an issuer sells a $1,000
face amount gold-related note with a seven year maturity, payable at maturity
at the greater of either $1,000 in cash or in the then market price of three
ounces of gold. If at maturity, the market price of gold is $400 per ounce, the
amount payable on the note would be $1,200. Certain asset-based securities may
be payable at maturity in cash at the stated principal amount or, at the option
of the holder, directly in a stated amount of the asset to which it is related.
In such instance, because the Fund presently does not intend to invest directly
in natural resource assets, the Fund would sell the asset-based security in the
secondary market, to the extent one exists, prior to maturity if the value of
the stated amount of the asset exceeds the stated principal amount and thereby
realize the appreciation in the underlying asset.
REAL ESTATE-RELATED SECURITIES
The real estate-related securities which will be emphasized by the Fund are
equity securities of real estate investment trusts, which own income-producing
properties, and mortgage real estate investment trusts which make various types
of mortgage loans often combined with equity features. The securities of such
trusts generally pay above average dividends and may offer the potential for
capital appreciation. Such securities
3
<PAGE>
will be subject to the risks customarily associated with the real estate
industry, including declines in the value of the real estate investments of the
trusts. Real estate values are affected by numerous factors including (i)
governmental regulations (such as zoning and environmental laws) and changes in
tax laws, (ii) operating costs, (iii) the location and the attractiveness of
the properties, (iv) changes in economic conditions (such as
fluctuations in interest and inflation rates and business conditions) and (v)
supply and demand for improved real estate. Such trusts also are dependent on
management skill and may not be diversified in their investments.
PORTFOLIO STRATEGIES INVOLVING OPTIONS AND FUTURES
Reference is made to the discussion under the caption "Investment Objective
and Policies--Portfolio Strategies Involving Options and Futures" in the
Prospectus for information with respect to various portfolio strategies
involving options and futures. The Fund may seek to increase its return through
the use of options on portfolio securities and to hedge its portfolio against
movements in the equity, debt and currency markets. The Fund has authority to
write (i.e., sell) covered put and call options on its portfolio securities,
purchase put and call options on securities and engage in transactions in stock
index options, stock index futures and stock futures and financial futures, and
related options on such futures. The Fund may also deal in forward foreign
exchange transactions and foreign currency options and futures, and related
options on such futures. Each of such portfolio strategies is described in the
Prospectus. Although certain risks are involved in options and futures
transactions (as discussed in the Prospectus and below), 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. 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 partial hedge against the price of the
underlying security declining.
The writer of a covered call option has no control over when he may be
required to sell his securities since he may be assigned an exercise notice at
any time prior to the termination of his obligation as a writer. If an option
expires unexercised, the writer would realize a gain in the amount of the
premium. Such a gain, of course, may be offset by a decline in the market value
of the underlying security during the option period. If a call option is
exercised, the writer would realize a gain or loss from the sale of the
underlying security.
4
<PAGE>
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options which means that so
long as the Fund is obligated as the writer of the option, it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S.
Government securities or other high grade liquid debt or equity securities
denominated in U.S. dollars or non-U.S. currencies with a securities depository
with a value equal to or greater than the exercise price of the underlying
securities. By writing a put, the Fund will be obligated to purchase the
underlying security at a price that may be higher than the market value of that
security at the time of exercise for as long as the option is outstanding. The
Fund may engage in closing transactions in order to terminate put options that
it has written.
Options referred to herein and in the Fund's Prospectus may be options issued
by The Options Clearing Corporation (the "Clearing Corporation") which are
currently traded on the Chicago Board Options Exchange, American Stock
Exchange, New York Stock Exchange, Philadelphia Stock Exchange and Pacific
Stock Exchange. Options referred to herein and in the Fund's Prospectus may
also be options traded on foreign securities exchanges such as the London Stock
Exchange and the Amsterdam Stock Exchange. An option position may be closed out
only on an exchange which provides a secondary market for an option of the same
series. If a secondary market does not exist, it might not be possible to
effect a closing transaction in a particular option, with the result, in the
case of a covered call option, that the Fund will not be able to sell the
underlying security until the option expires or until it delivers the
underlying security upon exercise. Reasons for the absence of a liquid
secondary market on an exchange include the following: (i) there may be
insufficient trading interest in certain options; (ii) restrictions may be
imposed by an exchange on opening transactions or closing transactions or both;
(iii) trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of options or underlying securities;
(iv) unusual or unforeseen circumstances may interrupt normal operations on an
exchange; (v) the facilities of an exchange or the Clearing Corporation may not
at all times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that exchange that had been issued by the Clearing Corporation as a
result of trades on that exchange would continue to be exercisable in
accordance with their terms.
The Fund may also enter into over-the-counter option transactions ("OTC
options"), which are two party contracts with price and terms negotiated
between the buyer and seller. The staff of the Securities and Exchange
Commission has taken the position that OTC options and the assets used as cover
for written OTC options are illiquid securities.
Purchasing Options. The Fund may purchase put options to hedge against a
decline in the market value of its securities 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
5
<PAGE>
certain circumstances, the Fund may purchase call options on securities held in
its portfolio on which it has written call options or on securities which it
intends to purchase. The Fund may purchase either exchange traded options or
OTC options. The Fund will not purchase options on securities (including stock
index options discussed below) if, as a result of such purchase, the aggregate
cost of all outstanding options on securities held by the Fund would exceed 5%
of the market value of the Fund's total assets.
Stock Index Options and Futures and Financial Futures. As described in the
Prospectus, the Fund is authorized to engage in transactions in stock index
options and futures and financial futures, and related options on such futures.
Set forth below is further information concerning futures transactions.
A futures contract is an agreement between two parties to buy and sell a
particular commodity, such as 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
6
<PAGE>
exchange will be limited to hedging involving either specific transactions or
portfolio positions. Transaction hedging is the purchase or sale of forward
foreign currency with respect to specific receivables or payables of the Fund
accruing in connection with the purchase and sale of its portfolio securities,
the sale and redemption of shares of the Fund or the payment of dividends and
distributions by the Fund. Position hedging is the sale of forward foreign
currency with respect to portfolio security positions denominated or quoted in
such foreign currency. The Fund will not speculate in forward foreign exchange.
The Fund may not position hedge with respect to the currency of a particular
country to an extent greater than the aggregate market value (at the time of
making such sale) of the securities held in its portfolio denominated or quoted
in that particular foreign currency. If the Fund enters into a position hedging
transaction, its custodian will place cash or liquid equity or debt securities
in a separate account of the Fund in an amount equal to the value of the Fund's
total assets committed to the consummation of such forward contract. If the
value of the securities placed in the separate account declines, additional
cash or securities will be placed in the account so that the value of the
account will equal the amount of the Fund's commitment with respect to such
contracts. The Fund will enter into such transactions only to the extent, if
any, deemed appropriate by the Manager. The Fund will not enter into a forward
contract with a term of more than one year.
The Fund is also authorized to purchase or sell listed or over-the-counter
foreign currency options, foreign currency futures and related options on
foreign currency futures as a short or long hedge against possible variations
in foreign exchange rates. Such transactions may be effected with respect to
hedges on non-U.S. dollar denominated securities owned by the Fund, sold by the
Fund but not yet delivered, or committed or anticipated to be purchased by the
Fund. As an illustration, the Fund may use such techniques to hedge the stated
value in U.S. dollars of an investment in a yen denominated security. In such
circumstances, for example, the Fund may purchase a foreign currency put option
enabling it to sell a specified amount of Japanese yen for dollars at a
specified price by a future date. To the extent the hedge is successful, a loss
in the value of the yen relative to the dollar will tend to be offset by an
increase in the value of the put option. To offset, in whole or part, the cost
of acquiring such a put option, the Fund may also sell a call option which, if
exercised, requires it to sell a specified amount of yen for dollars at a
specified price by a future date (a technique called a "straddle"). By selling
such call option in this illustration, the Fund gives up the opportunity to
profit without limit from increases in the relative value of the yen to the
dollar. The Manager believes that "straddles" of the type which may be utilized
by the Fund constitute hedging transactions and are consistent with the
policies described above.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the
currency at a price above the devaluation level it anticipates. The cost to the
Fund of engaging in foreign currency transactions varies with such factors as
the currencies involved, the length of the contract period and the market
conditions then prevailing. Since transactions in foreign currency exchange
usually are conducted on a principal basis, no fees or commissions are
involved.
Risk Factors in Options and Futures Transactions. Utilization of options and
futures transactions involves the risk of imperfect correlation in movements in
the prices of options and futures contracts and movements in the prices of the
securities and currencies which are the subject of the hedge. If the price of
the options and futures contract moves more or less than the prices of the
hedged securities or currencies, the Fund will experience a gain or loss which
will not be completely offset by movements in the prices of the
7
<PAGE>
securities and currencies which are the subject of the hedge. The successful
use of options and futures also depends on the Manager's ability to correctly
predict price movements in the market involved in a particular options or
futures transaction.
Prior to exercise or expiration, an exchange-traded option or futures
position can only be terminated by entering into a closing purchase or sale
transaction. This requires a secondary market on an exchange for call or put
options of the same series. The Fund will enter into an option or futures
transaction on an exchange only if there appears to be a liquid secondary
market for such options or futures. However, there can be no assurance that a
liquid secondary market will exist for any particular call or put option or
futures contract at any specific time. Thus, it may not be possible to close an
option or futures position. The Fund will acquire only over-the-counter options
for which management believes the Fund can receive on each business day at
least two independent bids or offers (one of which will be from an entity other
than a party to the option), unless there is only one dealer, in which case
that dealer's price is used. In the case of a futures position or an option on
a futures position written by the Fund in the event of adverse price movements,
the Fund would continue to be required to make daily cash payments of variation
margin. In such situations, if the Fund has insufficient cash, it may have to
sell portfolio securities to meet daily variation margin requirements at a time
when it may be disadvantageous to do so. In addition, the Fund may be required
to take or make delivery of the security or currency underlying futures
contracts it holds. The inability to close options and futures positions also
could have an adverse impact on the Fund's ability to hedge effectively its
portfolio. There is also the risk of loss by the Fund of margin deposits in the
event of bankruptcy of a broker with whom the Fund has an open position in a
futures contract or related option. The risk of loss from investing in futures
transactions is theoretically unlimited.
The exchanges on which the Fund intends to conduct options transactions have
generally established limitations governing the maximum number of call or put
options on the same underlying security or currency (whether or not covered)
which may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through
one or more brokers). "Trading limits" are imposed on the maximum number of
contracts which any person may trade on a particular trading day. An exchange
may order the liquidation of positions found to be in violation of these
limits, and it may impose other sanctions or restrictions. The Manager does not
believe that these trading and position limits will have any adverse impact on
the portfolio strategies for hedging the Fund's portfolio.
OTHER INVESTMENT POLICIES AND PRACTICES
Non-Diversified Status. The Fund is classified as non-diversified within the
meaning of the Investment Company Act, which means that the Fund is not limited
by such Act in the proportion of its assets that it may invest in securities of
a single issuer. However, the Fund's investments will be limited so as to
qualify for the special tax treatment afforded "regulated investment companies"
under 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
8
<PAGE>
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. 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
15% (10% to the extent required by certain state laws) of its total assets
taken at the time of acquisition of such commitment or security. The Fund will
at all times maintain a segregated account with its custodian of cash, cash
equivalents, U.S. Government securities or other high grade liquid debt or
equity securities denominated in U.S. dollars or non-U.S. currencies in an
aggregate amount equal to the purchase price of the securities underlying the
commitment.
There can be no assurance that the securities subject to a standby commitment
will be issued, and the value of the security, if issued, on the delivery date
may be more or less than its purchase price. Since the issuance of the security
underlying the commitment is at the option of the issuer, the Fund may bear the
risk of a decline in the value of such security and may not benefit from an
appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security can
reasonably be expected to be issued, and the value of the security will
thereafter be reflected in the calculation of the Fund's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment
fee. In the event the security is not issued, the commitment fee will be
recorded as income on the expiration date of the standby commitment.
Repurchase Agreements; Purchase and Sale Contracts. The Fund may invest in
securities pursuant to repurchase agreements or purchase and sale contracts.
Repurchase agreements may be entered into only with a member bank of the
Federal Reserve System or primary dealer in U.S. Government securities or an
affiliate thereof. Purchase and sale contracts may be entered into only with
financial institutions which have capital of at least $50 million or whose
obligations are guaranteed by an entity having capital of at least $50 million.
9
<PAGE>
Under such agreements, the other party agrees, upon entering into the contract
with the Fund, to repurchase the security at a mutually agreed upon time and
price in a specified currency, thereby determining the yield during the term of
the agreement. This results in a fixed rate of return insulated from market
fluctuations during such period although it may be affected by currency
fluctuations. In the case of repurchase agreements, the prices at which the
trades are conducted do not reflect the accrued interest on the underlying
obligations; whereas, in the case of purchase and sale contracts, the prices
take into account accrued interest. Such agreements usually cover short
periods, often under one week. Repurchase agreements may be construed to be
collateralized loans by the purchaser to the seller secured by the securities
transferred to the purchaser. In the case of a repurchase agreement, as a
purchaser, the Fund will require the seller to provide additional collateral if
the market value of the securities falls below the repurchase price at any time
during the term of the repurchase agreement; the Fund does not have the right
to seek additional collateral in the case of purchase and sale contracts. In
the event of default by the seller under a repurchase agreement construed to be
a collateralized loan, the underlying securities are not owned by the Fund but
constitute only collateral for the seller's obligation to pay the repurchase
price. Therefore, the Fund may suffer time delays and incur costs of possible
losses in connection with the disposition of the collateral. A purchase and
sale contract differs from a repurchase agreement in that the contract
arrangements stipulate that the securities are owned by the Fund. In the event
of a default under such a repurchase agreement or under a purchase and sale
contract, instead of the contractual fixed rate of return, the rate of return
to the Fund would depend on intervening fluctuations of the market values of
such securities and the accrued interest on the securities. In such event, the
Fund would have rights against the seller for breach of contract with respect
to any losses arising from market fluctuations following the failure of the
seller to perform. While the substance of purchase and sale contracts 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. The Fund may not invest more
than 15% (10% to the extent required by certain state laws) of its total assets
in repurchase agreements or purchase and sale contracts maturing in more than
seven days together with all other illiquid investments.
Lending of Portfolio Securities. Subject to the investment restrictions
stated 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. Such collateral will be maintained at all
times in an amount equal to at least 100% of the current market value of the
loaned securities. The purpose of such loans is to permit the borrower to use
such securities for delivery to purchasers when such borrower has sold short.
If cash collateral is received by the Fund, it is invested in short-term money
market securities, and a portion of the yield received in respect of such
investment is retained by the Fund. Alternatively, if securities are delivered
to the Fund as collateral, the Fund and the borrower negotiate a rate for the
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 debt securities
which, in the Manager's judgment, possess similar credit characteristics ("high
yield bonds").
10
<PAGE>
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 are greater than is the
case with higher rated securities. For example, during an economic downturn or
a sustained period of rising interest rates, issuers of high yield bonds may be
more likely to experience financial stress, especially if such issuers are
highly leveraged. During such periods, such issuers may not have sufficient
revenues to meet their interest payment obligations. The issuer's ability to
service its debt obligations also may be adversely affected by specific issuer
developments or the issuer's inability to meet specific projected business
forecasts or the unavailability of additional financing. The risk of loss due
to default by the issuer is significantly greater for the holder of high yield
bonds because such securities may be unsecured and may be subordinated to other
creditors of the issuer. The Fund's Board of Directors has adopted a policy
that the Fund will not invest more than 35% of its assets in debt 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 a number of fundamental and
non-fundamental restrictions and policies relating to the investment of its
assets and its activities. The fundamental policies set forth below may not be
changed without the approval of the holders of a majority of the Fund's
outstanding voting securities (which for this purpose and under the Investment
Company Act means the lesser of (i) 67% of the 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).
Under the fundamental investment restrictions, the Fund may not:
1. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
2. Make investments for the purpose of exercising control or management.
3. Purchase or sell real estate, except that, to the extent permitted by
applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
11
<PAGE>
4. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time to
time.
5. Issue senior securities to the extent such issuance would violate
applicable law.
6. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may borrow up
to an additional 5% of its total assets for temporary purposes, (iii) the
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) the Fund
may purchase securities on margin to the extent permitted by applicable
law. The Fund may not pledge its assets other than to secure such
borrowings or, to the extent permitted by the Fund's investment policies as
set forth in its Prospectus and Statement of Additional Information, as
they may be amended from time to time, in connection with hedging
transactions, short sales, when-issued and forward commitment transactions
and similar investment strategies.
7. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the "Securities Act"), in selling portfolio securities.
8. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
In addition, the Fund has adopted non-fundamental restrictions which may be
changed by the Board of Directors. Under the non-fundamental investment
restrictions, the Fund may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law.
b. Make short sales of securities or maintain a short position, except to
the extent permitted by applicable law.
c. Invest in securities which cannot be readily resold because of legal
or contractual restrictions or which cannot otherwise be marketed, redeemed
or put to the issuer or a third party, if at the time of acquisition more
than 15% of its total assets would be invested in such securities. This
restriction shall not apply to securities which mature within seven days or
securities which the Board of Directors of the Fund has otherwise
determined to be liquid pursuant to applicable law. Notwithstanding the 15%
limitation herein, to the extent the laws of any state in which the Fund's
shares are registered or qualified for sale require a lower limitation, the
Fund will observe such limitation. As of the date hereof, therefore, the
Fund will not invest more than 10% of its total assets in securities which
are subject to this investment restriction (c). Securities purchased in
accordance with Rule 144A under the Securities Act (a "Rule 144A security")
and determined to be liquid by the Fund's Board of Directors are not
subject to the limitations set forth in this investment restriction (c).
Notwithstanding the fact that the Board
12
<PAGE>
may determine that a Rule 144A security is liquid and not subject to
limitations set forth in this investment restriction (c), the State of Ohio
does not recognize Rule 144A securities as securities that are free of
restrictions as to resale. To the extent required by Ohio law, the Fund
will not invest more than 50% of its total assets in securities of issuers
that are restricted as to disposition, including Rule 144A securities.
d. Invest in warrants if, at the time of acquisition, its investments in
warrants, valued at the lower of cost or market value, would exceed 5% of
the Fund's net assets; included within such limitation, but not to exceed
2% of the Fund's net assets, are warrants which are not listed on the New
York Stock Exchange or American Stock Exchange or a major foreign exchange.
For purposes of this restriction, warrants acquired by the Fund in units or
attached to securities may be deemed to be without value.
e. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more
than 5% of the Fund's total assets would be invested in such securities.
This restriction shall not apply to mortgage-backed securities, asset-
backed securities or obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
f. Purchase or retain the securities of any issuer, if those individual
officers and directors of the Fund, the officers and general partner of the
Manager, the directors of such general partner or the officers and
directors of any subsidiary thereof each owning beneficially more than one-
half of one percent of the securities of such issuer own in the aggregate
more than 5% of the securities of such issuer.
g. Invest in real estate limited partnership interests or interests in
oil, gas or other mineral leases, or exploration or development programs,
except that the Fund may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or development activities.
h. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Fund's
Prospectus and Statement of Additional Information, as they may be amended
from time to time.
i. Notwithstanding fundamental investment restriction (6) above, borrow
amounts in excess of 10% of its total assets, taken at market value, and
then only from banks as a temporary measure for extraordinary or emergency
purposes such as the redemption of Fund shares. The Fund will not purchase
securities while borrowings exceed 5% (taken at market value) of its total
assets.
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 15% of the total assets of the Fund (10% to the
extent required by certain state laws), 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".
13
<PAGE>
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 in which such firm or any of its affiliates participate as an underwriter
or dealer.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Directors and executive officers of the Fund, their ages and their
principal occupations for at least the last five years are set forth below.
Unless otherwise noted, the address of each executive officer and Director is
P.O. Box 9011, Princeton, New Jersey 08543-9011.
Arthur Zeikel (62)--President and Director(1)(2)--President of the Manager
(which term as used herein includes its corporate predecessors) since 1977 and
Chief Investment Officer since 1976; President and Chief Investment Officer of
Fund Asset Management, L.P. ("FAM") (which term as used herein includes its
corporate predecessors) since 1977; President and Director of Princeton
Services, Inc. ("Princeton Services") since 1993; Executive Vice President of
Merrill Lynch since 1990 and a Senior Vice President thereof from 1985 to 1990;
Executive Vice President of Merrill Lynch & Co., Inc. ("ML & Co.") since 1990;
Director of the Distributor.
Donald Cecil (68)--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 (68)--Director(2)--777 Third Avenue, New York, New York
10017. President of Grey Advertising Inc. since 1968, Chief Executive Officer
since 1970, and Chairman of the Board of Directors since 1972; Director of The
May Department Stores Company, Bowne & Co., Inc. (financial printers), Ethan
Allen Interiors Inc. and Harman International Industries, Inc.
14
<PAGE>
Charles C. Reilly (63)--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 (57)--Director(2)--482 Tepi Drive, Southbury, Connecticut
06488. Professor of Finance since 1984, and Dean from 1984 to 1993, New York
University Leonard N. Stern School of Business Administration; Director of Re
Capital Corp. (reinsurance holding company), Bowne & Co., Inc. (financial
printers), Vornado, Inc. (real estate holding company), Smith-Corona
Corporation (manufacturer of typewriters and word processors) and Alexander's,
Inc. (real estate company).
Edward D. Zinbarg (60)--Director(2)--5 Hardwell Road, Short Hills, New Jersey
07078-2117. Former Executive Vice President of The Prudential Insurance Company
of America from 1988 to 1994; former Director of Prudential Reinsurance Company
and former Trustee of the Prudential Foundation.
Terry K. Glenn (54)--Executive Vice President(1)(2)--Executive Vice President
of the Manager and FAM since 1983; Executive Vice President and Director of
Princeton Services since 1993; President and Director of the Distributor since
1986.
Norman R. Harvey (61)--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 (39)--Vice President(1)--Vice President of the Manager since
1985; Portfolio Manager since 1984.
Donald C. Burke (34)--Vice President(1)(2)--Vice President and Director of
Taxation of the Manager since 1990; employee of Deloitte & Touche LLP from 1982
to 1990.
Gerald M. Richard (45)--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 (42)--Secretary (1)(2)--Vice President of the Manager
since 1985; attorney associated with the Manager since 1982.
- --------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a director, trustee or officer of one or more
additional investment companies for which the Manager, or its affiliate
FAM, acts as investment adviser or manager.
At January 31, 1995, the officers and Directors of the Fund as a group (12
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Director of the Fund, and the other officers
of the Fund owned less than 1% of the outstanding shares of common stock of ML
& Co.
15
<PAGE>
COMPENSATION OF DIRECTORS
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, 1994, fees
and expenses paid to the unaffiliated Directors aggregated $35,499+.
The following table sets forth for the fiscal year ended October 31, 1994,
compensation paid by the Fund to the non-interested Directors and for the
calendar year ending December 31, 1994, the aggregate compensation paid by all
investment companies advised by the Manager and its affiliate, FAM ("MLAM/FAM
Advised Funds") to the non-interested Directors.
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT TOTAL COMPENSATION
BENEFITS FROM FUND AND OTHER
AGGREGATE ACCRUED AS MLAM/FAM
NAME OF COMPENSATION PART OF FUND ADVISED FUNDS PAID
DIRECTOR FROM FUND EXPENSES TO DIRECTORS (1)
-------- ------------ ------------ -------------------
<S> <C> <C> <C>
Donald Cecil..................... $9,750 None $276,350
Edward H. Meyer.................. $8,500 None $251,600
Charles C. Reilly................ $8,500 None $276,900
Richard R. West.................. $8,500 None $300,900
Edward D. Zinbarg*............... $8,500 None $121,500
</TABLE>
- --------
* Projected annual compensation for the Fund's current fiscal year. Mr.
Zinbarg was elected to the Fund's Board of Directors effective October 25,
1994.
(1) In addition to the Fund, the Directors serve on the boards of other
MLAM/FAM Advised Funds as follows: Mr. Cecil (34 boards); Mr. Meyer (34
boards); Mr. Reilly (40 boards); Mr. West (40 boards); and Mr. Zinbarg (16
boards).
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.
- --------
+ During most of the fiscal year ended October 31, 1994, the Board consisted
of five Directors, four of whom were non-interested.
16
<PAGE>
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, 1994, the
Fund paid the Manager a fee at the rate of 0.71% of average daily net assets.
For the fiscal years ended October 31, 1992, 1993 and 1994, the total
management fees paid by the Fund to the Manager aggregated $3,938,829,
$18,984,493 and $49,037,363, respectively.
The Manager has also entered into a sub-advisory agreement with Merrill Lynch
Asset Management U.K. Limited ("MLAM U.K.") pursuant to which the Manager pays
MLAM U.K. a fee computed at the rate of 0.10% of the average daily net assets
of the Fund for providing investment advisory services to the Manager with
respect to the Fund. For the fiscal years ended October 31, 1992, 1993 and
1994, the fees paid by MLAM to MLAM U.K. pursuant to such arrangement
aggregated $525,177, $2,293,281 and $6,509,464, 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 years
ended October 31, 1992, 1993 and
17
<PAGE>
1994, the amount of such reimbursement was $104,603, $213,891 and $570,246,
respectively. 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 will be financed
by the Fund pursuant to distribution plans in compliance with Rule 12b-1 under
the Investment Company Act. See "Purchase of Shares--Distribution Plans".
ML & Co. and Princeton Services, Inc. are "controlling persons" of the
Manager as defined under the Investment Company Act because of their ownership
of its voting securities or their power to exercise a controlling influence
over its management or policies.
Duration and Termination. Unless earlier terminated as described herein, the
Management Agreement and the sub-advisory agreement will remain in effect from
year to year if approved annually (a) by the Board of Directors or by a
majority of the outstanding shares of the Fund and (b) by a majority of the
Directors who are not parties to such contracts or interested persons (as
defined in the Investment Company Act) of any such party. Such contracts are
not assignable and may be terminated without penalty on 60 days' written notice
at the option of either party thereto or by the vote of the shareholders of the
Fund.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
The Fund issues four classes of shares under the Merrill Lynch Select
PricingSM System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B and Class C are
sold to investors choosing the deferred sales charge alternatives. Each Class
A, Class B, Class C and Class D share of the Fund represents identical
interests in the investment portfolio of the Fund and has the same rights,
except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
Class B, Class C and Class D shares each have exclusive voting rights with
respect to the Rule 12b-1 distribution plan adopted with respect to such class
pursuant to which account maintenance and/or distribution fees are paid. Each
class has different exchange privileges. See "Shareholder Services -- Exchange
Privilege".
The Merrill Lynch Select PricingSM System is used by more than 50 mutual
funds advised by the Manager, or an affiliate of the Manager, FAM. Funds
advised by the Manager or FAM are referred to herein as "MLAM-advised mutual
funds".
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offering of each class of shares
of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the
offering of each class of shares of the Fund. After the prospectuses,
statements of additional information and periodic reports have been prepared,
set in type and mailed to shareholders, the Distributor pays for the printing
and distribution of copies thereof used in connection with the offering to
dealers and investors. The Distributor also pays for other supplementary sales
literature and advertising costs. The Distribution Agreements are subject to
the same renewal requirements and termination provisions as the Management
Agreement described above.
18
<PAGE>
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
The Fund commenced the public offering of its Class A shares on February 3,
1989. The gross sales charges for the sale of Class A shares for the fiscal
year ended October 31, 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 gross sales charges for the sale of Class A shares
for the fiscal year ended October 31, 1994, were $10,514,692, of which the
Distributor received $623,860 and Merrill Lynch received $9,890,832. The gross
sales charges for the sale of its Class D shares for the fiscal period October
21, 1994 (commencement of operations) to October 31, 1994, were $95,875, of
which the Distributor received $5,131 and Merrill Lynch received $90,744.
During such periods, the Distributor received no contingent deferred sales
charges with respect to redemptions within one year after purchase of Class A
or Class D shares purchased subject to front-end sales charge waivers.
The term "purchase", as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his spouse and their children under the
age of 21 years purchasing shares for his or their own account and to single
purchases by a trustee or other fiduciary purchasing shares for a single trust
estate or single fiduciary account (including a pension, profit-sharing or
other employee benefit trust created pursuant to a plan qualified under Section
401 of the Code) although more than one beneficiary is involved. The term
"purchase" also includes purchases by any "company", as that term is defined in
the Investment Company Act, but does not include purchases by any such company
which has not been in existence for at least six months or which has no purpose
other than the purchase of shares of the Fund or shares of other registered
investment companies at a discount; provided, however, that it shall not
include purchases by any group of individuals whose sole organizational nexus
is that the participants therein are credit cardholders of a company,
policyholders of an insurance company, customers of either a bank or broker-
dealer or clients of an investment adviser.
Closed-End Fund Investment Option. Class A shares of the Fund and other MLAM-
advised mutual funds ("Eligible Class A Shares") are offered at net asset value
to shareholders of certain closed-end funds advised by MLAM or the Investment
Adviser who purchased such closed-end fund shares prior to October 21, 1994
(the date the Merrill Lynch Select PricingSM System commenced operations) and
wish to reinvest the net proceeds from a sale of their closed-end fund shares
of common stock in Eligible Class A Shares, if the conditions set forth below
are satisfied. Alternatively, closed-end fund shareholders who purchased such
shares on or after October 21, 1994, and wish to reinvest the net proceeds from
a sale of their closed-end fund shares are offered Class A shares (if eligible
to buy Class A shares) or Class D shares of the Fund and other MLAM-advised
mutual funds ("Eligible Class D Shares"), if the following conditions are met.
First, the sale of the closed-end fund shares must be made through Merrill
Lynch, and the net proceeds therefrom must be immediately reinvested in
Eligible Class A or Class D shares. Second, the closed-end fund shares must
either have been acquired in the initial public offering or be shares
representing dividends from shares of common stock acquired in such offering.
Third, the closed-end fund shares must have been continuously maintained in a
Merrill Lynch securities account. Fourth, there must be a minimum purchase of
$250 to be eligible for the investment option. Class A shares of the Fund are
offered at net asset value to shareholders of Merrill Lynch Senior Floating
Rate Fund, Inc. ("Senior Floating Rate Fund") who wish to reinvest the net
proceeds from a sale of certain of their shares of common stock of Senior
Floating Rate Fund in shares of the
19
<PAGE>
Fund. In order to exercise this investment option, Senior Floating Rate Fund
shareholders must sell their Senior Floating Rate Fund shares to the Senior
Floating Rate Fund in connection with a tender offer conducted by the Senior
Floating Rate Fund and reinvest the proceeds immediately in the Fund. This
investment option is available only with respect to the proceeds of Senior
Floating Rate Fund shares as to which no Early Withdrawal Charge (as defined in
the Senior Floating Rate Fund prospectus) is applicable. Purchase orders from
Senior Floating Rate Fund shareholders wishing to exercise this investment
option will be accepted only on the day that the related Senior Floating Rate
Fund tender offer terminates and will be effected at the net asset value of the
Fund at such day.
REDUCED INITIAL SALES CHARGES
Right of Accumulation. Reduced sales charges are applicable through a right
of accumulation under which eligible investors are permitted to purchase shares
of the Fund subject to an initial sales charge at the offering price applicable
to the total of (a) the public offering price of the shares then being
purchased plus (b) an amount equal to the then current net asset value or cost,
whichever is higher, of the purchaser's combined holdings of all classes of
shares of the Fund and of other MLAM-advised mutual funds. For any such right
of accumulation to be made available, the Distributor must be provided at the
time of purchase, by the purchaser or the purchaser's securities dealer, with
sufficient information to permit confirmation of qualification. Acceptance of
the purchase order is subject to such confirmation. The right of accumulation
may be amended or terminated at any time. Shares held in the name of a nominee
or custodian under pension, profit-sharing, or other employee benefit plans may
not be combined with other shares to qualify for the right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of Class A or Class D shares of the Fund or any
other MLAM-advised mutual funds made within a 13-month period starting with the
first purchase pursuant to a Letter of Intention in the form provided in the
Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at the Fund's transfer agent. The Letter of Intention
is not available to employee benefit plans for which Merrill Lynch provides
plan-participant record-keeping services. The Letter of Intention is not a
binding obligation to purchase any amount of Class A or Class D shares;
however, its execution will result in the purchaser paying a lower sales charge
at the appropriate quantity purchase level. A purchase not originally made
pursuant to a Letter of Intention may be included under a subsequent Letter of
Intention executed within 90 days of such purchase if the Distributor is
informed in writing of this intent within such 90-day period. The value of
Class A and Class D shares of the Fund and of other MLAM-advised mutual funds
presently held, at cost or maximum offering price (whichever is higher), on the
date of the first purchase under the Letter of Intention, may be included as a
credit toward completion of such Letter, but the reduced sales charge
applicable to the amount covered by such Letter will be applied only to new
purchases. If the total amount of shares purchased does not equal the amount
stated in the Letter of Intention (minimum of $25,000), the investor will be
notified and must pay, within 20 days of the expiration of such Letter, the
difference between the sales charge on the Class A or Class D shares purchased
at the reduced rate and the sales charge applicable to the shares actually
purchased through the Letter. Class A or Class D shares equal to five percent
of the intended amount will be held in escrow during the 13-month period (while
remaining registered in the name of the purchaser) for this purpose. The first
purchase under the Letter of Intention must be at least five percent of the
dollar amount of such Letter. If a purchase during the term of such Letter
would otherwise be subject to a further reduced sales charge based on the right
of accumulation, the purchaser will be entitled on that purchase and subsequent
purchases to the reduced percentage sales charge which would be applicable to a
single purchase equal to the total dollar value of the Class A or Class D
shares then being purchased under such Letter, but there will be no retroactive
reduction of the sales charges on any previous purchase.
20
<PAGE>
The value of any shares redeemed or otherwise disposed of by the purchaser
prior to termination or completion of the Letter of Intention will be deducted
from the total purchases made under such Letter. An exchange from a MLAM-
advised money market fund into the Fund that creates a sales charge will count
toward completing a new or existing Letter of Intention from the Fund.
Merrill Lynch BlueprintSM Program. Class D shares of the Fund are offered to
participants in the Merrill Lynch BlueprintSM Program ("Blueprint"). In
addition, participants in Blueprint who own Class A shares or the Fund may
purchase additional Class A shares of the Fund through Blueprint. Blueprint is
directed to small investors, group IRAs and participants in certain affinity
groups such as credit unions, trade associations and benefit plans. Investors
placing orders to purchase Class A or Class D shares of the Fund through
Blueprint will acquire the Class A or Class D shares at net asset value plus a
sales charge calculated in accordance with the Blueprint sales charge schedule
(i.e., up to $300 at 4.25%, $300.01 to $5,000 at 3.25% plus $3.00 and
$5,000.01 or more at the standard sales charge rates disclosed in the
Prospectus). Class A or Class D shares of the Fund are offered at net asset
value plus a sales charge of 1/2 of 1% for corporate or group IRA programs
placing orders to purchase their Class A or Class D shares through Blueprint.
Services, including the exchange privilege, available to Class A and Class D
investors through Blueprint, however, may differ from those available to other
investors in Class A or Class D shares.
Class A and Class D shares are offered at net asset value to Blueprint
participants through the Merrill Lynch Directed IRA Rollover Program ("IRA
Rollover Program") available from Merrill Lynch Business Financial Services, a
business unit of Merrill Lynch. The IRA Rollover Program is available to
custodian rollover assets from Employer Sponsored Retirement and Savings Plans
(as defined below) whose Trustee and/or Plan Sponsor has entered into a
Merrill Lynch Directed IRA Rollover Program Service Agreement.
Orders for purchases and redemptions of Class A or Class D shares of the
Fund may be grouped for execution purposes which, in some circumstances, may
involve the execution of such orders two business days following the day such
orders are placed. The minimum initial purchase price is $100, with a $50
minimum for subsequent purchases through Blueprint. There are no minimum
initial or subsequent purchase requirements for participants who are part of
an automatic investment plan. Additional information concerning purchases
through Blueprint, including any annual fees and transaction charges, is
available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The
BlueprintSM Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
TMA SM Managed Trusts. Class A shares are offered to TMA SM Managed Trusts
to which Merrill Lynch Trust Company provides discretionary trustee services
at net asset value.
Employer Sponsored Retirement and Savings Plans. Class A and Class D shares
are offered at net asset value to employer sponsored retirement or savings
plans, such as tax qualified retirement plans within the meaning of Section
401(a) of the Code, deferred compensation plans within the meaning of Sections
403(b) and 457 of the Code, other deferred compensation arrangements,
Voluntary Employee Benefits Association ("VEBA") plans, and non-qualified
After Tax Savings and Investment programs, maintained on the Merrill Lynch
Group Employee Services system, herein referred to as "Employer Sponsored
Retirement or Savings Plans", provided the plan has accumulated $20 million or
more in MLAM-advised mutual funds (in the case of Class A shares) or $5
million or more in MLAM-advised mutual funds (in the case of Class D shares).
Class D shares may be offered at net asset value to new Employer Sponsored
Retirement or Savings Plans, provided the plan has $3 million or more
initially invested in MLAM-advised mutual funds. Assets of
21
<PAGE>
Employer Sponsored Retirement or Savings Plans sponsored by the same sponsor
or an affiliated sponsor may be aggregated. Class A shares and Class D shares
also are offered at net asset value to Employer Sponsored Retirement or
Savings Plans that have at least 1,000 employees eligible to participate in
the plan (in the case of Class A shares) or between 500 and 999 employees
eligible to participate in the plan (in the case of Class D shares). Employees
eligible to participate in Employer Sponsored Retirement or Savings Plans of
the same sponsoring employer or its affiliates may be aggregated. Tax
qualified retirement plans within the meaning of Section 401(a) of the Code
meeting any of the foregoing requirements and which are provided specialized
services (e.g., plans whose participants may direct on a daily basis their
plan allocations among a wide range of investments including individual
corporate equities and other securities in addition to mutual fund shares) by
Blueprint, are offered Class A shares at a price equal to net asset value per
share plus a reduced sales charge of 0.50%.
Any Employer Sponsored Retirement or Savings Plan which does not meet the
above described qualifications to purchase Class A or Class D shares at net
asset value has the option of (1) purchasing Class D shares at the initial
sales charge schedule disclosed in the Prospectus for purchases of up to
$1,000,000 and at 0.75% for purchases of $1,000,000 or more, (ii) if the
Employer Sponsored Retirement or Savings Plan meets the specified
requirements, purchasing Class B shares with a waiver of the CDSC upon
redemption, or (iii) if the Employer Sponsored Retirement or Savings Plan does
not qualify to purchase Class B shares with a waiver upon redemption,
purchasing Class B or Class C shares at their respective CDSC schedule
disclosed in the prospectus.
Certain Employer Sponsored Retirement or Savings Plans, which were permitted
prior to October 21, 1994, to purchase Class A shares at the initial sales
charge schedule in the then current prospectus for purchases up to $1,000,000
and at 0.75% for purchases of $1,000,000 or more, may purchase Class A shares
at the initial sales charge schedule disclosed in the Prospectus for purchases
of up to $1,000,000 and at 0.75% for purchases of $1,000,000 or more. The
minimum initial and subsequent purchase requirements are waived in connection
with all the above referenced Employer Sponsored Retirement or Savings Plans.
Purchase Privilege of Certain Persons. Directors of the Fund, members of the
Boards of other MLAM-advised investment companies, directors and employees of
ML & Co. and its subsidiaries (the term "subsidiaries" when used herein with
respect to Merrill Lynch & Co., Inc. includes MLAM, FAM and certain other
entities directly or indirectly wholly owned and controlled by Merrill Lynch &
Co., Inc.) and any trust, pension, profit-sharing or other benefit plan for
such persons may purchase Class A shares of the Fund at net asset value.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor if the following
conditions are satisfied. First, the investor must advise Merrill Lynch that
it will purchase Class D shares of the Fund with proceeds from a redemption of
a mutual fund that was sponsored by the financial consultant's previous firm
and was subject to a sales charge either at the time of purchase or on a
deferred basis. Second, the investor also must establish that such redemption
had been made within 60 days prior to the investment in the Fund, and the
proceeds from the redemption had been maintained in the interim in cash or a
money market fund.
Class D shares of the Fund are also offered at net asset value, without
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
22
<PAGE>
following conditions are satisfied: first, the investor must purchase Class D
shares of the Fund with proceeds from a redemption of shares of such other
mutual fund and the shares of such other fund were subject to a sales charge
either at the time of purchase or on a deferred basis; second, such purchase of
Class D shares must be made within 90 days after such notice of termination.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a Merrill Lynch
financial consultant and who has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer if the following conditions are
satisfied: First, the investor must advise Merrill Lynch that it will purchase
Class D shares of the Fund with proceeds from the redemption of such shares of
other mutual funds and that such shares have been outstanding for a period of
no less than six months. Second, such purchase of Class D shares must be made
within 60 days after the redemption and the proceeds from the redemption must
be maintained in the interim in cash or a money market fund.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation
with a public or private investment company. The value of the assets or company
acquired in a tax-free transaction may be adjusted in appropriate cases to
reduce possible adverse tax consequences to the Fund which might result from an
acquisition of assets having net unrealized appreciation which is
disproportionately higher at the time of acquisition than the realized or
unrealized appreciation of the Fund. The issuance of Class D shares for
consideration other than cash is limited to bona fide reorganizations,
statutory mergers or other acquisitions of portfolio securities which (i) meet
the investment objectives and policies of the Fund; (ii) are acquired for
investment and not for resale (subject to the understanding that the
disposition of the Fund's portfolio securities shall at all times remain within
its control); and (iii) are liquid securities, the value of which is readily
ascertainable, which are not restricted as to transfer either by law or
liquidity of market (except that the Fund may acquire through such transactions
restricted or illiquid securities to the extent the Fund does not exceed the
applicable limits on acquisition of such securities set forth under "Investment
Objective and Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares -- Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan") with respect to the account
maintenance and/or distribution fees paid by the Fund to the Distributor with
respect to such classes.
Payments of the account maintenance fees and/or distribution fees are subject
to the provisions of Rule 12b-1 under the Investment Company Act. Among other
things, each Distribution Plan provides that the Distributor shall provide and
the Directors shall review quarterly reports of the disbursement of the account
maintenance fees and/or distribution fees paid the Distributor. In their
consideration of each Distribution Plan, the Directors must consider all
factors they deem relevant, including information as to the benefits of the
Distribution Plan to the Fund and its related class of shareholders. Each
Distribution Plan further provides that, so long as the Distribution Plan
remains in effect, the selection and nomination of Directors
23
<PAGE>
who are not "interested persons" of the Fund, as defined in the Investment
Company Act (the "Independent Directors"), shall be committed to the discretion
of the Independent Directors then in office. In approving each Distribution
Plan in accordance with Rule 12b-1, the Independent Directors concluded that
there is a reasonable likelihood that such Distribution Plan will benefit the
Fund and its related class of shareholders. Each Distribution Plan can be
terminated at any time, without penalty, by the vote of a majority of the
Independent Directors or by the vote of the holders of a majority of the
outstanding related class of voting securities of the Fund. A Distribution Plan
cannot be amended to increase materially the amount to be spent by the Fund
without the approval of the related class of shareholders, and all material
amendments are required to be approved by the vote of the Directors, including
a majority of the Independent Directors who have no direct or indirect
financial interest in such Distribution Plan, cast in person at a meeting
called for that purpose. Rule 12b-1 further requires that the Fund preserve
copies of each Distribution Plan and any report made pursuant to such plan for
a period of not less than six years from the date of such Distribution Plan or
such report, the first two years in an easily accessible place.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on
certain asset-backed sales charges such as the distribution fee and the CDSC
borne by the Class B and Class C shares but not the account maintenance fee.
The maximum sales charge rule is applied separately to each class. As
applicable to the Fund, the maximum sales charge rule limits the aggregate of
distribution fee payments and CDSCs payable by the Fund to (1) 6.25% of
eligible gross sales of Class B shares and Class C shares, computed separately
(defined to exclude shares issued pursuant to dividend reinvestments and
exchanges), plus (2) interest on the unpaid balance for the respective class,
computed separately, at the prime rate plus 1% (the unpaid balance being the
maximum amount payable minus amounts received from the payment of the
distribution fee and the CDSC). In connection with the Class B shares, the
Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any time.
To the extent payments would exceed the voluntary maximum, the Fund will not
make further payments of the distribution fee with respect to Class B shares,
and any CDSCs will be paid to the Fund rather than to the Distributor; however,
the Fund will continue to make payments of the account maintenance fee. In
certain circumstances the amount payable pursuant to the voluntary maximum may
exceed the amount payable under the NASD formula. In such circumstances payment
in excess of the amount payable under the NASD formula will not be made.
24
<PAGE>
The following table sets forth comparative information as of October 31,
1994, with respect to the Class B shares and as of November 30, 1994, with
respect to the Class C shares of the Fund indicating the maximum allowable
payments that can be made under the NASD maximum sales charge rule and, with
respect to Class B shares, the Distributor's voluntary maximum.
<TABLE>
<CAPTION>
ANNUAL
DISTRIBUTION
ALLOWABLE ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT NET
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID ASSET
SALES (1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
---------- --------- ---------- -------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
FOR CLASS B SHARES--DATA
CALCULATED AS OF
OCTOBER 31, 1994 (IN
THOUSANDS):
Class B Shares (for the
fiscal period February
3, 1989 (commencement
of operations) to
October 31, 1994):
Under NASD Rule As
Adopted................ $5,715,384 $357,211 $30,754 $387,965 $74,154 $313,813 $48,428
Under Distributor's
Voluntary Waiver....... $5,715,384 $357,211 $28,577 $385,788 $74,154 $311,635 $48,428
FOR CLASS C SHARES--DATA
CALCULATED AS OF
NOVEMBER 30, 1994 (NOT
ROUNDED):
Class C Shares (for the
fiscal period October
21, 1994 (commencement
of public offering) to
November 30, 1994):
Under NASD Rule As
Adopted................ $ 13,427 $ 843 $ 4 $ 847 $ 8 $ 838 $ 119
</TABLE>
- --------
(1) Purchase price of all eligible Class B or Class C shares sold during
period indicated other than shares acquired through dividend reinvestment
and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1%, as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. Of the
distribution fee payments made with respect to Class B shares prior to
July 7, 1993, under the distribution plan in effect at that time, 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 CDSC payments) is amortizing
the unpaid balance. No assurance can be given that payments of the
distribution fee will reach either the NASD maximum or, with respect to
Class B shares, the voluntary maximum.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended only for 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.
25
<PAGE>
DEFERRED SALES CHARGES -- CLASS B AND CLASS C SHARES
As discussed in the Prospectus under "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares", while Class B shares
redeemed within four years of purchase are subject to a CDSC, under most
circumstances, the charge is waived (i) on redemptions of Class B shares in
connection with certain post-retirement withdrawals from an Individual
Retirement Account ("IRA") or other retirement plan or (ii) on redemptions of
Class B shares following the death or disability of a Class B shareholder.
Redemptions for which the waiver applies are: (a) any partial or complete
redemption in connection with a tax-free distribution following retirement
under a tax-deferred retirement plan or attaining age 59 1/2 in the case of an
IRA or other retirement plan, or part of a series of equal periodic payments
(not less frequently than annually) made for the life (or life expectancy) or
any redemption resulting from the tax-free return of an excess contribution to
an IRA or (b) any partial or complete redemption following the death or
disability (as defined in the Code) of a Class B shareholder (including one
who owns the Class B shares as joint tenant with his or her spouse), provided
the redemption is requested within one year of the death or initial
determination of disability. For the fiscal years ended October 31, 1992, 1993
and 1994, the Distributor received CDSCs of $301,136, $1,701,006 and
$6,842,598, respectively, with respect to redemptions of Class B shares, all
of which was paid to Merrill Lynch. For the fiscal period October 21, 1994
(commencement of operations) to October 31, 1994, there were no redemptions of
Class C shares resulting in payments of CDSCs.
Merrill Lynch Blueprint SM Program. Class B shares are offered to certain
participants in the Merrill Lynch Blueprintsm Program ("Blueprint"). Blueprint
is directed to small investors, group IRAs and participants in certain
affinity groups such as trade associations and credit unions. Class B shares
of the Fund are offered through Blueprint only to members of certain affinity
groups. The CDSC is waived in connection with purchase orders placed through
Blueprint. Services, including the exchange privilege, available to Class B
investors through Blueprint, however, may differ from those available to other
investors in Class B shares. Orders for purchases and redemptions of Class B
shares of the Fund will be grouped for execution purposes which, in some
circumstances, may involve the execution of such orders two business days
following the day such orders are placed. The minimum initial purchase price
is $100, with a $50 minimum for subsequent purchases through Blueprint. There
is no minimum initial or subsequent purchase requirement for investors who are
part of the Blueprint automatic investment plan. Additional information
concerning these Blueprint programs, including any annual fees or transaction
charges, is available from Merrill Lynch, Pierce, Fenner & Smith Incorporated,
The Blueprint SM Program, P.O. Box 30441, New Brunswick, New Jersey 08989-
0441.
Retirement Plans. Any Retirement Plan which does not meet the qualifications
to purchase Class A or Class D shares at net asset value has the option of
purchasing Class A or Class D shares at the sales charge schedule disclosed in
the Prospectus, or if the Retirement Plan meets the following requirements,
then it may purchase Class B shares with a waiver of the CDSC upon redemption.
The CDSC is waived for any Eligible 401(k) Plan redeeming Class B shares.
"Eligible 401(k) Plan" is defined as a retirement plan qualified under Section
401(k) of the Code with a salary reduction feature offering a menu of
investments to plan participants. The CDSC is also waived for redemptions from
a 401(a) plan qualified under the Code, provided, however, that each such plan
has the same or an affiliated sponsoring employer as an Eligible 401(k) Plan
purchasing Class B shares of MLAM-advised mutual funds ("Eligible 401(a)
Plan"). Other tax qualified retirement plans within the meaning of Section
401(a) or 403(b) of the Code which are provided specialized services (e.g.,
plans whose participants may direct on a daily basis their plan allocations
among a menu of investments) by independent administration firms contracted
through Merrill Lynch also may purchase Class B shares with a
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<PAGE>
waiver of the CDSC. The CDSC also is waived for any Class B shares which are
purchased by an Eligible 401(k) Plan or Eligible 401(a) Plan and are rolled
over into a Merrill Lynch or Merrill Lynch Trust Company custodied IRA and held
in such account at the time of redemption. The Class B CDSC also is waived for
any Class B shares which are purchased by a Merrill Lynch rollover IRA that was
funded by a rollover from a terminated 401(k) plan managed by the MLAM Private
Portfolio Group and held in such account at the time of redemption. The minimum
initial and subsequent purchase requirements are waived in connection with all
the above referenced Retirement Plans.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Reference is made to "Investment Objective and Policies -- Other Investment
Policies and Practices -- Portfolio Transactions" in the Prospectus.
Subject to policies established by the Board of Directors of the Fund, the
Manager is primarily responsible for the execution of the Fund's portfolio
transactions. In executing such transactions, the Manager seeks to obtain the
best net results for the Fund, taking into account such factors as price
(including the applicable brokerage commission or dealer spread), size of
order, difficulty of execution and operational facilities of the firm involved
and the firm's risk in positioning a block of securities. Subject to obtaining
the best price and execution, brokers who provide supplemental investment
research to the Manager may receive orders for transactions by the Fund.
Information so received will be in addition to and not in lieu of the services
required to be performed by the Manager under the Management Agreement, and the
expenses of the Manager will not necessarily be reduced as a result of the
receipt of such supplemental information. In addition, consistent with the
Rules of Fair Practice of the NASD and policies established by the Directors of
the Fund, the Manager may consider sales of shares of the Fund as a factor in
the selection of brokers or dealers to execute portfolio transactions for the
Fund. It is possible that certain of the supplementary investment research so
received will primarily benefit one or more other investment companies or other
accounts for which investment discretion is exercised. Conversely, the Fund may
be the primary beneficiary of the research or services received as a result of
portfolio transactions effected for such other accounts or investment
companies.
For the fiscal year ended October 31, 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. For the
fiscal year ended October 31, 1994, the Fund paid total brokerage commissions
of $4,792,669, of which $335,953 or 7.0% was paid to Merrill Lynch for
effecting 8.1% 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.
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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.
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the U.S. national securities exchanges from executing
exchange transactions for their affiliates and institutional accounts which
they manage unless the member (i) has obtained prior express authorization from
the account to effect such transactions, (ii) at least annually furnishes the
account with a statement disclosing the aggregate compensation received by the
member in effecting such transactions, and (iii) complies with any rules the
Commission has prescribed with respect to the requirements of clauses (i) and
(ii). To the extent Section 11(a) would apply to Merrill Lynch acting as a
broker for the Fund in any of its portfolio transactions executed on any such
securities exchange of which it is a member, appropriate consents have been
obtained from the Fund and annual statements as to aggregate compensation will
be provided to the Fund.
As a non-fundamental restriction, the Fund will not purchase or retain the
securities of any issuer, if those individual officers and Directors of the
Fund, the officers and general partner of the Manager, the directors of such
general partner or the officers and directors of any subsidiary thereof each
owning beneficially more than one-half of one percent of the securities of such
issuer own in the aggregate more than five percent of the securities of such
issuer.
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.
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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 15 minutes after the close of business on the New York
Stock Exchange (generally, 4:00 p.m., New York time), New York time, on each
day the New York Stock Exchange is open for trading. The New York Stock
Exchange is not open on New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Any
assets or liabilities initially expressed in terms of non-U.S. dollar
currencies are translated into U.S. dollars at the prevailing market rates as
quoted by one or more banks or dealers on the day of valuation. Net asset value
is computed by dividing the value of the securities held by the Fund plus any
cash or other assets (including interest and dividends accrued but not yet
received) minus all liabilities (including accrued expenses) by the total
number of shares outstanding at such time. Expenses, including the management
fees and any account maintenance and/or distribution fees, are accrued daily.
The per share net asset value of the Class B, Class C and Class D shares
generally will be lower than the per share net asset value of the Class A
shares reflecting the daily expense accruals of the account maintenance,
distribution and higher transfer agency fees applicable with respect to the
Class B and Class C shares and the daily expense accruals of the account
maintenance fees applicable with respect to the Class D shares; moreover, the
per share net asset value of Class B and Class C shares generally will be lower
than the per share net asset value of Class D shares reflecting the daily
expense accruals of the distribution fees and higher transfer agency fees
applicable with respect to Class B and Class C shares of the Fund. It is
expected, however, that the per share net asset value of the four classes will
tend to converge (although not necessarily meet) immediately after the payment
of dividends or distributions, which will differ by approximately the amount of
the expense accrual differentials between the classes.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the over-the-counter market are valued
at the last available bid price in the over-the-counter market prior to the
time of valuation. When the Fund writes a call option, the amount of the
premium received is recorded on the books of the Fund as an asset and an
equivalent liability. The amount of the liability is subsequently valued to
reflect the current market value of the option written, based upon the last
sale price in the case of exchange-traded options or, in the case of options
traded in the over-the-counter market, the last asked price. Options purchased
by the Fund are valued at their last sale price in the case of exchange-traded
options or, in the case of options traded in the over-the-counter market, the
last bid price.
Securities and assets for which market quotations are not readily available
are valued at fair value as determined in good faith under the direction of the
Board of Directors of the Fund.
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SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designed to facilitate investment in its shares. Full details as to each of
such services and copies of the various plans described below can be obtained
from the Fund, the Distributor or Merrill Lynch. Certain of these services are
available only to U.S. investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the transfer agent has an
Investment Account and will receive statements at least quarterly, from the
transfer agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gain distributions. The statements will also
show any other activity in the account since the preceding statement.
Shareholders will receive separate transaction confirmations for each purchase
or sale transaction other than automatic investment purchases and the
reinvestment of ordinary income dividends and long-term capital gains
distributions. A shareholder may make additions to his Investment Account at
any time by mailing a check directly to the Fund's transfer agent.
Share certificates are issued only for full shares and only upon the specific
request of the shareholder. Issuance of certificates representing all or only
part of the full shares in an Investment Account may be requested by a
shareholder directly from the Fund's transfer agent.
Shareholders considering transferring their Class A shares from Merrill Lynch
to another brokerage firm or financial institution should be aware that, if the
firm to which the Class A or Class D shares are to be transferred will not take
delivery of shares of the Fund, a shareholder either must redeem the Class A or
Class D shares (paying any applicable CDSC) so that the cash proceeds can be
transferred to the account at the new firm or such shareholder must continue to
maintain an Investment Account at the transfer agent for those Class A or Class
D shares. Shareholders interested in transferring their Class B or Class C
shares from Merrill Lynch and who do not wish to have an Investment Account
maintained for such shares at the transfer agent may request their new
brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder at the transfer agent. If
the new brokerage firm is willing to accommodate the shareholder in this
manner, the shareholder must request that he be issued certificates for his
shares, and then must turn the certificates over to the new firm for re-
registration as described in the preceding sentence. Shareholders considering
transferring a tax-deferred retirement account such as an individual retirement
account from Merrill Lynch to another brokerage firm or financial institution
should be aware that, if the firm to which the retirement account is to be
transferred will not take delivery of shares of the Fund, a shareholder must
either redeem the shares (paying any applicable CDSC) so that the cash proceeds
can be transferred to the account at the new firm, or such shareholder must
continue to maintain a retirement account at Merrill Lynch for those shares.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor as
described in the Prospectus) or Class B, Class C or Class D shares at the
applicable public offering price either through the shareholder's securities
dealer or by mail directly to the Fund's transfer agent, acting as agent for
such securities dealer. Voluntary accumulation also can be made through a
service known as the Fund's Automatic Investment Plan whereby the Fund is
authorized through pre-authorized checks or automated clearing house debits of
$50 or more to charge the
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regular bank account of the shareholder on a regular basis to provide
systematic additions to the Investment Account of such shareholder. For
investors who buy shares of the Fund through Blueprint no minimum charge to the
investors' bank account is required. An investor whose shares of the Fund are
held within a CMA(R) or CBA (R) account may arrange to have periodic
investments made in the Fund in amounts of $100 or more ($1 for retirement
accounts) through the CMA(R)/CBA (R) Automated Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions to the contrary are given as to the method of
payment of dividends and capital gains distributions, dividends and
distributions will be reinvested automatically in additional shares of the
Fund. Such reinvestment will be at the net asset value of shares of the Fund as
of the close of business on the ex-dividend date of the dividend or
distribution. Shareholders may elect in writing to receive either their
dividends or capital gains distributions, or both, in cash, in which event
payment will be mailed or direct deposited on or about the payment date.
Shareholders may, at any time, notify the transfer agent in writing or by
telephone (1-800-MER-FUND) that they no longer wish to have their dividends
and/or distributions reinvested in shares of the Fund or vice versa, and
commencing ten days after receipt by the transfer agent of such notice, those
instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS--CLASS A AND CLASS D SHARES
A Class A or Class D shareholder may elect to make withdrawals from an
Investment Account on either a monthly or quarterly basis as provided below.
Quarterly withdrawals are available for shareholders who have acquired Class A
or Class D shares of the Fund having a value, based on cost or the current
offering price, of $5,000 or more and monthly withdrawals are available for
shareholders with Class A or Class D shares with such a value of $10,000 or
more.
At the time of each withdrawal payment, sufficient Class A or Class D shares
are redeemed from those on deposit in the shareholder's account to provide the
withdrawal payment specified by the shareholder. The shareholder may specify
either a dollar amount or a percentage of the value of his Class A or Class D
shares. Redemptions will be made at net asset value as determined as of 15
minutes after the close of business of the New York Stock Exchange (generally,
4:00 p.m., New York time) on the 24th day of each month or the 24th day of the
last month of each quarter, whichever is applicable. If the Exchange is not
open for business on such date, the Class A or Class D shares will be redeemed
at the close of business on the following business day. The check for the
withdrawal payment will be mailed, or the direct deposit of the withdrawal
payment will be made, on the next business day following redemption. When a
shareholder is making systematic withdrawals, dividends and distributions on
all Class A or Class D shares in the Investment Account are reinvested
automatically in Class A or Class D shares of the Fund, respectively. A
shareholder's Systematic Withdrawal Plan may be terminated at any time, without
charge or penalty, by the shareholder, the Fund, the Fund's transfer agent or
the Distributor.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be reduced
correspondingly. Purchases of additional Class A or Class D shares concurrent
with withdrawals are ordinarily disadvantageous to the shareholder because of
sales charges and tax liabilities.
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The Fund will not knowingly accept purchase orders for Class A or Class D
shares of the Fund from investors who maintain a Systematic Withdrawal Plan
unless such purchase is equal to at least one year's scheduled withdrawals or
$1,200, whichever is greater. Periodic investments may not be made into an
Investment Account in which the shareholder has elected to make systematic
withdrawals.
Alternatively, a Class A or Class D shareholder whose shares are held within
a CMA(R), CBA(R) or Retirement Account may elect to have shares redeemed on a
monthly, bimonthly, quarterly, semiannual or annual basis through the
CMA (R)/CBA (R) Systematic Redemption Program. The minimum fixed dollar amount
redeemable is $25. The proceeds of systematic redemptions will be posted to the
shareholder's account five business days after the date the shares are
redeemed. Monthly systematic redemptions will be made at net asset value on the
first Monday of each month, bimonthly systematic redemptions will be made at
net asset value on the first Monday of every other month, and quarterly,
semiannual or annual redemptions are made at net asset value on the first
Monday of months selected at the shareholder's option. If the first Monday of
the month is a holiday, the redemption will be processed at net asset value on
the next business day. The CMA (R)/CBA (R) 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 CMA (R)/CBA (R)
Systematic Redemption Program, eligible shareholders should contact their
Financial Consultant.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds listed below. Under the Merrill
Lynch Select PricingSM System, Class A shareholders may exchange Class A shares
of the Fund for Class A shares of a second MLAM-advised mutual fund if the
shareholder holds any Class A shares of the second fund in his account in which
the exchange is made at the time of the exchange or is otherwise eligible to
purchase Class A shares of the second fund. If the Class A shareholder wants to
exchange Class A shares for shares of a second MLAM-advised mutual fund, but
does not hold Class A shares of the second fund in his account at the time of
the exchange and is not otherwise eligible to acquire Class A shares of the
second fund, the shareholder will receive Class D shares of the second fund as
a result of the exchange. Class D shares also may be exchanged for Class A
shares of a second MLAM-advised mutual fund at any time as long as, at the time
of the exchange, the shareholder holds Class A shares of the second fund in the
account in which the exchange is made or is otherwise eligible to purchase
Class A shares of the second fund. Class B, Class C and Class D shares are
exchangeable with shares of the same class of other MLAM-advised mutual funds.
For purposes of computing the CDSC that may be payable upon a disposition of
the shares acquired in the exchange, the holding period for the previously
owned shares of the Fund is "tacked" to the holding period of the newly
acquired shares of the other fund as more fully described below. Class A, Class
B, Class C and Class D shares also are exchangeable for shares of certain MLAM-
advised money market funds specifically designated below as available for
exchange by holders of Class A, Class B, Class C or Class D shares. Shares with
a net asset value of at least $100 are required to qualify for the exchange
privilege, and any shares utilized in an exchange must have been held by the
shareholder for at least 15 days. It is contemplated that the exchange
privilege may be applicable to other new mutual funds whose shares may be
distributed by the Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount
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equal to the difference, if any, between the sales charge previously paid on
the outstanding Class A or Class D shares and the sales charge payable at the
time of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have taken
place, the "sales charge previously paid" shall include the aggregate of the
sales charge paid with respect to such Class A or Class D shares in the initial
purchase and any subsequent exchange. Class A or Class D shares issued pursuant
to dividend reinvestment are sold on a no-load basis in each of the funds
offering Class A or Class D shares. For purposes of the exchange privilege,
Class A and Class D shares acquired through dividend reinvestment shall be
deemed to have been sold with a sales charge equal to the sales charge
previously paid on the Class A or Class D shares on which the dividend was
paid. Based on this formula, Class A and Class D shares of the Fund generally
may be exchanged into the Class A or Class D shares of the other funds or into
shares of the Class A and Class D money market funds with a reduced or without
a sales charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively, of another MLAM-
advised mutual fund ("new Class B or Class C shares") on the basis of relative
net asset value per Class B or Class C share, without the payment of any CDSC
that might otherwise be due on redemption of the outstanding shares. Class B
shareholders of the Fund exercising the exchange privilege will continue to be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the new Class B shares acquired through use of the
exchange privilege. In addition, Class B shares of the Fund acquired through
use of the exchange privilege will be subject to the Fund's CDSC schedule if
such schedule is higher than the CDSC schedule relating to the Class B shares
of the fund from which the exchange has been made. For purposes of computing
the sales charge that may be payable on a disposition of the new Class B or
Class C shares, the holding period for the outstanding Class B or Class C
shares is "tacked" to the holding period of the new Class B or Class C shares.
For example, an investor may exchange Class B shares of the Fund for those of
Merrill Lynch Special Value Fund, Inc. ("Special Value Fund") after having held
the Fund Class B shares for two and a half years. The 2% CDSC that generally
would apply to a redemption would not apply to the exchange. Three years later
the investor may decide to redeem the Class B shares of Special Value Fund and
receive cash. There will be no CDSC due on this redemption, since by "tacking"
the two and a half year holding period of Fund Class B shares to the three year
holding period for the Special Value Fund Class B shares, the investor will be
deemed to have held the new Class B shares for more than five years.
Shareholders also may exchange shares of the Fund into shares of a money
market fund advised by the Manager or its affiliates, but the period of time
that Class B or Class C shares are held in a money market fund will not count
towards satisfaction of the holding period requirement for purposes of reducing
the CDSC or with respect to Class B shares, towards satisfaction of the
conversion period. However, shares of a money market fund which were acquired
as a result of an exchange for Class B or Class C shares of the Fund may, in
turn, be exchanged back into Class B or Class C shares, respectively, of any
fund offering such shares, in which event the holding period for Class B or
Class C shares of the Fund will be aggregated with previous holding periods for
purposes of reducing the CDSC. Thus, for example, an investor may exchange
Class B shares of the Fund for shares of Merrill Lynch Institutional Fund
("Institutional Fund") after having held the Fund Class B shares for two and a
half years and three years later decide to redeem the shares of Institutional
Fund for cash. At the time of this redemption, the 2% CDSC that would have been
due had the Class B shares of the Fund been redeemed for cash rather than
exchanged for shares of Institutional Fund will be payable. If instead of such
redemption the shareholder exchanged such shares for Class B shares of a
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fund which the shareholder continued to hold for an additional two and half
years, any subsequent redemption will not incur a CDSC.
Set forth below is a description of the investment objectives of the other
funds into which exchanges can be made:
Funds Issuing Class A, Class B, Class C and Class D Shares:
Merrill Lynch Adjustable Rate
Securities Fund, Inc.......... High current income consistent with a policy
of limiting the degree of fluctuation in net
asset value by investing primarily in a
portfolio of adjustable rate securities,
consisting principally of mortgage-backed
and asset-backed securities.
Merrill Lynch Americas Income
Fund, Inc. ................... A high level of current income, consistent
with prudent investment risk, by investing
primarily in debt securities denominated in
a currency of a country located in the
Western Hemisphere (i.e., North and South
America and the surrounding waters).
Merrill Lynch Arizona Limited
Maturity Municipal Bond Fund.. A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and Arizona income taxes as is
consistent with prudent investment
management through investment in a portfolio
primarily of intermediate-term investment
grade Arizona Municipal Bonds.
Merrill Lynch Arizona
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Arizona
income taxes as is consistent with prudent
investment management.
Merrill Lynch Arkansas
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series Fund, whose
objective is to provide as high a level of
income exempt from Federal and Arkansas
income taxes as is consistent with prudent
investment management.
Merrill Lynch Asset Growth
Fund, Inc. ................... High total investment return, consistent with
prudent risk, from investment in United
States and foreign equity, debt and money
market securities the combination of which
will be varied both with respect to types of
securities and markets in response to
changing market and economic trends.
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Merrill Lynch Asset Income
Fund, Inc. ................... A high level of current income through
investment primarily in United States fixed
income securities.
Merrill Lynch Balanced Fund
for Investment and
Retirement, Inc. ............ As high a level of total investment return as
is consistent with reasonable risk by
investing in common stocks and other types
of securities, including fixed income
securities and convertible securities.
Merrill Lynch Basic Value
Fund, Inc. ................... Capital appreciation and, secondarily, income
through investment in securities, primarily
equities, that are undervalued and therefore
represent basic investment value.
Merrill Lynch California
Insured Municipal Bond Fund... A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and California
income taxes as is consistent with prudent
investment management through investment in
a portfolio consisting primarily of insured
California Municipal Bonds.
Merrill Lynch California
Limited Maturity Municipal
Bond Fund..................... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and California income taxes as is
consistent with prudent investment
management through investment in a portfolio
primarily of intermediate-term investment
grade California Municipal Bonds.
Merrill Lynch California
Municipal Bond Fund........... A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and California
income taxes as is consistent with prudent
investment management.
Merrill Lynch Capital Fund,
Inc. ......................... The highest total investment return
consistent with prudent risk through a fully
managed investment policy utilizing equity,
debt and convertible securities.
Merrill Lynch Colorado
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Colorado
income taxes as is consistent with prudent
investment management.
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Merrill Lynch Connecticut
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Connecticut
income taxes as is consistent with prudent
investment management.
Merrill Lynch Corporate Bond
Fund, Inc. ................... Current income from three separate
diversified portfolios of fixed income
securities.
Merrill Lynch Developing
Capital Markets Fund, Inc..... Long-term capital appreciation through
investment in securities, principally
equities, of issuers in countries having
smaller capital markets.
Merrill Lynch Dragon Fund,
Inc. ......................... Capital appreciation primarily through
investment in equity and debt securities of
issuers domiciled in developing countries
located in Asia and the Pacific Basin.
Merrill Lynch Eurofund......... Capital appreciation primarily through
investment in equity securities of
corporations domiciled in Europe.
Merrill Lynch Federal
Securities Trust.............. High current return through investments in
U.S. Government and Government agency
securities, including GNMA mortgage-backed
certificates and other mortgage-backed
Government securities.
Merrill Lynch Florida Limited
Maturity Municipal Bond Fund.. A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal income taxes as is consistent with
prudent investment management while serving
to offer shareholders the opportunity to own
securities exempt from Florida intangible
personal property taxes through investment
in a portfolio primarily of intermediate-
term investment grade Florida Municipal
Bonds.
Merrill Lynch Florida
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal income taxes as
is consistent with prudent investment
management, while seeking to offer
shareholders the opportunity to own
securities exempt from Florida intangible
personal property taxes.
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Merrill Lynch Fund For
Tomorrow, Inc................. Long-term growth through investment in a
portfolio of good quality securities,
primarily common stock, potentially
positioned to benefit from demographic and
cultural changes as they affect consumer
markets.
Merrill Lynch Fundamental
Growth Fund, Inc. ............ Long-term growth of capital through
investment in a diversified portfolio of
equity securities placing particular
emphasis on companies that have exhibited an
above-average growth rate in earnings.
Merrill Lynch Fundamental
Value Portfolio............... A portfolio of Merrill Lynch Retirement Asset
(Available only for Builder Program, Inc., a series fund, whose
exchanges by certain objective is to provide capital appreciation
individual retirement and income by investing in securities, with
accounts for which Merrill at least 65% of the portfolio's assets being
Lynch acts as custodian) invested in equities.
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,
Inc. (residents of Arizona
must meet investor
suitability standards)........ The highest total investment return
consistent with prudent risk through
worldwide investment in an internationally
diversified portfolio of securities.
Merrill Lynch Global
Opportunity Portfolio......... A portfolio of Merrill Lynch Retirement Asset
(Available only for Builder Program, Inc., a series fund, whose
exchanges by certain objective is to provide a high total
individual retirement investment return through an investment
accounts for which Merrill policy utilizing United States and foreign
Lynch acts as custodian) equity, debt and money market securities,
the combination of which will vary depending
upon changing market and economic trends.
Merrill Lynch Global Resources
Trust......................... Long-term growth and protection of capital
from investment in securities of domestic
and foreign companies that possess
substantial natural resource assets.
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Merrill Lynch Global SmallCap
Fund, Inc. ................... Long-term growth of capital by investing
primarily in equity securities of companies
with relatively small market capitalizations
located in various foreign countries and in
the United States.
Merrill Lynch Global Utility
Fund, Inc. ................... Capital appreciation and current income
through investment of at least 65% of its
total assets in equity and debt securities
issued by domestic and foreign companies
which are primarily engaged in the ownership
or operation of facilities used to generate,
transmit or distribute electricity, tele-
communications, gas or water.
Merrill Lynch Growth Fund for
Investment and Retirement..... Growth of capital and, secondarily, income
from investment in a diversified portfolio
of equity securities placing principal
emphasis on those securities which
management of the fund believes to be
undervalued.
Merrill Lynch Healthcare Fund,
Inc. (residents of Wisconsin
must meet investor
suitability standards)........ Capital appreciation through worldwide
investment in equity securities of companies
that derive or are expected to derive a
substantial portion of their sales from
products and services in healthcare.
Merrill Lynch International
Equity Fund................... Capital appreciation and, secondarily, income
by investing in a diversified portfolio of
equity securities of issuers located in
countries other than the United States.
Merrill Lynch Latin America
Fund, Inc. ................... Capital appreciation by investing primarily
in Latin American equity and debt
securities.
Merrill Lynch Maryland
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Maryland
income taxes as is consistent with prudent
investment management.
Merrill Lynch Massachusetts
Limited Maturity Municipal
Bond Fund..................... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and Massachusetts income taxes as is
consistent with prudent investment
management through investment in a portfolio
primarily of intermediate-term investment
grade Massachusetts Municipal Bonds.
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Merrill Lynch Massachusetts
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Massachusetts
income taxes as is consistent with prudent
investment management.
Merrill Lynch Michigan Limited
Maturity Municipal Bond Fund.. A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and Michigan income taxes as is
consistent with prudent investment
management through investment in a portfolio
primarily of intermediate-term investment
grade Michigan Municipal Bonds.
Merrill Lynch Michigan
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Michigan
income taxes as is consistent with prudent
investment management.
Merrill Lynch Minnesota
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Minnesota
personal income taxes as is consistent with
prudent investment management.
Merrill Lynch Municipal Bond
Fund, Inc. ................... Tax-exempt income from three separate
diversified portfolios of municipal bonds.
Merrill Lynch Municipal
Intermediate Term Fund........ Currently the only portfolio of Merrill Lynch
Municipal Series Trust, a series fund, whose
objective is to provide as high a level as
possible of income exempt from Federal
income taxes by investing in investment
grade obligations with a dollar weighted
average maturity of five to twelve years.
Merrill Lynch New Jersey
Limited Maturity Municipal
Bond Fund..................... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and New Jersey income taxes as is
consistent with prudent investment
management through a portfolio primarily of
intermediate-term investment grade New
Jersey Municipal Bonds.
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Merrill Lynch New Jersey
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and New Jersey
income taxes as is consistent with prudent
investment management.
Merrill Lynch New Mexico
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and New Mexico
income taxes as is consistent with prudent
investment management.
Merrill Lynch New York Limited
Maturity Municipal Bond Fund.. A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal, New York State and New York City
income taxes as is consistent with prudent
investment management through investment in
a portfolio primarily of intermediate-term
investment grade New York Municipal Bonds.
Merrill Lynch New York
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal, New York State
and New York City income taxes as is
consistent with prudent investment
management.
Merrill Lynch North Carolina
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and North
Carolina income taxes as is consistent with
prudent investment management.
Merrill Lynch Ohio Municipal
Bond Fund..................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Ohio income
taxes as is consistent with prudent
investment management.
Merrill Lynch Oregon Municipal
Bond Fund..................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Oregon income
taxes as is consistent with prudent
investment management.
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Merrill Lynch Pacific Fund,
Inc. ......................... Capital appreciation by investing in equity
securities of corporations domiciled in Far
Eastern and Western Pacific countries,
including Japan, Australia, Hong Kong and
Singapore.
Merrill Lynch Pennsylvania
Limited Maturity Municipal
Bond Fund..................... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and Pennsylvania income taxes as is
consistent with prudent investment
management through investment in a portfolio
of intermediate-term investment grade
Pennsylvania Municipal Bonds.
Merrill Lynch Pennsylvania
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Pennsylvania
personal income taxes as is consistent with
prudent investment management.
Merrill Lynch Phoenix Fund,
Inc. ......................... Long-term growth of capital by investing in
equity and fixed income securities,
including tax-exempt securities, of issuers
in weak financial condition or experiencing
poor operating results believed to be
undervalued relative to the current or
prospective condition of such issuer.
Merrill Lynch Quality Bond
Portfolio..................... A portfolio of Merrill Lynch Retirement Asset
(Available only for Builder Program, Inc., a series fund, whose
exchanges by certain objective is to provide a high level of
individual retirement current income through investment in a
accounts for which Merrill diversified portfolio of debt obligations,
Lynch acts as custodian) such as corporate bonds and notes,
convertible securities, preferred stocks and
governmental obligations.
Merrill Lynch Short-Term
Global Income Fund, Inc....... As high a level of current income as is
consistent with prudent investment
management from a global portfolio of high
quality debt securities denominated in
various currencies and multinational
currency units and having remaining
maturities not exceeding three years.
Merrill Lynch Special Value
Fund, Inc. ................... Long-term growth of capital from investments
in securities, primarily common stocks, of
relatively small companies believed to have
special investment value and emerging growth
companies regardless of size.
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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 to provide as high a level of
income exempt from Federal income taxes as
is consistent with prudent investment
management by investing primarily in a
portfolio of long-term, investment grade
obligations issued by the State of Texas,
its political subdivisions, agencies and
instrumentalities.
Merrill Lynch U.S. Government
Securities Portfolio.......... A portfolio of Merrill Lynch Retirement Asset
(Available only for Builder Program, Inc., a series fund, whose
exchanges by certain objective is to provide a high current
individual retirement return through investments in U.S.
accounts for which Merrill Government and government agency securities,
Lynch acts as custodian) including GNMA mortgage-backed certificates
and other mortgage-backed government
securities.
Merrill Lynch Utility Income
Fund, Inc. ................... High current income through investment in
equity and debt securities issued by
companies which are primarily engaged in the
ownership or operation of facilities used to
generate, transmit or distribute
electricity, telecommunications, gas or
water.
Merrill Lynch World Income
Fund, Inc. ................... High current income by investing in a global
portfolio of fixed income securities
denominated in various currencies, including
multinational currencies.
Class A Share Money Market Funds:
Merrill Lynch Ready
AssetsTrust................... Preservation of capital, liquidity and the
highest possible current income consistent
with the foregoing objectives from the
short-term money market securities in which
the Trust invests.
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Merrill Lynch Retirement
Reserves Money Fund
(available only for exchanges
within certain retirement
plans)........................ Currently the only portfolio of Merrill Lynch
Retirement Series Trust, a series fund,
whose objectives are current income,
preservation of capital and liquidity
available from investing in a diversified
portfolio of short-term money market
securities.
Merrill Lynch U.S.A.
Government Reserves........... Preservation of capital, current income and
liquidity available from investing in direct
obligations of the U.S. Government and
repurchase agreements relating to such
securities.
Merrill Lynch U.S. Treasury
Money Fund.................... Preservation of capital, liquidity and
current income through investment
exclusively in a diversified portfolio of
short-term marketable securities which are
direct obligations of the U.S. Treasury.
Class B, Class C and Class D Share Money Market Funds:
Merrill Lynch Government Fund.. A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
consistent with liquidity and security of
principal from investment in securities
issued or guaranteed by the U.S. Government,
its agencies and instrumentalities and in
repurchase agreements secured by such
obligations.
Merrill Lynch Institutional
Fund.......................... A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide maximum current
income consistent with liquidity and the
maintenance of a high quality portfolio of
money market securities.
Merrill Lynch Institutional
Tax-Exempt Fund............... A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
exempt from Federal income taxes,
preservation of capital and liquidity
available from investing in a diversified
portfolio of short-term, high quality
municipal bonds.
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.
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Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, shareholders should contact their Merrill
Lynch financial consultant, who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other funds described above
with shares for which certificates have not been issued, may exercise the
exchange privilege by wire through their securities dealers. The Fund reserves
the right to require a properly completed Exchange Application. This exchange
privilege may be modified or terminated in accordance with the rules of the
Commission. The Fund reserves the right to limit the number of times an
investor may exercise the exchange privilege. Certain funds may suspend the
continuous offering of their shares at any time and thereafter may resume such
offering from time to time. The exchange privilege is available only to U.S.
shareholders in states where the exchange legally may be made.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all of its net investment income, if
any. Dividends from such net investment income are paid at least annually. All
net realized long- or short-term capital gains, if any, are distributed to the
Fund's shareholders at least annually. From time to time, the Fund may declare
a special distribution at or about the end of the calendar year in order to
comply with a Federal income tax requirement that certain percentages of its
ordinary income and capital gains be distributed during the taxable year.
Premiums from expired call options written by the Fund and net gains from
closing purchase transactions are treated as short-term capital gains for
Federal income tax purposes. See "Shareholder Services--Automatic Reinvestment
of Dividends and Capital Gains Distributions" for information concerning the
manner in which dividends and distributions may be reinvested automatically in
shares of the Fund. Shareholders may elect in writing to receive any such
dividends or distributions, or both, in cash. Dividends and distributions are
taxable to shareholders as described below whether they are invested in shares
of the Fund or received in cash. The per share dividends and distributions on
Class B and Class C shares will be lower than the per share dividends and
distributions on Class A and Class D shares as a result of the account
maintenance, distribution and higher transfer agency fees applicable with
respect to the Class B and Class C shares; similarly, the per share dividends
and distributions on Class D shares will be lower than the per share dividends
and distributions on Class A shares as a result of the account maintenance fees
applicable with respect to the Class D shares. See "Determination of Net Asset
Value".
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (the "Code"). If it so qualifies, the Fund (but not
its shareholders) will not be subject to Federal income tax on the part of its
net ordinary income and net realized capital gains which it distributes to
Class A, Class B, Class C and Class D shareholders (together, the
"shareholders"). The Fund intends to distribute substantially all of such
income.
Dividends paid by the Fund from its ordinary income and distributions of the
Fund's net realized short-term capital gains (together referred to hereafter as
"ordinary income dividends") are taxable to shareholders
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<PAGE>
as ordinary income. Distributions made from the Fund's net realized long-term
capital gains (including long-term gains from certain transactions in futures
and options) ("capital gain dividends") are taxable to shareholders as long-
term capital gains, regardless of the length of time the shareholder has owned
Fund shares. Any loss upon the sale or exchange of Fund shares held for six
months or less, however, will be treated as long-term capital loss to the
extent of any capital gain dividends received by the shareholder. Distributions
in excess of the Fund's earnings and profits will first reduce the adjusted tax
basis of a holder's shares and, after such adjusted tax basis is reduced to
zero, will constitute capital gains to such holder (assuming the shares are
held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. A portion of the Fund's ordinary income dividends may be eligible
for the dividends received deduction allowed to corporations under the Code, if
certain requirements are met. For this purpose, the Fund will allocate
dividends eligible for the dividends received deduction among the Class A,
Class B, Class C and Class D shareholders according to a method (which it
believes is consistent with the Securities and Exchange Commission exemptive
order permitting the issuance and sale of multiple classes of stock) that is
based on the gross income allocable to Class A, Class B, Class C and Class D
shareholders during the taxable year, or such other method as the Internal
Revenue Service may prescribe. If the Fund pays a dividend in January that was
declared in the previous October, November or December to shareholders of
record on a specified date in one of such months, then such dividend will be
treated for tax purposes as being paid by the Fund and received by its
shareholders on December 31 of the year in which such dividend was declared.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% U.S.
withholding tax under existing provisions of the Code applicable to foreign
individuals and entities unless a reduced rate of withholding or a withholding
exemption is provided under applicable treaty law. Nonresident shareholders are
urged to consult their own tax advisers concerning the applicability of the
U.S. withholding tax.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes. Shareholders may be
able to claim U.S. foreign tax credits with respect to such taxes, subject to
certain conditions and limitations contained in the Code. For example, certain
retirement accounts cannot claim 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
45
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against their U.S. income taxes. No deductions for foreign taxes, however, may
be claimed by noncorporate shareholders who do not itemize deductions. A
shareholder that is a nonresident alien individual or a foreign corporation may
be subject to U.S. withholding tax on the income resulting from the Fund's
election described in this paragraph but may not be able to claim a credit or
deduction against such U.S. tax for the foreign taxes treated as having been
paid by such shareholder. The Fund will report annually to its shareholders the
amount per share of such withholding taxes. For this purpose, the Fund will
allocate foreign taxes and foreign source income among the Class A, Class B,
Class C and Class D shareholders according to a method similar to that
described above for the allocation of dividends eligible for the dividends
received deduction.
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period of the acquired Class D shares will
include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of acquiring
the shares, then the loss the shareholder can recognize on the exchange will be
reduced (or the gain increased) to the extent the sales charge paid to the Fund
reduces any sales charge the shareholder would have owed upon purchase of the
new shares in the absence of the exchange privilege. Instead, such sales charge
will be treated as an amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income
and capital gains in the manner necessary to avoid imposition of the 4% excise
tax, there can be no assurance that sufficient amounts of the Fund's taxable
income and capital gains will be distributed to avoid entirely the imposition
of the tax. In such event, the Fund will be liable for the tax only on the
amount by which it does not meet the foregoing distribution requirements.
The Fund may invest in securities rated in the medium to lower rating
categories of nationally recognized rating organizations, and in unrated
securities ("high yield securities"), as previously described. Some of these
high yield securities may be purchased at a discount and may therefore cause
the Fund to accrue income before amounts due under the obligations are paid. In
addition, a portion of the interest payments on such high yield securities may
be treated as dividends for Federal income tax purposes and may be eligible for
the dividends received deduction allowed to domestic corporations under the
Code.
Tax Treatment of Options, Futures and Forward Foreign Exchange Transactions.
The Fund may write, purchase or sell options, futures and forward foreign
exchange contracts. Options and futures contracts that are "Section 1256
contracts" will be "marked to market" for Federal income tax purposes at the
end of each taxable year, i.e., each such option or futures contract will be
treated as sold for its fair market value on the
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last day of the taxable year. Unless such contract is a forward foreign
exchange contract, or is a non-equity option or a regulated futures contract
for a non-U.S. currency for which the Fund elects to have gain or loss treated
as ordinary gain or loss under Code Section 988 (as described below), gain or
loss from Section 1256 contracts will be 60% long-term and 40% short-term
capital gain or loss. The mark-to-market rules outlined above, however, will
not apply to certain transactions entered into by the Fund solely to reduce the
risk of changes in price or interest or currency exchange rates with respect to
its investments.
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The
Fund may, nonetheless, elect to treat the gain or loss from certain forward
foreign exchange contracts as capital. In this case, gain or loss realized in
connection with a forward foreign exchange contract that is a Section 1256
contract will be characterized as 60% long-term and 40% short-term capital gain
or loss.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's transactions in options, futures and forward foreign
exchange contracts. Under Section 1092, the Fund may be required to postpone
recognition for tax purposes of losses incurred in certain closing transactions
in options, futures and forward foreign exchange contracts.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the
Fund may be restricted in effecting closing transactions within three months
after entering into an option or futures contract.
Special Rules for Certain Foreign Currency Transactions. In general, gains
from "foreign currencies" and from foreign currency options, foreign currency
futures and forward foreign exchange contracts relating to investments in
stock, securities or foreign currencies will be qualifying income for purposes
of determining whether the Fund qualifies as a RIC. It is currently unclear,
however, who will be treated as the issuer of a foreign currency instrument or
how foreign currency options, foreign currency futures and forward foreign
exchange contracts will be valued for purposes of the RIC diversification
requirements applicable to the Fund.
Under Code Section 988, special rules are provided for certain transactions
in a currency other than the taxpayer's functional currency (i.e., unless
certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains or losses from certain debt instruments, from
certain forward contracts, from futures contracts that are not "regulated
futures contracts" and from unlisted options will be treated as ordinary income
or loss under Code Section 988. In certain circumstances, the Fund may elect
capital gain or loss treatment for such transactions. Regulated futures
contracts, as described above, will be taxed under Code Section 1256 unless
application of Section 988 is elected by the Fund. In general, however, Code
Section 988 gains or losses will increase or decrease the amount of the Fund's
investment company taxable income available to be distributed to shareholders
as ordinary income. Additionally, if Code Section 988 losses exceed other
investment company taxable income during a taxable year, the Fund would not be
able to make any ordinary income dividend distributions, and any distributions
made before the losses were realized but in the same taxable year would be
recharacterized as a return of capital to shareholders, thereby reducing the
basis of each shareholder's Fund shares and resulting in a capital gain for any
shareholder who received a distribution greater than the shareholder's tax
basis in Fund shares (assuming the shares were held as a capital
47
<PAGE>
asset). These rules and the mark-to-market rules described above, however, will
not apply to certain transactions entered into by the Fund solely to reduce the
risk of currency fluctuations with respect to its investments.
----------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action
either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs which
are derived from interest on U.S. Government obligations. State law varies as
to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present
or prospective shareholders. Total return figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return is determined separately for Class A, Class B,
Class C and Class D shares in accordance with a formula specified by the
Commission.
Average annual total return quotations for the specified periods are computed
by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including the maximum sales charge in the case of
Class A and Class D shares and the CDSC that would be applicable to a complete
redemption of the investment at the end of the specified period in the case of
Class B and Class C shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (i) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted,
and (ii) the maximum applicable sales charges will not be included. Actual
annual or annualized total return data generally will be lower than average
annual total return data since the average rates of return reflect compounding
of return; aggregate total return data generally will be higher than average
annual total return data since the aggregate rates of return reflect
compounding over longer periods of time.
48
<PAGE>
Set forth in the tables below is total return information for the Class A,
Class B, Class C and Class D shares of the Fund for the periods indicated.
<TABLE>
<CAPTION>
PERIOD CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS D SHARES
------ ---------------------------- ---------------------------- ---------------------------- ----------------------------
REDEEMABLE REDEEMABLE REDEEMABLE REDEEMABLE
EXPRESSED AS A VALUE OF A EXPRESSED AS A VALUE OF A EXPRESSED AS A VALUE OF A EXPRESSED AS A VALUE OF A
PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL
BASED $1,000 BASED $1,000 BASED $1,000 BASED $1,000
ON A INVESTMENT ON A INVESTMENT ON A INVESTMENT ON A INVESTMENT
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF
$1,000 THE $1,000 THE $1,000 THE $1,000 THE
INVESTMENT PERIOD INVESTMENT PERIOD INVESTMENT PERIOD INVESTMENT PERIOD
-------------- ------------- -------------- ------------- -------------- ------------- -------------- -------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Inception
(October 21,
1994) to
October 31,
1994........... (30.71%) $ 990.00 (85.64%) $ 948.20
One Year Ended
October 31,
1994........... (3.22%) $ 967.80 (2.73%) $ 972.70
Five Years Ended
October 31,
1994........... 12.18% $1,776.40 12.26% $1,782.60
Inception
(February 3,
1989) to
October 31,
1994........... 12.26% $1,942.30 12.17% $1,934.20
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Inception
(October 21,
1994) to
October 31,
1994........... 0.00% $1,000.00 0.08% $1,000.80
One Year Ended
October 31,
1994........... 2.14% $1,021.40 1.13% $1,011.30
1993............ 22.61% $1,226.10 21.42% $1,214.20
1992............ 11.78% $1,117.80 10.64% $1,106.40
1991............ 28.89% $1,288.90 27.48% $1,274.80
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> <C> <C> <C> <C>
Inception
(October 21,
1994) to
October 31,
1994........... (1.00%) $ 990.00 (5.18%) $ 948.20
Inception
(October 21,
1994) to
October 31,
1994........... 94.23% $1,942.30 93.42% $1,934.20
</TABLE>
In order to reflect the reduced sales charges, in the case of Class A or
Class D shares, or the waiver of the CDSC, in the case of Class B shares,
applicable to certain investors, as described under "Purchase of Shares" and
"Redemption of Shares", respectively, the total return data quoted by the Fund
in advertisements directed to such investors may take into account the reduced,
and not the maximum, sales charge or may not take into account the CDSC and
therefore may reflect greater total return since, due to the reduced sales
charges or the waiver of sales charges, a lower amount of expenses may be
deducted.
49
<PAGE>
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund was incorporated under Maryland law on June 9, 1988. It has an
authorized capital of 2,200,000,000 shares of Common Stock par value $0.10 per
share, divided into four classes, designated Class A, Class B, Class C and
Class D Common Stock, of which Class A and Class C each consist of 200,000,000
shares and Class B and Class D each consist of 900,000,000 shares. Class A,
Class B, Class C and Class D Common Stock represent an interest in the same
assets of the Fund and are identical in all respects except that the Class B,
Class C and Class D shares bear certain expenses related to the account
maintenance and/or distribution of such shares and have exclusive voting
rights with respect to matters relating to such account maintenance and/or
distribution expenditures. The Fund has received an order from the Commission
permitting the issuance and sale of multiple classes of Common Stock. The
Board of Directors of the Fund may classify and reclassify the shares of the
Fund into additional classes of Common Stock at a future date.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors
and any other matter submitted to a shareholder vote. The Fund does not intend
to hold meetings of shareholders in any year in which the Investment Company
Act does not require shareholders to act upon any of the following matters:
(i) election of Directors; (ii) approval of an investment advisory agreement;
(iii) approval of a distribution agreement; and (iv) ratification of selection
of independent accountants. Also, the by-laws of the Fund require that a
special meeting of stockholders be held upon the written request of at least
10% of the outstanding shares of the Fund entitled to vote at such meeting.
Voting rights for Directors are not cumulative. Shares issued are fully paid
and non-assessable and have no preemptive rights. Redemption and conversion
rights are discussed elsewhere herein and in the Prospectus. Each share is
entitled to participate equally in dividends and distributions declared by the
Fund and in the net assets of the Fund upon liquidation or dissolution after
satisfaction of outstanding liabilities. Stock certificates are issued by the
transfer agent only on specific request. Certificates for fractional shares
are not issued in any case.
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class A, Class
B, Class C and Class D shares of the Fund based on the value of the Fund's net
assets on October 31, 1994, and its shares outstanding on that date is as
follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
-------------- -------------- ---------- ----------
<S> <C> <C> <C> <C>
Net Assets................. $1,357,905,506 $6,457,130,497 $7,347,309 $4,967,730
============== ============== ========== ==========
Number of Shares Outstand-
ing....................... 103,860,623 500,261,282 569,017 379,903
============== ============== ========== ==========
Net Asset Value Per Share
(net assets divided by
number of shares outstand-
ing)...................... $ 13.07 $ 12.91 $ 12.91 $ 13.08
Sales Charge (for Class A
and Class D shares: 5.25%
of offering price (5.54%
of net amount invested))*. 0.72 ** ** 0.72
-------------- -------------- ---------- ----------
Offering Price............. $ 13.79 $ 12.91 $ 12.91 $ 13.80
============== ============== ========== ==========
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent; assumes maximum sales
charge is applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption of shares. See "Purchase of
Shares--Deferred Sales Charge Alternatives-- Class B and Class C Shares"
in the Prospectus and "Redemption of Shares--Deferred Sales Charge--Class
B Shares" herein.
50
<PAGE>
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to ratification by the shareholders of the
Fund. The independent auditors are responsible for auditing the annual
financial statements of the Fund.
CUSTODIAN
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109
(the "Custodian"), acts as the custodian of the Fund's assets. Under its
contract with the Fund, the Custodian is authorized to establish separate
accounts in foreign currencies and to cause foreign securities owned by the
Fund to be held in its offices outside the U.S. and with certain foreign banks
and securities depositories. The Custodian is responsible for safeguarding and
controlling the Fund's cash and securities, handling the receipt and delivery
of securities and collecting interest and dividends on the Fund's investments.
TRANSFER AGENT
Financial Data Services, Inc., Transfer Agency Mutual Fund Operations, 4800
Deer Lake Drive East, Jacksonville, Florida 32246-6484 (the "Transfer Agent"),
acts as the Fund's transfer agent. The Transfer Agent is responsible for the
issuance, transfer and redemption of shares and the opening, maintenance and
servicing of shareholder accounts. See "Management of the Fund--Transfer Agency
Services" in the Prospectus.
LEGAL COUNSEL
Brown & Wood, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on October 31 of each year. The Fund sends
to its shareholders at least semi-annually reports showing the Fund's portfolio
and other information. An annual report, containing financial statements
audited by independent auditors, is sent to shareholders each year. After the
end of each year, shareholders will receive Federal income tax information
regarding dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Commission, Washington,
D.C., under the Securities Act 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, 1995.
51
<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.
52
<PAGE>
DESCRIPTION OF MOODY'S SHORT-TERM DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted. Moody's makes no
representation that rated bank or insurance company obligations are exempt from
registration under the Securities Act of 1933 or issued in conformity with any
other applicable law or regulation. Nor does Moody's represent that any
specific bank or insurance company obligation is legally enforceable or a valid
senior obligation of a rated issuer. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment ability 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 short-term debt obligations are
supported by the credit of another entity or entities, then the name or names
of such supporting entity or entities are listed within 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.
53
<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.
54
<PAGE>
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S
("STANDARD & POOR'S") CORPORATE DEBT RATINGS
A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.
The debt rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform any audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or unavailability
of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
(1) likelihood of default-capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation; (2) nature of and provisions of the obligation; and
(3) protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
<TABLE>
<C> <S>
AAA Debt rated AAA has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely
strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small
degree.
A Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
SPECULATIVE Debt rated BB, B, CCC, CC and C is regarded as having
GRADE predominantly speculative characteristics with respect to capacity
to pay interest and repay principal. BB indicates the least degree
of speculation and C the highest. While such debt will likely have
some quality and protective characteristics, these are outweighed
by large uncertainties or major exposures to adverse conditions.
BB Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to inadequate capacity to
meet timely interest and principal payments. The BB rating
category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB - rating.
</TABLE>
55
<PAGE>
<TABLE>
<C> <S>
B Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual
or implied BB or BB- rating.
CCC Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions
to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial, or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The CCC
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied B or B- rating.
CC The rating CC is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed,
but debt service payments are continued.
CI The rating CI is reserved for income bonds on which no interest is being
paid.
D Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D
rating also will be used upon the filing of a bankruptcy petition if debt
service payments are jeopardized.
</TABLE>
Plus (+) or minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
categories.
N.R. indicates not rated.
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.
56
<PAGE>
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. 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 highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess
overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high
as for issues designated "A-1".
A-3 Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations
carrying the higher designations.
B Issues rated "B" are regarded as having only an adequate capacity for
timely payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace period.
A commercial paper rating is not a recommendation to purchase, sell or hold a
security inasmuch as it does not comment as to market price or suitability for
a particular investor. The ratings are based on current information furnished
to Standard & Poor's by the issuer or obtained by Standard & Poor's from other
sources it considers reliable. Standard & Poor's does not perform an audit in
connection with any rating and may, on occasion, rely on unaudited financial
information. The ratings may be changed, suspended, or withdrawn as a result of
changes in or unavailability of such information.
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.
57
<PAGE>
III. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangement under the laws of bankruptcy and other
laws affecting creditors' rights.
AAA This is the highest rating that may be assigned by Standard & Poor's to a
preferred stock issue and indicates an extremely strong capacity to pay
the preferred stock obligations.
AA A preferred stock issue rated "AA" also qualifies as a high-quality fixed
income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated "AAA".
A An issue rated "A" is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
BBB An issue rated "BBB" is regarded as backed by an adequate capacity to pay
the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to make
payments for a preferred stock in this category than for issues in the "A"
category.
BB Preferred stock rated "BB", "B", and "CCC" are regarded, on balance, as
B predominately speculative with respect to the issuer's capacity to pay
CCC preferred stock obligations. "BB" indicates the lowest degree of
speculation and "CCC" the highest degree of speculation. While such issues
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.
CC The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C A preferred stock rated "C" is a non-paying issue.
D A preferred stock rated "D" is a non-paying issue with the issuer in
default on debt instruments.
NR indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate
a particular type of obligation as a matter of policy.
Plus (+) or minus (-): To provide more detailed indications of preferred
stock quality, the rating 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 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. 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, or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
58
<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, 1994, the related statements of operations for the year then
ended and changes in net assets for each of the years in the two-year period
then ended, and the financial highlights for each of the years in the five-year
period then ended. These financial statements and the financial highlights are
the responsibility of the Fund's management. Our responsibility is to express
an opinion on these financial statements and the financial highlights based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at October
31, 1994, by correspondence with the custodian, 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, 1994, the results of its
operations, the changes in its net assets, and the financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Princeton, New Jersey
December 7, 1994
59
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
Value Percent of
COUNTRY Industries Shares Held Common Stocks Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Australia Banking 2,645,800 Westpac Banking Corp. $ 5,614,396 $ 8,890,825 0.1%
Food 7,916,000 Goodman Fielder Wattie Ltd. 8,324,587 7,457,553 0.1
Insurance 500,000 GIO Australia Holdings, Ltd. 841,716 860,488 0.0
Tobacco 1,999,800 Rothmans Holdings, Ltd. 7,517,440 7,684,280 0.1
1,242,300 WD & HO Wills Holdings, Ltd. 2,092,022 3,317,537 0.0
-------------- -------------- ------
9,609,462 11,001,817 0.1
Total Common Stocks in Australia 24,390,161 28,210,683 0.3
Austria Utilities-- 174,750 Oesterreichische Elektrizitats 10,542,970 10,955,855 0.1
Electric AG (Verbund)
Total Common Stocks in Austria 10,542,970 10,955,855 0.1
Canada Natural Resources 300,000 Canadian Pacific, Ltd. 3,503,161 4,800,000 0.1
Oil & Related 353,000 International Petroleum Corp. 1,000,196 419,188 0.0
Telecommunications 100,000 BCE Telecommunications, Inc. 3,375,484 3,500,000 0.0
Total Common Stocks in Canada 7,878,841 8,719,188 0.1
Denmark Banking & Financial 53,500 Unidanmark A/S 1,870,730 2,143,815 0.0
</TABLE>
60
<PAGE>
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
Total Common Stocks in Denmark 1,870,730 2,143,815 0.0
Finland Banking 250,000 Kansallis-Osake-Pankki 533,290 465,230 0.0
3,033,915 Unitas Bank Ltd. 8,709,516 9,201,649 0.1
-------------- -------------- ------
9,242,806 9,666,879 0.1
Metals 175,000 Outokumpu OY 1,920,901 3,696,382 0.0
Paper & Forest 480,000 Enso-Gutzeit OY 3,485,619 4,253,033 0.1
Products 33,500 Metsa-Serla OY 1,397,019 1,553,076 0.0
450,000 Repola OY S 5,925,368 9,407,496 0.1
-------------- -------------- ------
10,808,006 15,213,605 0.2
Total Common Stocks in Finland 21,971,713 28,576,866 0.3
France Automobiles 113,300 Peugeot S.A. 14,661,303 16,952,125 0.2
Banking 100,878 Compagnie Financiere de Paribas 7,150,761 6,704,971 0.1
86,500 Societe Generale 9,605,405 9,752,862 0.1
-------------- -------------- ------
16,756,166 16,457,833 0.2
Insurance 89,900 GAN S.A. (Registered) 6,452,319 4,980,875 0.1
Multi-Industry 15,650 EuraFrance 4,256,713 5,412,051 0.1
Utilities 104,512 Compagnie Generale des Eaux 11,466,525 9,562,858 0.1
Total Common Stocks in France 53,593,026 53,365,742 0.7
Germany Banking 4,950 Bayerische Vereinsbank AG 1,181,909 1,468,067 0.0
33,900 Deutsche Bank AG 15,974,345 16,685,420 0.2
-------------- -------------- ------
17,156,254 18,153,487 0.2
Capital Goods 369,636 Kloeckner Werke AG 17,229,762 33,391,229 0.4
Chemicals 49,450 Bayer AG 8,953,719 11,558,589 0.2
Insurance 7,860 Munich Reinsurance Co. (Ordinary) 14,055,714 14,461,773 0.2
Machinery & Equipment 57,179 Mannesmann AG 15,621,661 15,267,989 0.2
Multi-Industry 103,840 Veba AG 29,898,982 34,762,776 0.5
Steel 92,100 Thyssen AG 11,715,893 17,575,775 0.2
Total Common Stocks in Germany 114,631,985 145,171,618 1.9
Hong Kong Telecommunications 1,180,000 Hong Kong Telecommunications Ltd. 754,179 2,527,437 0.0
Utilities--Electric 676,800 China Light & Power Co., Ltd. 841,166 3,521,168 0.0
Total Common Stocks in Hong Kong 1,595,345 6,048,605 0.0
Ireland Building & 1,065,600 CRH PLC 3,594,241 5,992,348 0.1
Construction
Miscellaneous-- 2,178,000 Waterford Wedgwood Units 1,080,827 2,029,648 0.0
Consumer Goods
Total Common Stocks in Ireland 4,675,068 8,021,996 0.1
Italy Banking 533,400 IMI (Ordinary) 3,443,328 3,479,600 0.0
Building & 1,922,200 Filippo Fochi S.p.A. 6,101,165 5,123,201 0.1
Construction
Multi-Industry 7,639,495 Compagnie Industriali Riunite S.p.A.
(CIR) 6,443,269 8,795,128 0.1
Telecommunications 3,000,000 Societa Finanziaria Telefonica
S.p.A.(STET) 4,365,656 9,068,452 0.1
11,181,363 Societa Finanziaria Telefonica
S.p.A. (STET) RISP 20,700,047 27,657,210 0.4
3,958,000 Societa Italiana Esercizio Telecom
S.p.A. (S.I.P.) 3,323,376 10,857,934 0.1
-------------- -------------- ------
28,389,079 47,583,596 0.6
Total Common Stocks in Italy 44,376,841 64,981,525 0.8
</TABLE>
61
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Value Percent of
COUNTRY Industries Shares Held Common Stocks Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Japan Automobiles & 1,512,000 Suzuki Motor Corp. $ 13,245,256 $ 19,198,513 0.2%
Equipment 295,000 Toyota Motor Corp. 4,030,746 6,516,982 0.1
-------------- -------------- ------
17,276,002 25,715,495 0.3
Beverage 497,000 Chukyo Coca-Cola Bottling Co., Ltd. 6,342,434 5,848,870 0.1
358,000 Hokkaido Coca-Cola Bottling Co., Ltd. 4,698,844 5,469,598 0.1
573,000 Kinki Coca-Cola Bottling Co., Ltd. 9,468,770 8,695,262 0.1
468,000 Mikuni Coca-Cola Bottling Co., Ltd. 7,366,538 6,763,704 0.1
444,000 Sanyo Coca-Cola Bottling Co., Ltd. 6,660,269 6,416,847 0.1
-------------- -------------- ------
34,536,855 33,194,281 0.5
Capital Goods 3,608,000 Mitsubishi Heavy Industries, Ltd. 21,963,469 29,386,931 0.4
Containers 751,000 Toyo Seikan Kaisha, Ltd. 18,417,114 25,118,613 0.3
Electric Construction 410,000 Chudenko Corp. 13,428,175 15,067,616 0.2
29,000 Taihei Dengyo Kaisha Ltd. 657,632 796,325 0.0
-------------- -------------- ------
14,085,807 15,863,941 0.2
Electric Equipment 189,000 Hitachi, Ltd. 1,899,032 1,970,579 0.0
562,500 Murata Manufacturing Co., Ltd. 18,134,758 22,994,735 0.3
1,360,000 Sumitomo Electric Industries 15,481,185 20,357,180 0.3
-------------- -------------- ------
35,514,975 45,322,494 0.6
Insurance 1,237,000 Dai-Tokyo Fire & Marine Insurance
Co., Ltd. 7,457,147 9,436,802 0.1
665,000 Fuji Fire & Marine Insurance
Co., Ltd. 3,727,641 4,633,788 0.1
1,426,000 Koa Fire & Marine Insurance
Co., Ltd. 7,615,672 10,010,117 0.1
620,000 Mitsui Marine & Fire Insurance
Co., Ltd. 5,004,638 4,704,243 0.1
1,314,000 Nichido Fire & Marine Insurance
Co., Ltd. 8,013,286 11,516,321 0.1
1,295,000 Nippon Fire & Marine Insurance
Co., Ltd. 6,665,367 9,598,534 0.1
1,775,000 Sumitomo Marine & Fire Insurance
Co.,Ltd. 13,830,866 16,069,733 0.2
1,625,000 Tokio Marine & Fire Insurance
Co., Ltd. 17,355,002 19,291,318 0.2
630,000 Yasuda Fire & Marine Insurance
Co., Ltd. 4,971,410 4,630,536 0.1
-------------- -------------- ------
74,641,029 89,891,392 1.1
Office Equipment 1,372,000 Canon, Inc. 18,975,801 25,493,961 0.3
Pharmaceuticals 865,000 Sankyo Pharmaceuticals Co., Ltd. 21,123,949 22,502,323 0.3
384,000 Taisho Pharmaceuticals Co. 7,984,458 7,056,055 0.1
-------------- -------------- ------
29,108,407 29,558,378 0.4
Photography 298,000 Fuji Photo Film Co., Ltd. 6,679,585 7,106,225 0.1
Retail Stores 448,000 Ito Yokado Co., Ltd. 20,618,869 24,464,953 0.3
100,000 Sangetsu Co., Ltd. 3,160,832 2,973,057 0.0
-------------- -------------- ------
23,779,701 27,438,010 0.3
Steel 10,000 Maruichi Steel Tube Ltd. 153,093 190,978 0.0
Total Common Stocks in Japan 295,131,838 354,280,699 4.5
Netherlands Airlines 800,960 KLM Royal Dutch Airlines N.V. 15,801,656 22,267,353 0.3
Banking 1,226,150 ABN Amro Holdings N.V. 39,994,928 43,536,683 0.6
Chemicals 129,450 Akzo N.V. 12,211,968 16,336,636 0.2
Electronics 986,000 Philips Electronics N.V. 29,158,574 32,613,397 0.4
Insurance 155,000 Aegon N.V. 8,361,695 9,564,612 0.1
</TABLE>
62
<PAGE>
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
375,400 Amev N.V. 14,542,480 15,599,016 0.2
800,965 Internationale Nederlanden Groep N.V. 30,066,279 37,460,663 0.5
-------------- -------------- ------
52,970,454 62,624,291 0.8
Miscellaneous-- 10,000 Nijverdal Ten Cate N.V. 501,699 493,776 0.0
Manufacturing
Paper & Forest 229,920 Koninklijke KNP 3,736,708 6,787,206 0.1
Products
Telecommunications 310,680 Koninklijke PTT Nederland N.V. 9,724,158 9,889,458 0.1
Total Common Stocks in the Netherlands 164,100,145 194,548,800 2.5
New Finance 4,585,700 Brierly Investments, Ltd. 2,882,632 3,187,869 0.0
Zealand
Total Common Stocks in New Zealand 2,882,632 3,187,869 0.0
Spain Banking 116,011 Banco de Santander S.A. (New) 4,603,421 4,500,786 0.1
568,670 Banco de Santander S.A. (Ordinary) 20,154,425 23,106,333 0.3
61,775 Banco Popular Espanol S.A. 6,511,311 7,747,148 0.1
83,000 Bank Intercontinental S.A. 4,607,612 7,659,296 0.1
-------------- -------------- ------
35,876,769 43,013,563 0.6
Electrical Equipment 45,750 Alba Corp. (Rights) -- -- 0.0
Energy & Petroleum 618,500 Repsol S.A. 18,566,656 19,774,028 0.3
Financial Services 326,000 Argentaria S.A. 12,974,203 12,608,526 0.2
Insurance 30,000 Mapfre S.A. 1,130,028 1,324,339 0.0
Miscellaneous 137,500 Autopista Espana (ACESA) 1,363,125 1,141,534 0.0
6,875 Autopista Espana (ACESA) (Rights) -- 57,077 0.0
195,000 Grupo Fosforera Espanola S.A. 1,696,601 1,603,337 0.0
-------------- -------------- ------
3,059,726 2,801,948 0.0
Multi-Industry 45,750 Corporacion Financiera Alba S.A. 1,611,658 2,227,788 0.0
Real Estate 236,708 Metrovacesa 5,888,465 7,747,288 0.1
Telecommunications 1,802,118 Telefonica Nacional de Espana S.A. 20,127,134 24,384,051 0.3
184,000 Telefonica Nacional de Espana S.A.
(ADR)++ 5,492,987 7,452,000 0.1
-------------- -------------- ------
25,620,121 31,836,051 0.4
Utilities--Electric 100,000 Empresa Nacional de Electricidad S.A. 3,759,956 4,582,103 0.1
591,800 Iberdrola I S.A. 3,310,030 3,897,461 0.1
-------------- -------------- ------
7,069,986 8,479,564 0.2
Total Common Stocks in Spain 111,797,612 129,813,095 1.8
Sweden Electrical Equipment 120,000 ASEA AB 'B' Free 6,532,086 8,709,193 0.1
Insurance 343,050 Skandia Forsakring 'AB' Free 5,159,320 6,248,199 0.1
Mining 725,725 Trelleborg 'B' Free 5,291,716 11,200,083 0.1
Miscellaneous 200,000 SKF 'A' 3,713,376 3,587,120 0.0
487,500 SKF 'B' Free 9,074,042 8,879,164 0.1
-------------- -------------- ------
12,787,418 12,466,284 0.1
Multi-Industry 245,000 Svedala Industri 'AB' Free 3,925,653 5,688,644 0.1
Total Common Stocks in Sweden 33,696,193 44,312,403 0.5
Switzerland Electrical Equipment 19,534 BBC Brown Boveri & Cie (Bearer) 12,064,907 16,765,647 0.2
Food & Beverage 16,500 Nestle AG 13,014,541 15,422,771 0.2
Insurance 1,040 Baloise Holding Insurance (Registered) 1,986,476 1,958,280 0.0
Pharmaceuticals 19,800 Ciba-Geigy AG (Registered) 9,511,983 11,539,490 0.2
Total Common Stocks in Switzerland 36,577,907 45,686,188 0.6
</TABLE>
63
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Value Percent of
COUNTRY Industries Shares Held Common Stocks Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
United Aerospace 1,452,500 Rolls Royce PLC $ 3,586,733 $ 4,125,646 0.1%
Kingdom
Banks & Finance 232,800 Reuters Holdings PLC 1,686,224 1,824,109 0.0
Beverage 1,560,600 Grand Metropolitan PLC 10,377,835 10,572,222 0.1
35,000 Grand Metropolitan PLC (ADR)++ 1,031,100 940,625 0.0
-------------- -------------- ------
11,408,935 11,512,847 0.1
Conglomerates 50,000 Hanson PLC (ADR)++ 984,250 931,250 0.0
Consumer Goods 850,000 Vendome Luxury Group (Units) 5,501,439 7,201,333 0.1
Electrical Equipment 1,230,200 General Electric Co. PLC 5,848,390 5,542,573 0.1
Food 825,000 Tate & Lyle PLC 5,110,541 5,737,070 0.1
Industrial--Other 1,581,600 Tomkins PLC 5,292,446 5,473,424 0.1
Insurance 599,000 Commercial Union Assurance Co. PLC 5,354,117 5,358,386 0.1
Leisure & 857,100 The Rank Organisation PLC 5,411,425 5,666,477 0.1
Entertainment 490,000 Thorn EMI PLC (Ordinary) 7,194,681 7,774,795 0.1
-------------- -------------- ------
12,606,106 13,441,272 0.2
Pharmaceuticals 625,000 SmithKline Beecham Corp. PLC (ADR)++ 17,244,510 19,062,500 0.2
1,000,000 Zeneca Group PLC 9,406,370 14,054,964 0.2
-------------- -------------- ------
26,650,880 33,117,464 0.4
Retail Stores 4,300 Boots Co. PLC 28,682 37,202 0.0
1,500,000 Sears Holdings PLC 2,825,599 2,632,245 0.0
-------------- -------------- ------
2,854,281 2,669,447 0.0
Steel 1,500,000 British Steel PLC 1,442,449 3,923,881 0.1
Telecommunications 1,097,200 British Telecommunications PLC 6,551,120 7,065,768 0.1
423,200 Unilever Capital Corp. 6,373,658 7,875,481 0.1
-------------- -------------- ------
12,924,778 14,941,249 0.2
Utilities-- 111,800 Cable & Wireless International PLC 823,118 766,510 0.0
Communications
Utilities--Gas 435,800 British Gas PLC 1,789,284 2,070,174 0.0
Waste Disposal 83,500 Attwoods PLC (ADR)++ 759,800 761,938 0.0
Total Common Stocks in the
United Kingdom 104,623,771 119,398,573 1.6
United Aerospace 56,000 Boeing Co. 2,003,133 2,457,000 0.0
States
Aerospace & Defense 200,000 EG&G, Inc. 2,889,403 3,225,000 0.0
Airlines 12,500 UAL Corp. 1,187,500 1,181,250 0.0
Apparel 860,000 Fruit of the Loom, Inc. 23,555,786 24,617,500 0.3
373,900 Liz Claiborne, Inc. 8,022,626 8,646,438 0.1
150,000 NIKE, Inc. (Class B) 7,970,975 9,131,250 0.1
-------------- -------------- ------
39,549,387 42,395,188 0.5
Automobiles 210,300 General Motors Corp. 8,014,471 8,306,850 0.1
Banking 85,000 Albank Financial Corp. 971,875 1,870,000 0.0
280,500 AmSouth Bancorporation 7,624,356 8,344,875 0.1
678,400 Anchor Bancorp., Inc. 8,229,970 10,006,400 0.1
400,000 Bank of New York 10,650,626 12,700,000 0.2
75,000 BankAmerica Corp. 3,219,677 3,262,500 0.0
319,000 Bankers Trust Co. 7,620,125 6,738,875 0.1
</TABLE>
64
<PAGE>
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
129,500 Banknorth Group, Inc. 1,865,422 2,946,125 0.0
700,000 Barnett Banks Inc. 28,355,015 29,050,000 0.4
500,000 California Federal Bank 4,500,000 5,750,000 0.1
496,700 Charter One Financial, Inc. 9,263,048 9,996,088 0.1
798,500 Chase Manhattan Corp. 26,045,496 28,746,000 0.4
1,391 Chase Manhattan Corp. (Warrants) (a) 6,955 9,215 0.0
1,513,500 Chemical Banking Corp. 55,174,508 57,513,000 0.7
1,560,300 City National Corp. 11,096,128 17,163,300 0.2
1,112,500 Comerica Inc. 30,077,266 30,732,813 0.4
375,000 CoreStates Financial Corp. 9,855,001 9,703,125 0.1
1,120,000 First of America Bank 41,734,310 37,940,000 0.5
1,080,000 First Commerce Corp. 27,728,848 28,350,000 0.4
400,000 First Union Corp. 16,226,028 18,000,000 0.2
1,426,103 KeyCorp 42,386,643 40,822,184 0.5
498,600 Mellon Bank Corp. 26,731,868 27,734,625 0.4
112,950 Mercantile Bancorp., Inc. 2,920,618 3,925,012 0.1
150,000 NBD Bancorp, Inc. 4,352,648 4,612,500 0.1
648,000 Onbancorp, Inc. 18,276,126 16,848,000 0.2
294,400 Oriental Bank and Trust 5,050,248 4,747,200 0.1
45,000 Premier Bancorp. 708,437 731,250 0.0
1,400,000 Republic New York Corp. 64,147,741 64,050,000 0.8
450,000 Southern National Corp. 8,670,728 9,281,250 0.1
17,000 Trustco Bankcorp. NY 222,793 327,250 0.0
-------------- -------------- ------
473,712,504 491,901,587 6.3
Building & 605,000 TJ International, Inc. 10,871,756 10,738,750 0.1
Construction
Communications 185,700 Comsat Corp. 4,308,767 3,992,550 0.1
104,500 GTE Corp. 3,514,166 3,213,375 0.0
300,000 Octel Communications Corp. 5,268,100 6,450,000 0.1
-------------- -------------- ------
13,091,033 13,655,925 0.2
Computers 148,500 Boole & Babbage, Inc. 2,962,360 4,714,875 0.1
700,000 Borland International Corp. 8,054,338 7,437,500 0.1
270,000 International Business Machines Corp. 12,146,536 20,115,000 0.3
800,000 Unisys Corp. 9,264,381 8,500,000 0.1
100,000 Western Digital Co. 1,224,880 1,700,000 0.0
-------------- -------------- ------
33,652,495 42,467,375 0.6
Construction & 153,800 Centex Corp. 3,880,118 3,422,050 0.0
Housing 500,000 K. Hovnanian Enterprises, Inc.
(Class A) 4,920,209 3,000,000 0.0
-------------- -------------- ------
8,800,327 6,422,050 0.0
Energy & Petroleum 163,900 Ashland Coal, Inc. 4,132,919 4,998,950 0.1
45,000 Brown (Tom), Inc. 195,997 568,125 0.0
49,500 Cabot Oil & Gas Corp. (Class A) 529,030 915,750 0.0
34,600 Coastal Corp. 817,773 986,100 0.0
153,000 Coho Resources, Inc. 1,662,813 765,000 0.0
408,000 Gerrity Oil & Gas Corp. 5,748,846 2,397,000 0.0
130,000 Helmerich & Payne, Inc. 2,773,423 4,062,500 0.1
30,000 McMoRan Oil & Gas Co. 146,197 105,000 0.0
46,400 Mitchell Energy Development Corp.
(Class A) 675,717 823,600 0.0
174,350 Mitchell Energy Development Corp.
(Class B) 2,755,451 3,138,300 0.0
50,000 Murphy Oil Corp. 1,899,720 2,381,250 0.0
106,100 Nuevo Energy Co. 2,048,791 2,373,987 0.0
</TABLE>
65
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Shares Held/ Value Percent of
COUNTRY Industries Face Amount Common Stocks & Notes Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
United Energy & Petroleum 1,563,400 Occidental Petroleum Corp. $ 29,245,537 $ 34,199,375 0.4%
States (concluded) 61,200 Pennzoil Co. 3,775,844 3,151,800 0.0
(continued) 149,700 +++Plains Resources, Inc. 1,371,062 991,762 0.2
1,794,247 Santa Fe Energy Resources, Inc. 16,331,708 16,372,512 0.0
1,175,000 Trans Texas Gas Corp. 14,200,000 15,421,875 0.2
700,000 USX-Marathon Group 12,267,189 13,125,000 0.2
138,800 Unocal Corp. 3,272,336 4,059,900 0.1
-------------- -------------- ------
103,850,353 110,837,786 1.3
Financial Services 807,800 Student Loan Marketing Association 34,901,569 25,950,575 0.3
Foods/Food 900,000 Borden, Inc. 11,393,223 12,150,000 0.2
Processing
Healthcare Services 410,000 Advocat, Inc. 3,897,500 4,305,000 0.1
961,200 Baxter International, Inc. 21,122,668 24,991,200 0.3
650,000 Beverly Enterprises, Inc. 6,733,713 9,831,250 0.1
55,000 Community Psychiatric Centers 580,744 543,125 0.0
150,000 HealthCare COMPARE Corp. 2,732,397 4,143,750 0.1
530,500 Hillhaven Corp. 8,732,138 11,803,625 0.2
150,000 Manor Care, Inc. 2,928,940 4,125,000 0.1
546,500 US Surgical Corp. 11,871,438 12,296,250 0.2
-------------- -------------- ------
58,599,538 72,039,200 1.1
Index-Related US$ 40,800 Republic of Austria Stock Index
Growth Notes due 8/15/1996 432,941 540,600 0.0
Industrial 915,000 BW/IP Holdings, Inc. 15,816,387 16,012,500 0.2
390,000 CBI Industries, Inc. 10,158,411 9,018,750 0.1
250,000 Cooper Industries, Inc. 9,064,307 9,343,750 0.1
2,672 Gardner Denver Machinery, Inc. 22,042 27,722 0.0
-------------- -------------- ------
35,061,147 34,402,722 0.4
Insurance 524,700 Ace, Ltd. 12,307,636 11,936,925 0.2
245,000 Aetna Life & Casualty Co. 12,939,855 11,300,625 0.1
500,000 Alexander & Alexander Services, Inc. 8,443,979 10,125,000 0.1
550,000 American General Corp. 14,227,584 15,125,000 0.2
571,000 Horace Mann Educators, Inc. 13,654,588 12,347,875 0.2
630,200 Lincoln National Corp. 23,245,001 22,844,750 0.3
203,000 PartnerRe Holdings, Ltd. 4,026,552 4,110,750 0.1
-------------- -------------- ------
88,845,195 87,790,925 1.2
Metals 277,500 Alcan Aluminum, Ltd. 4,669,221 7,423,125 0.1
120,000 Aluminum Co. of America 8,094,043 10,230,000 0.1
100,000 Inco Ltd. 2,132,000 3,012,500 0.0
132,800 Reynolds Metals Co. 5,801,771 7,353,800 0.1
-------------- -------------- ------
20,697,035 28,019,425 0.3
Miscellaneous 125,000 ADT Limited (ADR)++ 1,434,405 1,406,250 0.0
93,700 Handleman Co. 1,044,752 1,054,125 0.0
223,900 Jostens Inc. 4,199,326 3,862,275 0.1
385,000 Loews Corp. 35,433,180 33,976,250 0.4
-------------- -------------- ------
42,111,663 40,298,900 0.5
Natural Resources 7,500 Freeport McMoRan Copper and
Gold, Inc. 164,363 170,625 0.0
300,000 Freeport-McMoRan, Inc. 4,907,292 5,512,500 0.1
</TABLE>
66
<PAGE>
<TABLE>
<S> <C> <S> <C> <C> <C>
440,000 Horsham Corp. (ADR)++ 3,550,742 6,820,000 0.1
-------------- -------------- ------
8,622,397 12,503,125 0.2
Oil Services 670,000 Arethusa (Off-Shore) Ltd. 6,809,378 7,286,250 0.1
149,800 Atwood Oceanics, Inc. 1,238,663 1,872,500 0.0
43,400 Cliffs Drilling Co. 595,425 553,350 0.0
2,949,375 Noble Drilling Corp. 21,592,068 21,382,969 0.3
-------------- -------------- ------
30,235,534 31,095,069 0.4
Paper & Forest 561,900 Boise Cascade Corp. 12,517,685 14,890,350 0.2
Products 435,000 Bowater, Inc. 8,882,625 11,745,000 0.2
112,000 Champion International Corp. 3,318,152 4,144,000 0.1
150,000 International Paper Co. 9,477,586 11,175,000 0.1
150,000 Stone Container Corp. 1,954,854 2,512,500 0.0
-------------- -------------- ------
36,150,902 44,466,850 0.6
Pharmaceuticals/ 600,000 ALZA Corp. 13,048,597 10,650,000 0.1
Biotechnology 121,500 Alteon Inc. 1,205,188 789,750 0.0
139,400 American Home Products Corp. 8,256,144 8,851,900 0.1
435,000 +++Applied Immune Sciences, Inc. 6,160,143 2,229,375 0.0
58,200 AutoImmune Inc. 385,575 305,550 0.0
600,000 Bristol-Myers Squibb Co. 33,254,124 35,025,000 0.5
110,000 Immune Response Corp. 1,444,874 893,750 0.0
275,000 Lilly (Eli) & Co. 13,880,596 17,050,000 0.2
550,000 Merck & Co. 18,652,516 19,662,500 0.3
100,000 Pfizer, Inc. 5,793,898 7,412,500 0.1
-------------- -------------- ------
102,081,655 102,870,325 1.3
Pollution Control 646,900 WMX Technologies, Inc. 16,148,443 19,002,687 0.2
Publishing 250,000 Deluxe Corp. 6,706,999 7,062,500 0.1
301,500 New York Times Co. (Class A) 7,158,778 6,821,437 0.1
150,000 Times Mirror Co. 4,654,407 4,893,750 0.1
-------------- -------------- ------
18,520,184 18,777,687 0.3
Real Estate 424,600 Carr Realty Corp. 8,608,363 8,279,700 0.1
500,000 First Union Real Estate Investments 3,764,840 3,875,000 0.1
661,300 Mid-America Realty Investments 6,616,640 5,786,375 0.1
100,000 Mid-Atlantic Realty Trust Co. 917,500 875,000 0.0
720,000 Prime Residential, Inc. 11,584,750 11,340,000 0.1
-------------- -------------- ------
31,492,093 30,156,075 0.4
Retail Stores 608,500 Baker (J.) Inc. 10,187,765 10,268,437 0.1
516,900 ++++Buttrey Food & Drug Stores Co. 4,084,486 4,005,975 0.1
156,700 Dayton-Hudson Corp. 10,496,970 12,144,250 0.2
100,000 Eagle Food Centers, Inc. 612,500 225,000 0.0
1,110,000 ++++Filene's Basement Corp. 10,092,619 8,325,000 0.1
1,373,500 Payless Cashways Inc. 17,027,625 12,876,562 0.2
1,100,000 Service Merchandise Co., Inc. 9,491,185 6,600,000 0.1
158,400 Smith Food & Drug Ltd. 3,067,501 4,098,600 0.1
400,000 Sotheby's Holdings, Inc. (Class A) 4,879,558 4,850,000 0.1
1,111,600 The Vons Companies, Inc. 18,500,110 21,676,200 0.3
-------------- -------------- ------
88,440,319 85,070,024 1.3
</TABLE>
67
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Value Percent of
COUNTRY Industries Shares Held Common Stocks Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
United Savings Banks 106,000 Ahmanson (H.F.) & Co. $ 1,767,857 $ 2,027,250 0.0%
States 297,600 Bankers Corp. 1,688,842 4,240,800 0.1
(concluded) 655,000 Brooklyn Bancorp Inc. (e) 15,782,500 21,287,500 0.3
500,000 Dime Savings Bank of New York 3,417,510 4,375,000 0.1
196,400 Downey Savings & Loan Association 2,896,670 3,707,050 0.1
1,895,553 Glendale Federal Savings Bank 16,659,352 20,614,139 0.3
770,194 Glendale Federal Savings Bank
(Warrants) (a) -- 2,599,405 0.0
37,500 NS Bancorp, Inc. 300,000 1,031,250 0.0
200,000 Portsmouth Bank Shares, Inc. 1,396,014 2,300,000 0.0
-------------- -------------- ------
43,908,745 62,182,394 0.9
Textiles 2,825,200 Burlington Industries, Inc. 37,451,653 26,486,250 0.3
Tobacco 720,000 Philip Morris Companies, Inc. 34,696,738 44,100,000 0.6
Utilities--Electric 1,250,000 Allegheny Power System, Inc. 27,315,551 25,937,500 0.3
125,000 CMS Energy Corp. 2,290,025 2,875,000 0.0
2,071,000 Centerior Energy Corp. 31,583,112 17,085,750 0.2
150,000 Consolidated Edison Company Inc. 4,390,815 3,731,250 0.1
1,780,000 Entergy Corp. 47,516,856 41,607,500 0.5
475,000 FPL Group, Inc. 14,363,265 15,734,375 0.2
300,000 General Public Utilities Corp. 8,663,891 7,725,000 0.1
1,757,900 Niagara Mohawk Power Corp. 28,627,702 24,171,125 0.3
844,600 Texas Utilities Co. 26,942,999 27,555,075 0.4
1,148,800 Unicom Corporation 27,549,620 24,842,800 0.3
-------------- -------------- ------
219,243,836 191,265,375 2.4
Utilities--Gas 115,650 Atmos Energy Corp. 1,445,257 1,893,769 0.0
126,900 Pacific Enterprises 2,486,131 2,728,350 0.0
40,800 South Jersey Industries, Inc. 711,756 708,900 0.0
-------------- -------------- ------
4,643,144 5,331,019 0.0
Total Common Stocks
in the United States 1,661,300,316 1,708,087,988 22.0
Total Investments in Common Stocks 2,695,637,094 2,955,511,508 37.8
Equity Closed-End Funds
Portugal Financial Services 39,500 Capital Portugal Fund 2,052,116 3,250,976 0.1
Total Equity Closed-End Funds
in Portugal 2,052,116 3,250,976 0.1
United Financial Services 320,000 Austria Fund 2,642,432 2,600,000 0.0
States 166,666 European Warrant Fund 1,363,723 1,624,993 0.0
11,700 Global Yield Fund 89,798 71,662 0.0
300,100 Growth Fund of Spain, Inc. 2,630,827 3,076,025 0.1
150,000 Irish Investment Fund, Inc. 1,086,041 1,518,750 0.0
150,000 Italy Fund 1,198,520 1,312,500 0.0
25,600 Jakarta Growth Fund 158,080 275,200 0.0
40,000 Portugal Fund 360,368 635,000 0.0
-------------- -------------- ------
9,529,789 11,114,130 0.1
Total Equity Closed-End Funds
in the United States 9,529,789 11,114,130 0.1
Total Investments in
Equity Closed-End Funds 11,581,905 14,365,106 0.2
Preferred Stocks
</TABLE>
68
<PAGE>
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
Germany Automobiles 80,150 Volkswagen of America, Inc. 17,907,876 18,739,821 0.2
Multi-Industry 45,000 R.W.E. AG 8,725,424 11,029,558 0.1
Total Preferred Stocks in Germany 26,633,300 29,769,379 0.3
Netherlands Paper & Forest 100,240 Koninklijke KNP BT 404,041 450,397 0.0
Products
Total Preferred Stocks in Netherlands 404,041 450,397 0.0
Spain Banking 225,000 Santander Overseas Bank
(8%, Series D) (ADR)++ 5,463,250 4,837,500 0.1
Total Preferred Stocks in Spain 5,463,250 4,837,500 0.1
United Engineering 750,000 AMEC PLC (6.50% Convertible) 968,501 1,003,926 0.0
Kingdom
Retail Stores 545,000 Signet Group (Convertible) (ADR)++ 2,194,907 4,155,625 0.1
Waste Disposal 1,700,000 Attwoods PLC (8.50% Convertible) 2,417,796 2,455,946 0.0
Total Preferred Stocks
in the United Kingdom 5,581,204 7,615,497 0.1
United Airlines 100,000 +++++++AMR Corp. (Convertible $3.00) 5,065,500 4,150,000 0.1
States 85,000 +++++++UAL Corp. (6.25% Convertible) 7,885,625 7,203,750 0.1
150,000 USAir Group, Inc. (Convertible $4.375,
Series B) 7,940,250 2,493,750 0.0
-------------- -------------- ------
20,891,375 13,847,500 0.2
Automobiles &
Equipment 20,000 Ford Motor Co. (8.40% Convertible,
Series A) 1,000,000 1,935,000 0.0
Banking 75,000 California Federal Bank (10.625%) 7,500,000 7,593,750 0.1
115,000 First Nationwide Bank (11.50%) 11,500,000 11,787,500 0.2
100,000 Fourth Financial Corp. (Convertible,
Class A) 2,500,000 2,950,000 0.0
130,300 Marine Midland Banks, Inc.
(Adj. Rate, Series A) 5,219,925 5,765,775 0.1
100,000 Onbancorp, Inc. (6.75% Convertible,
Series B) 2,668,750 2,375,000 0.0
-------------- -------------- ------
29,388,675 30,472,025 0.4
Energy & Petroleum 150,000 Grant Tensor Corp. (9.75% Convertible) 1,853,375 1,987,500 0.0
13,000 +++Plains Resources, Inc.
(Convertible, Series C) 1,300,000 1,435,687 0.0
64,219 Santa Fe Energy Resources, Inc. (7%) 954,075 1,131,860 0.0
460,000 Santa Fe Energy Resources, Inc.
(Convertible, Class A) 4,082,500 4,197,500 0.1
50,000 Tenneco Inc. (Convertible, Series P) 1,475,000 2,081,250 0.0
-------------- -------------- ------
9,664,950 10,833,797 0.1
Financial Services 175,000 A/S Eksportfinans (8.70%) 4,377,500 4,221,875 0.1
Industrial 1,080,000 US Surgical Corp. (Convertible) 24,354,000 28,620,000 0.4
Natural Resources 85,000 Alumax Inc. (Convertible) 7,240,312 10,795,000 0.1
150,000 Cyprus Amax Minerals Co.
(Convertible, Series A) 9,188,313 9,262,500 0.1
20,000 Echo Bay Finance Ltd. (Convertible)
(Series A) 500,000 747,500 0.0
245,000 Freeport-McMoRan Copper and Gold Inc.
(Convertible Shares) 5,828,450 5,635,000 0.1
219,000 Freeport-McMoRan Inc.
(Convertible--Gold) 7,703,330 7,884,000 0.1
-------------- -------------- ------
30,460,405 34,324,000 0.4
Oil Service 447,200 +++Noble Drilling Corp. (Convertible) 10,745,382 10,062,000 0.1
Paper & Forest 300,000 Boise Cascade Corp.(Convertible,
Products Series G) 6,337,500 7,387,500 0.1
388,200 James River Corp. of Virginia
(9% Convertible, Series P) 6,696,450 8,540,400 0.1
-------------- -------------- ------
13,033,950 15,927,900 0.2
</TABLE>
69
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Value Percent of
COUNTRY Industries Shares Held Preferred Stocks Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
United Real Estate 500,000 Catellus Development Corp. (7.25%
States 666,000 Conv. Exchangeable, Series B) $ 25,000,000 $ 22,000,000 0.3%
(concluded) National Health Investors, Inc.
(8.50% Conv.) 16,650,000 16,150,500 0.2
700,000 Prime Retail, Inc. (10.50%) 16,712,575 14,875,000 0.2
-------------- -------------- ------
58,362,575 53,025,500 0.7
Savings Bank 619,900 Glendale Federal Savings Bank
(8.75% Convertible, Series E) 15,070,337 19,449,362 0.3
Total Preferred Stocks in the
United States 217,349,149 222,718,959 2.9
Total Investments in Preferred Stocks 255,430,944 265,391,732 3.4
<CAPTION>
Face Amount Fixed-Income Securities
<S> <S> <C> <S> <C> <C> <C>
Canada Government Canadian Government Bonds:
Obligations C$ 120,000,000 9.50% due 10/01/1998 91,871,422 91,843,526 1.2
25,000,000 8.50% due 3/01/2000 18,537,048 18,394,587 0.2
25,000,000 6.50% due 6/01/2004 16,791,181 15,473,638 0.2
-------------- -------------- ------
127,199,651 125,711,751 1.6
Oil & Related Mark Resources Inc., Convertible
Bonds:
7,250,000 7.00% due 4/15/2002 5,052,564 4,637,469 0.1
1,250,000 8.00% due 11/30/2004 943,556 887,377 0.0
14,500,000 Talisman Energy Inc.,8.50% due
12/01/2000 11,040,982 10,132,737 0.1
-------------- -------------- ------
17,037,102 15,657,583 0.2
Paper & Forest Domtar, Inc.:
Products 6,763,000 10.35% due 9/01/2006 4,014,962 4,576,015 0.1
3,500,000 10.00% due 4/15/2011 1,938,573 2,322,894 0.0
-------------- -------------- ------
5,953,535 6,898,909 0.1
Real Estate +++Olympia & York Inc.:
57,194,000 Series 1, 10.70% due 11/04/1995 29,626,733 29,182,770 0.4
34,000,000 Series 2, 11.00% due 11/04/1998 18,060,242 17,348,222 0.2
-------------- -------------- ------
47,686,975 46,530,992 0.6
Resources 67,000,000 Sheritt Gordon, Ltd., 11.00%
due 3/31/2004 48,454,704 47,811,137 0.6
Total Fixed-Income Securities
in Canada 246,331,967 242,610,372 3.1
European Government ECU 175,000,000 Government of France,8.25%
Currency Obligations due 4/25/2022 202,798,464 201,546,800 2.6
Unites
Banking 15,650,000 Banco Commercial Portuguese, Conv.
Bonds, 8.75% due 5/21/2002 21,845,827 20,995,038 0.3
2,000,000 Credit Local de France,
9.48% due 10/16/2001 (b) 1,538,042 1,384,313 0.0
-------------- -------------- ------
23,383,869 22,379,351 0.3
Industrial 1,000,000 Investor International Placements,
Conv. Bonds, 7.25% due 6/21/2001 1,001,412 1,271,928 0.0
7,000,000 SKF-AB Lyons, Conv. Bonds,
8.63% due 7/26/2002 (b) 4,907,415 4,628,932 0.1
-------------- -------------- ------
5,908,827 5,900,860 0.1
Total Fixed-Income Securities in
European Currency Units 232,091,160 229,827,011 3.0
</TABLE>
70
<PAGE>
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
Finland Government Fmk 75,000,000 Republic of Finland,
Obligations 11.00% due 1/15/1999 14,754,836 17,113,843 0.2
Total Fixed-Income Securities
in Finland 14,754,836 17,113,843 0.2
France Government Frf 675,000,000 Government of France,
Obligations 8.50% due 4/25/2023 125,049,588 127,690,666 1.6
Automobiles 5,500 Peugeot, Conv.Bonds, 2.00% 992,341 981,952 0.0
due 1/01/2001
Banking 58,000 Societe Generale, Conv. Bonds,
3.50% due 1/01/2000 7,499,838 7,788,861 0.1
13,000 Credit National, Conv. Bonds, 3.75%
due 1/01/2001 1,653,250 1,665,049 0.0
-------------- -------------- ------
9,153,088 9,453,910 0.1
Industrial 30,000 Alcatel Alsthom, Conv. Bonds,
2.50% due 1/01/2004 3,926,887 3,883,175 0.1
Insurance 28,000 Finaxa Conv. Bonds, 3.00%
due 1/01/2001 7,022,120 7,009,509 0.1
Multi-Industry 8,713 Compagnie Generale des Eaux, Conv.
Bonds, 6.00% due 1/01/1998 4,859,722 5,261,955 0.1
Total Fixed-Income Securities
in France 151,003,746 154,281,167 2.0
Germany Government DM 63,000,000 Bundesrepublic Deutscheland,
Obligations 6.75% due 4/22/2003 38,164,973 39,465,493 0.5
Treuhandanstalt:
35,000,000 7.375% due 12/02/2002 22,503,456 22,841,249 0.3
75,000,000 6.875% due 6/11/2003 44,862,188 47,331,451 0.6
400,000,000 7.50% due 9/09/2004 258,210,288 263,115,244 3.4
-------------- -------------- ------
363,740,905 372,753,437 4.8
Government 64,000,000 Baden-Wuerttemberg,
Obligations-- 6.20% due 11/22/2013 37,148,769 37,902,624 0.5
Regional 57,500,000 Freie Hansestadt Hamburg,
6.08% due 11/29/2018 33,152,404 33,678,844 0.4
165,000,000 Land Hessen, 6.00% due 11/29/2013 94,980,999 96,643,640 1.2
110,000,000 Mecklenberg Vorpommern,
6.15% due 6/16/2023 61,012,437 62,492,860 0.8
116,200,000 Nordrhein-Westfalen,
6.125% due 12/21/2018 66,517,753 68,392,441 0.9
Rheinland-Pfalz:
33,000,000 5.75% due 2/24/2014 18,324,663 18,885,952 0.2
62,000,000 6.08% due 11/29/2018 35,633,056 36,306,343 0.5
50,000,000 Sachsen-Anhalt, 6% due 1/10/2014 28,632,994 28,897,376 0.4
-------------- -------------- ------
375,403,075 383,200,080 4.9
Banking 2,310,000 Commerzbank AG, Floating Rate
Convertible Bonds, 2.00% due
6/15/2001 (b) 1,556,456 2,086,749 0.0
Total Fixed-Income Securities
in Germany 740,700,436 758,040,266 9.7
Ireland Industrial IrP 8,046,277 CRH Capital Corp., Conv. Bonds,
6.50% due 4/30/2003 15,808,558 16,806,339 0.2
Total Fixed-Income Securities
in Ireland 15,808,558 16,806,339 0.2
Italy Telecom- Softe SA-LUX:
munications Lit 10,500,000,000 Convertible Bonds, 4.25%
due 7/30/1998 7,317,044 7,610,674 0.1
16,760,000,000 8.75% due 3/24/1997 10,756,360 9,969,057 0.1
Total Fixed-Income Securities
in Italy 18,073,404 17,579,731 0.2
Japan Automobiles YEN 400,000,000 Toyota Motor Corp., Convertible
& Equipment Bonds, 1.20% due 1/28/1998 2,477,431 4,583,462 0.0
Beverages 1,282,500,000 Hokkaido Coca-Cola Bottling Co., Ltd.,
Conv. Bonds, 0.90% due 6/30/1995 13,057,275 13,040,802 0.2
Industrial 988,000,000 Matsushita Electric Works, Conv.
Bonds, 2.70% due 5/31/2002 9,691,544 11,525,137 0.2
</TABLE>
71
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Value Percent of
COUNTRY Industries Face Amount Fixed-Income Securities Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Japan Pharma- YEN 2,850,000,000 Glaxo Holdings PLC, Conv. Bonds,
(concluded) ceutical 4.30% due 9/28/1998 $ 25,735,735 $ 29,273,769 0.4%
Transportation 950,000,000 Hankyu Corp., Convertible Bonds,
1.25% due 9/30/1998 8,674,953 8,899,814 0.1
Total Fixed-Income Securities
in Japan 59,636,938 67,322,984 0.9
New Utilities-- NZ$ 2,000,000 Natural Gas Corp. Holdings,
Zealand Gas Convertible Bonds, 10.50% due
10/14/1997 1,186,318 1,661,040 0.0
Total Fixed-Income Securities
in New Zealand 1,186,318 1,661,040 0.0
South Food President Enterprises (b):
Korea KW 800,000 8.30% due 7/22/2001 796,158 834,000 0.0
2,000,000 +++++++8.30% due 7/22/2001 1,990,454 2,085,000 0.0
Total Fixed-Income Securities
in South Korea 2,786,612 2,919,000 0.0
Spain Government Government of Spain:
Obligations Pta 14,500,000,000 10.30% due 6/15/2002 108,997,661 109,696,256 1.4
12,000,000,000 10.90% due 8/30/2003 91,501,238 93,407,839 1.2
Total Fixed-Income Securities
in Spain 200,498,899 203,104,095 2.6
Switzerland Financial Chf 4,010,000 Chrysler Financial Corp.,
Services 5.75% due 6/18/1996 1,914,011 3,208,639 0.1
Hospital 1,500,000 American Medical International, Inc.,
Management 5.00% due 3/18/1996 493,386 1,161,425 0.0
Industrial 1,401,000 Ciba-Geigy AG, Convertible Bonds,
2.00% due 8/09/1998 1,178,587 1,332,958 0.0
Newspaper/Publishing 3,020,000 News International, PLC, 5.375%
due 4/30/1996 1,115,703 2,386,425 0.0
Total Fixed-Income Securities
in Switzerland 4,701,687 8,089,447 0.1
United Government Pound 37,500,000 United Kingdom Treasury Gilt,
Kingdom Obligations Sterling 8.00% due 6/10/2003 56,327,454 58,184,857 0.7
Building 3,250,000 Redland Capital PLC, Convertible
Materials Bonds, 7.25% due 1/28/2002 5,382,804 5,199,194 0.1
1,000,000 RMC Capital Ltd., Convertible Bonds,
8.75% due 5/31/2006 1,755,430 2,105,796 0.0
-------------- -------------- ------
7,138,234 7,304,990 0.2
Financial 3,550,000 SG Warburg Group, Convertible Bonds,
Services 6.50% due 8/04/2008 5,416,350 5,186,543 0.1
3,500,000 TransAtlantic Holdings, PLC,
Convertible Bonds, 5.50%
due 4/30/2009 4,521,101 4,656,421 0.0
-------------- -------------- ------
9,937,451 9,842,964 0.1
Food 7,750,000 Tate & Lyle International,
Convertible Bonds, 5.75% due
3/21/2001 10,092,554 10,563,668 0.1
Industrial 5,250,000 Hanson PLC, Convertible Bonds,
9.50% due 1/31/2006 9,953,589 8,827,203 0.1
Oil & Related 29,990,000 Elf Enterprises Finance PLC,
Convertible Bonds, 8.75%
due 6/27/2006 48,109,352 46,875,060 0.6
Real Estate 500,000 Land Securities PLC, Convertible
Investment Trust Bonds, 6.75% due 12/31/2002 679,603 783,552 0.0
Retail 8,350,000 Sainsbury (J.) PLC, Convertible
Bonds, 8.50% due 11/19/2005 16,072,715 17,106,328 0.2
Multi-Industry 4,875,000 English China Clays PLC, Convertible
Bonds, 6.50% due 9/30/2003 8,364,034 7,639,632 0.1
Total Fixed-Income Securities
in the United Kingdom 166,674,986 167,128,254 2.1
</TABLE>
72
<PAGE>
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
United Aerospace Rohr Industries, Inc.:
States US$ 7,500,000 11.625% due 5/15/2003 7,500,000 7,612,500 0.1
5,500,000 Convertible Bonds, 7.75%
due 5/15/2004 5,500,000 6,105,000 0.1
10,075,000 Sequa Corp., 9.625% due 10/15/1999 9,874,312 9,697,187 0.1
-------------- -------------- ------
22,874,312 23,414,687 0.3
Airlines Delta Airlines, Inc.:
8,000,000 Series A2, 9.20% due 9/23/2014 7,370,000 6,920,000 0.1
8,000,000 10.06% due 1/02/2016 8,005,000 7,400,000 0.1
USAir Inc.:
11,000,000 10.00% due 7/01/2003 8,529,375 6,297,500 0.1
4,525,207 9.33% due 1/01/2006 4,412,529 3,755,921 0.0
18,300,000 10.375% due 3/01/2013 16,754,875 15,234,750 0.2
7,500,000 USAir Pass Thru, 9.625% due
9/01/2003 (d) 7,495,625 6,243,750 0.1
-------------- -------------- ------
52,567,404 45,851,921 0.6
Banking 27,000,000 Crossland Federal Savings Bank,
9.00% due 9/01/2003 27,678,000 25,447,500 0.3
21,400,000 First Federal Financial Corporation,
11.75% due 10/01/2004 21,401,250 21,400,000 0.3
3,000,000 Roosevelt Financial Group, Inc.,
9.50% due 8/01/2002 3,000,000 3,052,500 0.0
-------------- -------------- ------
52,079,250 49,900,000 0.6
Broadcasting/ 15,550,000 +++Continental Cablevision, Inc.,
Cable 9.50% due 8/01/2013 14,092,188 13,956,125 0.2
55,061,000 Marcus Cable Co. L.P.,
13.50% due 8/01/2004 (b) 29,113,843 29,319,982 0.4
-------------- -------------- ------
43,206,031 43,276,107 0.6
Building 20,300,000 DalTile International, Inc.,
Materials 11.955% due 7/15/1998 (b) 12,758,069 12,636,750 0.2
Computers 25,000,000 Dell Computer Corp., 11.00%
due 8/15/2000 25,077,500 26,125,000 0.3
Financial 5,000,000 Card Establishment Services, Inc.,
Services 10.00% due 10/01/2003 4,812,500 4,712,500 0.1
Lomas Mortgage USA, Inc.:
11,000,000 9.75% due 10/01/1997 10,465,250 10,120,000 0.1
7,500,000 10.25% due 10/01/2002 7,000,000 6,525,000 0.1
3,851,000 US Trails Senior Secured Notes,
12.00% due 7/15/1998 3,150,185 2,714,955 0.0
-------------- -------------- ------
25,427,935 24,072,455 0.3
Governments 130,000,000 Banco Nacional (BNCE),
& Agencies--US$ 7.25% due 2/02/2004 112,951,825 105,625,000 1.3
Denominated 25,000,000 Brazil Exit Bonds, 6.00% due
9/15/2013 14,465,811 12,625,000 0.2
Republic of Argentina:
120,000,000 Discount Notes, 5.812%
due 3/31/2023 91,349,500 82,200,000 1.1
12,500,000 Global Bonds, 8.375%
due 12/20/2003 11,456,250 10,000,000 0.1
241,000,000 Par Bonds, 4.25% due 3/31/2023 128,770,375 112,667,500 1.4
38,220,000 Republic of Brazil,
4.312% due 1/01/2001 (d) 29,874,075 31,292,625 0.4
United Mexican States:
10,000,000 8.50% due 9/15/2002 9,420,000 9,109,300 0.1
65,000,000 Discount Notes, Series A, 6.687%
due 12/31/2019 58,148,000 55,412,500 0.7
35,000,000 Discount Notes, Series B,
4.312% due 12/31/2019 30,062,500 29,793,750 0.4
United Mexican States, Rights:
99,996,000 (Series A) 0 0 0.0
53,845,000 (Series B) 0 0 0.0
60,000,000 US Treasury Notes, 7.50%
due 11/15/2001 61,700,781 59,503,140 0.8
-------------- -------------- ------
548,199,117 508,228,815 6.5
</TABLE>
73
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Value Percent of
COUNTRY Industries Face Amount Fixed-Income Securities Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
United Health Care US$ 7,200,000 Cetus (Chiron) Corp., Convertible
States Bonds, 5.25% due 5/21/2002 $ 5,220,250 $ 5,976,000 0.1%
(continued) 8,500,000 Mediq/PRN Senior Notes,
11.125% due 7/01/1999 8,845,000 7,713,750 0.1
24,000,000 Paracelsus Healthcare Corp.,
9.875% due 10/15/2003 23,971,875 22,680,000 0.3
5,000,000 Regency Health Services, Inc.,
Convertible Bonds, 6.50%
due 7/15/2003 4,887,500 5,300,000 0.1
8,500 +++Total Renal Care Inc., 12.00%
due 8/15/2004 (with Warrants) (b) 6,060,840 6,247,500 0.1
-------------- -------------- ------
48,985,465 47,917,250 0.7
Homebuilding & 27,950,000 Baldwin Co., 10.375% due 8/01/2003 27,692,438 19,285,500 0.3
Construction 40,000,000 Beazer Homes USA, Inc.,
9.00% due 3/01/2004 38,250,750 33,600,000 0.4
29,500,000 K. Hovnanian Enterprises,
9.75% due 6/01/2005 28,874,300 22,125,000 0.3
10,000,000 Kaufman & Broad Home Corporation,
9.375% due 5/01/2003 9,137,500 9,000,000 0.1
MDC Holdings Inc.:
1,100,000 6.642% due 4/01/1998 914,375 918,500 0.0
27,000,000 11.125% due 12/15/2003 26,424,000 23,152,500 0.3
28,250,000 Presley Companies, Senior Notes,
12.50% due 7/01/2001 28,190,312 26,696,250 0.3
Webb (Del E.) Corp.:
12,000,000 9.75% due 3/01/2003 11,940,000 10,500,000 0.1
17,850,000 9.00% due 2/15/2006 15,222,475 14,369,250 0.2
-------------- -------------- ------
186,646,150 159,647,000 2.0
Hospital 3,087,500 American Medical International,
Management Inc., 6.50% due 5/30/1997 2,578,063 3,002,594 0.0
1,000,000 Novacare, Inc., Convertible Bonds,
5.50% due 1/15/2000 857,500 810,000 0.0
-------------- -------------- ------
3,435,563 3,812,594 0.0
Industrial 47,000,000 Allison Engine, Inc.,
10.00% due 12/01/2003 47,150,625 45,237,500 0.6
7,370,000 Boise Cascade Corp., 9.45%
due 11/01/2009 8,024,088 7,167,325 0.1
4,000,000 Congoleum Corp., 9.00% due 2/01/2001 4,000,000 3,710,000 0.0
20,000,000 Crown Packaging Ltd.,
10.75% due 11/01/2000 20,000,000 20,100,000 0.3
19,000,000 Easco Corp., 10.00% due 3/15/2001 19,005,000 18,050,000 0.2
19,000,000 Envirotest Systems Corp.,
9.125% due 3/15/2001 18,412,210 17,290,000 0.2
27,250,000 Genmar Holdings, Inc., 13.50%
due 7/15/2001 27,127,100 26,568,750 0.3
3,500,000 Hartmarx Corp., 10.875% due 1/15/2002 3,476,270 3,202,500 0.0
10,000,000 +++Merisel, Inc., 12.50% due 12/31/2004 10,000,000 9,987,500 0.1
14,000,000 OSI Specialities Corp.,
9.25% due 10/01/2003 14,000,000 12,810,000 0.2
Owens-Illinois, Inc.:
3,000,000 10.50% due 6/15/2002 3,051,000 3,022,500 0.0
10,000,000 9.75% due 8/15/2004 9,740,750 9,625,000 0.1
30,500,000 Plastic Specialties & Technology,
Inc., 11.25% due 12/01/2003 30,540,000 27,297,500 0.4
-------------- -------------- ------
214,527,043 204,068,575 2.5
Insurance 7,750,000 Horace Mann Educators, Inc.,
Convertible Bonds, 4.00%
due 12/01/1999 7,682,500 7,459,375 0.1
27,500,000 +++Mutual Life Insurance Co.,
11.25% due 8/15/2024 15,970,692 15,812,500 0.2
12,500,000 Nacolah Holding Corp., 9.50%
due 12/01/2003 12,500,000 10,937,500 0.1
-------------- -------------- ------
36,153,192 34,209,375 0.4
</TABLE>
74
<PAGE>
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
Oil & Related +++Columbia Gas System, Inc.:
2,000,000 9.00% due 8/01/1994 2,326,250 2,400,000 0.0
6,500,000 7.50% due 6/01/1997 6,808,750 7,280,000 0.1
4,700,000 10.25% due 8/01/2011 5,340,375 6,039,500 0.1
10,000,000 10.50% due 6/01/2012 11,225,000 12,750,000 0.2
5,000,000 10.15% due 11/01/2013 5,562,500 6,175,000 0.1
4,000,000 9.50% due 10/10/2019 4,310,000 4,940,000 0.1
9,500,000 Gerrity Oil & Gas Corp.,
11.75% due 7/15/2004 9,500,000 8,858,750 0.1
8,000,000 Noble Drilling Corp.,
9.25% due 10/01/2003 8,000,000 7,620,000 0.1
PDV America, Inc.:
35,000,000 7.25% due 8/01/1998 34,856,150 31,762,500 0.4
10,000,000 7.75% due 8/01/2000 10,062,500 8,775,000 0.1
26,362,500 +++++++Presidio Oil Co., 11.50%
due 9/15/2000 26,963,000 24,912,562 0.3
10,000,000 Santa Fe Energy Resources, Inc.,
11.00% due 5/15/2004 9,926,600 10,150,000 0.1
36,301,000 Transtexas Gas Corp.,10.50%
due 9/01/2000 36,300,233 35,030,465 0.4
6,000,000 USX-Marathon Oil Co., 7.00%
due 6/15/2017 5,650,000 5,460,000 0.1
-------------- -------------- ------
176,831,358 172,153,777 2.2
Paper & 9,000,000 Stone Consolidated Corp.,
Forest Products 10.25% due 12/15/2000 9,000,000 8,853,750 0.1
5,000,000 Stone Container Corp.,9.875%
due 2/01/2001 4,727,500 4,687,500 0.1
-------------- -------------- ------
13,727,500 13,541,250 0.2
Real Estate & 22,500,000 +++++++Alexander Haagen Properties Inc.,
Real Estate Exchangeable Debentures,
Investment 7.25% due 12/27/2003 22,500,000 20,587,500 0.3
Trusts 7,000,000 Centerpoint Properties Corp., Conv.
Bonds, 8.22% due 1/15/2004 7,000,000 7,070,000 0.1
30,000,000 First Union Real Estate,
8.875% due 10/01/2003 29,756,100 24,900,000 0.3
25,000,000 +++++++First Washington Realty,
8.25% due 6/26/1999 25,000,000 23,375,000 0.3
6,500,000 LTC Properties, Inc., Conv. Bonds,
9.75% due 7/01/2004 6,500,000 8,222,500 0.1
12,500,000 Liberty Property Trust, Conv. Bonds,
8.00% due 7/01/2001 12,500,000 11,625,000 0.2
27,000,000 +++++++Malan Realty Investors, Inc., Conv.
Bonds, 8.50% due 7/01/2003 27,000,000 24,975,000 0.3
Meditrust, Conv. Bonds:
6,000,000 7.00% due 3/01/1998 6,035,000 5,880,000 0.1
28,500,000 7.50% due 3/01/2001 28,500,000 26,790,000 0.3
5,000,000 Mid-Atlantic Realty Trust, Conv.
Bonds, 7.625% due 9/15/2003 4,875,000 4,500,000 0.0
5,000,000 National Health Investors, Inc.,
Conv. Bonds, 7.375% due 4/01/1998 5,125,000 5,000,000 0.0
22,000,000 Nationwide Health Properties Inc.,
Conv. Bonds, 6.25% due 1/01/1999 21,950,000 20,680,000 0.3
9,545,000 Phoenix Home Life-Mutual Insurance
Co., 8.00% due 11/25/2023 9,545,000 8,256,425 0.1
24,244,340 RTC Commercial Mortgage, Class E,
8.25% due 12/25/2020 (d) 23,873,099 20,850,133 0.3
5,500,000 Sizeler Property Investors, Inc.,
Conv. Bonds, 8.00% due 7/15/2003 5,505,000 5,060,000 0.1
23,336,370 Vista Properties, Inc., 13.75%
due 10/31/2001 (c) 11,748,460 7,934,366 0.1
-------------- -------------- ------
247,412,659 225,705,924 2.9
Resources 37,500,000 Freeport-McMoRan Resources,
8.75% due 2/15/2004 36,378,750 34,125,000 0.4
Retail 11,000,000 Best Buy Company Inc.,
8.625% due 10/01/2000 11,015,000 10,477,500 0.2
12,000,000 Price Club Co., Convertible Bonds,
5.50% due 2/28/2012 11,213,250 10,290,000 0.1
17,500,000 The Vons Companies, Inc., 9.625%
due 4/01/2002 18,448,750 17,368,750 0.2
10,500,000 Waban, Inc., 11.00% due 5/15/2004 10,487,500 10,171,875 0.1
-------------- -------------- ------
51,164,500 48,308,125 0.6
</TABLE>
75
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Value Percent of
COUNTRY Industries Face Amount Fixed-Income Securities Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
United Supermarkets US$ 39,650,000 Eagle Food Centers Inc., 8.625%
States due 4/15/2000 $ 36,095,837 $ 22,402,250 0.3%
(concluded) 40,000,000 Penn Traffic Co., 8.625%
due 12/15/2003 39,876,400 35,000,000 0.5
17,500,000 Pueblo Xtra International Inc.,
9.50% due 8/01/2003 16,855,125 14,875,000 0.2
11,000,000 Ralphs Grocery Company, 10.25%
due 7/15/2002 11,235,000 10,670,000 0.1
-------------- -------------- ------
104,062,362 82,947,250 1.1
Tele- 26,000,000 Allnet Communication Services,
communications 9.00% due 5/15/2003 25,763,225 25,220,000 0.3
28,500,000 Diamond Cable Communications, 13.251%
due 9/30/2004 (b) 15,082,612 14,891,250 0.2
20,000,000 MFS Communications Corp., Inc.,
9.374% due 1/15/2004 (b) 12,010,457 11,775,000 0.2
Nextel Communications Inc. (b):
3,000,000 11.45% due 9/01/2003 1,931,500 1,507,500 0.0
33,500,000 9.75% due 8/15/2004 20,177,505 14,823,750 0.2
10,875,000 Paging Network, Inc., 8.875%
due 2/01/2006 9,787,812 9,189,375 0.1
-------------- -------------- ------
84,753,111 77,406,875 1.0
Textiles 12,500,000 Consoltex Group, Inc., 11.00%
due 10/01/2003 12,530,000 11,500,000 0.1
23,500,000 Salant Corp., Secured, 10.50%
due 12/31/1998 23,030,000 22,442,500 0.3
18,250,000 Texfi Industries, Inc., 8.75%
due 8/01/1999 17,930,300 14,052,500 0.2
-------------- -------------- ------
53,490,300 47,995,000 0.6
Transportation 22,000,000 OMI Corp., 10.25% due 11/01/2003 21,910,000 19,360,000 0.3
Utilities-- CTC Mansfield Funding Corp.:
Electric 17,000,000 10.25% due 3/30/2003 17,580,000 15,980,000 0.2
12,000,000 11.125% due 9/30/2016 12,820,000 11,160,000 0.1
40,000,000 California Energy Co., Inc., 10.246%
due 1/15/2004 (b) 30,674,126 28,000,000 0.4
8,000,000 Calpine Corp., Inc., 9.25%
due 2/01/2004 7,277,500 6,980,000 0.1
Cleveland Electric Illuminating
Company Inc., First Mortgage:
5,000,000 9.30% due 7/26/1999 5,437,500 4,800,000 0.1
12,500,000 9.25% due 7/29/1999 13,562,500 11,968,750 0.2
3,000,000 9.05% due 8/15/2001 3,093,750 2,790,000 0.0
7,500,000 7.625% due 8/01/2002 7,462,500 6,300,000 0.1
5,000,000 7.375% due 6/01/2003 4,700,000 4,075,000 0.0
+++EUA Power Corp.:
1,000,000 Series B, 17.50% due 5/15/1993 475,000 60,000 0.0
3,157,600 Series C, 17.50% due 5/15/1993 1,915,790 189,456 0.0
+++El Paso Funding:
4,050,000 9.20% due 7/02/1997 3,286,000 2,065,500 0.0
25,000,000 10.375% due 1/02/2011 21,170,000 12,750,000 0.2
62,040,000 10.75% due 4/01/2013 52,996,150 31,640,400 0.4
6,000,000 Long Island Lighting Co., 7.90%
due 7/15/2008 5,412,060 5,130,000 0.1
Public Service Company of New Mexico:
19,800,000 10.30% due 1/15/2014 19,466,500 18,315,000 0.2
18,000,000 10.15% due 1/15/2016 17,128,125 16,470,000 0.2
23,000,000 PS of New Mexico, First PV Funding,
10.25% due 10/01/2012 23,000,000 21,217,500 0.3
Toledo Edison Co.:
2,000,000 9.30% due 4/01/1998 2,130,000 1,945,000 0.0
15,425,000 7.25% due 8/01/1999 15,425,000 13,612,562 0.2
3,000,000 9.50% due 4/01/2001 3,221,250 2,835,000 0.0
</TABLE>
76
<PAGE>
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
2,000,000 7.91% due 4/01/2003 1,992,500 1,680,000 0.0
-------------- -------------- ------
270,226,251 219,964,168 2.8
Total Fixed-Income Securities
in the United States 2,331,893,822 2,124,667,898 27.1
Foreign Banking 21,000,000 Banco de Galicia, 9.00%
Issuers-- due 11/01/2003 20,913,960 16,983,750 0.2
US$ De- Banco Rio de la Plata:
nominated 52,000,000 (Class 3), 8.50% due 7/15/1998 52,444,125 48,262,500 0.6
40,000,000 8.75% due 12/15/2003 35,628,125 31,750,000 0.4
-------------- -------------- ------
108,986,210 96,996,250 1.2
Building & 41,100,000 Tarkett International, 9.00%
Materials due 3/01/2002 39,413,750 37,606,500 0.5
Hotel/Leisure 23,500,000 +++++++Four Seasons Hotel, Inc., 9.125%
due 7/01/2000 23,401,875 21,855,000 0.3
Industrial 8,250,000 Burns, Philp & Company Ltd., Conv.
Bonds, 5.50% due 4/30/2004 7,249,450 6,930,000 0.1
24,945,000 +++++++Ciba-Geigy Corp., Convertible Bonds,
6.25% due 3/15/2016 25,632,050 23,011,762 0.3
7,945,000 Ciba-Geigy Corp., 5.50%
due 10/28/1998 (Warrants) (a) 9,418,275 8,540,875 0.1
1,330,000 CRH Capital Corp., Convertible Bonds,
5.75% due 4/30/2005 1,602,550 1,569,400 0.0
2,470,000 HIH Capital Ltd., Convertible Bonds
(Bearer), 7.50% due 9/25/2006 2,059,800 1,624,025 0.0
5,750,000 Hanson America Convertible Bonds,
2.39% due 3/01/2001 4,388,842 4,197,500 0.1
77,000,000 International Semi-Tech
Microelectronics Inc., 11.466% due
8/15/2003 (b) 38,729,137 34,650,000 0.5
4,580,000 Johnson Electric Holdings Ltd.,
Convertible Bonds, 4.50%
due 11/05/2000 4,298,779 4,557,100 0.1
20,360,000 Lend Lease Finance Corp., Ltd.,
Convertible Bonds, 4.75% due 6/01/2003 22,511,980 21,632,500 0.3
9,000,000 Methanex Corp., 8.875% due 11/15/2001 8,956,250 8,685,000 0.1
2,000,000 P.T. Indorayon, Convertible Bonds,
5.50% due 10/01/2002 2,363,125 2,450,000 0.0
1,000,000 Siemens Corp. (with Warrants),
8.00% due 6/24/2002 (a) 1,318,750 1,267,500 0.0
2,220,000 Tung Ho Steel Enterprise, Convertible
Bonds, 4.00% due 7/26/2001 2,243,700 2,464,200 0.0
14,000,000 Wilrig AS, 11.25% due 3/15/2004 14,000,000 12,320,000 0.2
-------------- -------------- ------
144,772,688 133,899,862 1.8
Multi-Industry 5,875,000 Veba International Finance (Warrants),
6.00% due 4/06/2000 (a) 7,083,300 9,032,812 0.1
Oil & Related 6,500,000 +++++++Petrolera Argentina San Jorge S.A.,
11.00% due 2/09/1998 6,278,750 6,607,500 0.1
2,750,000 Ssangyong Oil Corp., 3.75%
due 12/31/2008 2,929,812 3,588,750 0.0
-------------- -------------- ------
9,208,562 10,196,250 0.1
Resources 26,000,000 Sherritt Ltd., 9.75% due 4/01/2003 26,124,375 25,090,000 0.3
34,000,000 Sifto Canada, Inc., 8.50% due
7/15/2000 33,875,187 31,110,000 0.4
-------------- -------------- ------
59,999,562 56,200,000 0.7
Textile 10,000,000 Dominion Textile (USA) Inc.,
Senior Notes, 8.875% due 11/01/2003 9,950,800 9,275,000 0.1
Transportation 8,500,000 Eletson Holdings Inc., 9.25%
due 11/15/2003 8,537,500 7,713,750 0.1
Total Foreign Issuers--
US$ Denominated 411,354,247 382,775,424 4.9
Total Investments in
Fixed-Income Securities 4,597,497,616 4,393,926,871 56.1
</TABLE>
77
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<CAPTION>
Value Percent of
COUNTRY Face Amount Short-Term Securities Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
United Commercial US$ 91,738,000 General Electric Capital Corp.,
States Paper* 4.72% due 11/01/1994 $ 91,738,000 $ 91,738,000 1.2%
Total Investments in Commercial Paper 91,738,000 91,738,000 1.2
US Government & 50,000,000 Federal National Mortgage Association,
Agency Obligations 4.88% due 11/17/1994 49,891,556 49,891,556 0.6
Total Investments in US Government &
Agency Obligations 49,891,556 49,891,556 0.6
Total Investments in
Short-Term Securities 141,629,556 141,629,556 1.8
Total Investments $7,701,777,115 7,770,824,773 99.3
==============
Unrealized Depreciation on Forward Foreign Exchange Contracts** (35,886,925) (0.4)
Other Assets Less Liabilities 92,413,194 1.1
-------------- ------
Net Assets $7,827,351,042 100.0%
============== ======
<FN>
*Commercial Paper and US Government & Agency Obligations are traded
on a discount basis; the interest rates shown are the discount rates paid at
the time of purchase by the Fund.
**Forward foreign exchange contracts as of October 31, 1994 were as follows:
Unrealized
Foreign Expiration Appreciation
Currency Sold Date (Depreciation)
Chf 15,000,000 November 1994 $ (221,787)
Chf 40,000,000 December 1994 (844,087)
DM 466,000,000 November 1994 (8,689,835)
DM 727,000,000 December 1994 (9,410,926)
DM 90,000,000 January 1995 219,481
Dkr 7,000,000 November 1994 (31,297)
ECU 25,000,000 November 1994 (847,150)
ECU 25,000,000 December 1994 (710,075)
ECU 100,000,000 January 1995 317,840
Pta 5,500,000,000 November 1994 (1,000,119)
Pta 10,000,000,000 December 1994 (1,811,334)
Pta 9,500,000,000 January 1995 18,580
Frf 174,000,000 November 1994 (823,345)
Frf 420,000,000 December 1994 (2,178,092)
Frf 180,000,000 January 1995 (10,731)
Frf 140,000,000 February 1995 133,533
Pound Sterling 25,000,000 November 1994 (1,133,275)
Pound Sterling 20,000,000 December 1994 (1,008,640)
Pound Sterling 51,000,000 January 1995 (563,977)
YEN 32,000,000,000 December 1994 (5,480,366)
Nlg 63,000,000 November 1994 (1,097,777)
Nlg 55,000,000 December 1994 (963,816)
Nlg 68,000,000 January 1995 250,270
Total (US$ Commitment--$2,061,915,619) $(35,886,925)
------------
Total Unrealized Depreciation--Net On
Forward Foreign Exchange Contracts $(35,886,925)
============
(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.
(d)Subject to principal paydowns as a result of prepayments or refinancings
of the underlying mortgage instruments. As a result, the average life may be
less than the original maturity.
(e)Name changed from Crossland Federal Savings Bank.
++American Depositary Receipt (ADR).
++++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:
<CAPTION>
Net Share Net Dividend
Industry Affiliate Activity Cost Income
<S> <S> <C> <C> <C>
Retail Stores Buttrey Food & Drug -- -- --
Stores Co.
Retail Stores Filene's Basement Corp. 200,000 $1,890,625 --
+++Non-income producing security.
+++++++Restricted securities as to resale. The value of the Fund's investment in restricted
securities was approximately $158,763,000, representing 2.0% of net assets.
<CAPTION>
Acquisition Value
Issue Date Cost (Note 1a)
<S> <C> <C> <C>
Alexander Haagan Properties
Inc., Exchangeable Debentures,
7.25% due 12/27/2003 12/27/1993 $ 22,500,000 $ 20,587,500
AMR Corp. (Convertible $3.00) 6/21/1993 5,065,500 4,150,000
Ciba-Geigy Corp., Convertible
Bonds, 6.25% due 3/15/2016 3/23/1993 25,632,050 23,011,762
First Washington Realty,
8.25% due 6/26/1999 6/27/1994 25,000,000 23,375,000
Four Seasons Hotel, Inc.,
9.125% due 7/01/2000 6/23/1993 23,401,875 21,855,000
Malan Realty Investors, Inc.,
Convertible Bonds,
8.50% due7/01/2003 6/24/1994 27,000,000 24,975,000
Petrolera Argentina San Jorge S.A.,
11% due 2/09/1998 1/29/1993 6,278,750 6,607,500
President Enterprises, 8.30%
due 7/22/2001 7/06/1994 1,990,454 2,085,000
</TABLE>
78
<PAGE>
[FN]
(b) The interest rate shown represents the yield-to-maturity on this
zero coupon issue.
(c) Represents a pay-in-kind security.
<TABLE>
<S> <C> <C> <C>
Presidio Oil Co., 11.50% due 9/15/2000 8/03/1993 26,963,000 24,912,562
UAL Corp., (6.25% Convertible) 2/23/1993 7,885,625 7,203,750
------------ ------------
$171,717,254 $158,763,074
============ ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of October 31, 1994
<S> <C> <C>
Assets: Investments, at value (identified cost--$7,701,777,115) (Note 1a) $7,770,824,773
Cash 2,123,122
Foreign cash (Note 1c) 228,878
Receivables:
Interest $ 118,023,952
Securities sold 63,997,769
Capital shares sold 33,964,220
Dividends 8,047,941 224,033,882
--------------
Prepaid registration fees and other assets (Note 1h) 173,328
--------------
Total assets 7,997,383,983
--------------
Liabilities: Unrealized depreciation on forward foreign exchange contracts (Note 1c) 35,886,925
Payables:
Securities purchased 100,798,857
Capital shares redeemed 18,658,959
Distributor (Note 2) 5,475,841
Investment adviser (Note 2) 4,628,672 129,562,329
--------------
Accrued expenses and other liabilities 4,583,687
--------------
Total Liabilities 170,032,941
--------------
Net Assets: Net assets $7,827,351,042
==============
Net Assets Class A Shares of Common Stock, $0.10 par value, 200,000,000 shares authorized $ 10,386,062
Consist of: Class B Shares of Common Stock, $0.10 par value, 900,000,000 shares authorized 50,026,128
Class C Shares of Common Stock, $0.10 par value, 200,000,000 shares authorized 56,902
Class D Shares of Common Stock, $0.10 par value, 900,000,000 shares authorized 37,990
Paid-in capital in excess of par 7,612,200,596
Undistributed investment income--net 93,144,339
Undistributed realized capital gains and foreign currency transactions--net 25,491,311
Unrealized appreciation on investments and foreign currency transactions--net 36,007,714
--------------
Net assets $7,827,351,042
==============
Net Asset Class A--Based on net assets of $1,357,905,506 and 103,860,623 shares outstanding $ 13.07
Value: ==============
Class B--Based on net assets of $6,457,130,497 and 500,261,282 shares outstanding $ 12.91
==============
Class C--Based on net assets of $7,347,309 and 569,017 shares outstanding $ 12.91
==============
Class D--Based on net assets of $4,967,730 and 379,903 shares outstanding $ 13.08
==============
See Notes to Financial Statements.
</TABLE>
79
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended October 31, 1994
<S> <S> <C> <C>
Investment Interest and discount earned $ 308,032,977
Income Dividends (net of $3,302,212 foreign withholding tax) 73,919,529
(Notes 1f Other 218,581
& 1g): --------------
Total income 382,171,087
--------------
Expenses: Distribution fees--Class B (Note 2) 57,576,826
Investment advisory fees (Note 2) 49,037,363
Transfer agent fees--Class B (Note 2) 5,917,129
Custodian fees 2,579,126
Registration fees (Note 1h) 1,957,917
Transfer agent fees--Class A (Note 2) 1,038,346
Amortization of organization expenses (Note 1h) 984,686
Printing and shareholder reports 642,909
Accounting services (Note 2) 570,246
Professional fees 121,645
Directors' fees and expenses 35,499
Pricing fees 16,590
Distribution fees--Class C (Note 2) 1,216
Transfer agent fees--Class C (Note 2) 419
Transfer agent fees--Class D (Note 2) 298
Account maintenance fees--Class D (Note 2) 216
Other 35,336
--------------
Total expenses 120,515,767
--------------
Investment income--net 261,655,320
--------------
Realized & Realized gain (loss) from:
Unrealized Investments--net $ 186,774,367
Gain (Loss) Foreign currency transactions--net (159,324,097) 27,450,270
on Invest- --------------
ments & Change in unrealized appreciation/depreciation on:
Foreign Investments--net (198,866,445)
Currency Foreign currency transactions--net (46,111,336) (244,977,781)
Transactions -------------- --------------
- --Net (Notes Net realized and unrealized loss on investments and foreign currency transactions (217,527,511)
1c, 1g & 3): --------------
Net Increase in Net Assets Resulting from Operations $ 44,127,809
==============
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended October 31,
Increase (Decrease) in Net Assets: 1994 1993
<S> <S> <C> <C>
Operations: Investment income--net $ 261,655,320 $ 78,569,836
Realized gain on investments and foreign currency transactions--net 27,450,270 96,098,223
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net (244,977,781) 303,533,099
-------------- --------------
Net increase in net assets resulting from operations 44,127,809 478,201,158
-------------- --------------
</TABLE>
80
<PAGE>
<TABLE>
<S> <S> <C> <C>
Dividends & Investment income--net:
Distributions Class A (42,294,885) (21,579,231)
to Class B (157,338,890) (78,516,167)
Shareholders Realized gain on investments--net:
(Note 1i): Class A (16,636,230) (2,640,570)
Class B (80,810,426) (10,640,849)
-------------- --------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (297,080,431) (113,376,817)
-------------- --------------
Capital Share Net increase in net assets derived from capital share transactions 2,862,952,855 3,647,738,774
Transactions -------------- --------------
(Note 4):
Net Assets: Total increase in net assets 2,610,000,233 4,012,563,115
Beginning of year 5,217,350,809 1,204,787,694
-------------- --------------
End of year* $7,827,351,042 $5,217,350,809
============== ==============
<FN>
*Undistributed investment income--net $ 93,144,339 $ 31,215,711
============== ==============
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. Class A
For the Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1994 1993 1992 1991 1990
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 13.52 $ 11.92 $ 12.16 $ 10.37 $ 10.79
Operating ---------- --------- --------- --------- ---------
Performance: Investment income--net .60 .39 .36 .55 .60
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net (.31) 2.14 .89 2.24 (.16)
---------- --------- --------- --------- ---------
Total from investment operations .29 2.53 1.25 2.79 .44
---------- --------- --------- --------- ---------
Less dividends and distributions:
Investment income--net (.51) (.81) (.89) (.45) (.66)
Realized gain on investments--net (.23) (.12) (.60) (.55) (.20)
---------- --------- --------- --------- ---------
Total dividends and distributions (.74) (.93) (1.49) (1.00) (.86)
---------- --------- --------- --------- ---------
Net asset value, end of year $ 13.07 $ 13.52 $ 11.92 $ 12.16 $ 10.37
========== ========= ========= ========= =========
Total Based on net asset value per share 2.14% 22.61% 11.78% 28.89% 3.91%
Investment ========== ========= ========= ========= =========
Return:*
Ratios to Average Expenses .89% .93% 1.07% 1.29% 1.29%
Net Assets: ========== ========= ========= ========= =========
Investment income--net 4.60% 3.90% 10.82% 8.96% 4.37%
========== ========= ========= ========= =========
Supplemental Net assets, end of year (in thousands) $1,357,906 $ 917,806 $ 245,839 $ 72,702 $ 49,691
Data: ========== ========= ========= ========= =========
Portfolio turnover 57.04% 50.35% 59.56% 81.21% 129.51%
========== ========= ========= ========= =========
<FN>
*Total investment returns exclude the effects of sales loads.
See Notes to Financial Statements.
</TABLE>
81
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS (concluded)
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. Class B
For the Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1994 1993 1992 1991 1990
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 13.38 $ 11.83 $ 12.10 $ 10.33 $ 10.73
Operating ---------- ---------- --------- --------- ---------
Performance: Investment income--net .46 .28 .22 .44 .49
Realized and unrealized gain (loss) on
investments and foreign currency transactions--net (.31) 2.11 .91 2.22 (.16)
---------- ---------- --------- --------- ---------
Total from investment operations .15 2.39 1.13 2.66 .33
---------- ---------- --------- --------- ---------
Less dividends and distributions:
Investment income--net (.39) (.72) (.80) (.34) (.53)
Realized gain on investments--net (.23) (.12) (.60) (.55) (.20)
---------- ---------- --------- --------- ---------
Total dividends and distributions (.62) (.84) (1.40) (.89) (.73)
---------- ---------- --------- --------- ---------
Net asset value, end of year $ 12.91 $ 13.38 $ 11.83 $ 12.10 $ 10.33
========== ========== ========= ========= =========
Total Investment Based on net asset value per share 1.13% 21.42% 10.64% 27.48% 2.93%
Return:** ========== ========== ========= ========= =========
Ratios to Average Expenses, excluding distribution fees .91% .95% 1.09% 1.31% 1.31%
Net Assets: ========== ========== ========= ========= =========
Expenses 1.91% 1.95% 2.09% 2.31% 2.31%
========== ========== ========= ========= =========
Investment income--net 3.58% 2.87% 11.95% 7.98% 3.35%
========== ========== ========= ========= =========
Supplemental Net assets, end of year (in thousands) $6,457,130 $4,299,545 $ 958,949 $ 161,328 $ 115,682
Data: ========== ========== ========= ========= =========
Portfolio turnover 57.04% 50.35% 59.56% 81.21% 129.51%
========== ========== ========= ========= =========
<CAPTION>
The following per share data and ratios have been derived For the Period
from information provided in the financial statements. October 21, 1994++ to
October 31, 1994
Increase (Decrease) in Net Asset Value: Class C Class D
<S> <S> <C> <C>
Per Share Net asset value, beginning of period $ 12.91 $ 13.07
Operating -------- ---------
Performance: Investment income--net .01 .01
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net (.01) --
-------- ---------
Total from investment operations -- .01
-------- ---------
Net asset value, end of period $ 12.91 $ 13.08
======== =========
Total Investment Based on net asset value per share .00%+++ .08%+++
Return:** ======== =========
Ratios to Average Expenses, excluding distribution fees 1.44%* 1.44%*
Net Assets: ======== =========
Expenses 2.44%* 1.69%*
======== =========
Investment income--net 3.71%* 4.46%*
======== =========
Supplemental Net assets, end of period (in thousands) $ 7,347 $ 4,968
Data: ======== =========
Portfolio turnover 57.04% 57.04%
======== =========
</TABLE>
82
<PAGE>
[FN]
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
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 Fund offers four
classes of shares under the Merrill Lynch Select Pricing SM System.
Shares of Class A and Class D are sold with a front-end sales charge.
Shares of Class B and Class C may be subject to a contingent deferred
sales charge. All classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions,
except that Class B, Class C and Class D Shares bear certain expenses
related to the account maintenance of such shares, and Class B and
Class C Shares also bear certain expenses related to the distribution
of such shares. Each class has exclusive voting rights with respect
to matters relating to its account maintenance and distribution
expenditures. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments--Portfolio securities which are traded on
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 sales price in the
case of exchange-traded options or, in the case of options traded in
the over-the-counter market, the last asked price. Options pur-
chased by the Fund are valued at their last sale price in the case of
exchange-traded options or, in the case of options traded in the
over-the-counter market, the last bid price.
Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or
under the direction of the Board of Directors of the Fund.
(b) Repurchase agreements--The Fund invests in US Government
securities pursuant to repurchase agreements with a member bank
of the Federal Reserve System or a primary dealer in US Government
securities. Under such agreements, the bank or primary dealer
agrees to repurchase the security at a mutually agreed upon time
and price. The Fund takes possession of the underlying securities,
marks to market such securities and, if necessary, receives additions
to such securities daily to ensure that the contract is fully
collateralized.
(c) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing
when recognized. Assets and liabilities denominated in foreign
currencies are valued at the exchange rate at the end of the period.
Foreign currency transactions are the result of settling (realized)
or valuing (unrealized) receivables or payables expressed in foreign
currencies into US dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates
on investments.
The Fund is authorized to enter into forward foreign exchange
contracts as a hedge against either specific transactions or portfolio
positions. Such contracts are not entered on the Fund's records.
83
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
However, the effect on operations is recorded from the date the Fund
enters into such contracts. Premium or discount is amortized over
the life of the contracts.
The Fund may also purchase or sell listed or over-the-counter foreign
currency options, foreign currency futures and related options on
foreign currency futures as a short or long hedge against possible
variations in foreign exchange rates. Such transactions may be
effected with respect to hedges on non-US dollar denominated
securities owned by the Fund, sold by the Fund but not yet
delivered, or committed or anticipated to be purchased by the Fund.
(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 premiums paid or received).
Written and purchased options are non-income producing
investments.
(e) Financial futures contracts--The Fund may purchase or sell
stock index futures contracts and options on such futures contracts.
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 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.
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, 1994, MLAM
paid MLAM U.K. a fee of $6,509,464 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 next $70
million of average daily net assets, and 1.5% of the average daily net
assets in excess thereof. MLAM's obligation to reimburse the Fund
is limited to the amount of the management fee. No fee payment
will be made to MLAM during any fiscal year which will cause such
expenses to exceed the most restrictive expense limitation appli-
cable at the time of such payment.
Pursuant to the distribution plans adopted by the Fund in accord-
ance with Rule 12b-1 under the Investment Company Act of 1940,
the Fund pays the Distributor ongoing account maintenance and
distribution fees. The fees are accrued daily and paid monthly at
annual rates based upon the average daily net assets of the shares
as follows:
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services
to Class B, Class C and Class D shareholders. The ongoing distribu-
tion fee compensates the Distributor and MLPF&S for providing
shareholder and distribution-related services to Class B and
Class C shareholders.
For the year ended October 31, 1994, MLFD earned underwriting
discounts and MLPF&S earned dealer concessions on sales of the
Fund's Class A and Class D Shares as follows:
84
<PAGE>
(g) Security transactions and investment income--Security trans-
actions are recorded on the dates the transactions are entered into
(the trade dates). Dividend income is recorded on the ex-dividend
dates except that if the ex-dividend date has passed, certain divi-
dends from foreign securities are recorded as soon as the Fund is
informed of the ex-dividend date. Interest income (including
amortization of discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined
on the identified cost basis.
(h) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.
(i) Dividends and distributions--Dividends and distributions paid
by the Fund are recorded on the ex-dividend dates.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). Effective January 1,
1994, the investment advisory business of MLAM was reorganized
from a corporation to a limited partnership. Both prior to and after
the reorganization, ultimate control of MLAM was vested with
Merrill Lynch & Co., Inc. ("ML & Co."). The general partner of
MLAM is Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of ML & Co. The limited partners are ML & Co. and Merrill
Lynch Investment Management, Inc. ("MLIM"), which is also an
indirect wholly-owned subsidiary of ML & Co. The Fund has also
entered into a Distribution Agreement and a Distribution Plan ("the
Distribution Plans") with Merrill Lynch Funds Distributor, Inc.
("MLFD" or "Distributor"), a wholly-owned subsidiary of MLIM.
MLAM is responsible for the management of the Fund's portfolio
and provides the necessary personnel, facilities, equipment and
certain other services necessary to the operations of the Fund. For
such services, the Fund pays a monthly fee of 0.75%, on an annual
basis, of the average daily value of the Fund's net assets. MLAM has
agreed to waive a portion of its fee payable by the Fund so that such
fee is reduced for average daily net assets of the Fund, in excess of
$2.5 billion from the annual rate of 0.75% to 0.70%, and further
reduced from 0.70% to 0.65% for average daily net assets in excess of
$5 billion. MLAM has entered into a sub-advisory agreement with
Merrill Lynch Asset Management U.K., Ltd. ("MLAM U.K."), an
affiliate of MLAM, pursuant to which MLAM pays MLAM U.K. a fee
MLFD MLPF&S
Class A $623,860 $9,890,832
Class D $ 5,131 $ 90,744
MLPF&S received contingent deferred sales charges of $6,812,598
relating to transactions in Class B Shares of beneficial interest,
$0 relating to transactions in Class C Shares of beneficial interest,
and $294,624 in commissions on the execution of portfolio security
transactions for the Fund for the year ended October 31, 1994.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, PSI, MLIM, MLPF&S, FDS, MLFD and/or
ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended October 31, 1994 were $7,206,550,417 and
$3,586,603,191, respectively.
Net realized and unrealized gains (losses) as of October 31, 1994
were as follows:
Realized Unrealized
Gains Gains
(Losses) (Losses)
Long-term investments $182,548,624 $ 69,047,658
Short-term investments (27,825) --
Financial futures contracts 4,253,568 --
Forward foreign exchange contracts (173,001,391) (35,886,925)
Foreign currency transactions 13,677,294 2,846,981
------------ ------------
Total $ 27,450,270 $ 36,007,714
============ ============
As of October 31, 1994, net unrealized appreciation for Federal income
tax purposes aggregated $68,860,827, of which $451,980,812 related
to appreciated securities and $383,119,985 related to depreciated
securities. At October 31, 1994, the aggregate cost of investments
for Federal income tax purposes was $7,701,597,115.
85
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
4. Capital Share Transactions:
Net increase (decrease) in net assets derived from capital share
transactions was $2,862,952,855 and $3,647,738,774 for the years
ended October 31, 1994 and October 31, 1993, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Year Ended Dollar
October 31, 1994 Shares Amount
Shares sold 51,696,255 $ 691,831,423
Shares issued to shareholders in
reinvestment of dividends and
distributions 3,969,366 52,332,829
-------------- --------------
Total issued 55,665,621 744,164,252
Shares redeemed (19,692,065) (262,792,460)
-------------- --------------
Net increase 35,973,556 $ 481,371,792
============== ==============
Class A Shares for the Year Ended Dollar
October 31, 1994 Shares Amount
Shares sold 51,001,581 $ 652,336,461
Shares issued to shareholders in
reinvestment of dividends and
distributions 1,771,977 20,906,783
-------------- --------------
Total issued 52,773,558 673,243,244
Shares redeemed (5,508,522) (70,517,148)
-------------- --------------
Net increase 47,265,036 $ 602,726,096
============== ==============
Class B Shares for the Year Ended Dollar
October 31, 1994 Shares Amount
Shares sold 225,442,147 $2,984,209,294
Shares issued to shareholders in
reinvestment of dividends and
distributions 16,263,879 212,326,903
-------------- --------------
Total issued 241,706,026 3,196,536,197
Shares redeemed (62,873,994) (827,228,356)
-------------- --------------
Net increase 178,832,032 $2,369,307,841
============== ==============
Class B Shares for the Year Ended Dollar
October 31, 1994 Shares Amount
Shares sold 248,487,181 $3,152,585,403
Shares issued to shareholders in
reinvestment of dividends and
distributions 6,532,523 76,482,665
-------------- --------------
Total issued 255,019,704 3,229,068,068
Shares redeemed (14,631,176) (184,055,390)
-------------- --------------
Net increase 240,388,528 $3,045,012,678
============== ==============
Class C Shares for the Period Dollar
October 21, 1994++ to October 31, 1994 Shares Amount
Shares sold 569,603 $ 7,333,052
Shares redeemed (586) (7,533)
-------------- --------------
Net increase 569,017 $ 7,325,519
============== ==============
[FN]
++Commencement of Operations.
Class D Shares for the Period Dollar
October 21, 1994++ to October 31, 1994 Shares Amount
Shares sold 385,289 $ 5,017,907
Shares redeemed (5,386) (70,204)
-------------- --------------
Net increase 379,903 $ 4,947,703
============== ==============
[FN]
++Commencement of Operations.
5. Commitments:
At October 31, 1994, 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 $17,629,000
and $7,333,000, respectively.
6. Subsequent Event:
On December 14, 1994, the Fund's Board of Directors declared an
ordinary income dividend to Common Stock shareholders in the
amount of $0.221714 per Class A Share, $0.155144 per Class B
Share, $0.203138 per Class C Share and $0.217868 per Class D Share
and a capital gains distribution of $0.304732 per Class A Share, Class B
Share, Class C Share and Class D Share, payable on December 21,
1994, to shareholders of record as of December 13, 1994.
86
<PAGE>
[This page is intentionally left blank.]
87
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies.......................................... 2
Precious Metal-Related Securities......................................... 2
Real Estate-Related Securities............................................ 3
Portfolio Strategies Involving Options and Futures........................ 4
Other Investment Policies and Practices................................... 8
Management of the Fund..................................................... 14
Directors and Officers.................................................... 14
Compensation of Directors................................................. 16
Management and Advisory Arrangements...................................... 16
Purchase of Shares......................................................... 18
Initial Sales Charge Alternatives--Class A and Class D Shares............. 19
Reduced Initial Sales Charges............................................. 20
Distribution Plans........................................................ 23
Limitations on the Payment of Deferred Sales Charges...................... 24
Redemption of Shares....................................................... 25
Deferred Sales Charges--Class B and Class C Shares........................ 26
Portfolio Transactions and Brokerage....................................... 27
Determination of Net Asset Value........................................... 29
Shareholder Services....................................................... 30
Investment Account........................................................ 30
Automatic Investment Plans................................................ 30
Automatic Reinvestment of Dividends and Capital Gains Distributions....... 31
Systematic Withdrawal Plans--Class A and Class D Shares................... 31
Exchange Privilege........................................................ 32
Dividends, Distributions and Taxes......................................... 44
Dividends and Distributions............................................... 44
Taxes..................................................................... 44
Performance Data........................................................... 48
General Information........................................................ 50
Description of Shares..................................................... 50
Computation of Offering Price Per Share................................... 50
Independent Auditors...................................................... 51
Custodian................................................................. 51
Transfer Agent............................................................ 51
Legal Counsel............................................................. 51
Reports to Shareholders................................................... 51
Additional Information.................................................... 51
Security Ownership of Certain Beneficial Owners........................... 51
Appendix................................................................... 52
Independent Auditors' Report............................................... 59
Financial Statements....................................................... 60
</TABLE>
Code # 10811-0295
Merrill Lynch
Global Allocation
Fund, Inc.
STATEMENT OF
ADDITIONAL
INFORMATION
February 27, 1995
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
EXHIBIT 99.17(C)
PROSPECTUS
JANUARY 31, 1995
MERRILL LYNCH BALANCED FUND
FOR INVESTMENT AND RETIREMENT, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
----------------
Merrill Lynch Balanced Fund for Investment and Retirement, Inc., is a mutual
fund of the type permitted to have a number of different portfolios, or
series. The fund and its only series, the Full Investment Portfolio, are
referred to as the "Fund". The Fund seeks to provide shareholders with as high
a level of total investment return as is consistent with reasonable risk. The
Fund seeks to achieve its objective through investment in common stocks and
other types of securities, including fixed-income securities and convertible
securities. Because the Fund is designed for investors for whom current tax
liability is not a consideration, such as certain tax qualified employee
benefit plans, the Fund (and any other series that may be added in the future)
will invest without regard to tax considerations.
----------------
Pursuant to the Merrill Lynch Select PricingSM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select PricingSM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances. See
"Merrill Lynch Select PricingSM System" on page 3.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9011, Princeton, New Jersey 08543-9011 (609)
282-2800, or from securities dealers which have entered into dealer agreements
with the Distributor, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"). The minimum initial purchase price is $1,000
($100 for retirement plans) and the minimum subsequent purchase is $50 ($1 for
retirement plans). Merrill Lynch may charge its customers a processing fee
(presently $4.85) for confirming purchases and repurchases. Purchases and
redemptions directly through the Fund's transfer agent are not subject to the
processing fee. See "Purchase of Shares" and "Redemption of Shares".
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURI-
TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated January 31, 1995 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission and
is available, without charge, by calling or by writing the Fund at the above
telephone number or address. The Statement of Additional Information is hereby
incorporated by reference into this Prospectus.
----------------
MERRILL LYNCH ASSET MANAGEMENT -- INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C CLASS D
---------- ---------- ------- -------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES:
Maximum Sales Charge
Imposed on Purchases
(as a percentage of
offering price)....... 5.25%(c) None None 5.25%(c)
Sales Charge Imposed
on Dividend Reinvest-
ments................. None None None None
Deferred Sales Charge
(as a percentage of
original purchase None (d) 4.0% during the first 1% for one year None (d)
price or redemption year, decreasing 1.0%
proceeds, whichever annually thereafter to 0.0%
is lower)............. after the fourth year
Exchange Fee........... None None None None
ANNUAL FUND OPERATING
EXPENSES (AS A
PERCENTAGE OF AVERAGE
NET ASSETS)(E).........
Investment Advisory
Fees(f)............... 0.63% 0.63% 0.63% 0.63%
12b-1 Fees(g):
Account Maintenance
Fees................ None 0.25% 0.25% 0.25%
Distribution Fees.... None 0.75% 0.75% None
(Class B shares convert to
Class D shares automatically
after approximately eight years
and cease being subject
to distribution fees)
Other Expenses:
Custodial Fees....... 0.02% 0.02% 0.02% 0.02%
Shareholder Servicing
Costs(h)............ 0.12% 0.15% 0.15% 0.12%
Other................ 0.06% 0.06% 0.06% 0.06%
---- ---- ---- ----
Total Other Ex-
penses............ 0.20% 0.23% 0.23% 0.20%
---- ---- ---- ----
Total Fund Operating
Expenses.............. 0.83% 1.86% 1.86% 1.08%
==== ==== ==== ====
</TABLE>
- --------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and investment programs.
See "Purchase of Shares--Initial Sales Charge Alternatives--Class A and
Class D Shares"--page 13.
(b) Class B shares convert to Class D shares automatically approximately eight
years after initial purchase. See "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares"--page 14.
(c) Reduced for purchases of $25,000 and over. Class A or Class D purchases of
$1,000,000 or more may not be subject to an initial sales charge. See
"Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class
D Shares"--page 13.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that purchases of $1,000,000 or more which may not
be subject to an initial sales charge will instead be subject to a CDSC of
1.0% of amounts redeemed within the first year of purchase.
(e) Information for Class A and Class B shares is stated for the fiscal year
ended September 30, 1994. Information under "Other Expenses" for Class C
and Class D shares is estimated for the fiscal year ending September 30,
1995.
(f) See "The Fund and Its Management--Advisory Fee"--page 10.
(g) See "Purchase of Shares--Distribution Plans"--page 17.
(h) See "The Fund and Its Management--Transfer Agency Services"--page 10.
2
<PAGE>
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
---------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
An investor would pay the
following expenses on a
$1,000 investment in-
cluding the maximum
$52.50 initial sales
charge (Class A and
Class D shares only) and
assuming (1) the Total
Fund Operating Expenses
for each class set forth
above; (2) a 5% annual
return throughout the
periods and (3) redemp-
tion at the end of the
period:
Class A................. $ 61 $ 78 $ 96 $ 150
Class B................. $ 59 $ 78 $ 101 $ 198*
Class C................. $ 29 $ 58 $ 101 $ 218
Class D................. $ 63 $ 85 $ 109 $ 177
An investor would pay the
following expenses on
the same $1,000 invest-
ment assuming no redemp-
tion at the end of the
period:
Class A................. $ 61 $ 78 $ 96 $ 150
Class B................. $ 19 $ 58 $ 101 $ 198*
Class C................. $ 19 $ 58 $ 101 $ 218
Class D................. $ 63 $ 85 $ 109 $ 177
</TABLE>
- --------
* Assumes conversion to Class D shares approximately eight years after
purchase.
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Securities and Exchange Commission (the "Commission") regulations. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL
RATE OF RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. Class B and Class C
shareholders who own their shares for an extended period of time may pay more
in Rule 12b-1 distribution fees than the economic equivalent of the maximum
front-end sales charge permitted under the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. ("NASD"). Merrill Lynch may
charge its customers a processing fee (presently $4.85) for confirming
purchases and repurchases. Purchases and redemptions directly through the
Fund's transfer agent are not subject to the processing fee. See "Purchase of
Shares" and "Redemption of Shares".
MERRILL LYNCH SELECT PRICINGSM SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
PricingSM System. The shares of each class may be purchased at a price equal
to the next determined net asset value per share subject to the sales charges
and ongoing fee arrangements described below. Shares of Class A and Class D
are sold to investors choosing the initial sales charge alternatives, and
shares of Class B and Class C are sold to investors choosing the deferred
sales charge alternatives. The Merrill Lynch Select PricingSM System is used
by more than 50 mutual funds advised by Merrill Lynch Asset Management, L.P.,
doing business as Merrill Lynch Asset Management ("MLAM" or the "Investment
Adviser") or an affiliate of MLAM, Fund Asset Management, L.P. ("FAM"). Funds
advised by MLAM or FAM are referred to herein as "MLAM-advised mutual funds".
Each Class A, Class B, Class C and Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The deferred sales charges and account maintenance fees that are imposed on
Class B and Class C shares, as well as the account maintenance fees that are
imposed on the Class D shares, will be imposed directly against those classes
and not against all assets of the Fund and,
3
<PAGE>
accordingly, such charges will not affect the net asset value of any other
class or have any impact on investors choosing another sales charge option.
Dividends paid by the Fund for each class of shares will be calculated in the
same manner at the same time and will differ only to the extent that account
maintenance and distribution fees and any incremental transfer agency costs
relating to a particular class are borne exclusively by that class. Each class
has different exchange privileges. See "Shareholder Services--Exchange
Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges with respect to the Class B and Class C
shares in that the sales charges applicable to each class provide for the
financing of the distribution of the shares of the Fund. The distribution-
related revenues paid with respect to a class will not be used to finance the
distribution expenditures of another class. Sales personnel may receive
different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select PricingSM System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select PricingSM System that the investor
believes is most beneficial under the investor's particular circumstances.
More detailed information as to each class of shares is set forth under
"Purchase of Shares".
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(/1/) FEE FEE CONVERSION FEATURE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 5.25% initial No No No
sales charge(/2/)(/3/)
- -------------------------------------------------------------------------------------------------
B CDSC for a period of 4 years, 0.25% 0.75% B shares convert to D shares
at a rate of 4.0% during the automatically after
first year, decreasing 1.0% approximately
annually to 0.0% eight years(/4/)
- -------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.75% No
- -------------------------------------------------------------------------------------------------
D Maximum 5.25% initial sales 0.25% No No
charge(/3/)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. Contingent deferred sales charges ("CDSCs") are
imposed if the redemption occurs within the applicable CDSC time period.
The charge will be assessed on an amount equal to the lesser of the
proceeds of redemption or the cost of the shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors".
(3) Reduced for purchases of $25,000 or more. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead will be subject to a 1.0% CDSC for one year. See "Class
A" and "Class D" below.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other MLAM-
advised mutual funds into which exchanges may be made have a ten year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares.
Investors that currently own Class A shares in a shareholder account
are entitled to purchase additional Class A shares in that account.
Other eligible investors include certain retirement plans and
participants in certain investment programs. In addition, Class A
shares will be offered to directors and
4
<PAGE>
employees of Merrill Lynch & Co., Inc. and its subsidiaries (the term
"subsidiaries", when used herein with respect to Merrill Lynch & Co.,
Inc., includes MLAM, FAM and certain other entities directly or
indirectly wholly-owned and controlled by Merrill Lynch & Co., Inc.),
and to members of the Boards of MLAM-advised mutual funds. The maximum
initial sales charge is 5.25%, which is reduced for purchases of
$25,000 and over. Purchases of $1,000,000 or more may not be subject to
an initial sales charge but if the initial sales charge is waived such
purchases will be subject to a CDSC of 1.0% if the shares are redeemed
within one year after purchase. Sales charges also are reduced under a
right of accumulation which takes into account the investor's holdings
of all classes of all MLAM-advised mutual funds. See "Purchase of
Shares--Initial Sales Charge Alternatives--Class A and Class D Shares".
Class B: Class B shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%,
an ongoing distribution fee of 0.75% of the Fund's average net assets
attributable to the Class B shares, and a CDSC if they are redeemed
within four years of purchase. Approximately eight years after
issuance, Class B shares will convert automatically into Class D
shares of the Fund, which are subject to an account maintenance fee
but no distribution fee; Class B shares of certain other MLAM-advised
mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately ten years. If Class B shares
of the Fund are exchanged for Class B shares of another MLAM-advised
mutual fund, the conversion period applicable to the Class B shares
acquired in the exchange will apply, and the holding period for the
shares exchanged will be tacked onto the holding period for the shares
acquired. Automatic conversion of Class B shares into Class D shares
will occur at least once a month on the basis of the relative net
asset values of the shares of the two classes on the conversion date,
without the imposition of any sales load, fee or other charge.
Conversion of Class B shares to Class D shares will not be deemed a
purchase or sale of the shares for Federal income tax purposes. Shares
purchased through reinvestment of dividends on Class B shares also
will convert automatically to Class D shares. The conversion period
for dividend reinvestment shares and for certain retirement plans is
modified as described under "Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class B Shares
to Class D Shares".
Class C: Class C shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.75% of the Fund's average net
assets attributable to Class C shares. Class C shares are also subject
to a CDSC if they are redeemed within one year of purchase. Although
Class C shares are subject to a 1.0% CDSC for only one year (as
compared to four years for Class B), Class C shares have no conversion
feature and, accordingly, an investor that purchases Class C shares
will be subject to distribution fees that will be imposed on Class C
shares for an indefinite period subject to annual approval by the
Fund's Board of Directors and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. Purchases of $1,000,000 or more may not be subject
to an initial sales charge but if the initial sales charge is waived
such purchases will be subject to a CDSC of 1.0% if the shares are
redeemed within one year of purchase. The schedule of initial sales
charges and reductions for the Class D shares is the same as the
schedule for Class A shares. Class D shares also will be issued upon
conversion of Class B shares as described above under "Class B". See
"Purchase of Shares--Initial Sales Charge Alternatives--Class A and
Class D Shares".
5
<PAGE>
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
PricingSM System that the investor believes is most beneficial in the
investor's particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because of the account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative
particularly attractive because similar sales charge reductions are not
available with respect to the deferred sales charges imposed in connection with
purchases of Class B or Class C shares. Investors not qualifying for reduced
initial sales charges who expect to maintain their investment for an extended
period of time also may elect to purchase Class A or Class D shares, because
over time the accumulated ongoing account maintenance and distribution fees on
Class B or Class C shares may exceed the initial sales charge and, in the case
of Class D shares, the account maintenance fee. Although some investors that
previously purchased Class A shares may no longer be eligible to purchase Class
A shares of other MLAM-advised mutual funds, those previously purchased Class A
shares, together with Class B, Class C and Class D share holdings, will count
toward a right of accumulation which may qualify the investor for reduced
initial sales charges on new initial sales charge purchases. In addition, the
ongoing Class B and Class C account maintenance and distribution fees will
cause Class B and Class C shares to have higher expense ratios, pay lower
dividends and have lower total returns than the initial sales charge shares.
The ongoing Class D account maintenance fees will cause Class D shares to have
a higher expense ratio, pay lower dividends and have a lower return than Class
A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the
benefit of putting all of the investor's dollars to work from the time the
investment is made. The deferred sales charge alternatives may be particularly
appealing to investors who do not qualify for a reduction in initial sales
charges. Both Class B and Class C shares are subject to ongoing account
maintenance fees and distribution fees; however, the ongoing account
maintenance and distribution fees potentially may be offset to the extent any
return is realized on the additional funds initially invested in Class B or
Class C shares. In addition, Class B shares will be converted into Class D
shares of the Fund after a conversion period of approximately eight years, and
thereafter investors will be subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend
to hold their shares for an extended period of time. Investors in Class B
shares should take into account whether they intend to redeem their shares
within the CDSC period and, if not, whether they intend to remain invested
until the end of the conversion period and thereby take advantage of the
reduction in ongoing fees resulting from the conversion into Class D shares.
Other investors, however, may elect to purchase Class C shares if they
determine that it is advantageous to have all their assets invested initially
and they are uncertain as to the length of time they intend to hold their
assets in MLAM-advised mutual funds. Although Class C shareholders are subject
to a shorter CDSC period at a lower rate, they forgo the Class B conversion
feature, making their investment subject to account maintenance and
distribution fees for an indefinite period of time. In addition, while both
Class B and Class C distribution fees are subject to the limitations on asset-
based sales charges imposed by the NASD, the Class B distribution fees are
further limited under a voluntary waiver of asset-based sales charges. See
"Purchase of Shares--Limitations on the Payment of Deferred Sales Charges".
6
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in conjunction
with the audits of the financial statements of the Fund by Deloitte & Touche
LLP, independent auditors. Financial statements for the year ended September
30, 1994, and the independent auditors' report thereon are included in the
Statement of Additional Information. Because Class C and Class D shares had not
commenced operations during the fiscal year ended September 30, 1994, no
information is provided for such shares. 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 writing the
Fund at the telephone number or address on the front cover of this Prospectus.
THE FOLLOWING
PER SHARE DATA
AND RATIOS HAVE
BEEN DERIVED
FROM INFORMATION
PROVIDED IN THE
FINANCIAL
STATEMENTS.
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------
FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
1994 1993 1992 1991 1990 1989+
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
INCREASE
(DECREASE) IN NET
ASSET VALUE:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period........... $ 13.02 $ 12.57 $ 11.94 $ 10.61 $ 11.93 $ 11.18
------- ------- ------- ------- ------- -------
Investment
Income--net...... .32 .43 .47 .70 .64 .24
Realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions--
net(1)........... (.07) 1.29 .61 1.63 (1.41) 1.42
------- ------- ------- ------- ------- -------
Total from
investment
operations....... .25 1.72 1.08 2.33 (.77) 1.66
------- ------- ------- ------- ------- -------
Less dividends
and
distributions:
Investment
income--net...... (.37) (.39) (.45) (.62) (.55) (.90)
Realized gain on
investments--
net............. (1.23) (.88) -- (.38) -- (.01)
------- ------- ------- ------- ------- -------
Total dividends
and
distributions.... (1.60) (1.27) (.45) (1.00) (.55) (.91)
------- ------- ------- ------- ------- -------
Net asset value,
end of period.... $ 11.67 $ 13.02 $ 12.57 $ 11.94 $ 10.61 $ 11.93
======= ======= ======= ======= ======= =======
TOTAL INVESTMENT
RETURN:**
Based on net
asset value per
share............ 1.81% 14.62% 9.23% 23.14% (6.86%) 15.54%++
======= ======= ======= ======= ======= =======
RATIOS TO AVERAGE
NET ASSETS:
Expenses,
excluding
distribution
fees............. .83% .83% .81% .85% .83% .78%*
======= ======= ======= ======= ======= =======
Expenses......... .83% .83% .81% .85% .83% .78%*
======= ======= ======= ======= ======= =======
Investment
income--net...... 2.68% 3.09% 3.18% 3.64% 5.12% 4.23%*
======= ======= ======= ======= ======= =======
SUPPLEMENTAL
DATA:
Net assets, end
of period (in
thousands)....... $39,963 $40,688 $20,320 $12,839 $ 4,511 $ 2,080
======= ======= ======= ======= ======= =======
Portfolio
turnover......... 59.15% 79.55% 65.40% 173.76% 163.56% 175.47%
======= ======= ======= ======= ======= =======
<CAPTION>
CLASS B
--------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986++
--------- --------- --------- --------- ------------ ----------- ------------ ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE
(DECREASE) IN NET
ASSET VALUE:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period........... $ 13.09 $ 12.62 $ 11.99 $ 10.60 $ 11.91 $ 10.94 $ 12.54 $ 11.17 $ 10.00
--------- --------- --------- --------- ------------ ----------- ------------ ----------- --------------
Investment
Income--net...... .20 .24 .29 .39 .50 .53 .57 .39 .25
Realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions--
net(1)........... (.07) 1.37 .66 1.83 (1.39) 1.25 (1.40) 1.64 .98
--------- --------- --------- --------- ------------ ----------- ------------ ----------- --------------
Total from
investment
operations....... .13 1.61 .96 2.22 (.89) 1.78 (.83) 2.03 1.23
--------- --------- --------- --------- ------------ ----------- ------------ ----------- --------------
Less dividends
and
distributions:
Investment
income--net...... (.24) (.26) (.32) (.45) (.42) (.80) (.55) (.38) (.06)
Realized gain on
investments--
net............. (1.23) (.88) -- (.38) -- (.01) (.22) (.28) --
--------- --------- --------- --------- ------------ ----------- ------------ ----------- --------------
Total dividends
and
distributions.... (1.47) (1.14) (.32) (.83) (.42) (.81) (.77) (.66) (.06)
--------- --------- --------- --------- ------------ ----------- ------------ ----------- --------------
Net asset value,
end of period.... $ 11.75 $ 13.09 $ 12.62 $ 11.99 $ 10.60 $ 11.91 $ 10.94 $ 12.54 $ 11.17
========= ========= ========= ========= ============ =========== ============ =========== ==============
TOTAL INVESTMENT
RETURN:**
Based on net
asset value per
share............ 0.76% 13.49% 8.01% 21.91% (7.79%) 16.93% (6.36%) 18.98% 12.29%++
========= ========= ========= ========= ============ =========== ============ =========== ==============
RATIOS TO AVERAGE
NET ASSETS:
Expenses,
excluding
distribution
fees............. .86% .85% .85% .90% .86% .84% .82% .73% .82%*
========= ========= ========= ========= ============ =========== ============ =========== ==============
Expenses......... 1.86% 1.85% 1.85% 1.90% 1.86% 1.84% 1.82% 1.73% 1.82%*
========= ========= ========= ========= ============ =========== ============ =========== ==============
Investment
income--net...... 1.65% 1.99% 2.10% 3.37% 3.90% 3.73% 4.66% 3.60% 4.23%*
========= ========= ========= ========= ============ =========== ============ =========== ==============
SUPPLEMENTAL
DATA:
Net assets, end
of period (in
thousands)....... $709,836 $830,955 $886,920 $986,895 $1,171,567 $1,735,873 $2,264,429 $3,384,647 $ 2,065,752
========= ========= ========= ========= ============ =========== ============ =========== ==============
Portfolio
turnover......... 59.15% 79.55% 65.40% 173.76% 163.56% 175.47% 239.78% 145.17% 143.78%
========= ========= ========= ========= ============ =========== ============ =========== ==============
</TABLE>
- ----
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Class A shares commenced operations on October 27, 1988.
++ Class B shares commenced operations on November 29, 1985.
++ Aggregate total investment return.
(1)
Foreign currency transaction amounts have been reclassified to conform to the
1994 presentation.
7
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund is designed to provide investors with a convenient and
professionally managed vehicle for seeking as high a level of total investment
return as is consistent with a relatively low level of risk. This is a
fundamental investment objective. The Fund seeks to achieve its objective
through investment in high quality, larger capitalization common stocks
(generally companies with $500,000,000 or more of market capitalization) and
other types of securities, including fixed-income securities (preferred stock
and debt securities) and convertible securities, as well as through the
writing of covered call options and the lending of portfolio securities. It is
anticipated that, except under unusual circumstances, the Fund will maintain
at least 25% of the value of its assets in fixed-income senior securities. In
its common stock investments, it is anticipated that the Fund will seek to
emphasize issues with relatively low price earnings ratios, above average
dividend yields, and relatively low price to book value ratios, as compared to
prevailing market conditions. In seeking to identify "high quality" companies,
particular emphasis is placed by management on common stocks of companies
which are believed to have internal strengths, such as good financial
resources, a satisfactory rate of return on capital, a good industry position
and superior management skills. With respect to debt securities, the Fund will
invest only in instruments which are rated Aa or better by Moody's Investors
Service, Inc. ("Moody's") or AA or better by Standard & Poor's Ratings Group
("S & P"), or which are determined by the Fund's investment adviser to be of
quality comparable to instruments so rated. The Fund also may engage in
options and futures transactions and lend its portfolio securities. The Fund
attempts to reduce overall exposure to risk from declines in securities prices
by spreading its investments over many different companies in a variety of
industries. No assurance can be given that the Fund will be able to achieve
its investment objective.
Total investment return is the sum of current income and capital gains
received from portfolio investments, as well as the capital appreciation of
investments retained in the portfolio. It is anticipated that ordinarily the
Fund's emphasis on current income and capital appreciation will be relatively
equal, although from time to time the Fund may vary its emphasis between these
two elements as market or economic conditions change. In this regard, the
composition of the Fund is largely unrestricted. In furtherance of its efforts
to reduce overall exposure to investment and income risk through adequate
diversification of its portfolio, the Fund may invest up to 20% of its total
assets in securities issued by foreign companies.
Inasmuch as the Fund is authorized to invest in bonds and other fixed-income
securities, it is important to note that the portion of the Fund's net asset
value attributable to such securities may fall when interest rates rise and
rise when interest rates fall. In general, fixed-income securities with longer
maturities will be subject to greater volatility resulting from interest rate
fluctuations than will fixed-income securities with shorter maturities.
The Fund also reserves the right to invest all or a portion of its assets in
high quality money market securities (such as U.S. Treasury bills,
certificates of deposit issued by U.S. banks having more than $1 billion in
assets, commercial paper and repurchase agreements with respect to U.S.
government securities and U.S. government agency securities) for purposes of
enhancing liquidity and avoiding the effects of declining securities prices
when it seems advisable to do so in light of prevailing market or economic
conditions. The Fund will invest only in commercial paper that is rated A-1 or
A-2 by S & P, or P-1 or P-2 by Moody's, or, if not rated, issued by companies
having an outstanding debt issue rated AA or better by S & P, or Aa or better
by Moody's. The proportion of the Fund's assets that is invested in money
market securities will vary from time to time.
8
<PAGE>
Because the Fund is designed for investors for whom current tax liability is
not a consideration, the Fund may realize capital gains without regard to
whether they will qualify as long-term capital gains. This means that the Fund
has the flexibility to take advantage of short-term investment opportunities
when determined appropriate by the Investment Adviser. For a discussion of the
investment restrictions of the Fund, see "Investment Practices and
Restrictions--Investment Restrictions".
THE FUND AND ITS MANAGEMENT
The Fund is a mutual fund, technically known as an open-end diversified
management investment company. It was incorporated under the laws of the State
of Maryland on May 21, 1984. The Fund is a company of the series type. At the
present time it consists of only one portfolio. The Fund is designed as an
investment vehicle for investors who seek a high level of total investment
return without regard to tax considerations, such as certain tax-qualified
employee benefit plans, including Individual Retirement Accounts ("IRAs") and
corporate, governmental and other retirement plans qualified under sections
401, 403(b) or 408 of the Internal Revenue Code of 1986, as amended (the
"Code").
The Directors of the Fund consist of five individuals, four of whom are not
"interested persons" of the Fund as defined in the Investment Company Act of
1940, as amended (the "Investment Company Act"). The Directors of the Fund are
responsible for the overall supervision of the operations of the Fund and
perform the various duties imposed on the directors of investment companies by
the Investment Company Act.
The Directors are:
Arthur Zeikel*--President and Chief Investment Officer of MLAM and FAM;
President and Director of Princeton Services, Inc.; Executive Vice
President of Merrill Lynch & Co., Inc. ("ML & Co.") and Executive Vice
President of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch"); Director of Merrill Lynch Funds Distributor, Inc.
Herbert I. London--John M. Olin Professor of Humanities, Gallatin
Division of New York University.
Robert R. Martin--Director, WTC Industries, Inc.
Joseph L. May--Attorney in private practice.
Andre F. Perold--Professor, Harvard Business School.
- --------
* Interested person, as defined in the Investment Company Act, of the Fund.
MLAM, with offices at 800 Scudders Mill Road, Plainsboro, New Jersey 08536
(mailing address: P.O. Box 9011, Princeton, New Jersey 08543-9011), is the
investment adviser for the Fund. MLAM is owned and controlled by ML & Co., a
financial services holding company. MLAM manages the investment of the Fund's
assets, provides administrative services and manages the Fund's business
affairs. These services are subject to general oversight by the Fund's Board of
Directors. The Investment Adviser has been engaged in the investment advisory
business since 1976, and, together with its affiliate, FAM, currently serves as
the investment adviser to more than 130 other registered investment companies,
as well as to numerous pension plans and other institutions. As of December 31,
1994, the Investment Adviser and FAM had a total of approximately $163.8
billion in investment company and other portfolio assets under management,
including accounts of certain affiliates of the Investment Adviser.
9
<PAGE>
Denis B. Cummings is primarily responsible for the day-to-day management of
the Fund's portfolio and has served in that capacity since 1991. Mr. Cummings
has served as a Vice President of the Investment Adviser since 1978.
Advisory Fee. The Fund pays the Investment Adviser a monthly fee based upon
the average daily value of the portfolio's net assets at the following annual
rates: 0.65% of the average daily net assets not exceeding $500 million; 0.60%
of the average daily net assets exceeding $500 million but not exceeding $1.5
billion; 0.55% of the average daily net assets exceeding $1.5 billion but not
exceeding $2.5 billion; 0.50% of the average daily net assets exceeding $2.5
billion but not exceeding $3.5 billion; and 0.45% of the average daily net
assets exceeding $3.5 billion. For the fiscal year ended September 30, 1994,
the total management fee payable by the Fund to the Investment Adviser was
$5,173,680 (based upon average net assets of approximately $820.6 million). For
the fiscal year ended September 30, 1994, the annualized ratio of total
expenses (excluding distribution fees) to average net assets was 0.83% for the
Class A shares and 0.86% for the Class B shares; no Class C or Class D shares
had been issued during that year.
Transfer Agency Services. Financial Data Services, Inc. (the "Transfer
Agent"), which is a wholly-owned subsidiary of ML & Co., acts as the Fund's
Transfer Agent pursuant to a Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement (the "Transfer Agency Agreement").
Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible
for the issuance, transfer and redemption of shares and the opening and
maintenance of shareholder accounts. Pursuant to the Transfer Agency Agreement,
the Transfer Agent receives a fee of $11.00 per Class A and Class D shareholder
account and $14.00 per Class B and Class C shareholder account and is entitled
to reimbursement for out-of-pocket expenses incurred by it under the Transfer
Agency Agreement. For the fiscal year ended September 30, 1994, the total fee
paid by the Fund to the Transfer Agent was $1,227,546. At December 31, 1994,
the Fund had 3,825 Class A shareholder accounts, 47,698 Class B shareholder
accounts, 22 Class C shareholder accounts and 58,202 Class D shareholder
accounts. At this level of accounts, the annual fee payable to the Transfer
Agent would aggregate approximately $1.5 million plus out-of-pocket expenses.
Reimbursement for Portfolio Accounting Services. The Fund reimburses the
Investment Adviser for its costs in providing portfolio accounting services to
the Fund. For the fiscal year ended September 30, 1994, the Fund reimbursed the
Investment Adviser $98,036 for accounting services.
Code of Ethics. The Board of Directors of the Fund has adopted a Code of
Ethics under Rule 17j-1 of the Investment Company Act which incorporates the
Code of Ethics of the Investment Adviser (together, the "Codes"). The Codes
significantly restrict the personal investing activities of all employees of
the Investment Adviser and, as described below, impose additional, more
onerous, restrictions on fund investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are
designed to identify any substantive prohibition or limitation applicable to
the proposed investment. The substantive restrictions applicable to all
employees of the Investment Adviser include a ban on acquiring any securities
in a "hot" initial public offering and a prohibition from profiting on short-
term trading in securities. In addition, no employee may purchase or sell any
security which at the time is being purchased or sold (as the case may be), or
to the knowledge of the employee is being considered
10
<PAGE>
for purchase or sale, by any fund advised by the Investment Adviser.
Furthermore, the Codes provide for trading "blackout periods" which prohibit
trading by investment personnel of the Fund within periods of trading by the
Fund in the same (or equivalent) security (15 or 30 days depending upon the
transaction).
PURCHASE OF SHARES
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), an affiliate of
both the Investment Adviser and Merrill Lynch, acts as the Distributor of the
shares of the Fund.
Shares of the Fund are offered continuously for sale by the Distributor and
other eligible securities dealers (including Merrill Lynch). Shares of the Fund
may be purchased from securities dealers or by mailing a purchase order
directly to the Transfer Agent. The minimum initial investment is $1,000, and
the minimum subsequent purchase is $50, except for retirement plans, for which
the minimum initial purchase is $100 and the minimum subsequent purchase is
$1.00. Different minimums may apply to purchases through the Merrill Lynch
BlueprintSM Program. See "Purchase of Shares--Reduced Initial Sales Charges--
Merrill Lynch BlueprintSM Program" in the Statement of Additional Information.
The Fund is offering its shares in four classes at a public offering price
equal to the next determined net asset value per share plus sales charges
imposed either at the time of purchase or on a deferred basis depending upon
the class of shares selected by the investor under the Merrill Lynch Select
PricingSM System described below. The applicable offering price for purchase
orders is based upon the net asset value of the Fund next determined after
receipt of the purchase orders by the Distributor. As to purchase orders
received by securities dealers prior to the close of the New York Stock
Exchange (generally 4:00 P.M. New York time), which includes orders received
after the determination of net asset value on the previous day, the applicable
offering price will be based on the net asset value determined as of 15 minutes
after the close of business on the New York Stock Exchange (generally 4:00 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 30 minutes after the close
of business on the New York Stock Exchange on that day. If the purchase orders
are not received by the Distributor prior to 30 minutes after the close of
business on the New York Stock Exchange, such orders shall be deemed received
on the next business day. 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 of any class to the general public at any time in response to
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
Fund's Transfer Agent are not subject to the processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
PricingSM System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the
amount of purchase, the length of time the investor expects to hold the shares
and other relevant circumstances. Shares of Class A and Class D are sold to
investors choosing the initial sales charge alternatives and shares of Class B
and Class C are sold to investors choosing the deferred sales charge
alternatives. Investors should determine whether under their particular
circumstances it is more advantageous to incur an initial sales charge or to
have the entire initial purchase price invested in the Fund with the investment
thereafter being subject to a CDSC and ongoing distribution fees. A discussion
of the factors that investors should consider in determining the method of
purchasing shares under the Merrill Lynch Select PricingSM System is set forth
under "Merrill Lynch Select PricingSM System" on page 3.
11
<PAGE>
Each Class A, Class B, Class C and Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The deferred sales charges and account maintenance fees that are imposed on
Class B and Class C shares, as well as the account maintenance fees that are
imposed on Class D shares, will be imposed directly against those classes and
not against all assets of the Fund and, accordingly, such charges will not
affect the net asset value of any other class or have any impact on investors
choosing another sales charge option. Dividends paid by the Fund for each
class of shares will be calculated in the same manner at the same time and
will differ only to the extent that account maintenance and distribution fees
and any incremental transfer agency costs relating to a particular class are
borne exclusively by that class. Class B, Class C and Class D shares each have
exclusive voting rights with respect to the Rule 12b-1 distribution plan
adopted with respect to such class pursuant to which account maintenance
and/or distribution fees are paid. See "Distribution Plans" below. Each class
has different exchange privileges. See "Shareholder Services--Exchange
Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges with respect to Class B and Class C shares in
that the sales charges applicable to each class provide for the financing of
the distribution of the shares of the Fund. The distribution-related revenues
paid with respect to a class will not be used to finance the distribution
expenditures of another class. Sales personnel may receive different
compensation for selling different classes of shares. Investors are advised
that only Class A and Class D shares may be available for purchase through
securities dealers, other than Merrill Lynch, which are eligible to sell
shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select PricingSM System.
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(/1/) FEE FEE CONVERSION FEATURE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 5.25% initial No No No
sales charge(/2/)(/3/)
- -------------------------------------------------------------------------------------------------
B CDSC for a period of 4 years, 0.25% 0.75% B shares convert to D shares
at a rate of 4.0% during the automatically after
first year, decreasing 1.0% approximately
annually to 0.0% eight years(/4/)
- -------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.75% No
- -------------------------------------------------------------------------------------------------
D Maximum 5.25% initial sales 0.25% No No
charge(/3/)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs may be imposed if the redemption occurs
within the applicable CDSC time period. The charge will be assessed on an
amount equal to the lesser of the proceeds of redemption or the cost of
the shares being redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives--Class A and Class D Shares--Eligible Class A Investors".
(3) Reduced for purchases of $25,000 or more. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead will be subject to a 1.0% CDSC for one year.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other MLAM-
advised mutual funds into which exchanges may be made have a ten year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
12
<PAGE>
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible to
purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternative is the next determined net asset
value plus varying sales charges (i.e., sales loads), as set forth below.
<TABLE>
<CAPTION>
SALES LOAD SALES LOAD DISCOUNT TO
AS PERCENTAGE AS PERCENTAGE* SELECTED DEALERS
OF OFFERING OF THE NET AS PERCENTAGE OF
AMOUNT OF PURCHASE PRICE AMOUNT INVESTED THE OFFERING PRICE
------------------ ------------- --------------- ------------------
<S> <C> <C> <C>
Less than $25,000............. 5.25% 5.54% 5.00%
$25,000 but less than $50,000. 4.75 4.99 4.50
$50,000 but less than
$100,000..................... 4.00 4.17 3.75
$100,000 but less than
$250,000..................... 3.00 3.09 2.75
$250,000 but less than
$1,000,000................... 2.00 2.04 1.80
$1,000,000 and over**......... 0.00 0.00 0.00
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more made on or after October 21, 1994. If the sales charge is
waived, such purchases will be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. Class A purchases made prior to
October 21, 1994 may be subject to a CDSC, in lieu of an initial sales
charge, if the shares are redeemed within one year of purchase at the
following rates: 1.00% on purchases of $1,000,000 to $2,500,000; 0.60% on
purchases of $2,500,001 to $3,500,000; 0.40% on purchases of $3,500,001 to
$5,000,000; and 0.25% on purchases of more than $5,000,000. The charge will
be assessed on an amount equal to the lesser of the proceeds of redemption
or the cost of the shares being redeemed. A sales charge of 0.75% will be
charged on purchases of $1,000,000 or more of Class A or Class D shares by
certain 401(k) plans.
The Distributor may reallow discounts to such dealers and retain the balance
over such discounts. At times the Distributor may reallow the entire sales
charge to such dealers. Since securities dealers selling Class A and Class D
shares of the Fund will receive a concession equal to most of the sales charge,
they may be deemed to be underwriters under the Securities Act of 1933, as
amended (the "Securities Act").
During the fiscal year ended September 30, 1994, the Fund sold 1,518,510
Class A shares for aggregate net proceeds of $18,698,722. The gross sales
charges for the sale of Class A shares of the Fund for that year were $54,923,
of which $3,336 and $51,587 were received by the Distributor and Merrill Lynch,
respectively. No CDSCs were received with respect to Class A shares for which
the initial sales charge was waived during the fiscal year ended September 30,
1994. The Fund did not begin to offer Class D shares publicly until after the
fiscal year ended September 30, 1994.
Eligible Class A Investors. Class A shares are offered to a limited group of
investors and also will be issued upon reinvestment of dividends from
outstanding Class A shares. Investors that currently own Class A shares in a
shareholder account, including participants in the Merrill Lynch BlueprintSM
Program, are entitled to purchase additional Class A shares in that account.
Certain employer sponsored retirement or savings plans, including eligible
401(k) plans, may purchase Class A shares at net asset value provided such
plans meet the required minimum number of eligible employees or required amount
of assets advised by MLAM or any of its affiliates. Class A shares are
available at net asset value to corporate warranty insurance reserve fund
programs provided that the program has $3 million or more initially invested in
MLAM-advised mutual funds. Also eligible to purchase Class A shares at net
asset value are participants in certain investment
13
<PAGE>
programs including TMASM Managed Trusts to which Merrill Lynch Trust Company
provides discretionary trustee services and certain purchases made in
connection with the Merrill Lynch Mutual Fund Adviser program. In addition,
Class A shares will be offered at net asset value to ML & Co. and its
subsidiaries and their directors and employees and to members of the Boards of
MLAM-advised investment companies, including the Fund. Certain persons who
acquired shares of certain MLAM-advised closed-end funds who wish to reinvest
the net proceeds from a sale of their closed-end fund shares of common stock in
shares of the Fund also may purchase Class A and Class D shares of the Fund if
certain conditions set forth in the Statement of Additional Information are met
for closed-end funds that commenced operations prior to October 21, 1994. For
example, Class A shares of the Fund and certain other MLAM-advised mutual funds
are offered at net asset value to shareholders of Merrill Lynch Senior Floating
Rate Fund, Inc. who wish to reinvest the net proceeds from a sale of certain of
their shares of common stock of Merrill Lynch Senior Floating Rate Fund, Inc.
in shares of such funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges are
reduced under a Right of Accumulation and a Letter of Intention. Class A shares
are offered at net asset value to certain eligible Class A investors as set
forth above under "Eligible Class A Investors".
Class D shares are offered at net asset value 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. Class D shares may be offered at net asset value in connection with the
acquisition of assets of other investment companies. Class D shares also are
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 (i)
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 or
(ii) invested in a mutual fund sponsored by a non-Merrill Lynch company for
which Merrill Lynch has not served as a selected dealer, if certain conditions
set forth in the Statement of Additional Information are met.
Class D shares are offered with reduced sales charges and, in certain
circumstances, at net asset value, to participants in the Merrill Lynch
BlueprintSM Program.
Additional information concerning these reduced initial sales charges,
including information regarding investments by Employee Sponsored Retirement or
Savings Plans, is set forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four year CDSC,
while Class C shares are subject only to a one year 1.0% CDSC. On the other
hand, approximately eight years after Class B shares are issued, such Class B
shares, together with shares issued upon dividend reinvestment with respect to
those shares, are automatically converted into Class D shares of the Fund and
thereafter will be subject to lower
14
<PAGE>
continuing fees. See "Conversion of Class B Shares to Class D Shares" below.
Both Class B and Class C shares are subject to an account maintenance fee of
0.25% of net assets and a distribution fee of 0.75% of net assets as discussed
below under "Distribution Plans".
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the ongoing distribution fees are paid to the
Distributor and are used in whole or in part by the Distributor to defray the
expenses of dealers (including Merrill Lynch) related to providing
distribution-related services to the Fund in connection with the sale of the
Class B and Class C shares, such as the payment of compensation of financial
consultants for selling Class B and Class C shares, from its own funds. The
combination of the CDSC and the ongoing distribution fee facilitates the
ability of the Fund to sell the Class B and Class C shares without a sales
charge being deducted at the time of purchase. Approximately eight years after
issuance, Class B shares will convert automatically into Class D shares of the
Fund, which are subject to an account maintenance fee but no distribution fee;
Class B shares of certain other MLAM-advised mutual funds into which exchanges
may be made convert into Class D shares automatically after approximately ten
years. If Class B shares of the Fund are exchanged for Class B shares of
another MLAM-advised mutual fund, the conversion period applicable to the Class
B shares acquired in the exchange will apply, and the holding period for the
shares exchanged will be tacked onto the holding period for the shares
acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C shares
is limited by the NASD asset-based sales charge rule. See "Limitations on the
Payment of Deferred Sales Charges" below. The proceeds from the ongoing account
maintenance fee are used to compensate Merrill Lynch for providing continuing
account maintenance activities. Class B shareholders of the Fund exercising the
exchange privilege described under "Shareholder Services--Exchange Privilege"
will continue to be subject to the Fund's CDSC schedule if such schedule is
higher than the CDSC schedule relating to the Class B shares acquired as a
result of the exchange.
Contingent Deferred Sales Charges--Class B Shares. Class B shares which are
redeemed within four years of purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. Accordingly, no CDSC will
be imposed on increases in net asset value above the initial purchase price. In
addition, no CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B CDSC
AS A PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
------------------- ------------------
<S> <C>
0-1..................................................... 4.00%
1-2..................................................... 3.00
2-3..................................................... 2.00
3-4..................................................... 1.00
4 and thereafter........................................ 0.00
</TABLE>
15
<PAGE>
For the fiscal year ended September 30, 1994, the Distributor received CDSCs
of $163,949 with respect to Class B shares.
In determining whether a CDSC is applicable to a redemption, the calculation
will be determined in the manner that results in the lowest possible rate being
charged. Therefore, it will be assumed that the redemption is first of shares
held for over four years or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the four-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of
shares from a shareholder's account to another will be assumed to be made in
the same order as a redemption.
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares upon dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to 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 Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an IRA or other retirement plan or
following the death or disability (as defined in the Internal Revenue Code of
1986, as amended) of a shareholder. The Class B CDSC also is waived on
redemptions of shares by certain eligible 401(a) and eligible 401(k) plans and
in connection with certain group plans placing orders through the Merrill Lynch
BlueprintSM Program. The CDSC also is waived for any Class B shares which are
purchased by eligible 401(k) or eligible 401(a) plans which are rolled over
into a Merrill Lynch or Merrill Lynch Trust Company custodied IRA and held in
such account at the time of redemption. The Class B CDSC also is waived for any
Class B shares which are purchased by a Merrill Lynch rollover IRA that was
funded by a rollover from a terminated 401(k) plan managed by the MLAM Private
Portfolio Group and held in such account at the time of redemption. Additional
information concerning the waiver of the Class B CDSC is set forth in the
Statement of Additional Information.
Contingent Deferred Sales Charges--Class C Shares. Class C shares which are
redeemed within one year of purchase may be subject to a 1.0% CDSC charged as a
percentage of the dollar amount subject thereto. The charge will be assessed on
an amount equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed. Accordingly, no Class C CDSC will be imposed on
increases in net asset value above the initial purchase price. In addition, no
Class C CDSC will be assessed on shares derived from reinvestment of dividends
or capital gains distributions.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible rate being charged. Therefore, it will be assumed that the redemption
is first of shares held for over one year or shares acquired pursuant to
reinvestment of dividends or distributions and then of shares held longest
during the one-year period. The charge will not be applied to dollar amounts
representing an increase in the net asset value since the time of purchase. A
transfer of shares from a shareholder's account to another account will be
assumed to be made in the same order as a redemption. The Fund did not begin to
offer Class C shares publicly until after the fiscal year ended September 30,
1994.
16
<PAGE>
Conversion of Class B Shares to Class D Shares. After approximately eight
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
"Conversion Date") on the basis of the relative net asset values of the shares
of the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class
D shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert
approximately ten years after initial purchase. If, during the Conversion
Period, a shareholder exchanges Class B shares with an eight-year Conversion
Period for Class B shares with a ten-year Conversion Period, or vice versa, the
Conversion Period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked onto
the holding period for the shares acquired.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the
CDSC normally imposed on purchases of Class B shares ("Class B Retirement
Plans"). When the first share of any MLAM-advised mutual fund purchased by a
Class B Retirement Plan has been held for ten years (i.e., ten years from the
date the relationship between MLAM-advised mutual funds and the Class B
Retirement Plan was established), all Class B shares of all MLAM-advised mutual
funds held in that Class B Retirement Plan will be converted into Class D
shares of the appropriate funds. Subsequent to such conversion, that Class B
Retirement Plan will be sold Class D shares of the appropriate funds at net
asset value per share.
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each, a
"Distribution Plan") with respect to the account
17
<PAGE>
maintenance and/or distribution fees paid by the Fund to the Distributor with
respect to such classes. The Class B and Class C Distribution Plans provide for
the payment of account maintenance fees and distribution fees, and the Class D
Distribution Plan provides for the payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual
rate of 0.25% of the average daily net assets of the Fund attributable to
shares of the relevant class in order to compensate the Distributor and Merrill
Lynch (pursuant to a sub-agreement) in connection with account maintenance
activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.75% of
the average daily net assets of the Fund attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services, and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C
shares through dealers without the assessment of an initial sales charge and at
the same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this regard, the
purpose and function of the ongoing distribution fees and the CDSC are the same
as those of the initial sales charge with respect to the Class A and Class D
shares of the Fund in that the deferred sales charges provide for the financing
of the distribution of the Fund's Class B and Class C shares.
Prior to July 6, 1993, the Fund paid the Distributor an ongoing distribution
fee, accrued daily and paid monthly, at the annual rate of 1.0% of average
daily net assets of the Class B shares of the Fund under a distribution plan
previously adopted by the Fund (the "Prior Plan") to compensate the Distributor
and Merrill Lynch for providing account maintenance and distribution-related
activities and services to Class B shareholders. The fee rate payable and the
services provided under the Prior Plan are identical to the aggregate fee rate
payable and the services provided under the Class B Distribution Plan, the
difference being that the account maintenance and distribution services have
been unbundled.
For the year ended September 30, 1994, the Fund paid the Distributor account
maintenance fees of $1,944,798 and distribution fees of $5,834,397 under the
Class B Distribution Plan. The Fund did not begin to offer shares of Class C or
Class D publicly until October 21, 1994.
The payments under the Distribution Plans are based upon a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred and, accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Directors for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information is presented annually as of December 31 of each year on
a "fully allocated accrual" basis and quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated
18
<PAGE>
accrual basis, revenues consist of the account maintenance fees, distribution
fees, the CDSCs and certain other related revenues, and expenses consist of
financial consultant compensation, branch office and regional operation center
selling and transaction processing expenses, advertising, sales promotion and
marketing expenses, corporate overhead and interest expense. On the direct
expense and revenue/cash basis, revenues consist of the account maintenance
fees, distribution fees and CDSCs and the expenses consist of financial
consultant compensation. As of December 31, 1993, the last date for which fully
allocated accrual data is available, the fully allocated accrual revenues
incurred by the Distributor and Merrill Lynch since the Fund commenced
operations on November 29, 1985 exceeded expenses for such period by
$24,803,000 (2.99% of Class B net assets at that date). As of December 31,
1993, direct cash revenues for the period since the commencement of operations
exceeded direct cash expenses by $109,814,195 (13.22% of Class B net assets at
that date); as of September 30, 1994, direct cash revenues for the period since
the commencement of operations exceeded direct cash expenses by $114,890,699
(16.19% of Class B net assets at that date).
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with the Class B, Class C and Class D shares, and there is no
assurance that the Board of Directors of the Fund will approve the continuance
of the Distribution Plans from year to year. However, the Distributor intends
to seek annual continuation of the Distribution Plans. In their review of the
Distribution Plans, the Directors will be asked to take into consideration
expenses incurred in connection with the account maintenance and/or
distribution of each class of shares separately. The initial sales charges, the
account maintenance fee, the distribution fee and/or the CDSCs received with
respect to one class will not be used to subsidize the sale of shares of
another class. Payments of the distribution fee on Class B shares will
terminate upon conversion of those Class B shares into Class D shares as set
forth under "Deferred Sales Charge Alternatives--Class B and Class C Shares--
Conversion of Class B Shares to Class D Shares".
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the NASD
imposes a limitation on certain asset-based sales charges such as the Fund's
distribution fee and the CDSC borne by the Class B and Class C shares, but not
the account maintenance fee. The maximum sales charge rule is applied
separately to each class. As applicable to the Fund, the maximum sales charge
rule limits the aggregate of distribution fee payments and CDSCs payable by the
Fund to (1) 6.25% of eligible gross sales of Class B shares and Class C shares,
computed separately (defined to exclude shares issued pursuant to dividend
reinvestments and exchanges) plus (2) interest on the unpaid balance at the
prime rate plus 1% (the unpaid balance being the maximum amount payable minus
amounts received from the payment of the distribution fee and the CDSC). The
Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any time.
To the extent payments would exceed the voluntary maximum, the Fund will not
make further payments of the distribution fee with respect to Class B shares,
and any CDSCs will be paid to the Fund rather than to the Distributor; however,
the Fund will continue to make payments of the account maintenance fee. In
certain circumstances, the amount payable pursuant to the voluntary maximum may
exceed the amount payable under the NASD formula. In such circumstances payment
in excess of the amount payable under the NASD formula will not be made.
19
<PAGE>
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
designed to facilitate investment in its shares. Certain of such services are
not available to investors who place orders for the Fund through the Merrill
Lynch BlueprintSM Program. Full details as to each of such services, copies of
the various plans described below and instructions as to how to participate in
the various services or plans, or how to change options with respect thereto,
can be obtained from the Fund, the Distributor or Merrill Lynch. Included in
such services are the following:
Investment Account. Each shareholder whose account is maintained at the
Transfer Agent has an Investment Account and will receive statements, at least
quarterly, from the Transfer Agent. These statements will serve as transaction
confirmations for automatic investment purchases and the reinvestment of
ordinary income dividends and long-term capital gain distributions. The
statements will also show any other activity in the account since the preceding
statement. Shareholders will receive separate transaction confirmations for
each purchase or sale transaction other than automatic investment purchases and
the reinvestment of ordinary income dividends, and long-term capital gains
distributions. Shareholders may make additions to their 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 automatically opened, without charge,
at the Transfer Agent. Shareholders considering transferring their Class A or
Class D shares from Merrill Lynch to another brokerage firm or financial
institution should be aware that, if the firm to which the shares are to be
transferred will not take delivery of shares of the Fund, a shareholder either
must redeem the Class A or Class D shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm or such
shareholder must continue to maintain an Investment Account at the Transfer
Agent for those Class A or Class D shares. Shareholders interested in
transferring their Class B or Class C shares from Merrill Lynch and who do not
wish to have an Investment Account maintained for such shares at the Transfer
Agent may request their new brokerage firm to maintain such shares in an
account registered in the name of the brokerage firm for the benefit of the
shareholder at the Transfer Agent. Shareholders considering transferring a tax-
deferred retirement account such as an IRA from Merrill Lynch to another
brokerage firm or financial institution should be aware that, if the firm to
which the retirement account is to be transferred will not take delivery of
shares of the Fund, a shareholder must either redeem the shares (paying any
applicable CDSC) so that the cash proceeds may be transferred to the account at
the new firm, or such shareholder must continue to maintain a retirement
account at Merrill Lynch for those shares.
Exchange Privilege. Shareholders of each class of shares of the Fund each
have an exchange privilege with certain other MLAM-advised mutual funds. There
is currently no limitation on the number of times a shareholder may exercise
the exchange privilege. The exchange privilege may be modified or terminated at
any time in accordance with the rules of the Commission.
Under the Merrill Lynch Select PricingSM System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund in
his account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class
A shareholder wants to exchange
20
<PAGE>
Class A shares for shares of a second MLAM-advised mutual fund, and the
shareholder does not hold Class A shares of the second fund in his account at
the time of the exchange and is not otherwise eligible to acquire Class A
shares of the second fund, the shareholder will receive Class D shares of the
second fund as a result of the exchange. Class D shares also may be exchanged
for Class A shares of a second MLAM-advised mutual fund at any time as long as,
at the time of the exchange, the shareholder holds Class A shares of the second
fund in the account in which the exchange is made or is otherwise eligible to
purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the relative
net asset values per Class A or Class D share, respectively, plus an amount
equal to the difference, if any, between the sales charge previously paid on
the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares will be exchangeable with shares of the
same class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC will be exchangeable on the
basis of relative net asset value per share without the payment of any CDSC
that might otherwise be due upon redemption of the shares of the Fund. For
purposes of computing the CDSC that may be payable upon a disposition of the
shares acquired in the exchange, the holding period for the previously owned
shares of the Fund is "tacked" to the holding period of the newly acquired
shares of the other Fund.
Class A, Class B, Class C and Class D shares also will be exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for reduction of any CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange privilege is treated as a sale for Federal income
tax purposes. For further information, see "Shareholder Services--Exchange
Privilege" in the Statement of Additional Information.
The Fund's exchange privilege is modified with respect to purchases of Class
A and Class D shares under the Merrill Lynch Mutual Fund Adviser ("MFA")
program. First, the initial allocation of assets is made under the MFA program.
Then, any subsequent exchange under the MFA program of Class A or Class D
shares of a MLAM-advised mutual fund for Class A or Class D shares of the Fund
will be made solely on the basis of the relative net asset values of the shares
being exchanged. Therefore, there will not be a charge for any difference
between the sales charge previously paid on the shares of the other MLAM-
advised mutual fund and the sales charge payable on the shares of the Fund
being acquired in the exchange under the MFA program.
21
<PAGE>
Automatic Reinvestment of Dividends and Capital Gains Distributions. All
dividends and capital gains distributions are reinvested automatically in full
and fractional shares of the Fund, without sales charge, at the net asset value
per share next determined on the ex-dividend date of such dividend or
distribution. A shareholder may at any time, by written notification or by
telephone (1-(800)-MER-FUND) to the Transfer Agent, elect to have subsequent
dividends or both dividends and capital gains distributions paid in cash rather
than reinvested, in which event payment will be mailed on or about the payment
date. Cash payments can also be directly deposited to the shareholder's bank
account. No CDSC will be imposed on redemption of shares issued as a result of
the automatic reinvestment of dividends or capital gains distributions.
Systematic Withdrawal Plans. A Class A or Class D shareholder may elect to
receive systematic withdrawal payments from his Investment Account 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, bi-monthly, quarterly, semiannual or annual
basis through the Systematic Redemption Program, subject to certain conditions.
Automatic Investment Plans. Regular additions of Class A, Class B, Class C or
Class D shares may be made to an investor's Investment Account by prearranged
charges of $50 or more to such investor's regular bank account. Investors who
maintain CMA (R) accounts may arrange to have periodic investments made in the
Fund in their CMA (R) account or in certain related accounts in amounts of $100
or more through the CMA Automated Investment Program.
Retirement Plans. Self-directed individual retirement accounts and other
retirement plans are available from Merrill Lynch. Under these plans,
investments may be made in the Fund and in certain of the other mutual funds
whose shares are distributed by the Distributor as well as in other securities.
Merrill Lynch charges an initial establishment fee and an annual custodial fee
for each account. The minimum initial purchase to establish any such plan is
$100 and the minimum subsequent purchase is $1.
REDEMPTION OF SHARES
The Fund is required to redeem for cash all shares of the Fund on receipt of
a written request in proper form. The redemption price is the net asset value
per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC which may be applicable, there will be no
charge for redemption if the redemption request is sent directly to the
Transfer Agent. Shareholders liquidating their holdings will receive 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 Fund's Transfer Agent, Financial Data Services,
Inc., Transfer Agency Mutual Funds 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 Funds
Operations, 4800 Deer Lake Drive
22
<PAGE>
East, Jacksonville, Florida 32246-6484. Proper notice of redemption in the case
of shares deposited with the Transfer Agent may be accompanied by a written
letter requesting redemption. Proper notice of redemption in the case of shares
for which certificates have been issued may be accomplished by a written letter
as noted above accompanied by certificates for the shares to be redeemed. 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 redemption request must be guaranteed by an "eligible guarantor
institution" as such term is defined in Rule 17Ad-15 under the Securities
Exchange Act of 1934, the existence and validity of which may be verified by
the Transfer Agent through the use of industry publications. Notarized
signatures are not sufficient. In certain instances, the Transfer Agent may
require additional documents, such as, but not limited to, trust instruments,
death certificates, appointments as executor or administrator, or certificates
of corporate authority. For shareholders redeeming directly with the Transfer
Agent, 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 it has assured itself that
good payment (e.g., cash or certified check drawn on a United States bank) has
been collected for the purchase of such shares. Normally, this delay will not
exceed 10 days.
REPURCHASE
The Fund also will repurchase shares through a shareholder's listed
securities dealer. The Fund 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, less any applicable CDSC,
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 such
request is received by the Fund from the dealer not later than 30 minutes after
the close of business on the New York Stock Exchange (generally 4:00 P.M. New
York time) on the same day.
Dealers have the responsibility of submitting such repurchase requests to the
Fund not later than 30 minutes after the close of business on the New York
Stock Exchange (generally 4:00 P.M. New York time) in order to obtain that
day's closing price. These repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any applicable
CDSC). 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 Fund's Transfer Agent are
not subject to the processing fee. The Fund reserves the right to reject any
order for repurchase, which right of rejection might adversely affect
shareholders seeking redemption through the repurchase procedure. However, a
shareholder whose order for repurchase is rejected by the Fund may redeem
shares as set forth above.
REINSTATEMENT PRIVILEGE--CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a one-
time privilege to reinstate their accounts by purchasing Class A or Class D
shares, as the case may be, of the Fund at net asset value without a sales
charge up to the dollar amount redeemed. The reinstatement privilege may be
exercised by sending a notice of exercise along with a check for the amount to
be reinstated to the Transfer Agent within
23
<PAGE>
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 or Class
D shareholder only the first time such shareholder makes a redemption.
INVESTMENT PRACTICES AND RESTRICTIONS
PORTFOLIO STRATEGIES INVOLVING OPTIONS AND FUTURES
The Fund may engage in various portfolio strategies to seek to increase its
return through the use of options on portfolio securities and to hedge its
portfolio against movements in the equity markets, interest rates and exchange
rates between currencies. The Fund has authority to write (i.e., sell) covered
call options on its portfolio securities, purchase put options on securities
and engage in transactions in stock index options, stock index futures and
financial futures, and related options on such futures. The Fund may also deal
in forward foreign exchange transactions and foreign currency options and
futures, and related options on such futures. Each of these portfolio
strategies is described below. Although certain risks are involved in options
and futures transactions (as discussed below in "Risk Factors in Options,
Futures and Currency Transactions"), the Investment Adviser believes that,
because the Fund will only engage in these transactions for hedging purposes,
the options and futures portfolio strategies of the Fund will not subject the
Fund to the risks frequently associated with the speculative use of options and
futures transactions. While the Fund's use of hedging strategies is intended to
reduce the volatility of the net asset value of Fund shares, the Fund's net
asset value will fluctuate. There can be no assurance that the Fund's hedging
transactions will be effective. Furthermore, the Fund will only engage in
hedging activities from time to time and may not necessarily be engaging in
hedging activities when movements in the equity markets, interest rates or
currency exchange rates occur.
Purchasing Put Options. The Fund is authorized to purchase put options to
hedge against a decline in the market value of its portfolio securities. By
buying a put option, the Fund has a right to sell the underlying security at
the exercise price, thus limiting the Fund's risk of loss through a decline in
the market value of the security until the put option expires. The amount of
any appreciation in the value of the underlying security will be partially
offset by the amount of the premium paid for the put option and any related
transaction costs. Prior to its expiration, a put option may be sold in a
closing sale transaction and profit or loss from the sale will depend on
whether the amount received is more or less than the premium paid for the put
option plus the related transaction costs. A closing sale transaction cancels
out the Fund's position as the purchaser of an option by means of an offsetting
sale of an identical option prior to the expiration of the option it has
purchased. The Fund will not purchase put options on securities if, as a result
of such purchase, the aggregate cost of all outstanding options on securities
held by the Fund would exceed 5% of the market value of the Fund's total
assets.
Writing of Covered Call Options. The Fund may, from time to time, sell
("write") covered call options in order to attempt to increase the yield on its
portfolio or to protect against declines in the value of its portfolio
securities. A covered call option is an option whereby the Fund, in return for
a premium, gives another party a right to buy particular securities owned by
the Fund at a specified price for a certain period
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of time. By writing a covered call option, the Fund, in return for the premium
income realized from the sale of the option, gives up the opportunity to profit
from a price increase in the underlying security above the option exercise
price, where the price increase occurs while the option is in effect. In
addition, the Fund's ability to sell the underlying security will be limited
while the option is in effect. The Fund may not write covered call options on
underlying securities in an amount exceeding 25% of the value of its 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
call options and purchase or write put options on stock indexes to hedge
against the risks of market-wide stock price movements in the securities in
which the Fund invests. The effectiveness of the hedge will depend on the
degree of diversification of the Fund's portfolio and the sensitivity of the
securities comprising the portfolio to factors influencing the market as a
whole. Because the value of an index option depends upon movements in the level
of the index rather than the price of a particular stock, whether the Fund will
realize a gain or loss on the purchase or sale of an option on an index depends
upon movements in the level of prices in the stock market generally or in an
industry or market segment rather than movements in the prices of a particular
stock. Currently, stock index options traded include the S&P 100 Index, the S&P
500 Index, the NYSE Composite Index, the AMEX Market Value Index, the National
Over-the-Counter Index and other standard, broadly based stock market indices.
The Fund may also purchase and sell stock index futures contracts and
financial futures contracts ("futures contracts") as a hedge against adverse
changes in the market value of its portfolio securities and interest rates, as
described below. A futures contract is an agreement between two parties which
obligates the purchaser of the futures contract to buy and the seller of a
futures contract to sell a security for a set price on a future date. Unlike
most other futures contracts, a stock index futures contract does not require
actual delivery of securities, but results in cash settlement based upon the
difference in value of the index between the time the contract was entered into
and the time of its settlement. The Fund may effect transactions in stock index
futures contracts in securities and financial futures contracts in United
States Government and agency securities and corporate debt securities.
Transactions by the Fund in stock index futures and financial futures are
subject to limitations as described below under "Restrictions on the Use of
Futures Transactions".
The Fund may sell stock index futures contracts in anticipation of or during
a market decline to attempt to offset the decrease in market value of the
Fund's securities portfolio that might otherwise result. When the Fund is not
fully invested in the securities markets and anticipates a significant market
advance, it may purchase stock index futures in order to gain rapid market
exposure that may in part or entirely offset increases in the cost of
securities that the Fund intends to purchase. As such securities purchases are
made, an equivalent amount of stock index futures contracts will be terminated
by offsetting sales. The Fund does not consider purchases of futures contracts
to be a speculative practice under these circumstances. It is anticipated that,
in a substantial majority of these transactions, the Fund will purchase such
securities upon termination of the long futures position, whether the long
position is the purchase of a stock index futures contract or the purchase of a
call option on a stock index future, but under unusual circumstances (e.g., the
Fund experiences a significant amount of redemptions), a long futures position
may be terminated without the corresponding purchase of securities.
The Fund may sell financial futures contracts in anticipation of an increase
in the general level of interest rates. Generally, as interest rates rise, the
market values of debt securities which may be held by the Fund as
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<PAGE>
a temporary defensive measure will fall, thus reducing the net asset value of
the Fund. However, as interest rates rise, the value of the Fund's short
position in the futures contract will also tend to increase, thus offsetting
all or a portion of the depreciation in the market value of the Fund's
investments which are being hedged. While the Fund will incur commission
expenses in selling and closing out futures positions, these commissions are
generally less than the transaction expenses which the Fund would have incurred
had the Fund sold portfolio securities in order to reduce its exposure to
increases in interest rates. The Fund also may purchase financial futures
contracts in anticipation of a decline in interest rates when it is not fully
invested in a particular market in which it intends to make investments to gain
market exposure that may in part or entirely offset an increase in the cost of
securities it intends to purchase. It is anticipated that, in a substantial
majority of these transactions, the Fund will purchase securities upon
termination of the futures contract.
The Fund also has authority to purchase and write call and put options on
futures contracts in connection with its hedging activities. Generally, these
strategies are utilized under the same market and market sector conditions
(i.e., conditions relating to specific types of investments) in which the Fund
enters into futures transactions. The Fund may purchase put options or write
call options on futures contracts rather than selling the underlying futures
contract in anticipation of a decrease in the market value of a security or an
increase in interest rates. Similarly, the Fund may purchase call options, or
write put options on futures contracts, as a substitute for the purchase of
such futures to hedge against the increased cost resulting from an increase in
the market value or a decline in interest rates of securities which the Fund
intends to purchase.
The Fund may engage in options and futures transactions on exchanges and
options in the over-the-counter markets ("OTC options"). In general, exchange-
traded contracts are third-party contracts (i.e., performance of the parties'
obligations is guaranteed by an exchange or clearing corporation) with
standardized strike prices and expiration dates. OTC options transactions are
two-party contracts with price and terms negotiated by the buyer and seller.
See "Restrictions on OTC Options" below for information as to restrictions on
the use of OTC options.
Foreign Currency Options, Futures and Related Options. The Fund is also
authorized to purchase or sell listed or over-the-counter foreign currency
options, foreign currency futures and related options on foreign currency
futures as a short or long hedge against possible variations in foreign
exchange rates. Such transactions may be effected with respect to hedges on
non-U.S. dollar denominated securities owned by the Fund, sold by the Fund but
not yet delivered, or committed or anticipated to be purchased by the Fund. As
an illustration, the Fund may use such techniques to hedge the stated value in
United States dollars of an investment in a pound sterling denominated
security. In such circumstances, for example, the Fund may purchase a foreign
currency put option enabling it to sell a specified amount of pounds for
dollars at a specified price by a future date. To the extent the hedge is
successful, a loss in value of the pound relative to the dollar will tend to be
offset by an increase in the value of the put option. To offset, in whole or in
part, the cost of acquiring such a put option, the Fund may also sell a call
option which, if exercised, requires it to sell a specified amount of pounds
for dollars at a specified price by a future date (a technique called a
"straddle"). By selling such call option, the Fund gives up the opportunity to
profit without limit from increases in the relative value of the pound to the
dollar. The Investment Adviser believes that "straddles" of the type which may
be utilized by the Fund constitute hedging transactions and are consistent with
the policies described above.
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<PAGE>
Certain differences exist between these foreign currency hedging instruments.
Foreign currency options provide the holder thereof the right to buy or sell a
currency at a fixed price on a future date (with exchange-traded contracts and
OTC options having the characteristics described above). A futures contract on
a foreign currency is an agreement between two parties to buy and sell a
specified amount of 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 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. Under regulations of the
Commodity Futures Trading Commission ("CFTC"), the futures trading activities
described herein will not result in the Fund being deemed to be a "commodity
pool," as defined under such regulations, provided that the Fund adheres to
certain restrictions. In particular, the Fund may (i) purchase and sell futures
contracts and options thereon for bona fide hedging purposes, as defined under
CFTC regulations, without regard to the percentage of the Fund's assets
committed to margin and option premiums, and (ii) the Fund may enter into non-
hedging transactions, provided that the Fund not enter into such transactions
for yield enhancement or risk management purposes if, immediately thereafter,
the sum of the amount of initial margin deposits on the Fund's existing futures
positions and option premiums would exceed 5% of the market value of its
liquidation value, after taking into account unrealized profits and unrealized
losses on any such transactions. However, the Fund intends to engage in options
and futures transactions only for hedging purposes. Margin deposits may consist
of cash or securities acceptable to the broker and the relevant contract
market.
When the Fund purchases a futures contract or writes a put option or
purchases a call option thereon, 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 is unleveraged.
An order has been obtained from the Commission which exempts the Fund from
certain provisions of the Investment Company Act in connection with
transactions involving futures contracts and options thereon.
Restrictions on OTC Options. The Fund will engage in OTC options, including
over-the-counter foreign currency options and options on foreign currency
futures, only with member banks of the Federal Reserve System and primary
dealers in United States Government securities or with affiliates of such banks
or dealers which have capital of at least $50 million or whose obligations are
guaranteed by an entity having capital of at least $50 million. The Fund will
acquire only those OTC options for which the Investment Adviser believes the
Fund can receive on each business day at least two independent bids or offers
(one of which will be from an entity other than a party to the option).
The staff of the Commission has taken the position that purchased OTC options
and the assets used as cover for written OTC options are illiquid securities.
Therefore, the Fund has adopted an investment policy
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<PAGE>
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 exceed 15% 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 is not a fundamental policy of the Fund
and may be amended by the Board of 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
positions.
Risk Factors in Options, Futures and Currency 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 prices
and movements in the prices of the securities, interest rates 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 subject of the hedge, the Fund will
experience a gain or loss which will not be completely offset by movements in
the price of the subject of the hedge.
The 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 OTC
options, the Investment Adviser 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 effectively hedge 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 a related option.
The exchanges on which currency options are traded have generally established
limitations governing the maximum number of call or put options on the same
underlying currency (whether or not covered) which may be written by a single
investor, whether acting alone or in concert with others (regardless of whether
such options are written on the same or different exchanges or are held or
written on one or more accounts or through one or more brokers). "Trading
limits" are imposed on the maximum number of contracts which any person may
trade on a particular trading day. The Investment Adviser 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 PRACTICES
Lending of Portfolio Securities. The Fund may from time to time lend
securities which it holds, with a value not exceeding 33 1/3% of its total
assets, to approved borrowers such as brokers and financial institutions.
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All loans of portfolio securities will be fully collateralized by cash or U.S.
government securities. During the period of this 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 fell below the market value of the borrowed securities.
Repurchase Agreements. In repurchase transactions, the Fund purchases a
collaterized debt security from a bank, broker-dealer or financial institution
which agrees to repurchase such security on a certain date and at a fixed price
calculated to produce a previously agreed upon return to the Fund. If the bank
or financial institution were to default upon its repurchase obligation and the
debt security were sold for a lesser amount, the Fund would realize a loss.
Foreign and Emerging Markets Securities. The Fund may invest up to 20% of its
total assets in securities issued by foreign companies. For purposes of this
investment policy, an issuer ordinarily will be considered to be located in the
country under the laws of which it is organized or where the primary trading
market of its securities is located. The Fund, however, may consider a company
to be located in a country, without reference to its domicile or to the primary
trading market of its securities, when at least 50% of its non-current assets,
capitalization, gross revenues or profits in any one of the two most recent
fiscal years represents (directly or indirectly through subsidiaries) assets or
activities located in such country.
Investments in the securities of foreign issuers involve certain
considerations and risks not ordinarily associated with investments in
securities of domestic issuers. Foreign companies are not generally subject to
uniform accounting, auditing and financial standards and requirements
comparable to those applicable to U.S. companies. Foreign securities exchanges,
brokers and listed companies may be subject to less government supervision and
regulation than exists in the United States. Dividend and interest income may
be subject to withholding and other foreign taxes which may adversely affect
the net return on such investments. In addition, with respect to certain
countries, there are risks of expropriation, confiscatory taxation, political
or social instability or diplomatic developments which could affect assets of
the Fund held in foreign countries.
There may be less publicly available information about a foreign company than
a U.S. company. Foreign securities markets may have substantially less volume
than U.S. securities markets and some foreign company securities are less
liquid and more volatile than comparable securities of U.S. companies. A
portfolio of foreign securities may also be adversely affected by fluctuations
in the rates of exchange between the currencies of different nations and by
exchange control regulations. Foreign markets also have different clearance and
settlement procedures, and in certain markets there have been times when
settlements have failed to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when assets of the Fund are
uninvested and no return is earned thereon. The inability of the Fund to make
intended security purchases due to settlement problems could cause the Fund to
miss attractive investment opportunities. Inability to dispose of a portfolio
security due to settlement problems could result either in losses to the Fund
due to subsequent declines in value of such portfolio security or, if the Fund
has entered into a contract to sell the security, could result in possible
liability to the purchaser. In addition, a portfolio which includes foreign
securities can expect to have a higher expense ratio because of the increased
transaction costs on non-U.S. securities markets and the increased costs of
maintaining the custody of foreign securities.
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<PAGE>
The Fund has made, and may continue to make, substantial investments in
securities of issuers in Latin America, the Far East and lesser developed
capital markets. The risks of investments in foreign securities described above
tend to be particularly significant when investing in lesser developed capital
markets.
Forward Foreign Exchange Transactions. The Fund has authority to deal in
forward foreign exchange between currencies of the different countries in which
it will invest as a hedge against possible variations in the foreign exchange
rate among these currencies. This is accomplished through contractual
agreements to purchase or sell a specified currency at a specified future date
(up to one year) and price set at the time of the contract. The Fund's dealings
in forward foreign exchange will be limited to hedging involving either
specific transactions or portfolio positions. Transaction hedging is the
purchase or sale of forward foreign currency with respect to specific
receivables or payables of the Fund accruing in connection with the purchase
and sale of its portfolio securities, the sale and redemption of shares of the
Fund or the payment of dividends and distributions by the Fund. Position
hedging is the sale of forward foreign currency with respect to portfolio
security positions denominated or quoted in such foreign currency. The Fund
will not speculate in forward foreign exchange. The Fund will not attempt to
hedge all of its foreign portfolio positions. The Fund may not commit more than
15% of its assets to position hedging contracts.
Portfolio Brokerage. The Fund has no obligation with any broker or group of
brokers in the execution of transactions in portfolio securities. Orders for
transactions in portfolio securities are placed for the Fund with a number of
brokers and dealers, including Merrill Lynch. In placing orders it is the
policy of the Fund to obtain the most favorable net results, taking into
account various factors including price, commission, if any, size of the
transaction, and difficulty of execution. Where practicable, the Investment
Adviser surveys a number of brokers and dealers in connection with proposed
portfolio transactions and selects the broker or dealer which offers the Fund
the best price and execution or other services which are of benefit to the
Fund.
Investment Restrictions. The Fund has adopted certain investment restrictions
which may not be changed without a vote of the Fund's shareholders, including a
majority of the shares of the Fund and any other portfolio which might be added
in the future. The Statement of Additional Information contains a description
of those restrictions under "Investment Practices and Restrictions--Current
Investment Restrictions."
PERFORMANCE DATA
From time to time the Fund may include its average annual total return for
various specified time periods in advertisements or information furnished to
present or prospective shareholders. Average annual total return is computed
separately for Class A, Class B, Class C and Class D shares in accordance with
a formula specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any capital gains or losses on portfolio investments over
such periods) that would equate the initial amount invested to the redeemable
value of such investment at the end of each period. Average annual total return
will be computed assuming all dividends and distributions are reinvested and
taking into account all applicable recurring and nonrecurring expenses,
including the maximum sales charge in the case of Class A and Class D shares
and
30
<PAGE>
the CDSC that would be applicable to a complete redemption of the investment at
the end of the specified period in the case of Class B and Class C shares.
Dividends paid by the Fund with respect to all shares, to the extent any
dividends are paid, will be calculated in the same manner at the same time on
the same day and will be in the same amount, except that account maintenance
fees and distribution charges and any incremental transfer agency costs
relating to each class of shares will be borne exclusively by that class. The
Fund will include performance data for both Class A and Class B shares of the
Fund in any advertisement or information including performance data for all
classes of shares of the Fund.
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return
calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return and (2) the maximum applicable sales
charges will not be included with respect to annual or annualized rates of
return calculations. Aside from the impact on the performance data calculations
of including or excluding the maximum applicable sales charges, actual annual
or annualized total return data generally will be lower than average annual
total return data since the average annual rates of return reflect compounding;
aggregate total return data generally will be higher than average annual total
return data since the aggregate rates of return reflect compounding over a
longer period of time. In advertisements directed to investors whose purchases
are subject to reduced sales charges in the case of Class A and Class D shares
or waiver of the CDSC in the case of Class B and Class C shares (such as
investors in certain retirement plans), performance data may take into account
the reduced, and not the maximum, sales charge or may not take into account the
CDSC and therefore may reflect greater total return since, due to the reduced
sales charges or waiver of the CDSC, a lower amount of expenses may be
deducted. See "Purchase of Shares". The Fund's total return may be expressed
either as a percentage or as a dollar amount in order to illustrate the effect
of such total return on a hypothetical $1,000 investment in the Fund at the
beginning of each specified period.
Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate and an investor's shares, when redeemed, may be worth more
or less than their original cost.
On occasion, the Fund may compare its performance to that of the Standard &
Poor's 500 Composite Stock Price Index, the Value Line Composite Index or the
Dow Jones Industrial Average, or to data contained in publications such as
Lipper Analytical Services, Inc., Morningstar Publications, Inc.
("Morningstar"), Money Magazine, U.S. News & World Report, Business Week, CDA
Investment Technology, Inc., Forbes Magazine and Fortune Magazine. From time to
time, the Fund may include the Fund's Morningstar risk-adjusted performance
ratings in advertisements or supplemental sales literature. As with other
performance data, performance comparisons should not be considered indicative
of the Fund's relative performance for any future period.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board of Directors of the Fund, the
Investment Adviser is responsible for the Fund's portfolio decisions and the
placing of the Fund's portfolio transactions. With
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<PAGE>
respect to such transactions, the Investment Adviser 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. While the Investment Adviser
generally seeks reasonably competitive commission rates, the Fund will not
necessarily be paying the lowest commission or spread available.
The Fund has no obligation to deal with any broker or dealer in the execution
of its portfolio transactions. The Fund pays brokerage fees to Merrill Lynch in
connection with portfolio transactions executed by Merrill Lynch.
Brokers and dealers, including Merrill Lynch, who provide supplemental
investment research to the Investment Adviser may receive orders for
transactions by the Fund. Information so received is in addition to and not in
lieu of the services required to be performed by the Investment Adviser under
the Investment Advisory Agreement, and the expenses of the Investment Adviser
will not necessarily be reduced as a result of the receipt of such supplemental
information. Supplemental investment research received by the Investment
Adviser also may be used in connection with other investment advisory accounts
of the Investment Adviser and its affiliates. Whether or not a particular
broker-dealer sells shares of the Fund neither qualifies nor disqualifies such
broker-dealer to execute transactions for the Fund.
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 semi-annually. All net
realized long- or short-term capital gains, if any, are distributed to the
Fund's shareholders at least annually. 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. The per
share dividends and distributions on each class of shares will be reduced as a
result of any account maintenance, distribution and transfer agency fees
applicable to that class. See "Additional Information--Determination of Net
Asset Value". Dividends and distributions may be automatically reinvested in
shares of the Fund, at the 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.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of the Fund is determined
once daily 15 minutes after the close of business on the New York Stock
Exchange (generally, 4:00 P.M. New York time), on each day during which the New
York Stock Exchange is open for trading. Any assets or liabilities initially
expressed in terms of non-U.S. dollar currencies are translated into U.S.
dollars at the prevailing market rates as quoted by one or more banks or
dealers on the day of valuation. The net asset value per share is computed by
dividing the sum of the value of the securities held by the Fund plus any cash
or other assets (including interest and dividends accrued but not yet received)
minus all liabilities (including accrued expenses) by the total number of
shares outstanding at such time, rounded to the nearest cent. Expenses,
including the investment advisory
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<PAGE>
fees payable to the Investment Adviser and any account maintenance and/or
distribution fee payable to the Distributor, are accrued daily. The Fund
employs Merrill Lynch Securities Pricing Service ("MLSPS"), an affiliate of the
Investment Adviser, to provide certain securities prices for the Fund. The Fund
paid fees to MLSPS in the amount of $54 for the fiscal period ended September
30, 1994. The per share net asset value of the Class A shares generally will be
higher than the per share net asset value of shares of the other classes,
reflecting the daily expense accruals of the account maintenance, distribution
and higher transfer agency fees applicable with respect to Class B and Class C
shares and the daily expense accruals of the account maintenance fees
applicable with respect to the Class D shares; moreover, the per share net
asset value of Class D shares generally will be higher than the per share net
asset value of Class B and Class C shares, reflecting the daily expense
accruals of the distribution and higher transfer agency fees applicable with
respect to Class B and Class C shares. It is expected, however, that the per
share net asset value of the classes will tend to converge (although not
necessarily meet) immediately after the payment of dividends or distributions,
which will differ by approximately the amount of the expense accrual
differentials among the classes.
Portfolio securities and options which are traded on 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. Securities traded in the over-the-counter market are valued at the last
quoted bid prices as at the close of trading on the New York Stock Exchange on
each day by brokers that make markets in the securities. 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. 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.
TAXES
The Fund has elected and intends to continue to qualify for the special tax
treatment afforded regulated investment companies ("RICs") under the Internal
Revenue Code of 1986, as amended (the "Code"). If it so qualifies, the Fund
(but not its shareholders) will not be subject to Federal income tax on the
part of its net ordinary income and net realized capital gains which it
distributes to Class A, Class B, Class C and Class D shareholders (together,
the "shareholders").
The 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. If the Fund pays a dividend in January which was
declared in the previous October, November or December to shareholders of
record on a specified date in one of such months, then such dividend or
distribution will be treated for federal tax purposes as being paid on December
31, and will be taxable to shareholders as if received on December 31.
The following discussion applies generally to shareholders of the Fund and,
in particular, to those shareholders of the Fund whose income is subject to
tax.
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
33
<PAGE>
as ordinary income. Distributions made from the Fund's net realized long-term
capital gains (including long-term gains from certain transactions in options)
are taxable to shareholders as long-term capital gains, regardless of the
length of time the shareholder has owned Fund shares.
Dividends and distributions 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 gains 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.
Ordinary income dividends paid by the Fund to shareholders who are non-
resident aliens or foreign entities generally will be subject to a 30% United
States 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. Non-resident
shareholders are urged to consult their own tax advisers concerning the
applicability of the United States withholding tax.
Pursuant to the Fund's investment objectives, the Fund may invest in foreign
securities. Foreign taxes may be paid by the Fund as a result of tax laws of
countries in which the Fund may invest. Income tax treaties between certain
countries and the United States may reduce or eliminate such taxes. It is
impossible to determine in advance the effective rate of foreign tax to which
the Fund will be subject, since the amount of Fund assets to be invested in
various countries is not known. Because the Fund limits its investment in
foreign securities, shareholders will not be entitled to claim foreign tax
credits with respect to their share of foreign taxes paid by the Fund on income
from investments of foreign securities held by the Fund.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gains dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom a certified taxpayer identification
number is not on file with the Fund, those who, to the Fund's knowledge, have
furnished an incorrect number or those who are subject to backup withholding
because of a failure to report income. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such investor is not subject to backup withholding.
A shareholder who holds shares as a capital asset generally will recognize a
capital gain or loss upon the sale of such shares, which will be a long-term
capital gain or loss if such shares were held for more than one year. However,
any loss realized by a shareholder who held shares for six months or less will
be treated as a long-term capital loss to the extent of any distributions of
net capital gains received by the shareholder with respect to such shares.
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period of the acquired Class D shares will
include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of acquiring
such shares, then the loss the shareholder can recognize on the exchange will
be reduced (or the gain increased) to the extent the sales
34
<PAGE>
charge paid to the Fund reduces any sales charge the shareholder would have
owed upon purchase of the new shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new
shares. See "Shareholder Services--Exchange Privilege".
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and these
Treasury regulations are subject to change by legislative or administrative
action either prospectively or retroactively.
The Fund intends to provide shareholders annually with information relating
to the Fund's income and assets necessary to permit shareholders to determine
whether and to what extent their dividend income from the Fund is exempt from
their state income tax.
Shareholders are urged to consult their tax advisers as to whether any
portion of the dividends they receive from the Fund are exempt from state
income tax and as to any other 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 May 21, 1984. It has an
authorized capital of 2,000,000,000 shares of Common Stock, par value $0.01 per
share, divided into four classes, designated Class A, Class B, Class C and
Class D Common Stock, each of which consists of 500,000,000 shares. Class A,
Class B, Class C and Class D Common Stock represent interests in the same
assets of the Fund and are identical in all respects except that Class B, Class
C and Class D shares bear certain expenses related to the account maintenance
associated with such shares, and Class B and Class C shares bear certain
expenses related to the distribution of such shares. Each class has exclusive
voting rights with respect to matters relating to account maintenance and
distribution expenditures, as the case may be. See "Purchase of Shares". The
Fund has received an order from the Commission permitting the issuance and sale
of multiple classes of Common Stock. The Directors of the Fund may classify and
reclassify the shares of the Fund into additional classes of Common Stock at a
future date.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matter submitted to a shareholder vote. The Fund does not intend to
hold meetings of shareholders in any year in which the Investment Company Act
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. Voting rights for Directors are not cumulative. Shares
issued are fully paid and non-assessable and have no preemptive rights. Shares
have the conversion rights described in this Prospectus. Each share of Common
Stock is entitled to participate equally in dividends and distributions
declared by the
35
<PAGE>
Fund and in the net assets of the Fund upon liquidation or dissolution after
satisfaction of outstanding liabilities, except, as noted above, the Class B,
Class C and Class D shares bear certain additional expenses.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts the shareholder should notify in writing:
Financial Data Services, Inc.
Attn: TAMFO
P.O. Box 45289
Jacksonville, Florida 32232-5289
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this
please call your Merrill Lynch financial consultant or Financial Data Services,
Inc. at 800-637-3863.
36
<PAGE>
MERRILL LYNCH BALANCED FUND FOR INVESTMENT AND RETIREMENT, INC.--
AUTHORIZATION FORM (PART 1)
- -------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINT SM PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINT SM
PROGRAM APPLICATION BY CALLING (800) 637-3766.
- -------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
[_] Class A shares [_] Class B shares [_] Class C shares [_] Class D shares
of Merrill Lynch Balanced Fund for Investment and Retirement, Inc., and
establish an Investment Account as described in the Prospectus. In the event
that I am not eligible to purchase Class A shares, I understand that Class D
shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $............ payable to Financial Data Services,
Inc. as an initial investment (minimum $1,000). I understand that this
purchase will be executed at the applicable offering price next to be
determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the Right of Accumulation as outlined in the Statement of
Additional Information: Please list all funds. (Use a separate sheet of
paper if necessary.)
1. .................................. 4. ..................................
2. .................................. 5. ..................................
3. .................................. 6. ..................................
Name...........................................................................
First Name Initial Last Name
Name of Co-Owner (if any)......................................................
First Name Initial Last Name
Address........................................................................
................................................. Date........................
(Zip Code)
Occupation........................... Name and Address of Employer ........
..................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
(In the case of co-owner, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- -------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
Ordinary Income Dividends Long-term Capital Gains
Select [_] Reinvest Select [_] Reinvest
One: [_] Cash One: [_] Cash
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: [_] CHECK
OR [_] DIRECT DEPOSIT TO BANK ACCOUNT
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by
direct deposit to my bank account and, if necessary, debit entries and
adjustments for any credit entries made to my account in accordance with the
terms I have selected on the Merrill Lynch Balanced Fund for Investment and
Retirement, Inc. Authorization Form.
SPECIFY TYPE OF ACCOUNT (CHECK ONE) [_] CHECKING [_] SAVINGS
Name on your account ..........................................................
Bank Name .....................................................................
Bank Number ...................... Account Number ............................
Bank Address ..................................................................
I agree that this authorization will remain in effect until I provide written
notification to Financial Data Services, Inc. amending or terminating this
service.
Signature of Depositor ........................................................
Signature of Depositor ............................... Date...................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED
CHECK MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD
ACCOMPANY THIS APPLICATION.
- -------------------------------------------------------------------------------
37
<PAGE>
- --------------------------------------------------------------------------------
3. SOCIAL SECURITY OR TAXPAYER IDENTIFICATION NUMBER
-----------------------------------------------------
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security Number or Taxpayer Identification Number and (2)
that I am not subject to backup withholding (as discussed under "Additional
Information--Taxes") either because I have not been notified that I am subject
thereto as a result of a failure to report all interest or dividends, or the
Internal Revenue Service ("IRS") has notified me that I am no longer subject
thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDER-REPORTING AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS
BEEN TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS
CERTIFICATION TO OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
..................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
- -------------------------------------------------------------------------------
4. LETTER OF INTENTION--CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
Dear Sir/Madam:
..................., 19......
Date of Initial Purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Balanced Fund for Investment and Retirement, Inc. or any other investment
company with an initial sales charge or deferred sales charge for which Merrill
Lynch Funds Distributor, Inc. acts as distributor over the next 13 month period
which will equal or exceed:
[_] $25,000 [_] $50,000 [_] $100,000 [_] $250,000 [_] $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Fund's prospectus.
I agree to the terms and conditions of this Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Balanced Fund for Investment and Retirement, Inc.
held as security.
By .................................. .....................................
Signature of Owner Signature of Co-Owner
(If registered in joint names,
both must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name............................. (2) Name.............................
Account Number....................... Account Number.......................
- -------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp We hereby authorize Merrill Lynch
Funds Distributor, Inc. to act as
- - - our agent in connection with
transactions under this
authorization form and agree to
notify the Distributor of any
purchases made under a Letter of
Intention or Systematic Withdrawal
Plan. We guarantee the shareholder's
- - - signature.
This form when completed should be .....................................
mailed to: Dealer Name and Address
Merrill Lynch Balanced Fund for By ..................................
Investment and Retirement, Inc. Authorized Signature of Dealer
c/o Financial Data Services, Inc.
Transfer Agency Mutual Fund Operations [_][_][_] [_][_][_][_] ..............
P.O. Box 45289 Branch F/C No. F/C Last Name
Jacksonville, FL 32232-5289 Code
[_][_][_] [_][_][_][_][_]
Dealer's Customer Account No.
38
<PAGE>
MERRILL LYNCH BALANCED FUND FOR INVESTMENT AND RETIREMENT, INC. AUTHORIZATION
FORM (PART 2)
- -------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR
AUTOMATIC INVESTMENT PLANS ONLY.
- -------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
Name of Owner......................
-------------------------
Name of Co-Owner (if any).......... Social Security Number or
Taxpayer Identification
Number
Address............................ Account Number ....................
(if existing account)
...................................
- -------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN--CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for quarterly,
of [_] Class A or [_] Class D shares in Merrill Lynch Balanced Fund for
Investment and Retirement, Inc., at cost or current offering price. Withdrawals
to be made either (check one) [_] Monthly on the 24th day of each month, or [_]
Quarterly on the 24th day of March, June, September and December. If the 24th
falls on a weekend or holiday, the next succeeding business day will be
utilized. Begin systematic withdrawal on . . . . . . . . . .(month), or as soon
as possible thereafter.
SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE): [_] $ _____
or [_] _____% of the current value of [_] Class A or [_] Class D shares in the
account.
SPECIFY WITHDRAWAL METHOD: [_] check or [_] direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a) I hereby authorize payment by check
[_] as indicated in Item 1.
[_] to the order of........................................................
Mail to (check one)
[_] the address indicated in Item 1.
[_] Name (Please Print)....................................................
Address .......................................................................
..........................................................................
Signature of Owner................................ Date..................
Signature of Co-Owner (if any)............................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO BANK ACCOUNT AND IF
NECESSARY DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO FINANCIAL DATA SERVICES, INC. AMENDING OR TERMINATING
THIS SERVICE.
Specify type of account (check one): [_] checking [_] savings
Name on your Account...........................................................
Bank Name......................................................................
Bank Number........................ Account Number............................
Bank Address...................................................................
...............................................................................
Signature of Depositor................................. Date..................
Signature of Depositor.........................................................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID"
OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHALL ACCOMPANY THIS APPLICATION.
39
<PAGE>
- -------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Financial Data Services, Inc. draw an automated
clearing house ("ACH") debit on my checking account described below each month
to purchase: (choose one)
[_] Class A shares [_] Class B shares [_] Class C shares [_] Class D shares
of Merrill Lynch Balanced Fund for Investment and Retirement, Inc., subject to
the terms set forth below. In the event that I am not eligible to purchase Class
A shares, I understand that Class D shares will be purchased.
AUTHORIZATION TO HONOR ACH DEBITS
FINANCIAL DATA SERVICES, INC. DRAWN BY FINANCIAL DATA SERVICES,
INC.
You are hereby authorized to draw an To...............................Bank
ACH debit each month on my bank (Investor's Bank)
account for investment in Merrill
Lynch Balanced Fund for Investment Bank Address.........................
and Retirement, Inc. as indicated
below: City...... State...... Zip Code......
Amount of each ACH debit $........
Account Number ................... As a convenience to me, I hereby
request and authorize you to pay and
Please date and invest ACH debits on charge to my account ACH debits
the 20th of each month beginning drawn on my account by and payable
to Financial Data Services, Inc., I
..................................... agree that your rights in respect to
each such debit shall be the same as
................(month) if it were a check drawn on you and
signed personally by me. This
or as soon thereafter as possible. authority is to remain in effect
I agree that you are drawing these until revoked by me in writing.
ACH debits voluntarily at my request Until you receive such notice, you
and that you shall not be liable for shall be fully protected in honoring
any loss arising from any delay in any such debit. I further agree that
preparing or failure to prepare any if any such debit be dishonored,
such debit. If I change banks or whether with or without cause and
desire to terminate or suspend this whether intentionally or
program, I agree to notify you inadvertently, you shall be under no
promptly in writing. I hereby liability.
authorize you to take any action to
correct erroneous ACH debits of my ............ .....................
bank account or purchases of fund Date Signature of
shares including liquidating shares Depositor
of the Fund and crediting my bank
account. I further agree that if a ............ .....................
debit is not honored upon Bank Signature of Depositor
presentation, Financial Data Account (If joint account,
Services, Inc. is authorized to Number both must sign)
discontinue immediately the Automatic
Investment Plan and to liquidate
sufficient shares held in my account
to offset the purchase made with the
returned dishonored debit.
............ .....................
Date Signature of
Depositor
......................
Signature of Depositor
(If joint account,
both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" SHOULD ACCOMPANY THIS APPLICATION.
40
<PAGE>
[This Page Intentionally Left Blank]
41
<PAGE>
[This Page Intentionally Left Blank]
42
<PAGE>
INVESTMENT ADVISER
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
CUSTODIAN
The Chase Manhattan Bank, N.A.
4 Metro Tech Center
18th Floor
Brooklyn, New York 11245
TRANSFER AGENT
Financial Data Services, Inc.
Administrative Offices:
Transfer Agency Mutual Funds Operations
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540
COUNSEL
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, New York 10022
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND THE STATEMENT OF
ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFER CONTAINED IN THIS PRO-
SPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND, THE INVESTMENT AD-
VISER, OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN
ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table.................................................................. 2
Merrill Lynch Select PricingSM System...................................... 3
Financial Highlights....................................................... 7
Investment Objective and Policies.......................................... 8
The Fund and Its Management................................................ 9
Purchase of Shares......................................................... 11
Initial Sales Charge Alternatives--
Class A and Class D Shares............................................... 13
Deferred Sales Charge Alternatives--
Class B and Class C Shares............................................... 14
Distribution Plans........................................................ 17
Limitations on the Payment of Deferred Sales Charges...................... 19
Shareholder Services....................................................... 20
Redemption of Shares....................................................... 22
Redemption................................................................ 22
Repurchase................................................................ 23
Reinstatement Privilege--
Class A and Class D Shares............................................... 23
Investment Practices and Restrictions...................................... 24
Portfolio Strategies Involving Options and Futures........................ 24
Other Investment Practices................................................ 28
Performance Data........................................................... 30
Portfolio Transactions and Brokerage....................................... 31
Additional Information..................................................... 32
Dividends and Distributions............................................... 32
Determination of Net Asset Value.......................................... 32
Taxes..................................................................... 33
Organization of the Fund.................................................. 35
Shareholder Inquiries..................................................... 36
Shareholder Reports....................................................... 36
Authorization Form......................................................... 37
</TABLE>
Code #10331-0195
Merrill Lynch
Balanced Fund for
Investment and
Retirement, Inc.
PROSPECTUS
January 31, 1995
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 31, 1995
MERRILL LYNCH BALANCED FUND
FOR INVESTMENT AND RETIREMENT, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
----------------
Merrill Lynch Balanced Fund for Investment and Retirement, Inc., is a mutual
fund, technically known as an open-end diversified management investment
company, of the type permitted to have a number of different portfolios, or
series. The fund and its only series, the Full Investment Portfolio, are
referred to as the "Fund". The Fund seeks to provide shareholders with as high
a level of total investment return as is consistent with a relatively low
level of risk. It tries to achieve its objective through investment in high
quality, larger capitalization common stocks (generally companies with
$500,000,000 or more of market capitalization) and other types of securities,
including preferred stocks, debt securities and convertible securities.
Because the Fund is designed for investors for whom current tax liability is
not a consideration, such as certain tax qualified employee benefit plans, the
Fund will invest without regard to tax considerations.
----------------
Pursuant to the Merrill Lynch Select PricingSM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select Pricing SM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances.
----------------
This Statement of Additional Information of the Fund is not a prospectus and
should be read in conjunction with the prospectus of the Fund, dated January
31, 1995 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission and can be obtained without charge from Merrill Lynch
Funds Distributor, Inc., P.O. Box 9011, Princeton, New Jersey 08543-9011,
(609) 282-2800, or from selected securities dealers. This Statement of
Additional Information contains information in addition to, and more detailed
than, that set forth in the Prospectus and has been incorporated by reference
into the Prospectus. It is intended to provide investors with additional
information regarding the activities and operations of the Fund.
----------------
MERRILL LYNCH ASSET MANAGEMENT -- INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
----------------
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
As discussed on page 8 of the Prospectus, the investment objective of the
Fund is to provide shareholders with as high a level of total investment return
as is consistent with a relatively low level of risk. This is a fundamental
investment objective. The Fund seeks to accomplish its objective through
investment in high quality, larger capitalization common stocks (generally
companies with $500,000,000 or more of market capitalization) and other types
of securities, including preferred stocks, debt securities and convertible
securities, as well as through the writing of covered call options and the
lending of its portfolio securities. It is anticipated that, except under
unusual circumstances, the Fund will maintain at least 25% of the value of its
assets in fixed-income senior securities. In its common stock investments, it
is anticipated that the Fund will seek to emphasize issues with relatively low
price earnings ratios, above average dividend yields, and relatively low price
to book value ratios, as compared to prevailing market conditions. With respect
to debt securities (other than money market instruments which are discussed
below), the Fund will invest only in instruments which are rated Aa or better
by Moody's Investors Service, Inc. or AA or better by Standard & Poor's Ratings
Group or which are determined by the investment adviser of the Fund to be of
quality comparable to instruments so rated.
As discussed on page 8 of the Prospectus, the Fund may, under certain
circumstances, invest all or a portion of its assets in high quality money
market securities. Such securities can include the following: (1) U.S. Treasury
bills; (2) bankers' acceptances and certificates of deposit; (3) commercial
paper; and (4) repurchase agreements with respect to U.S. Government securities
and U.S. Government agency securities.
MANAGEMENT OF THE FUND
The Investment Adviser. Merrill Lynch Asset Management, L.P., doing business
as Merrill Lynch Asset Management (the "Investment Adviser" or "MLAM") is the
investment adviser of the Fund. MLAM is owned and controlled by Merrill Lynch &
Co., Inc., a financial services holding company ("ML & Co."). The Investment
Adviser and its affiliate, Fund Asset Management, L.P. ("FAM"), together serve
as the investment adviser to over 130 other registered investment companies, as
well as to numerous pension plans and other institutions.
The Advisory Agreement. Under its investment advisory agreement with the Fund
(the "Agreement"), the Investment Adviser is responsible for the actual
management of the Fund's portfolio. Responsibility for making decisions to buy,
sell or hold a particular security rests with the Investment Adviser, subject
to general oversight by the Board of Directors. The Investment Adviser provides
the portfolio managers for the Fund, who make investment decisions and place
orders to effect portfolio transactions for the Fund. In this regard, the
Investment Adviser has access to the total securities research and economic
research facilities of Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"). Pursuant to the Agreement, the Investment Adviser also
performs certain administrative and management services for the Fund. The
Agreement obligates the Investment Adviser 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, and to pay the fees of all Directors of the Fund who are affiliated with
ML & Co. or any of its
2
<PAGE>
subsidiaries. Portfolio accounting services are provided for the Fund by the
Investment Adviser, and the Fund reimburses the Investment Adviser for its
costs in connection with such services.
The Agreement will continue in effect until April 3, 1995, and may continue
in effect thereafter from year to year if approved at least annually by vote of
a majority of the Directors of the Fund or by the holders of a majority of the
outstanding shares of each series of the Fund. Any such continuation also
requires approval by a majority of the Directors who are not parties to the
Agreement or "interested persons" of any such party as defined in the
Investment Company Act by vote cast in person at a meeting called for such
purpose. The Agreement may be terminated at any time, without penalty, on sixty
days' written notice by the Fund's Board of Directors, by the holders of a
majority of the Fund's outstanding voting securities or by the Investment
Adviser. The Agreement automatically terminates in the event of its assignment
(as defined in the Act and the rules thereunder).
As discussed under "The Fund and Its Management" in the Prospectus, the
Agreement provides that the Fund will pay the Investment Adviser a monthly fee
based upon the average daily value of the portfolio's net assets at the
following annual rate: 0.65% of the average daily net assets not exceeding $500
million; 0.60% of the average daily net assets exceeding $500 million but not
exceeding $1.5 billion; 0.55% of the average daily net assets exceeding $1.5
billion but not exceeding $2.5 billion; 0.50% of the average daily net assets
exceeding $2.5 billion but not exceeding $3.5 billion; and 0.45% of the average
daily net assets exceeding $3.5 billion. Certain states in which the shares of
the Fund are qualified for sale impose limitations on the expenses of the Fund.
At the date of this Statement of Additional Information, the most restrictive
annual expense limitations to which the Fund is subject require that the
Investment Adviser reimburse each portfolio in any amount necessary to prevent
the portfolio's aggregate ordinary operating expenses (excluding interest,
taxes, account maintenance, distribution and brokerage fees and commissions,
and extraordinary charges such as litigation costs) from exceeding in any
fiscal year 2.5% of the first $30 million of the portfolio's average net
assets, 2.0% of the next $70 million of average net assets and 1.5% of the
portfolio's remaining average net assets. Any such reimbursements would be made
on a monthly basis. No payment of the investment advisory fee will be made to
the Investment Adviser which would result in expenses of any portfolio
exceeding on a cumulative annualized basis the most restrictive applicable
expense limitation in effect at the time of such payment. For the Fund's fiscal
years ended September 30, 1994, 1993, and 1992, the Investment Adviser earned a
fee of approximately $5,173,680, $5,620,993 and $6,063,373, respectively, from
the Fund.
Directors and Officers. The Directors and executive officers of the Fund,
their ages and their principal occupations for at least the last five years are
set forth below. Unless otherwise noted, the address of each Director and
executive officer is P.O. Box 9011, Princeton, New Jersey 08543-9011.
Arthur Zeikel (62)--President and Director (1)--President of the Investment
Adviser (which term as used herein includes its corporate predecessors) since
1977 and Chief Investment Officer thereof since 1976; President and Chief
Investment Officer of FAM (which term as used herein includes its corporate
predecessors) since 1977; President and Director of Princeton Services, Inc.
("Princeton Services") since 1993; Executive Vice President of Merrill Lynch
since 1990 and a Senior Vice President thereof from 1985 to 1990; Executive
Vice President of ML & Co. since 1990; Director of Merrill Lynch Funds
Distributor, Inc. ("MLFD" or the "Distributor").
3
<PAGE>
Herbert I. London (55)--Director--New York University-Gallatin Division, 113-
115 University Place, New York, New York 10003. John M. Olin Professor of
Humanities, New York University since 1993 and Professor thereof since 1973;
Dean, Gallatin Division of New York University from 1978 to 1993 and Director
from 1975 to 1976; Distinguished Fellow, Herman Kahn Chair, Hudson Institute
from 1984 to 1985; Director, Damon Corporation since 1991; Overseer, Center for
Naval Analyses.
Robert R. Martin (67)--Director--513 Grand Hill, St. Paul, Minnesota 55102.
Director, WTC Industries, Inc. since 1995 and Chairman thereof from 1994 to
1995; Chairman and Chief Executive Officer, Kinnard Investments, Inc. from 1990
to 1993; Executive Vice President, Dain Bosworth from 1974 to 1989; Director,
Carnegie Capital Management from 1977 to 1985 and Chairman thereof in 1979;
Director, Securities Industry Association from 1981 to 1982 and Public
Securities Association from 1979 to 1980; Trustee, Northland College since
1992.
Joseph L. May (65)--Director--424 Church Street, Suite 2000, Nashville,
Tennessee 37219. Attorney in private practice since 1984; President, May and
Athens Hosiery Mills Division, Wayne-Gossard Corporation from 1954 to 1983;
Vice President, Wayne-Gossard Corporation from 1972 to 1983; Chairman, The May
Corporation (personal holding company) from 1972 to 1983; Director, Signal
Apparel Co. from 1972 to 1989.
Andre F. Perold (42)--Director--Morgan Hall, Soldiers Field, Boston,
Massachusetts 02163. Professor, Harvard Business School and Associate Professor
from 1983 to 1989; Trustee, The Common Fund, since 1989; Director, Quantec
Limited since 1991 and Teknekron Software Systems since 1994.
Terry K. Glenn (54)--Executive Vice President (1)--Executive Vice President
of the Investment Adviser and FAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of MLFD since 1986 and
Director thereof since 1991.
Bernard J. Durnin (52)--Senior Vice President (1)--Senior Vice President of
the Investment Adviser and FAM since 1981 and Vice President from 1977 to 1981.
Denis B. Cummings (52)--Vice President (1)--Vice President of the Investment
Adviser since 1978.
Donald C. Burke (34)--Vice President (1)--Vice President and Director of
Taxation of MLAM since 1990; employee of Deloitte & Touche LLP from 1981 to
1990.
Gerald M. Richard (45)--Treasurer (1)--Senior Vice President and Treasurer of
FAM and the Investment Adviser since 1984; Senior Vice President and Treasurer
of Princeton Services since 1993; Treasurer of MLFD since 1984 and Vice
President since 1981; employee of MLFD since 1978.
Jerry Weiss (36)--Secretary (1)--Vice President of the Investment Adviser
since 1990; Attorney in private practice from 1982 to 1990.
- --------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
4
<PAGE>
Pursuant to the terms of the management agreement with the Fund, the
Investment Adviser pays all compensation of officers of the Fund as well as the
fees of all Directors who are affiliated persons of the Investment Adviser. The
Fund pays each Director not affiliated with the Investment Adviser a fee of
$5,000 per year plus $500 per meeting attended, together with such Director's
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 Directors of the Fund who are not interested persons of the Fund,
with a fee of $1,000 per year and a per meeting fee of $250 per year. For the
fiscal year ended September 30, 1994, fees and expenses paid to the
unaffiliated Directors aggregated $48,967.
The following table sets forth for the fiscal year ended September 30, 1994,
compensation paid by the Fund to the non-interested Directors and the aggregate
compensation paid by all investment companies advised by MLAM and its
affiliate, FAM ("MLAM/FAM Advised Funds") to the non-interested Directors.
<TABLE>
<CAPTION>
TOTAL COMPENSATION
FROM FUND AND
AGGREGATE PENSION OR RETIREMENT MLAM/FAM ADVISED
COMPENSATION BENEFITS ACCRUED AS FUNDS PAID TO
NAME OF DIRECTORS FROM FUND PART OF FUND EXPENSES DIRECTORS(1)
----------------- ------------ --------------------- ------------------
<S> <C> <C> <C>
Herbert I. London......... $10,500 None 187,625
Robert R. Martin.......... $ 9,250 None 182,000
Joseph L. May............. $10,500 None 187,625
Andre F. Perold........... $10,500 None 187,625
</TABLE>
- --------
(1) The Directors served on the boards of other MLAM/FAM Advised Funds as
follows: Mr. London (23 boards); Mr. Martin (23 boards); Mr. May (23
boards); and Mr. Perold (23 boards).
As of January 1, 1995, the officers and Directors of the Fund as a group (11
persons) owned, in the aggregate, less than 1% of the outstanding shares of the
Fund.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
The Fund issues four classes of shares under the Merrill Lynch Select
PricingSM System: Class A and Class D shares are sold to investors choosing the
initial sales charge alternatives and Class B and Class C shares are sold to
investors choosing the deferred sales charge alternatives. Each Class A, Class
B, Class C and Class D share of the Fund represents an identical interest in
the investment portfolio of the Fund, has the same rights and is identical in
all respects, except that Class B, Class C and Class D shares bear the expenses
of the ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
Class B, Class C and Class D shares each have exclusive voting rights with
respect to the Rule 12b-1 distribution plan adopted with respect to such class
pursuant to which the account maintenance and distribution fees are paid. Each
class has different exchange privileges. See "Shareholder Services--Exchange
Privilege".
5
<PAGE>
The Merrill Lynch Select PricingSM System is used by more than 50 mutual
funds advised by the Investment Adviser or its affiliate, FAM. Funds advised by
the Investment Adviser or FAM are referred to herein as "MLAM-advised mutual
funds".
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offering of each class of shares
of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the
offering of each class of shares of the Fund. After the prospectuses,
statements of additional information and periodic reports have been prepared,
set in type and mailed to the 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 Investment Advisory Agreement described above.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
The gross sales charges for the sale of Class A shares for the fiscal year
ended September 30, 1994 were $54,923, of which the Distributor received $3,336
and Merrill Lynch received $51,587. For the fiscal year ended September 30,
1994 the Distributor received no CDSCs with respect to Class A shares for which
the initial sales charge was waived.
The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his spouse and their children under the
age of 21 years purchasing shares for his or their own account and to single
purchases by a trustee or other fiduciary purchasing shares for a single trust
estate or single fiduciary account although more than one beneficiary is
involved. The term "purchase" also includes purchases by any "company," as that
term is defined in the Investment Company Act, but does not include purchases
by any such company which has not been in existence for at least six months or
which has no purpose other than the purchase of shares of the Fund or shares of
other registered investment companies at a discount; provided, however, that it
shall not include purchases by any group of individuals whose sole
organizational nexus is that the participants therein are credit cardholders of
a company, policyholders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser.
REDUCED INITIAL SALES CHARGES
Right of Accumulation. Reduced sales charges are applicable through a right
of accumulation under which eligible investors are permitted to purchase shares
of the Fund subject to an initial sales charge at the offering price applicable
to the total of (a) the public offering price then being purchased plus (b) an
amount equal to the then current net asset value or cost, whichever is higher,
of the purchaser's combined holdings of all classes of shares of the Fund and
of other MLAM-advised mutual funds. For any such right of accumulation to be
made available, the Distributor must be provided at the time of purchase, by
the purchaser or the purchaser's securities dealer, with sufficient information
to permit confirmation of qualification. Acceptance of the purchase order is
subject to such confirmation. The right of accumulation may be amended or
terminated at any time. Shares held in the name of a nominee or custodian under
pension, profit-sharing or other employee benefit plans may not be combined
with other shares to qualify for the right of accumulation.
6
<PAGE>
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A or Class D shares of the Fund or
any other MLAM-advised mutual funds 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 Financial Data Services, Inc., the
Fund's transfer agent (the "Transfer Agent"). The Letter of Intention is not
available to employee benefit plans for which Merrill Lynch provides plan
participant recordkeeping services. The Letter of Intention is not a binding
obligation to purchase any amount of Class A or Class D shares, but 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 executed
within 90 days of such purchase if the Distributor is informed in writing of
this intent within such 90-day period. The value of Class A and Class D shares
of the Fund and of other MLAM-advised mutual funds presently held, at cost or
maximum offering price (whichever is higher), on the date of the first
purchase under the Letter of Intention, may be included as a credit toward the
completion of such Letter. If the total amount of shares does not equal the
amount stated in the Letter of Intention (minimum of $25,000), the investor
will be notified and must pay, within 20 days of the expiration of such
Letter, the difference between the sales charge on the Class A or Class D
shares purchased at the reduced rate and the sales charge applicable to the
shares actually purchased through the Letter. Class A or Class D shares equal
to five percent of the intended amount will be held in escrow during the 13-
month period (while remaining registered in the name of the purchaser) for
this purpose. The first purchase under the Letter of Intention must be at
least five percent or more of the dollar amount of such Letter. If during the
term of such Letter, a purchase brings the total amount invested to an amount
equal to or in excess of the amount indicated in the Letter, the purchaser
will be entitled on that purchase and subsequent purchases to the reduced
percentage sales charge which would be applicable to a single purchase equal
to the total dollar value of the shares then being purchased under such
Letter, but there will be no retroactive reduction of the sales charges on any
previous purchase. The value of any shares redeemed or otherwise disposed of
by the purchaser prior to termination or completion of the Letter of Intention
will be deducted from the total purchases made under such Letter. An exchange
from a MLAM-advised money market fund into the Fund that creates a sales
charge will count toward completing a new or existing Letter of Intention from
the Fund.
Merrill Lynch Blueprint SM Program. Class D shares of the Fund are offered
to participants in the Merrill Lynch Blueprint SM Program ("Blueprint"). In
addition, participants in Blueprint who own Class A shares of the Fund may
purchase additional Class A shares of the Fund through Blueprint. Blueprint is
directed to small investors, group Investment Retirement Accounts ("IRAs") and
participants in certain affinity groups such as credit unions, trade
associations and benefit plans. Investors placing orders to purchase Class A
or Class D shares of the Fund through Blueprint will acquire the Class A or
Class D shares at net asset value plus a sales charge calculated in accordance
with the Blueprint sales charge schedule (i.e., up to $300 at 4.25%, $300.01
up to $5,000 at 3.25% plus $3 and $5,000.01 or more at the standard sales
charge rates disclosed in the Prospectus). In addition, Class A or Class D
shares of the Fund are being offered at net asset value plus a sales charge of
1/2 of 1% for corporate or group IRA programs placing orders to purchase their
Class A or Class D shares through Blueprint. Services, including the exchange
privilege, available to Class A and Class D investors through Blueprint,
however, may differ from those available to other investors in Class A and
Class D shares. Orders for purchases and redemptions of Class A or Class D
shares of the Fund may be grouped for execution purposes which, in some
circumstances, may involve the execution of
7
<PAGE>
such orders two business days following the day such orders are placed. The
minimum initial purchase price is $100, with a $50 minimum for subsequent
purchases through Blueprint. There are no minimum initial or subsequent
purchase requirements for participants who are part of an automatic investment
plan.
Class A and Class D shares are offered at net asset value to participants in
the Merrill Lynch Blueprint Program through the Merrill Lynch Directed IRA
Rollover Program ("IRA Rollover Program") available from Merrill Lynch
Business Financial Services, a business unit of Merrill Lynch. The IRA
Rollover Program is available to custodian rollover assets from Employer
Sponsored Retirement and Savings Plans (see definition below) whose Trustee
and/or Plan Sponsor offers the Merrill Lynch Directed IRA Rollover Program.
Additional information concerning purchases through Blueprint, including any
annual fees and transaction charges, is available from Merrill Lynch, Pierce,
Fenner & Smith Incorporated, The Blueprint SM Program, P.O. Box 30441, New
Brunswick, New Jersey 08989-0441.
Employer Sponsored Retirement and Savings Plans. Class A and Class D shares
are offered at net asset value to employer sponsored retirement or savings
plans, such as tax qualified retirement plans within the meaning of Section
401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), deferred
compensation plans within the meaning of Section 403(b) and 457 of the Code,
other deferred compensation arrangements, Voluntary Employee Benefits
Association ("VEBA") plans, and non-qualified After Tax Savings and Investment
programs, maintained on the Merrill Lynch Group Employee Services system,
herein referred to as "Employer Sponsored Retirement or Savings Plans",
provided the plan has accumulated at least $20 million in MLAM-advised mutual
funds (in the case of Class A shares) or $5 million in MLAM-advised mutual
funds (in the case of Class D shares). Class D shares may be offered at net
asset value to new Employer Sponsored Retirement or Savings Plans, provided
the plan has $3 million or more initially invested in MLAM-advised mutual
funds. Assets of Employer Sponsored Retirement or Savings Plans sponsored by
the same sponsor or an affiliated sponsor may be aggregated. Class A shares
and Class D shares also are offered at net asset value to Employer Sponsored
Retirement or Savings Plans that have at least 1,000 employees eligible to
participate in the plan (in the case of Class A shares) or between 500 and 999
employees eligible to participate in the plan (in the case of Class D shares).
Employees eligible to participate in Employer Sponsored Retirement or Savings
Plans of the same sponsoring employer or its affiliates may be aggregated. Tax
qualified retirement plans within the meaning of Section 401(a) of the Code
meeting any of the foregoing requirements and which are provided specialized
services (e.g., plans whose participants may direct on a daily basis their
plan allocations among a wide range of investments including individual
corporate equities and other securities in addition to mutual fund shares) by
the Merrill Lynch Blueprint SM Program, are offered Class A shares at a price
equal to net asset value per share plus a reduced sales charge of 0.50%. Any
Employer Sponsored Retirement or Savings Plan which does not meet the above
described qualifications to purchase Class A shares or Class D shares at net
asset value has the option of (i) purchasing Class A shares at the initial
sales charge and possible CDSC schedule disclosed in the Prospectus if it is
otherwise eligible to purchase Class A shares, (ii) purchasing Class D shares
at the initial sales charge and possible CDSC schedule disclosed in the
Prospectus, (iii) if the Employer Sponsored Retirement or Savings Plan meets
the specified requirements, purchasing Class B shares with a waiver of the
CDSC upon redemption, or (iv) if the Employer Sponsored Retirement or Savings
Plan does not qualify to purchase Class B shares with a waiver of the CDSC
upon redemption, purchasing Class C shares at the CDSC schedule disclosed in
the Prospectus. The minimum initial and subsequent purchase requirements are
waived in connection with all the above referenced Employer Sponsored
Retirement or Savings Plans.
8
<PAGE>
Purchase Privileges of Certain Persons. Directors of the Fund, members of the
Boards of other MLAM-advised investment companies, directors and employees of
ML & Co. and its subsidiaries (the term "subsidiaries", when used herein with
respect to ML & Co., includes MLAM, FAM and certain other entities directly or
indirectly wholly-owned and controlled by ML & Co.), 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. Under such programs, the Fund realizes
economies of scale and reduction of sales related expenses by virtue of
familiarity with the Fund.
Employees and directors wishing to purchase shares of the Fund must satisfy
the Fund's suitability standards.
Class D shares of the Fund are offered at net asset value, without sales
charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied. First the investor must advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from a redemption of a
mutual fund that was sponsored by the financial consultant's previous firm and
was subject to a sales charge either at the time of purchase or on a deferred
basis. Second, the investor must also establish that such redemption was made
within 60 days prior to the investment in the Fund, and the proceeds from the
redemption had been maintained in the interim in cash or a money market fund.
Class D shares of the Fund are 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 for which Merrill
Lynch has not served as a selected dealer if the following conditions are
satisfied: First, the investor must advise Merrill Lynch that it will purchase
Class D shares of the Fund with proceeds from a redemption of such shares of
other mutual funds and that such shares have been outstanding for a period of
no less than 6 months. Second, such purchase of Class D shares must be made
within 60 days after the redemption and the proceeds from the redemption must
have been maintained in the interim in cash or a money market fund.
Class D shares of the Fund are also offered at net asset value, without sales
charge, to an investor who has a business relationship with a Merrill Lynch
financial consultant and who has invested in a mutual fund sponsored by a non-
Merrill Lynch company for which Merrill Lynch has served as a selected dealer
and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice"), if the following conditions are
satisfied. First, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and such fund
was subject to a sales charge either at the time of purchase or on a deferred
basis; and second, such purchase of Class D shares must be made within 90 days
after such notice.
Closed-End Fund Investment Option. Class A shares of the Fund and other MLAM-
advised mutual funds ("Eligible Class A shares") are offered at net asset value
to shareholders of certain closed-end funds advised by the Investment Adviser
or FAM who purchased such closed-end fund shares prior to October 21, 1994 and
wish to reinvest the net proceeds of a sale of their closed-end fund shares of
common stock in Eligible Class A shares, if the conditions set forth below are
satisfied. Alternatively, closed-end fund shareholders who purchased such
shares on or after October 21, 1994 and wish to reinvest the net proceeds from
a sale of their closed-end fund shares are offered Class A shares (if eligible
to buy Class A shares) or
9
<PAGE>
Class D shares of the Fund and other MLAM-advised mutual funds ("Eligible
Class D shares"), if the following conditions are met. First, the sale of
closed-end fund shares must be made through Merrill Lynch, and the net
proceeds therefrom must be immediately reinvested in Eligible Class A or Class
D shares. Second, the closed-end fund shares either must have been acquired in
the initial public offering or be shares representing dividends from shares of
common stock acquired in such offering. Third, the closed-end fund shares must
have been continuously maintained in a Merrill Lynch securities account.
Fourth, there must be a minimum purchase of $250 to be eligible for the
investment option. Class A shares of the Fund are offered at net asset value
to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. ("Senior
Floating Rate Fund") who wish to reinvest the net proceeds from a sale of
certain of their shares of common stock of the 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 the 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.
TMA SM Managed Trusts. Class A shares are offered to TMA SM Managed Trusts
to which Merrill Lynch Trust Company provides discretionary trustee services
at net asset value.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation
with a personal holding company or a public or private investment company. The
value of the assets or company acquired in a tax-free transaction may be
adjusted in appropriate cases to reduce possible adverse tax consequences to
the Fund which might result from an acquisition of assets having net
unrealized appreciation which is disproportionately higher at the time of
acquisition than the realized or unrealized appreciation of the Fund. The
issuance of Class D shares for consideration other than cash is limited to
bona fide reorganizations, statutory mergers or other acquisitions of
portfolio securities which (i) meet the investment objectives and policies of
the Fund; (ii) are acquired for investment and not for resale (subject to the
understanding that the disposition of the Fund's portfolio securities shall at
all times remain within its control); and (iii) are liquid securities, the
value of which is readily ascertainable, which are not restricted as to
transfer either by law or liquidity of market (except that the Fund may
acquire through such transactions restricted or illiquid securities to the
extent the Fund does not exceed the applicable limits on acquisition of such
securities set forth under "Investment Objective and Policies" herein).
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares--Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule12b-1 under the
Investment Company Act (each a "Distribution Plan") with respect to the
account maintenance and/or distribution fees paid by the Fund to the
Distributor with respect to such classes.
Payments of the distribution fees and/or account maintenance fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act.
Among other things, each Distribution Plan provides that the
10
<PAGE>
Distributor shall provide and the Directors shall review quarterly reports of
the disbursement of the account maintenance fees and/or distribution fees paid
to the Distributor. In their consideration of each Distribution Plan, the
Directors must consider all factors they deem relevant, including information
as to the benefits of the Distribution Plan to the Fund and its related class
of shareholders. Each Distribution Plan further provides that, so long as the
Distribution Plan remains in effect, the selection and nomination of Directors
who are not "interested persons" of the Fund, as defined in the Investment
Company Act (the "Independent Directors"), shall be committed to the discretion
of the Independent Directors then in office. In approving each Distribution
Plan in accordance with Rule 12b-1, the Independent Directors concluded that
there is reasonable likelihood that such Distribution Plan will benefit the
Fund and its related class of shareholders. Each Distribution Plan can be
terminated at any time, without penalty, by the vote of a majority of the
Independent Directors or by the vote of the holders of a majority of the
outstanding related class of voting securities of the Fund. A Distribution Plan
cannot be amended to increase materially the amount to be spent by the Fund
without the approval of the related class of shareholders, and all material
amendments are required to be approved by the vote of the Directors, including
a majority of the Independent Directors who have no direct or indirect
financial interest in such Distribution Plan, cast in person at a meeting
called for that purpose. Rule 12b-1 further requires that the Fund preserve
copies of each Distribution Plan and any report made pursuant to such plan for
a period of not less than six years from the date of such Distribution Plan or
such report, the first two years in an easily accessible place.
During the fiscal year ended September 30, 1994, the Fund paid the
Distributor account maintenance fees of $1,944,798 and distribution fees of
$5,834,397 under the Class B Distribution Plan.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on
certain asset-based sales charges such as the distribution fee and the CDSC
borne by the Class B and Class C shares, but not the account maintenance fee.
The maximum sales charge rule is applied separately to each class. As
applicable to the Fund, the maximum sales charge rule limits the aggregate of
distribution fee payments and CDSCs payable by the Fund to (1) 6.25% of
eligible gross sales of Class B shares and Class C shares, computed separately
(defined to exclude shares issued pursuant to dividend reinvestments and
exchanges), plus (2) interest on the unpaid balance for the respective class,
computed separately, at the prime rate plus 1% (the unpaid balance being the
maximum amount payable minus amounts received from the payment of the
distribution fee and the CDSC). In connection with the Class B shares, the
Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any time.
To the extent payments would exceed the voluntary maximum, the Fund will not
make further payments of the distribution fee with respect to Class B shares,
and any CDSCs will be paid to the Fund rather than to the Distributor; however,
the Fund will continue to make payments of the account maintenance fee. In
certain circumstances the amount payable pursuant to the voluntary maximum may
exceed the amount payable under the NASD formula. In such circumstances payment
in excess of the amount payable under the NASD formula will not be made.
11
<PAGE>
The following table sets forth comparative information as of September 30,
1994 with respect to the Class B shares of the Fund indicating the maximum
allowable payments that can be made under the NASD maximum sales charge rule
and the Distributor's voluntary maximum for the period November 29, 1985
(commencement of the public offering of Class B shares) to September 30, 1994.
<TABLE>
<CAPTION>
CLASS B SHARES
------------------------------------------------------------------------------------
DATA CALCULATED AS OF SEPTEMBER 30, 1994
(IN THOUSANDS)
------------------------------------------------------------------------------------
ALLOWABLE AMOUNTS ANNUAL
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE DISTRIBUTION
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID FEE AT CURRENT
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE NET ASSET LEVEL(4)
---------- --------- ---------- -------- -------------- --------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule
as Adopted.... $3,625,869 $226,617 $140,866 $367,483 $148,648 $218,835 $5,324
Under Distribu-
tor's
Voluntary
Waiver........ $3,625,869 $226,617 $ 18,129 $244,746 $148,648 $ 96,098 $5,324
</TABLE>
- --------
(1) Purchase price of all eligible Class B shares sold since November 29, 1985
(commencement of the public offering of Class B shares) other than shares
acquired through dividend reinvestment and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0% as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. Of the
distribution fee payments made prior to July 6, 1993 under a 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. See "Purchase of Shares--Distribution Plans" in the Prospectus.
(4) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any CDSC payments) is amortizing
the unpaid balance. No assurance can be given that payments of the
distribution fee will reach either the voluntary maximum or the NASD
maximum.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
Payment for shares presented for redemption will be made by check sent
within seven days after receipt by the Transfer Agent of your written request
in proper form and, if issued, certificates for the shares being redeemed. 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.
The value of shares at the time of redemption may be more or less than the
shareholder costs, depending on the net asset value of such shares at such
time.
12
<PAGE>
DEFERRED SALES CHARGE--CLASS B SHARES
As discussed in the Prospectus under "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares", while Class B shares redeemed
within four years of purchase are subject to a CDSC under most circumstances,
the charge is waived on redemptions of Class B shares in connection with
certain post-retirement withdrawals from an 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 distribution following retirement under a tax-deferred
retirement plan which is permitted to be made without tax penalty under the
Internal Revenue Code, or attaining age 59 1/2 in the case of an IRA or other
retirement plan, or part of a series of equal periodic payments (not less
frequently than annually) made for life (or life expectancy) or any redemption
resulting from the tax-free return of an excess contribution to an IRA; or (b)
any partial or complete redemption following the death or disability (as
defined in the Internal Revenue 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 year ended September 30, 1994, the
Distributor received CDSCs of $163,949 with respect to Class B shares, all of
which was paid to Merrill Lynch.
Merrill Lynch BlueprintSM Program. Class B shares are offered to certain
participants in Blueprint. Blueprint is directed to small investors, group IRAs
and participants in certain affinity groups such as trade associations, credit
unions and benefit plans. Class B shares of the Fund are offered through
Blueprint only to members of certain affinity groups. The CDSC is waived in
connection with purchase orders placed through Blueprint. Services, including
the exchange privilege, available to Class B investors through Blueprint,
however, may differ from those available to other Class B investors. Orders for
purchases and redemptions of Class B shares of the Fund may be grouped for
execution purposes which, in some circumstances, may involve the execution of
such orders two business days following the day such orders are placed. The
minimum initial purchase price is $100, with a $50 minimum for subsequent
purchases through Blueprint. There is no minimum initial or subsequent purchase
requirement for investors who are part of a Blueprint automatic investment
plan. Additional information concerning Blueprint, including any annual fees or
transaction charges, is available from Merrill Lynch, Pierce, Fenner & Smith
Incorporated, The BlueprintSM Program, P.O. Box 30441, New Brunswick, New
Jersey 08989-0441.
Retirement Plans. Any Retirement Plan which does not meet the qualifications
to purchase Class A or Class D shares at net asset value has the option of
purchasing Class A or Class D shares at the sales charge schedule disclosed in
the Prospectus, or if the Retirement Plan meets the following requirements,
then it may purchase Class B shares with a waiver of the CDSC upon redemption.
The CDSC is waived for any Eligible 401(k) Plan redeeming Class B shares.
"Eligible 401(k) Plan" is defined as a retirement plan qualified under Section
401(k) of the Code with a salary reduction feature offering a menu of
investments to plan participants. The CDSC is also waived for redemptions from
a 401(a) plan qualified under the Code, provided, however, that each such plan
has the same or an affiliated sponsoring employer as an Eligible 401(k) Plan
purchasing Class B shares of MLAM-advised mutual funds ("Eligible 401(a)
Plan"). Other tax qualified retirement plans within the meaning of Section
401(a) and 403(b) of the Code which are provided specialized services (e.g.,
plans whose participants may direct on a daily basis their plan allocations
among a menu of investments) by independent administration firms contracted
through Merrill Lynch also may purchase Class B shares with a waiver of the
CDSC. The CDSC also is waived for any Class B or Class C 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
13
<PAGE>
Company custodied IRA and held in such account at the time of redemption. The
Class B CDSC also is waived for any Class B shares which are purchased by a
Merrill Lynch rollover IRA, that was funded by a rollover from a terminated
401(k) plan managed by the MLAM Private Portfolio Group and held in such
account at the time of redemption. The minimum initial and subsequent purchase
requirements are waived in connection with all the above-referenced Retirement
Plans.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of the Fund is determined once daily 15
minutes after the close of business on the New York Stock Exchange (generally,
4:00 p.m. New York time), on each day during which the New York Stock Exchange
is open for trading. The New York Stock Exchange is not open on New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Any assets or liabilities initially
expressed in terms of non-U.S. dollar currencies are translated into U.S.
dollars at the prevailing market rates as quoted by one or more banks or
dealers on the day of valuation. The net asset value per share is computed by
dividing the sum of the value of the securities held by the Fund plus any cash
or other assets (including interest and dividends accrued but not yet received)
minus all liabilities (including accrued expenses) by the total number of
shares outstanding at such time, rounded to the nearest cent. Expenses,
including the investment advisory fees and account maintenance and/or
distribution fees, are accrued daily. The per share net asset value of the
Class B, Class C and Class D shares generally will be lower than the per share
net asset value of the Class A shares reflecting the daily expense accruals of
the account maintenance, distribution and higher transfer agency fees
applicable with respect to the Class B and Class C shares and the daily expense
accruals of the account maintenance fees applicable with respect to the Class D
shares; moreover the per share net asset value of the Class B and Class C
shares generally will be lower than the per share net asset value of its Class
D shares reflecting the daily expense accruals of the distribution fees and
higher transfer agency fees applicable with respect to the Class B and Class C
shares of the Fund. It is expected, however, that the per share net asset value
of the four classes will tend to converge (although not necessarily meet)
immediately after the payment of dividends or distributions, which will differ
by approximately the amount of the expense accrual differential between the
classes.
Portfolio securities and options which are traded on 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. Securities traded in the over-the-counter market are valued at the last
quoted bid prices at the close of trading on the New York Stock Exchange on
each day by brokers that make markets in the securities. 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. 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.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designed to facilitate investment in its shares. Certain of such services are
not available to investors who place orders for the Fund through the Merrill
Lynch BlueprintSM Program. Full details as to each of such services and copies
of the various plans described below can be obtained from the Fund, the
Distributor or Merrill Lynch.
14
<PAGE>
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive, at least quarterly, statements from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gain distributions. The statements will also
show any other activity in the account since the preceding statement.
Shareholders will receive separate transaction confirmations for each purchase
or sale transaction other than automatic investment purchases and the
reinvestment of income dividends, and long-term capital gain distributions.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the Class A or Class D shares are to be
transferred will not take delivery of shares of the Fund, a shareholder either
must redeem the Class A or Class D shares so that the cash proceeds can be
transferred to the account at the new firm or such shareholder must continue to
maintain an Investment Account at the Transfer Agent for those Class A or Class
D shares. Shareholders interested in transferring their Class B or Class C
shares from Merrill Lynch and who do not wish to have an Investment Account
maintained for such shares at the Transfer Agent may request their new
brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder. If the new brokerage
firm is willing to accommodate the shareholder in this manner, the shareholder
must request that he be issued certificates for his shares, and then must turn
the certificates over to the new firm for re-registration as described in the
preceding sentence. Shareholders may make additions to their Investment Account
at any time by mailing a check directly to the Transfer Agent.
Share certificates are issued only for full shares and only upon the specific
request of the shareholder who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by a shareholder directly from the Transfer Agent.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if an eligible Class A investor as described in the
Prospectus) or Class B, Class C or Class D shares at the applicable public
offering price either through the shareholder's securities dealer, or by mail
directly to the Transfer Agent, acting as agent for such securities dealer.
Voluntary accumulation can also be made through a service known as the
Automatic Investment Plan whereby the Transfer Agent is authorized through pre-
authorized checks or automatic clearing house debits of $50 or more to charge
the regular bank account of the shareholder on a regular basis to provide
systematic additions to the Investment Account of such shareholder. For
investors who buy shares of the Fund through the Merrill Lynch BlueprintSM
Program, no minimum charge to the investor's bank account is required.
Investors who maintain CMA(R) accounts may arrange to have periodic investments
made in the Fund, in the CMA accounts or in certain related accounts in amounts
of $100 or more ($1 for retirement accounts) through the CMA Automated
Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
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
15
<PAGE>
business on the ex-dividend date of the dividend or distribution. Shareholders
may elect in writing or by telephoning (1-(800)-MER-FUND) to receive either
their dividends or capital gains distributions, or both, in cash, in which
event payment will be mailed or direct deposited on or about the payment date.
Shareholders may, at any time, notify the Transfer Agent in writing that they
no longer wish to have their dividends and/or capital gains distributions
reinvested in shares of the Fund or vice versa and, commencing ten days after
the receipt by the Transfer Agent of such notice, those instructions will be
effected.
SYSTEMATIC WITHDRAWAL PLANS--CLASS A AND CLASS D SHARES
A Class A or Class D shareholder may elect to make withdrawals from an
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 as provided below. Quarterly withdrawals are available for shareholders
who have acquired Class A or Class D shares of the Fund having a value, based
on cost or the current offering price, of $5,000 or more, and monthly
withdrawals are available for shareholders with Class A or Class D shares with
such a value of $10,000 or more.
At the time of each withdrawal payment, sufficient Class A or Class D shares
are redeemed from those on deposit in the shareholder's account to provide the
withdrawal payment specified by the shareholder. The shareholder may specify
either a dollar amount or a percentage of the value of his Class A or Class D
shares. Redemptions will be made at net asset value as determined 15 minutes
after the close of business on the New York Stock Exchange (generally 4:00 P.M.
New York time) on the 24th day of each month or the 24th day of the last month
of each quarter, whichever is applicable. If the Exchange is not open for
business on such date, the Class A or Class D shares will be redeemed at the
close of business on the following business day. The check for the withdrawal
payment will be mailed or the direct deposit for 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 Class A or
Class D shares, respectively, of the Fund. A shareholder's Systematic
Withdrawal Plan may be terminated at any time, without charge or penalty, by
the shareholder, the Fund, the Fund's Transfer Agent or the Distributor.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be reduced
correspondingly. Purchases of additional Class A or Class D shares concurrent
with withdrawals are ordinarily disadvantageous to the shareholder because of
sales charges and tax liabilities. The Fund will not knowingly accept purchase
orders for Class A or Class D shares of the Fund from investors who maintain a
Systematic Withdrawal Plan unless such purchase is equal to at least one year's
scheduled withdrawals or $1,200, whichever is greater. Periodic investments may
not be made into an Investment Account in which the shareholder has elected to
make systematic withdrawals.
A Class A or Class D shareholder whose shares are held within a CMA (R),
CBA (R) or Retirement Account may elect to have shares redeemed on a monthly,
bi-monthly, quarterly, semiannual or annual basis through the Systematic
Redemption Program. The minimum fixed dollar amount redeemable is $25. The
proceeds of systematic redemptions will be posted to the shareholder's account
five business days after the date the shares are redeemed. Monthly systematic
redemptions will be made at net asset value on the first Monday of each month,
bi-monthly systematic redemptions will be made at net asset value on the first
16
<PAGE>
Monday of every other month, and quarterly, semiannual or annual redemptions
are made at net asset value on the first Monday of months selected at the
shareholder's option. If the first Monday of the month is a holiday, the
redemption will be processed at net asset value on the next business day. The
Systematic Redemption Program is not available if Fund shares are being
purchased within the account pursuant to the Automatic Investment Program. For
more information on the Systematic Redemption Program, eligible shareholders
should contact their Financial Consultant.
RETIREMENT PLANS
Self-directed individual retirement accounts and other retirement plans are
available from Merrill Lynch. Under these plans, investments may be made in the
Fund and certain of the other mutual funds sponsored by Merrill Lynch as well
as in other securities. Merrill Lynch charges an initial establishment fee and
an annual custodial fee for each account. Information with respect to these
plans is available on request from Merrill Lynch. The minimum initial purchase
to establish any such plan is $100. However, there is no minimum for purchases
through the Merrill Lynch BlueprintSM Program's systematic investment plans).
Capital gains and income received in each of the plans referred to above are
exempt from Federal taxation until distributed from the plans. Investors
considering participation in any such plan should review specific tax laws
relating thereto and should consult their attorneys or tax advisers with
respect to the establishment and maintenance of any such plan.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds listed below. Under the Merrill
Lynch Select PricingSM System, Class A shareholders may exchange Class A shares
of the Fund for Class A shares of a second MLAM-advised mutual fund if the
shareholder holds any Class A shares of the second fund in his account in which
the exchange is made at the time of the exchange or is otherwise eligible to
purchase Class A shares of the second fund. If the Class A shareholder wants to
exchange Class A shares for shares of a second MLAM-advised mutual fund, and
the shareholder does not hold Class A shares of the second fund in his account
at the time of the exchange and is not otherwise eligible to acquire Class A
shares of the second fund, the shareholder will receive Class D shares of the
second fund as a result of the exchange. Class D shares also may be exchanged
for Class A shares of a second MLAM-advised mutual fund at any time as long as,
at the time of the exchange, the shareholder holds Class A shares of the second
fund in the account in which the exchange is made or is otherwise eligible to
purchase Class A shares of the second fund. Class B, Class C and Class D shares
will be exchangeable with shares of the same class of other MLAM-advised mutual
funds. For purposes of computing the CDSC that may be payable upon a
disposition of the shares acquired in the exchange, the holding period for the
previously owned shares of the Fund is "tacked" to the holding period of the
newly acquired shares of the other Fund as more fully described below. Class A,
Class B, Class C and Class D shares also will be exchangeable for shares of
certain MLAM-advised money market funds specifically designated below as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. Shares with a net asset value of at least $100 are required to qualify
for the exchange privilege, and any shares utilized in an exchange must have
been held by the shareholder for 15 days. It is contemplated that the exchange
privilege may be applicable to other new mutual funds whose shares may be
distributed by the Distributor.
17
<PAGE>
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount
equal to the difference, if any, between the sales charge previously paid on
the outstanding Class A or Class D shares and the sales charge payable at the
time of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have taken
place, the "sales charge previously paid" shall include the aggregate of the
sales charges paid with respect to such Class A or Class D shares in the
initial purchase and any subsequent exchange. Class A and Class D shares issued
pursuant to dividend reinvestment are sold on a no-load basis in each of the
funds offering Class A or Class D shares. For purposes of the exchange
privilege, Class A and Class D shares acquired through dividend reinvestment
shall be deemed to have been sold with a sales charge equal to the sales charge
previously paid on the Class A or Class D shares on which the dividend was
paid. Based on this formula, Class A and Class D shares generally may be
exchanged into the Class A or Class D shares of the other funds or into shares
of the Class A money market funds without a sales charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively, of another MLAM-
advised mutual fund ("new Class B or Class C shares") on the basis of relative
net asset value per Class B or Class C share, without the payment of any CDSC
that might otherwise be due on redemption of the outstanding shares. Class B
shareholders of the Fund exercising the exchange privilege will continue to be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the new Class B shares acquired through use of the
exchange privilege. In addition, Class B shares of the Fund acquired through
use of the exchange privilege will be subject to the Fund's CDSC schedule if
such schedule is higher than the CDSC schedule relating to the Class B shares
of the fund from which the exchange has been made. For purposes of computing
the sales charge that may be payable on a disposition of the new Class B or
Class C shares, the holding period for the outstanding Class B or Class C
shares is "tacked" to the holding period of the new Class B or Class C shares.
For example, an investor may exchange Class B shares of the Fund for those of
Merrill Lynch Special Value Fund, Inc. ("Special Value Fund") after having held
Class B shares of the Fund for two and a half years. The 2% sales charge that
generally would apply to a redemption would not apply to the exchange. Three
years later the investor may decide to redeem the Class B shares of Special
Value Fund and receive cash. There will be no CDSC due on this redemption,
since by "tacking" the two and a half year holding period of Fund Class B
shares to the three year holding period for the Special Value Fund Class B
shares, the investor will be deemed to have held the new Class B shares for
more than five years.
Shareholders also may exchange shares of the Fund into shares of a money
market fund advised by the Investment Adviser or its affiliates, but the period
of time that Class B or Class C shares are held in a money market fund will not
count towards satisfaction of the holding period requirement for purposes of
reducing the CDSC or, with respect to Class B shares, towards satisfaction of
the conversion period. However, shares of a money market fund which were
acquired as a result of an exchange for Class B or Class C shares of the fund
may in turn be exchanged back into Class B or Class C shares of any fund
offering such shares, in which event the holding period for Class B or Class C
shares of the fund will be aggregated with previous holding periods for
purposes of reducing the CDSC. Thus, for example, an investor may exchange
Class B shares of the Fund for shares of Merrill Lynch Institutional Fund
("Institutional Fund") after having held
18
<PAGE>
Class B shares of the Fund for two and a half years and three years later
decide to redeem the shares of Institutional Fund for cash. At the time of
this redemption, the 2% CDSC that would have been due had the Class B shares
of the Fund been redeemed for cash rather than exchanged for shares of
Institutional Fund will be payable. If, instead of such redemption, the
shareholder exchanged such shares for Class B shares of a fund which the
shareholder continues to hold for an additional two and a half years, any
subsequent redemption will not incur a CDSC.
Set forth below is a description of the investment objectives of the other
funds into which exchanges can be made:
Funds issuing Class A, Class B, Class C and Class D Shares:
Merrill Lynch Adjustable Rate
Securities Fund, Inc. .............. High current income consistent with a
policy of limiting the degree of
fluctuation in net asset value by
investing primarily in a portfolio of
adjustable rate securities,
consisting principally of mortgage-
backed and asset-backed securities.
Merrill Lynch Americas Income Fund,
Inc. ............................... A high level of current income,
consistent with prudent investment
risk, by investing primarily in debt
securities denominated in a currency
of a country located in the Western
Hemisphere (i.e., North and South
America and the surrounding waters).
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 Arkansas Municipal
Bond Fund........................... A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a
series fund, whose objective is to
provide as high a level of income
exempt from Federal and Arkansas
income taxes as is consistent with
prudent investment management.
19
<PAGE>
Merrill Lynch Asset Growth Fund,
Inc................................. A high level of current income through
investment primarily in United States
fixed income securities.
Merrill Lynch Asset Income Fund,
Inc................................. High total investment return,
consistent with prudent risk, from
investment in United States and
foreign equity, debt and money market
securities, the combination of which
will be varied both with respect to
types of securities and markets in
response to changing market and
economic trends.
Merrill Lynch Basic Value Fund,
Inc. ............................... Capital appreciation and, secondarily,
income through investment in
securities, primarily equities, that
are undervalued and therefore
represent basic investment value.
Merrill Lynch California Insured
Municipal Bond Fund................. A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of insured income exempt from
Federal and California income taxes as
is consistent with prudent investment
management through investment in a
portfolio primarily of insured
California Municipal Bonds.
Merrill Lynch California Limited
Maturity Municipal Bond Fund........ A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal
Series Trust, a series fund, whose
objective is to provide 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,
whose 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, Inc. .... The highest total investment return
consistent with prudent risk through a
fully managed investment policy
utilizing equity, debt and convertible
securities.
Merrill Lynch Colorado Municipal
Bond Fund........................... A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to
20
<PAGE>
provide as high a level of income
exempt from Federal and Colorado
income taxes as is consistent with
prudent investment management.
Merrill Lynch Connecticut Municipal
Bond Fund........................... A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal and Connecticut income taxes
as is consistent with prudent
investment management.
Merrill Lynch Corporate Bond Fund,
Inc. ............................... Current income from three separate
diversified portfolios of fixed-income
securities.
Merrill Lynch Developing Capital
Markets Fund, Inc. ................. Long-term appreciation through
investment in securities, principally
equities, of issuers in countries
having smaller capital markets.
Merrill Lynch Dragon Fund, Inc. ..... Capital appreciation primarily through
investment in equity and debt
securities of issuers domiciled in
developing countries located in Asia
and the Pacific Basin.
Merrill Lynch EuroFund............... Capital appreciation primarily through
investment in equity securities of
corporations domiciled in Europe.
Merrill Lynch Federal Securities
Trust............................... High current return through investments
in U.S. Government and Government
agency securities, including GNMA
mortgage-backed certificates and other
mortgaged-backed Government
securities.
Merrill Lynch Florida Limited
Maturity Municipal Bond Fund........ A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal
Series Trust, a series fund, whose
objective is to provide as high a
level of income exempt from Federal
income taxes as is consistent with
prudent investment management while
seeking to offer shareholders the
opportunity to own securities exempt
from Florida intangible personal
property taxes through investment in a
portfolio primarily of intermediate-
term investment grade Florida
Municipal Bonds.
Merrill Lynch Florida Municipal Bond
Fund................................ A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to
21
<PAGE>
provide as high a level of income
exempt from Federal income taxes as is
consistent with prudent investment
management while seeking to offer
shareholders the opportunity to own
securities exempt from Florida
intangible personal property taxes.
Merrill Lynch Fund For Tomorrow,
Inc................................. Long-term growth through investment in
a portfolio of good quality
securities, primarily common stock,
potentially positioned to benefit from
demographic and cultural changes as
they affect consumer markets.
Merrill Lynch Fundamental Growth
Fund, Inc........................... Long-term growth through investment in
a diversified portfolio of equity
securities placing particular emphasis
on companies that have exhibited an
above-average growth rate in earnings.
Merrill Lynch Global Allocation
Fund, Inc........................... High total return consistent with
prudent risk, through a fully managed
investment policy utilizing United
States and foreign equity, debt and
money market securities, the
combination of which will be varied
from time to time both with respect to
the types of securities and markets in
response to changing market and
economic trends.
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 multi-national
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, Inc.
(residents of Arizona must meet
investor suitability standards)..... The highest total investment return
consistent with prudent risk through
worldwide investment in an
internationally diversified portfolio
of securities.
22
<PAGE>
Merrill Lynch Global Resources
Trust............................... Long-term growth and protection of
capital from investment in securities
of foreign and domestic companies
that possess substantial natural
resource assets.
Merrill Lynch Global SmallCap Fund,
Inc................................. Long-term growth of capital by
investing primarily in equity
securities of companies with
relatively small market
capitalizations located in various
foreign countries and in the United
States.
Merrill Lynch Global Utility Fund,
Inc................................. Capital appreciation and current
income through investment of at least
65% of its total assets in equity and
debt securities issued by domestic
and foreign companies primarily
engaged in the ownership or operation
of facilities used to generate,
transmit or distribute electricity,
telecommunications, gas or water.
Merrill Lynch Growth Fund for
Investment and Retirement........... Growth of capital and, secondarily,
income from investment in a
diversified portfolio of equity
securities placing principal emphasis
on those securities which management
of the fund believes to be
undervalued.
Merrill Lynch Healthcare Fund, Inc.
(residents of Wisconsin must meet
investor suitability standards)..... Capital appreciation through worldwide
investment in equity securities of
companies that derive or are expected
to derive a substantial portion of
their sales from products and
services in healthcare.
Merrill Lynch International Equity
Fund................................ Capital appreciation and, secondarily,
income by investing in a diversified
portfolio of equity securities of
issuers located in countries other
than the United States.
Merrill Lynch Latin America Fund,
Inc. ............................... Capital appreciation by investing
primarily in Latin American equity
and debt securities.
Merrill Lynch Maryland Municipal
Bond Fund........................... A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a
series fund, whose objective is to
provide as high a level of income
exempt from Federal and Maryland
income taxes as is consistent with
prudent investment management.
23
<PAGE>
Merrill Lynch Massachusetts Limited
Maturity Municipal Bond Fund........ A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal
Series Trust, a series fund, whose
objective is to provide as high a
level of income exempt from Federal
and Massachusetts income taxes as is
consistent with prudent investment
management through investment in a
portfolio primarily of intermediate-
term investment grade Massachusetts
Municipal Bonds.
Merrill Lynch Massachusetts
Municipal Bond Fund................. A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a
series fund, whose objective is to
provide investors with as high a
level of income exempt from both
Federal and Massachusetts income
taxes as is consistent with prudent
investment management.
Merrill Lynch Michigan Limited
Maturity Municipal Bond Fund........ A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal
Series Trust, a series fund, whose
objective is to provide as high a
level of income exempt from Federal
and Michigan income taxes as is
consistent with prudent investment
management through investment in a
portfolio primarily of intermediate-
term investment grade Michigan
Municipal Bonds.
Merrill Lynch Michigan Municipal
Bond Fund........................... A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a
series fund, whose objective is to
provide as high a level of income
exempt from Federal and Michigan
income taxes as is consistent with
prudent investment management.
Merrill Lynch Minnesota Municipal
Bond Fund........................... A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a
series fund, whose objective is to
provide as high a level of income
exempt from Federal and Minnesota
personal income taxes as is
consistent with prudent investment
management.
Merrill Lynch Municipal Bond Fund,
Inc................................. Tax-exempt income from three separate
diversified portfolios of municipal
bonds.
Merrill Lynch Municipal Intermediate
Term Fund........................... Currently the only portfolio of
Merrill Lynch Municipal Series Trust,
a series fund, whose objective
24
<PAGE>
is to provide as high a level as
possible of income exempt from Federal
income taxes by investing in
investment grade obligations with a
dollar weighted average maturity of
five to twelve years.
Merrill Lynch New Jersey Limited
Maturity Municipal Bond Fund........ A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal
Series Trust, a series fund, whose
objective is to provide as high a
level of income exempt from Federal
and New Jersey income taxes as is
consistent with prudent investment
management through a portfolio
primarily of intermediate-term
investment grade New Jersey Municipal
Bonds.
Merrill Lynch New Jersey Municipal
Bond Fund........................... A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal and New Jersey income taxes as
is consistent with prudent investment
management.
Merrill Lynch New Mexico Municipal
Bond Fund........................... A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal and New Mexico income taxes as
is consistent with prudent investment
management.
Merrill Lynch New York Limited
Maturity Municipal Bond Fund........ A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal
Series Trust, a series fund, whose
objective is to provide as high a
level of income exempt from Federal,
New York State and New York City
income taxes as is consistent with
prudent investment management through
investment in a portfolio primarily of
intermediate-term investment grade New
York Municipal Bonds.
Merrill Lynch New York Municipal
Bond Fund........................... A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal, New York State and New York
City income taxes as is consistent
with prudent investment management.
25
<PAGE>
Merrill Lynch North Carolina
Municipal Bond Fund................. A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a
series fund, whose objective is to
provide as high a level of income
exempt from Federal and North
Carolina income taxes as is
consistent with prudent investment
management.
Merrill Lynch Ohio Municipal Bond
Fund................................ A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a
series fund, whose objective is to
provide investors with as high a
level of income exempt from both
Federal and Ohio income taxes as is
consistent with prudent investment
management.
Merrill Lynch Oregon Municipal Bond
Fund................................ A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a
series fund, whose objective is to
provide investors with as high a
level of income exempt from both
Federal and Oregon income taxes as is
consistent with prudent investment
management.
Merrill Lynch Pacific Fund, Inc...... Capital appreciation by investing in
equity securities of corporations
domiciled in Far Eastern and Western
Pacific countries, including Japan,
Australia, Hong Kong, and Singapore.
Merrill Lynch Pennsylvania Limited
Maturity Municipal Bond Fund........ A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal
Series Trust, a series fund, whose
objective is to provide as high a
level of income exempt from Federal
and Pennsylvania income taxes as is
consistent with prudent investment
management through investment in a
portfolio of intermediate-term
investment grade Pennsylvania
Municipal Bonds.
Merrill Lynch Pennsylvania Municipal
Bond Fund........................... A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a
series fund, whose objective is to
provide as high a level of income
exempt from Federal and Pennsylvania
income taxes as is consistent with
prudent investment management.
Merrill Lynch Phoenix Fund, Inc...... Long-term growth of capital by
investing in equity and fixed income
securities, including tax exempt
securities, of issuers in weak
financial condition or experiencing
poor operating results believed to be
26
<PAGE>
undervalued relative to the current or
prospective condition of such issuer.
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
multi-national 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 stock, or relatively small
companies believed to have special
investment value and emerging growth
companies regardless of size.
Merrill Lynch Strategic Dividend
Fund................................ Long-term total return from investment
in dividend paying common stocks which
yield more than Standard & Poor's 500
Composite Stock Price Index.
Merrill Lynch Technology Fund, Inc... Capital appreciation through worldwide
investment in equity securities of
companies that derive or are expected
to derive a substantial portion of
their sales from products and services
in technology.
Merrill Lynch Texas Municipal Bond
Fund................................ A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide
investors with as high a level of
income exempt from Federal income
taxes as is consistent with prudent
investment management by investing
primarily in a portfolio of long-term,
investment grade obligations issued by
the State of Texas, its political
subdivisions, agencies and
instrumentalities.
Merrill Lynch Utility Income Fund,
Inc. ............................... High current income through investment
primarily in equity and debt
securities issued by companies
primarily engaged in the ownership or
operation of facilities used to
generate, transmit or to 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.
27
<PAGE>
Class A Share Money Market Funds:
Merrill Lynch Ready Assets Trust..... Preservation of capital, liquidity and
the highest possible current income
consistent with the foregoing
objectives from the short-term money
market securities in which the Trust
invests.
Merrill Lynch Retirement Reserves
Money Fund (available only for
exchanges within certain retirement
plans).............................. Currently the only portfolio of
Merrill Lynch Retirement Series
Trust, a series fund, whose
objectives are current income,
preservation of capital and liquidity
available from investing in a
diversified portfolio of short-term
money market securities.
Merrill Lynch U.S.A. Government
Reserves............................ Preservation of capital, current
income and liquidity available from
investing in direct obligations of
the U.S. Government and repurchase
agreements relating to such
securities.
Merrill Lynch U.S. Treasury Money
Fund................................ Preservation of capital, liquidity and
current income through investment
exclusively in a diversified
portfolio of short-term marketable
securities which are direct
obligations of the U.S. Treasury.
Class B; Class C and Class D Share
Money Market Funds:
Merrill Lynch Government Fund........ A portfolio of Merrill Lynch Funds For
Institutions Series, a series fund,
whose objective is to provide current
income consistent with liquidity and
security of principal from investment
in securities issued or guaranteed by
the U.S. Government, its agencies and
instrumentalities and in repurchase
agreements secured by such
obligations.
Merrill Lynch Institutional Fund..... A portfolio of Merrill Lynch Funds For
Institutions Series, a series fund,
whose objective is to provide maximum
current income consistent with
liquidity and the maintenance of a
high-quality portfolio of money
market securities.
Merrill Lynch Institutional Tax-
Exempt Fund......................... A portfolio of Merrill Lynch Funds For
Institutions Series, a series fund,
whose objective is to provide current
income exempt from Federal income
taxes, preservation of capital and
liquidity available from investing in
a diversified portfolio of short-
term, high quality municipal bonds.
28
<PAGE>
Merrill Lynch Treasury Fund.......... A portfolio of Merrill Lynch Funds For
Institutions Series, a series fund,
whose objective is to provide current
income consistent with liquidity and
security of principal from investment
in direct obligations of the U.S.
Treasury and up to 10% of its total
assets in repurchase agreements
secured by such obligations.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, shareholders should contact their Merrill
Lynch financial consultant, who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other funds described above
with shares for which certificates have not been issued, may exercise the
exchange privilege by wire through their securities dealers. The Fund reserves
the right to require a properly completed Exchange Application. This exchange
privilege may be modified or terminated in accordance with the rules of the
Commission. The Fund reserves the right to limit the number of times an
investor may exercise the exchange privilege. Certain funds may suspend the
continuous offering of their shares 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 investment income are paid semi-annually. All net
realized long- or short-term capital gains, if any, are distributed to the
Fund's shareholders at least annually. Premiums from expired call options
written by the Fund and net gains from closing purchase transactions are
treated as short-term capital gains for Federal income tax purposes. See
"Shareholder Services--Automatic Reinvestment of Dividends and Capital Gains
Distributions" for information concerning the manner in which dividends and
distributions may be reinvested automatically in shares of the Fund.
Shareholders may elect in writing to receive any such dividends or
distributions, or both, in cash. Dividends and distributions are taxable to
shareholders as described below whether they are invested in shares of the Fund
or received in cash. The per share dividends and distributions on Class B and
Class C shares will be lower than the per share dividends and distributions on
Class A and Class D shares as a result of the account maintenance, distribution
and higher transfer agency fees applicable with respect to the Class B and
Class C shares; similarly, the per share dividends and distributions on Class D
shares will be lower than the per share dividends and distributions on Class A
shares as a result of the account maintenance fees applicable with respect to
the Class D shares. See "Determination of Net Asset Value".
TAXES
The Fund has elected and 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
29
<PAGE>
qualifies, the Fund will not be subject to Federal income tax on the part of
its net ordinary income and net realized capital gains which it distributes to
Class A, Class B, Class C and Class D shareholders (together, the
"shareholders").
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 options) are taxable to
shareholders as long-term capital gains, regardless of the length of time the
shareholder has owned Fund shares. Any loss on a sale or exchange of shares
held for six months or less, however, will be treated as long-term capital loss
to the extent of any long-term capital gains distribution with respect to such
shares.
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 dividends or capital gains distributions. A
portion of the Fund's ordinary income dividends may be eligible for the
dividends received deduction allowed to corporations under the Code, if certain
requirements are met. For this purpose, the Fund will allocate dividends
eligible for the dividends received deduction among the Class A, Class B, Class
C and Class D shareholders according to a method (which it believes is
consistent with the Securities and Exchange Commission exemptive order
permitting the issuance and sale of multiple classes of stock) that is based on
the gross income allocable to Class A, Class B, Class C and Class D
shareholders during the taxable year, or such other method as the Internal
Revenue Service may prescribe.
Pursuant to the Fund's investment objectives, the Fund may invest in foreign
securities. Foreign taxes may be paid by the Fund as a result of tax laws of
countries in which the Fund may invest. Income tax treaties between certain
countries and the United States may reduce or eliminate such taxes. It is
impossible to determine in advance the effective rate of foreign tax to which
the Fund will be subject, since the amount of Fund assets to be invested in
various countries is not known. Because the Fund limits its investment in
foreign securities, shareholders will not be entitled to claim foreign tax
credits with respect to their share of foreign taxes paid by the Fund on income
from investments of foreign securities held by the Fund.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gains distributions
and redemption payments ("backup withholding"). Generally, shareholders subject
to backup withholding will be those for whom a certified taxpayer
identification number is not on file with the Fund, those who, to the Fund's
knowledge, have furnished an incorrect number or those who are subject to
backup withholding because of a failure to report income. When establishing an
account, an investor must certify under penalty of perjury that such number is
correct and that such shareholder is not otherwise subject to backup
withholding.
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares for Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period of the acquired Class D shares will
include the holding period of the converted Class B shares.
30
<PAGE>
Ordinary income dividends paid by the Fund to shareholders who are non-
resident aliens or foreign entities generally will be subject to a 30% United
States 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. Non-resident
shareholders are urged to consult their own tax advisers concerning the
applicability of the United States withholding tax.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. If the Fund pays a dividend in January which was
declared in the previous October, November or December to shareholders of
record on a specified date in one of such months, then such dividend or
distribution will be treated for federal tax purposes as being paid on December
31 and will be taxable to shareholders as if received on December 31. While the
Fund intends to distribute its ordinary 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 Option Transactions. The Fund may write (i.e., sell) covered
call options with respect to the securities that it holds in its portfolio. In
general, gain or loss from transactions in such options contracts will be
capital gain or loss.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's transactions in options contracts. Under Section 1092,
the Fund may be required to postpone recognition for tax purposes of losses
incurred in certain closing transactions in options.
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 option contract or from making short-term investments in
securities.
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, futures, or forward foreign exchange contracts
will be valued for purposes of the RIC diversification requirements applicable
to the Fund.
Under Code Section 988, special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency (i.e.,
unless certain special rules apply, currencies other than the U.S.
31
<PAGE>
dollar). In general, foreign currency gains or losses from certain forward
contracts not traded in the interbank market, 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. 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, rather than increasing or
decreasing the amount of the Fund's net capital gain. 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 each shareholder's basis in his Fund 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 and capital gains distributions also may be subject to state
and local taxes.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, state or local taxes.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present
or prospective shareholders. Total return figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return is determined separately for Class A, Class B,
Class C and Class D shares in accordance with a formula specified by the
Commission.
Average annual total return quotations for the specified periods are computed
by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including the maximum sales charge in the case of
Class A and Class D shares and the CDSC that would be applicable to a complete
redemption of the investment at the end of the specified period in the case of
Class B and Class C shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that, (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted
and (2) the maximum applicable sales charges will not be included with respect
to annual or annualized rates of return calculations. Aside from the impact on
the performance
32
<PAGE>
data calculations of including or excluding the maximum applicable sales
charges, actual annual or annualized total return data generally will be lower
than average annual total return data since the average rates of return reflect
compounding of return; aggregate total return data generally will be higher
than average annual total return data since the aggregate rates of return
reflect compounding over a longer period of time.
Set forth below is total return information for Class A, Class B, Class C and
Class D shares of the Fund for the periods indicated.
<TABLE>
<CAPTION>
CLASS A SHARES* CLASS B SHARES**
----------------------------------- -----------------------------------
REDEEMABLE REDEEMABLE
VALUE OF A VALUE OF A
EXPRESSED AS A HYPOTHETICAL EXPRESSED AS A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END OF THE ON A HYPOTHETICAL AT THE END OF THE
PERIOD $1,000 INVESTMENT PERIOD $1,000 INVESTMENT PERIOD
------ ----------------- ----------------- ----------------- -----------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
<S> <C> <C> <C> <C>
One Year Ended December
31, 1994............... (11.46%) $ 885.40 (10.72%) $ 892.80
Five Years Ended
December 31, 1994...... 5.71% $1,320.30 5.78% $1,324.30
November 29, 1985 to
December 31, 1994...... 7.76% $1,972.50
October 27, 1988 to
December 31, 1994...... 7.41% $1,555.90
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
<S> <C> <C> <C> <C>
Quarter Ended December
31, 1994............... (2.79%) $ 972.10 (2.91%) $ 970.90
<CAPTION>
YEAR ENDED SEPTEMBER 30,
- ------------------------
<S> <C> <C> <C> <C>
1994.................... 1.81% $1,018.10 0.76% $1,007.60
1993.................... 14.62% $1,146.20 13.49% $1,134.90
1992.................... 9.23% $1,092.30 8.01% $1,080.10
1991.................... 23.14% $1,231.40 21.91% $1,219.10
1990.................... (6.86%) $ 931.40 (7.79%) $ 922.10
1989.................... 16.93% $1,169.30
1988.................... (6.36%) $ 936.40
1987.................... 18.98% $1,189.80
November 29, 1985 to
September 30, 1986..... 12.29% $1,122.90
October 27, 1988 to
September 30, 1989..... 15.54% $1,155.40
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
November 29, 1985 to
December 31, 1994...... 97.25% $1,972.50
October 27, 1988 to
December 31, 1994...... 55.59% $1,555.90
</TABLE>
- --------
* Information as to Class A shares is presented only for the period October
27, 1988 to December 31, 1994. No Class A shares were sold prior to October
27, 1988.
** Commencement of Operations of Class B shares was November 29, 1985.
33
<PAGE>
<TABLE>
<CAPTION>
CLASS C SHARES* CLASS D SHARES*
----------------------------------- -----------------------------------
REDEEMABLE REDEEMABLE
VALUE OF A VALUE OF A
EXPRESSED AS A HYPOTHETICAL EXPRESSED AS A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END OF THE ON A HYPOTHETICAL AT THE END OF THE
PERIOD $1,000 INVESTMENT PERIOD $1,000 INVESTMENT PERIOD
------ ----------------- ----------------- ----------------- -----------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
<S> <C> <C> <C> <C>
Inception (October 21,
1994) to December 31,
1994.................. (17.75%) $962.70 (34.57%) $920.80
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
<S> <C> <C> <C> <C>
Inception (October 21,
1994) to December 31,
1994.................. (2.86%) $971.40 (2.82%) $971.80
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (October 21,
1994) to December 31,
1994.................. (3.73%) $962.70 (7.92%) $920.80
</TABLE>
- --------
* Class C Shares and Class D Shares commenced operations on October 21, 1994.
In order to reflect the reduced sales charges in the case of Class A or Class
D shares or the waiver of the CDSC in the case of Class B or Class C shares
applicable to certain investors, as described under "Purchase of Shares" and
"Redemption of Shares", respectively, the total return data quoted by the Fund,
in advertisements directed to such investors, may take into account the
reduced, and not the maximum, sales charge or may not take into account the
CDSC and therefore may reflect greater total return since, due to the reduced
sales charges or the waiver of sales charges, a lower amount of expenses may be
deducted.
From time to time, the Fund may include the Fund's Morningstar risk-adjusted
performance rating in advertisements or supplemental sales literature.
INVESTMENT PRACTICES AND RESTRICTIONS
Reference is made to "Investment Objective and Policies" in the Prospectus
for a discussion of the investment objective and policies of the Fund.
PORTFOLIO STRATEGIES INVOLVING OPTIONS AND FUTURES
Reference is made to the discussion under "Investment Practices and
Restrictions--Portfolio Strategies Involving Options and Futures" in the
Prospectus for information regarding various portfolio strategies involving
options and futures. The Fund may engage in various portfolio strategies to
seek to increase its return through the use of options on portfolio securities
and to hedge its portfolio against movements in the equity markets, interest
rates and exchange rates between currencies. The Fund has authority to write
(i.e., sell) covered call options on its portfolio securities, purchase put
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
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futures, and related options on such futures. Each of these portfolio
strategies is described below. Although certain risks are involved in options
and futures transactions (as discussed below in "Risk Factors in Options,
Futures and Currency Transactions"), the Investment Adviser believes that,
because the Fund will only engage in these transactions for hedging purposes,
the options and futures portfolio strategies of the Fund will not subject the
Fund to the risks frequently associated with the speculative use of options and
futures transactions. While the Fund's use of hedging strategies is intended to
reduce the volatility of the net asset value of Fund shares, the Fund's net
asset value will fluctuate. There can be no assurance that the Fund's hedging
transactions will be effective. Furthermore, the Fund will only engage in
hedging activities from time to time and may not necessarily be engaging in
hedging activities when movements in the equity markets, interest rates or
currency exchange rates occur.
Writing of Covered Call Options. As discussed in the Prospectus, the Fund may
from time to time sell ("write") covered call options. The term option, as used
herein, means an option issued by the Options Clearing Corporation and traded
on a national securities exchange. A call option gives the purchaser of the
option the right to buy, and obligates the writer (seller) to sell, the
underlying security at the exercise price during the option period. When the
Fund writes an option it receives a premium. This premium is the price of such
option on the exchange on which it is traded. At the time the option is
written, the exercise price of the option may be lower, equal to or higher than
the market price of the security on which the option is written.
A call option is "covered" if the Fund already owns securities subject to the
option ("underlying securities") or has an absolute and immediate right to
acquire that security without additional cash consideration upon conversion or
exchange of other securities held in its portfolio. By writing a covered call
option, the Fund, in return for the premium income realized from the sale of
the option, gives up the opportunity to profit from any increase in the price
of the underlying security above the option exercise price during the period
until the option expires, is exercised or the Fund effects a "closing purchase
transaction" as described below. In addition, the Fund will not be able to sell
the security during the period of the option without taking special steps
described below which will involve expense. If the call option expires
unexercised, the Fund realizes a gain (short-term capital gain for Federal
income tax purposes) in the amount of the premium received for the option. This
gain may be offset by a decline in the market price of the underlying security
during the option period.
The Fund can terminate its obligation under an option prior to the expiration
date of the option by effecting a "closing purchase transaction." This is done
by purchasing on an exchange an option of the same series (i.e., same
underlying security, exercise price and expiration date) as the option
previously written. This can be done, however, only on an exchange which
provides a secondary market for an option of the same series and there is no
assurance that a secondary market will exist for any particular option. With
respect to a covered call option, in the event the Fund is unable to effect a
closing purchase transaction, it will not be able to dispose of the underlying
securities until the option expires or until the underlying securities are
delivered upon exercise of the option, with the result that the Fund will be
subject to the risk of decline in the price of the underlying securities during
such period. The Fund writes options on securities only if management believes
that secondary markets will exist on an exchange for options of the same series
which will permit the Fund to effect closing purchase transactions. Depending
on the premium paid by the Fund in effecting a closing purchase transaction and
transaction costs, the cost of a closing purchase transaction may exceed the
premium received by the Fund from writing the original option, in which case
the transaction will result in a loss to the Fund.
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Purchasing Put Options. The Fund is authorized to purchase put options to
hedge against a decline in the market value of its portfolio securities. By
buying a put option, the Fund has a right to sell the underlying security at
the exercise price, thus limiting the Fund's risk of loss through a decline in
the market value of the security until the put option expires. The amount of
any appreciation in the value of the underlying security will be partially
offset by the amount of the premium paid for the put option and any related
transaction costs. Prior to its expiration, a put option may be sold in a
closing sale transaction and profit or loss from the sale will depend on
whether the amount received is more or less than the premium paid for the put
option plus the related transaction costs. A closing sale transaction cancels
out the Fund's position as the purchaser of an option by means of an offsetting
sale of an identical option prior to the expiration of the option it has
purchased. The Fund will not purchase put options on securities if, as a result
of such purchase, the aggregate cost of all outstanding options on securities
held by the Fund would exceed 5% of the market value of the Fund's total
assets.
Stock Index Options and Futures and Financial Futures. 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
call options and purchase or write put options on stock indexes to hedge
against the risks of market-wide stock price movements in the securities in
which the Fund invests. The effectiveness of the hedge will depend on the
degree of diversification of the Fund's portfolio and the sensitivity of the
securities comprising the portfolio to factors influencing the market as a
whole. Because the value of an index option depends upon movements in the level
of the index rather than the price of a particular stock, whether the Fund will
realize a gain or loss on the purchase or sale of an option on an index depends
upon movements in the level of prices in the stock market generally or in an
industry or market segment rather than movements in the prices of a particular
stock. Currently, stock index options traded include the S&P 100 Index, the S&P
500 Index, the NYSE Composite Index, the AMEX Market Value Index, the National
Over-the-Counter Index and other standard, broadly based stock market indices.
The Fund may also purchase and sell stock index futures contracts and
financial futures contracts ("futures contracts") as a hedge against adverse
changes in the market value of its portfolio securities and interest rates, as
described below. A futures contract is an agreement between two parties which
obligates the purchaser of the futures contract to buy and the seller of a
futures contract to sell a security for a set price on a future date. Unlike
most other futures contracts, a stock index futures contract does not require
actual delivery of securities, but results in cash settlement based upon the
difference in value of the index between the time the contract was entered into
and the time of its settlement. The Fund may effect transactions in stock index
futures contracts in securities and financial futures contracts in United
States Government and agency securities and corporate debt securities.
Transactions by the Fund in stock index futures and financial futures are
subject to limitations as described below under "Restrictions on the Use of
Futures Transactions".
The Fund may sell stock index futures contracts in anticipation of or during
a market decline to attempt to offset the decrease in market value of the
Fund's securities portfolio that might otherwise result. When the Fund is not
fully invested in the securities markets and anticipates a significant market
advance, it may purchase stock index futures in order to gain rapid market
exposure that may in part or entirely offset increases in the cost of
securities that the Fund intends to purchase. As such securities purchases are
made, an equivalent amount of stock index futures contracts will be terminated
by offsetting sales. The Fund does not consider purchases of futures contracts
to be a speculative practice under these circumstances. It is anticipated that,
in a substantial majority of these transactions, the Fund will purchase such
securities upon
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termination of the long futures position, whether the long position is the
purchase of a stock index futures contract or the purchase of a call option on
a stock index future, but under unusual circumstances (e.g., the Fund
experiences a significant amount of redemptions), a long futures position may
be terminated without the corresponding purchase of securities.
The Fund may sell financial futures contracts in anticipation of an increase
in the general level of interest rates. Generally, as interest rates rise, the
market values of debt securities which may be held by the Fund as a temporary
defensive measure will fall, thus reducing the net asset value of the Fund.
However, as interest rates rise, the value of the Fund's short position in the
futures contract will also tend to increase, thus offsetting all or a portion
of the depreciation in the market value of the Fund's investments which are
being hedged. While the Fund will incur commission expenses in selling and
closing out futures positions, these commissions are generally less than the
transaction expenses which the Fund would have incurred had the Fund sold
portfolio securities in order to reduce its exposure to increases in interest
rates. The Fund also may purchase financial futures contracts in anticipation
of a decline in interest rates when it is not fully invested in a particular
market in which it intends to make investments to gain market exposure that may
in part or entirely offset an increase in the cost of securities it intends to
purchase. It is anticipated that, in a substantial majority of these
transactions, the Fund will purchase securities upon termination of the futures
contract.
The Fund also has authority to purchase and write call and put options on
futures contracts in connection with its hedging activities. Generally, these
strategies are utilized under the same market and market sector conditions
(i.e., conditions relating to specific types of investments) in which the Fund
enters into futures transactions. The Fund may purchase put options or write
call options on futures contracts rather than selling the underlying futures
contract in anticipation of a decrease in the market value of a security or an
increase in interest rates. Similarly, the Fund may purchase call options, or
write put options on futures contracts, as a substitute for the purchase of
such futures to hedge against the increased cost resulting from an increase in
the market value or a decline in interest rates of securities which the Fund
intends to purchase.
The Fund may engage in options and futures transactions on exchanges and
options in the over-the-counter markets ("OTC options"). In general, exchange-
traded contracts are third-party contracts (i.e., performance of the parties'
obligations is guaranteed by an exchange or clearing corporation) with
standardized strike prices and expiration dates. OTC options transactions are
two-party contracts with price and terms negotiated by the buyer and seller.
See "Restrictions on OTC Options" below for information as to restrictions on
the use of OTC options.
Foreign Currency Options, Futures and Related Options. The Fund is also
authorized to purchase or sell listed or over-the-counter foreign currency
options, foreign currency futures and related options on foreign currency
futures as a short or long hedge against possible variations in foreign
exchange rates. Such transactions may be effected with respect to hedges on
non-U.S. dollar denominated securities owned by the Fund, sold by the Fund but
not yet delivered, or committed or anticipated to be purchased by the Fund. As
an illustration, the Fund may use such techniques to hedge the stated value in
United States dollars of an investment in a pound sterling denominated
security. In such circumstances, for example, the Fund may purchase a foreign
currency put option enabling it to sell a specified amount of pounds for
dollars at a specified price by a future date. To the extent the hedge is
successful, a loss in value of the pound relative to
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<PAGE>
the dollar will tend to be offset by an increase in the value of the put
option. To offset, in whole or in part, the cost of acquiring such a put
option, the Fund may also sell a call option which, if exercised, requires it
to sell a specified amount of pounds for dollars at a specified price by a
future date (a technique called a "straddle"). By selling such call option, the
Fund gives up the opportunity to profit without limit from increases in the
relative value of the pound to the dollar. The Investment Adviser believes that
"straddles" of the type which may be utilized by the Fund constitute hedging
transactions and are consistent with the policies described above.
Certain differences exist between these foreign currency hedging instruments.
Foreign currency options provide the holder thereof the right to buy or sell a
currency at a fixed price on a future date (with exchange-traded contracts and
OTC options having the characteristics described above). A futures contract on
a foreign currency is an agreement between two parties to buy and sell a
specified amount of 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 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. Under regulations of the
Commodity Futures Trading Commission ("CFTC"), the futures trading activities
described herein will not result in the Fund being deemed to be a "commodity
pool," as defined under such regulations, provided that the Fund adheres to
certain restrictions. In particular, the Fund may (i) purchase and sell futures
contracts and options thereon for bona fide hedging purposes, as defined under
CFTC regulations, without regard to the percentage of the Fund's assets
committed to margin and option premiums, and (ii) the Fund may enter into non-
hedging transactions, provided that the Fund not entered into such transactions
for yield enhancement or risk management purposes if, immediately thereafter,
the sum of the amount of initial margin deposits on the Fund's existing futures
positions and option premiums would exceed 5% of the market value of its
liquidating value, after taking into account unrealized profits and unrealized
losses on any such transactions. However, the Fund intends to engage in options
and futures transactions only for hedging purposes. Margin deposits may consist
of cash or securities acceptable to the broker and the relevant contract
market.
When the Fund purchases a futures contract or writes a put option or
purchases a call option thereon, 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 is unleveraged.
An order has been obtained from the Commission which exempts the Fund from
certain provisions of the Investment Company Act in connection with
transactions involving futures contracts and options thereon.
Restrictions on OTC Options. The Fund will engage in OTC options, including
over-the-counter foreign currency options and options on foreign currency
futures, only with member banks of the Federal Reserve System and primary
dealers in United States Government securities or with affiliates of such banks
or dealers which have capital of at least $50 million or whose obligations are
guaranteed by an entity having capital of
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at least $50 million. The Fund will acquire only those OTC options for which
the Investment Adviser believes the Fund can receive on each business day at
least two independent bids or offers (one of which will be from an entity other
than a party to the option).
The staff of the Commission has taken the position that purchased OTC options
and the assets used as cover for written OTC options are illiquid securities.
Therefore, the Fund has adopted an investment policy pursuant to which it will
not purchase or sell OTC options (including OTC options on futures contracts)
if, as a result of such 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 exceed 15% 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 is not a fundamental policy of the Fund and may be amended by the
Board of 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 positions.
Risk Factors in Options, Futures and Currency 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 prices
and movements in the prices of the securities, interest rates 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 subject of the hedge, the Fund will
experience a gain or loss which will not be completely offset by movements in
the price of the subject of the hedge.
The 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 OTC
options, the Investment Adviser 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 effectively hedge 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 a related option.
The exchanges on which currency options are traded have generally established
limitations governing the maximum number of call or put options on the same
underlying currency (whether or not covered) which may be written by a single
investor, whether acting alone or in concert with others (regardless of whether
such options are written on the same or different exchanges or are held or
written on one or more accounts or through one or more brokers). "Trading
limits" are imposed on the maximum number of contracts which any person may
trade on a particular trading day. The Investment Adviser does not believe that
these trading and position limits will have any adverse impact on the portfolio
strategies for hedging the Fund's portfolio.
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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. It is possible
that, under certain circumstances, the Fund may have to limit its currency
transactions to qualify as a regulated investment company under the Code; in
this regard, the Fund presently intends to limit its gross income from currency
hedging transactions to less than 10% of its gross income in any taxable year
until such time as the Fund determines that income from the transactions is not
subject to this restriction. The cost to the Fund of engaging in foreign
currency transactions varies with such factors as the currency involved, the
length of the contract period and the market conditions then prevailing. Since
transactions in foreign currency exchange are usually conducted on a principal
basis, no fees or commissions are involved.
OTHER INVESTMENT POLICIES AND PRACTICES
Lending of Portfolio Securities. As discussed in the Prospectus, the Fund may
from time to time lend its portfolio securities in order to increase the total
yield on its portfolio. Such loans will be effected in accordance with
applicable regulatory guidelines and will at all times be secured by cash
collateral or securities issued or guaranteed by the United States government
in an amount that is at least equal to the market value, determined daily, of
the loaned securities. Cash collateral received by the Fund is invested in
short-term money market securities, and a portion of the yield earned on such
securities is retained by the Fund. Where securities, instead of cash, are
delivered to the Fund as collateral, the Fund earns its return in the form of a
loan premium paid by the borrower. The Fund retains the right to regain record
ownership of loaned securities and to exercise beneficial rights such as voting
rights, subscription rights and rights to dividends, interest or other
distributions. Securities loans can be terminated by the Fund at any time. The
Fund may pay reasonable finders', administrative and custodial fees in
connection with such loans.
Foreign Securities. As discussed in the Prospectus, the Fund may invest up to
20% of its total assets in securities issued by foreign companies. Foreign
investments may be affected favorably or unfavorably by changes in currency
rates and exchange control regulations. There may be less publicly available
information about a foreign company than about a U.S. company, and foreign
companies may not be subject to uniform accounting, auditing and financial
reporting standards requirements comparable to those applicable to U.S.
companies. Securities of some foreign companies may be less liquid or more
volatile than securities of U.S. companies, and foreign brokerage commissions
and custodian fees are generally higher than in the U.S. There is generally
less government regulation of stock exchanges, brokers and listed companies
abroad than in the U.S. Investment in foreign securities may also be subject to
other risks different from those affecting U.S. investments, including local
political or economic developments, expropriation or nationalization of assets
and imposition of withholding taxes on dividends or interest payments.
Forward Foreign Exchange Transactions. Generally, the foreign exchange
transactions of the Fund will be conducted on a spot, i.e., cash, basis at the
spot rate for purchasing or selling currency prevailing in the foreign exchange
market. This rate under normal market conditions differs from the prevailing
exchange rate in an amount generally less than 0.1 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 between currencies of the
different countries in which it will invest as a hedge against possible
variations in the foreign exchange rate
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between these currencies. This is accomplished through contractual agreements to
purchase or sell a specified currency at a specified future date and price set
at the time of the contract. The Fund's dealings in forward foreign exchange
will be limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is the purchase or sale of forward foreign
currency with respect to specific receivables or payables of the Fund accruing
in connection with the purchase and sale of its portfolio securities, the sale
and redemption of shares of the Fund or the payment of dividends and
distributions by the Fund. Position hedging is the sale of forward foreign
currency with respect to portfolio security positions denominated or quoted in
such foreign currency. The Fund will not speculate in forward foreign exchange.
The Fund may not position hedge with respect to the currency of a particular
country to an extent greater than the aggregate market value (at the time of
making such sale) of the securities held in its portfolio denominated or quoted
in that particular foreign currency. If the Fund enters into a position hedging
transaction, its custodian bank will place cash or liquid 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 not attempt to hedge all of its foreign portfolio
positions and will enter into such transactions only to the extent, if any,
deemed appropriate by the Investment Adviser. The Fund will not enter into a
position hedging commitment if, as a result thereof, the Fund would have more
than 15% of the value of its assets committed to such contracts. The Fund will
not enter into a forward contract with a term of more than one year.
Restricted Securities. The Fund may purchase securities that are not
registered ("restricted securities") under the Securities Act of 1933, as
amended (the "Securities Act"), but can be offered and sold to "qualified
institutional buyers" under Rule 144A under the Securities Act. However, the
Fund will not invest more than 15% of its net assets in illiquid investments,
which includes securities for which there is no readily available market,
securities subject to contractual restrictions on resale, certain investments
in asset-backed and receivable-backed securities and restricted securities,
unless the Fund's Board of Directors continuously determines, based on the
trading markets for the specific restricted security, that it is liquid. The
Board of Directors may adopt guidelines and delegate to the Investment Adviser
the daily function of determining and monitoring liquidity of restricted
securities. The Board of Directors, however, will retain sufficient oversight
and be ultimately responsible for the determinations.
The Board of Directors monitors the Fund's investments in these securities
purchased pursuant to Rule 144A, focusing on such factors, among others, as
valuation, liquidity and availability of information. These investments in
securities purchased pursuant to Rule 144A could have the effect of increasing
the level of illiquidity in the Fund to the extent that qualified institutional
buyers become for a time uninterested in purchasing these restricted
securities.
Portfolio Turnover. The Fund has not placed any limit on its rate of
portfolio turnover and securities may be sold without regard to the time they
have been held when, in the opinion of the Investment Adviser, investment
considerations warrant such action. As a result, portfolio turnover rate may
vary greatly from year to year or during periods within a year. Also, the use
of covered call options at times when the underlying securities are
appreciating in value may result in higher portfolio turnover than would
otherwise be the case. The Fund pays brokerage commissions in connection with
writing call options and effecting closing purchase transactions, as well as in
connection with purchases and sales of portfolio securities. A high rate of
portfolio turnover would result in correspondingly greater brokerage commission
expenses. Portfolio turnover rate is calculated by dividing the lesser of the
Fund's annual sales or purchases of portfolio securities (exclusive of
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purchases and sales of Government securities and of all other securities,
including options, whose maturity or expiration dates at the time of
acquisition were one year or less) by the monthly average value of the
securities in the Fund during the fiscal year. For the years ended September
30, 1994 and 1993 the rate of portfolio turnover for the Fund was 59.15% and
79.55%, respectively.
Portfolio Brokerage. Subject to policies established by the Board of
Directors of the Fund, the Investment Adviser is responsible for the Fund's
portfolio decisions and the placing of orders to effect the Fund's portfolio
transactions. With respect to such transactions, the Investment Adviser 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, operational facilities of the firm involved and
the firm's risk in positioning a block of securities. While the Investment
Adviser generally seeks reasonably competitive commission rates, the Fund will
not necessarily be paying the lowest commission or spread available. The Fund
has no obligation to deal with any broker or dealer in the execution of its
portfolio transactions. The Fund contemplates that, consistent with the above
policy of obtaining the best net results, a substantial amount of its brokerage
transactions will be conducted through Merrill Lynch. The Fund has been
informed by Merrill Lynch that it will not attempt to influence or control the
placing by the Investment Adviser or by the Fund of orders for brokerage
transactions.
Brokers and dealers, including Merrill Lynch, who provide supplemental
investment research (such as economic data and market forecasts) to the
Investment Adviser may receive orders for transactions by the Fund. Information
so received is in addition to, and not in lieu of, the services required to be
performed by the Investment Adviser under the Investment Advisory Agreement
with the Fund. The expenses of the Investment Adviser are not necessarily
reduced as a result of the receipt of such supplemental information.
Supplemental investment research received by the Investment Adviser may also be
used in connection with other investment advisory accounts of the Investment
Adviser and its affiliates.
The Fund may invest in securities traded in the over-the-counter market.
Transactions in the over-the-counter market are generally principal
transactions with dealers and the costs of such transactions involve dealer
spreads rather than brokerage commissions. With respect to over-the-counter
transactions, the Fund deals directly with dealers who make markets in the
securities involved where possible, except in circumstances where better prices
and execution are available elsewhere. Under the Investment Company Act,
Merrill Lynch and its affiliates are generally prohibited from dealing with the
Fund or its portfolios as principal in the purchase and sale of securities.
Since transactions in the over-the-counter market usually involve transactions
with dealers acting as principal for their own account, neither Merrill Lynch
nor any affiliate of Merrill Lynch may serve as the Fund's dealer in connection
with such transactions. However, such companies may serve as broker for the
Fund in over-the-counter transactions conducted on an agency basis.
The aggregate dollar amounts of brokerage commissions paid by the Fund for
the fiscal years ended September 30, 1994, 1993 and 1992 were $1,097,166,
$1,375,992 and $1,433,924, respectively. The aggregate dollar amounts of such
portfolio transactions were $658,162,025, $843,535,870 and $1,042,727,092,
respectively, for such periods. During those periods, the aggregate dollar
amounts of brokerage commissions paid by the Fund to Merrill Lynch were
$75,348, $80,436 and $99,711, respectively. These amounts represent 6.87%,
5.85% and 6.95%, respectively, of the Fund's aggregate brokerage commissions
paid to all brokers during those periods. The Fund's aggregate dollar amounts
of transactions involving the payment of commissions effected through Merrill
Lynch during those periods were 7.27%, 1.65% and 5.83%, respectively, of the
aggregate dollar amount of all Fund transactions involving the payment of
commissions.
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The Fund and one or more of the other investment companies or accounts which
the Investment Adviser or its affiliate, FAM, manages, may own the same
investments from time to time. Similarly, a particular security may be bought
for one or more companies or accounts at the same time that one or more
companies or accounts are selling the same security. If purchases or sales of
securities for the Fund and other companies or accounts arise for consideration
at or about the same time, transactions in such securities will be made,
insofar as feasible, for the respective companies and accounts in a manner
deemed equitable to all. To the extent that transactions on behalf of more than
one company or account 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 the price of the security being purchased or sold for the
Fund.
Investment Restrictions. The Fund has adopted the following fundamental and
non-fundamental investment restrictions and policies relating to the investment
of its assets and its activities. The fundamental restrictions set forth below
may not be changed without the prior approval of the holders of the majority of
the Fund's outstanding voting securities, including a majority of the voting
securities of each portfolio affected. A majority for this purpose means: (a)
more than 50% of the outstanding voting securities, or (b) 67% of the
outstanding voting securities represented at a meeting where more than 50% of
the outstanding voting securities are represented, whichever is less. For
purposes of the following restrictions, all percentage limitations apply
immediately after a purchase or initial investment and any subsequent change in
any application percentage resulting from market fluctuations does not require
elimination of any security from a portfolio. Under its fundamental investment
restrictions, the Fund may not:
1. Make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act.
2. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
3. Make investments for the purpose of exercising control or management.
4. Purchase or sell real estate, except that, to the extent permitted by
applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time to
time.
6. Issue senior securities to the extent such issuance would violate
applicable law. The Fund currently does not intend to engage in short
sales, except short sales "against the box".
7. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may borrow up
to an additional 5% of its total assets for temporary purposes, (iii) the
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) the Fund
may purchase securities on margin to the extent permitted by applicable
43
<PAGE>
law. The Fund may not pledge its assets other than to secure such
borrowings or, to the extent permitted by the Fund's investment policies as
set forth in its Prospectus and Statement of Additional Information, as
they may be amended from time to time, in connection with hedging
transactions, short sales, when-issued and forward commitment transactions
and similar investment strategies.
8. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the "Securities Act") in selling portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
Under the non-fundamental restrictions, the Fund may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law.
b. Make short sales of securities or maintain a short position, except to
the extent permitted by applicable law.
c. Invest in securities which cannot be readily resold because of legal
or contractual restrictions or which cannot otherwise be marketed, redeemed
or put to the issuer or a third party, if at the time of acquisition more
than 15% of its total assets would be invested in such securities. This
restriction shall not apply to securities which mature within seven days or
securities which the Board of Directors of the Fund has otherwise
determined to be liquid pursuant to applicable law. Notwithstanding the 15%
limitation herein, to the extent the laws of any state in which the Fund's
shares are registered or qualified for sale require a lower limitation, the
Fund will observe such limitation. As of the date hereof, therefore, the
Fund will not invest more than 10% of its total assets in securities which
are subject to this investment restriction (c). Notwithstanding the fact
that the Board may determine that a Rule 144A security is liquid and not
subject to limitations set forth in this investment restriction (c), the
State of Ohio does not recognize Rule 144A securities as securities that
are free of restrictions as to resale. To the extent required by Ohio law,
the Fund will not invest more than 5% of its total assets in securities of
issuers that are restricted as to disposition, including Rule 144A
securities.
d. Invest in warrants if, at the time of acquisition, its investments in
warrants, valued at the lower of cost or market value, would exceed 5% of
the Fund's total assets; included within such limitation, but not to exceed
2% of the Fund's total assets, are warrants which are not listed on the New
York Stock Exchange or American Stock Exchange or a major foreign exchange.
For purposes of this restriction, warrants acquired by the Fund in units or
attached to securities may be deemed to be without value.
e. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more
than 5% of the Fund's total assets would be invested in such securities.
This restriction shall not apply to mortgage-backed securities, asset-
backed securities or obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
44
<PAGE>
f. Purchase or retain the securities of any issuer, if those individual
officers and directors of the Fund, the officers and general partner of the
Investment Adviser, the directors of such general partner or the officers
and directors of any subsidiary thereof each owning beneficially more than
one-half of one percent of the securities of such issuer own in the
aggregate more than 5% of the securities of such issuer.
g. Invest in real estate limited partnership interests or interests in
oil, gas or other mineral leases, or exploration or development programs,
except that the Fund may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or development activities.
h. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Fund's
Prospectus and Statement of Additional Information, as they may be amended
from time to time.
i. Notwithstanding fundamental restriction (7) above, borrow amounts in
excess of 10% of its total assets, taken at market value, and then only
from banks as a temporary measure for extraordinary or emergency purposes
such as the redemption of Fund shares. In addition, the Fund will not
purchase securities while borrowings exceed 5% of its assets.
Because of the affiliation of Merrill Lynch with the Fund, the Fund is
prohibited from engaging in certain transactions involving Merrill Lynch except
pursuant to a permissive order or otherwise in compliance with the provisions
of the Investment Company Act and the rules and regulations thereunder.
Included among such restricted transactions are purchases from or sales to
Merrill Lynch of securities in transactions in which it acts as principal and
purchases of securities from underwriting syndicates of which Merrill Lynch is
a member.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund was incorporated under Maryland law on May 21, 1984, under the name
Merrill Lynch Retirement Fund, Inc. The name of the Fund was changed to Merrill
Lynch Retirement Benefit Investment Program, Inc. on August 8, 1985. On April
30, 1991, the Fund began doing business under the name Merrill Lynch Balanced
Fund for Investment and Retirement. The Fund officially changed its name to
Merrill Lynch Balanced Fund for Investment and Retirement, Inc. on December 21,
1994. The Fund has an authorized capital of 2,000,000,000 shares of Common
Stock, par value $0.01 per share, divided into four classes, designated Class
A, Class B, Class C and Class D Common Stock, each of which consists of
500,000,000 shares. Shares of Class A, Class B, Class C and Class D Common
Stock represent an interest in the same assets of the Fund and are identical in
all respects except that the Class B, Class C and Class D shares bear certain
expenses related to the account maintenance and/or distribution of such shares
and have exclusive voting rights with respect to matters relating to such
account maintenance and/or distribution expenditures. The Fund has received an
order from the Commission permitting the issuance and sale of multiple classes
of Common Stock. The Board of Directors of the Fund may classify and reclassify
the shares of the Fund into additional classes of Common Stock at a future
date.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matter submitted to a shareholder vote. The Fund does not intend to
hold meetings of shareholders in any year in which the Act does not require
shareholders
45
<PAGE>
to act upon any of the following matters: (i) election of Directors; (ii)
approval of an investment advisory agreement; (iii) approval of a distribution
agreement; and (iv) ratification of selection of independent accountants.
Generally, under Maryland law, a meeting of shareholders may be called for any
purpose on the written request of the holders of at least 25% of the
outstanding shares of the Fund. Voting rights for Directors are not cumulative.
Shares issued are fully paid and non-assessable and have no preemptive rights.
Redemption and conversion rights are discussed elsewhere herein and in the
Prospectus. Each share 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.
COMPUTATION OF OFFERING PRICE PER SHARE
The offering price for Class A and Class B shares of the Fund, based on the
value of the Fund's net assets and number of shares outstanding as of September
30, 1994, is calculated as set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B
----------- ------------
<S> <C> <C>
Net Assets............................................ $39,962,564 $709,836,126
=========== ============
Number of Shares Outstanding.......................... 3,424,576 60,042,048
=========== ============
Net Asset Value Per Share (net assets divided by
number of shares outstanding)........................ $ 11.67 $ 11.75
Sales Charge* (for Class A shares; 5.25% of offering
price (5.54% of net asset value per share)).......... .65 **
----------- ------------
Offering Price ....................................... $ 12.32 $ 11.75
=========== ============
</TABLE>
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge
is applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption of shares. See "Purchase of Shares--
Deferred Sales Charge Alternatives--Class B and Class C Shares" in the
Prospectus.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to ratification by the shareholders of the
Fund, and the employment of such auditors may be terminated without any penalty
by vote of a majority of the outstanding shares of the Fund at a meeting called
for the purpose of terminating such employment. The independent auditors are
responsible for auditing the annual financial statements of the Fund.
CUSTODIAN
Chase Manhattan Bank N.A., 4 Chase MetroTech Center, 18th Floor, Brooklyn, NY
11245, acts as Custodian of the Fund's assets. The Custodian is responsible for
safeguarding and controlling the Fund's cash and securities, handling the
delivery of securities and collecting interest and dividends on the Fund's
investments.
TRANSFER AGENT
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 33246-6484, acts as the Fund's Transfer Agent. The Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the
opening, maintenance and servicing of shareholder accounts. See "The Fund and
Its Management-- Transfer Agency Services" in the Prospectus.
46
<PAGE>
LEGAL COUNSEL
Shereff, Friedman, Hoffman & Goodman, LLP, 919 Third Avenue, New York, New
York 10022, is counsel for the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on September 30 of each year. The Fund will
send 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.
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 of 1940, to which reference is hereby made.
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's shares on January 1, 1995.
47
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders, Merrill Lynch Balanced Fund for
Investment and Retirement (formerly Merrill Lynch Retirement Benefit Investment
Program, Inc.):
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Merrill Lynch Balanced Fund for
Investment and Retirement as of September 30, 1994, the related statements of
operations for the year then ended and changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for each
of the years in the five-year period then ended. These financial statements and
the financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at
September 30, 1994 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Balanced Fund for Investment and Retirement as of September 30, 1994, the
results of its operations, the changes in its net assets, and the financial
highlights for the respective stated periods in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
October 31, 1994
48
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Face Value Percent of
Industries Amount* Corporate Bonds Cost (Note 1a) Net Assets
<C> <C> <C> <S> <C> <C> <C>
Financial $ 10,000,000 Ford Capital BV, 9.375% due 1/01/1998 $ 10,037,900 $ 10,552,600 1.4%
Services 5,000,000 Landeskreditbank, N.V., 7.875% due 4/15/2004 4,972,068 4,957,500 0.7
Financial 10,000,000 American General Financial Corp., 7.38%
Services-- due 5/13/1997 9,993,200 10,020,400 1.3
Consumer
Total Investments in Corporate Bonds 25,003,168 25,530,500 3.4
Country US Government & Agency Obligations
United States 4,910,000 Federal Home Loan Mortgage Corp., REMIC,
1243-HP, 5.625% due 11/25/2015 (a) 4,788,017 4,437,413 0.6
20,000,000 Federal National Mortgage Association,
7.00% due 3/25/2024 18,443,750 18,362,500 2.4
Government National Mortgage Association:
12,720,792 7.50% due 6/15/2024 12,152,332 11,953,575 1.6
6,869,588 7.50% due 7/15/2024 6,562,603 6,455,269 0.8
US Treasury Notes:
55,000,000 7.875% due 8/15/2001 53,943,600 56,289,200 7.5
25,000,000 6.25% due 2/15/2003 25,710,938 22,972,750 3.1
35,000,000 5.75% due 8/15/2003 36,432,813 30,860,200 4.1
22,000,000 US Treasury STRIPS++, 6.81% due 5/15/2000(b) 16,050,781 14,639,240 2.0
Total Investments in US Government &
Agency Obligations 174,084,834 165,970,147 22.1
Foreign Obligations
Australia A$ 3,100,000 Queensland Treasury Corp., Global, 8.00%
due 7/14/1999 2,328,332 2,134,085 0.3
Germany Bundes:
DM 17,000,000 6.00% due 2/20/1998 10,668,744 10,668,625 1.4
22,000,000 6.375% due 5/20/1998 13,923,234 13,918,671 1.8
Italy Lit 5,000,000 Republic of Italy, 8.75% due 2/08/2001 5,373,050 5,152,670 0.7
Mexico Mxp 45,013,640 Mexican Cetes, 9.04% due 9/07/1995(b) 13,025,996 11,761,787 1.6
United UK Treasury Gilt:
Kingdom Pound Sterling 1,350,000 8.75% due 9/01/1997 2,267,919 2,149,575 0.3
4,000,000 8.00% due 6/10/2003 6,698,788 5,949,233 0.8
Total Investments in Foreign Obligations 54,286,063 51,734,646 6.9
Total Investments in Corporate Bonds,
US Government & Agency and
Foreign Obligations 253,374,065 243,235,293 32.4
</TABLE>
49
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Shares Value Percent of
Industries Held US Stocks & Warrants Cost (Note 1a) Net Assets
<C> <C> <S> <C> <C> <C>
Basic Industry
Aluminum 15,000 Aluminum Co. of America (ALCOA) $ 1,285,103 $ 1,271,250 0.2%
Chemicals 110,000 du Pont (E.I.) de Nemours & Co. 6,362,863 6,380,000 0.8
145,000 Eastman Chemical Co. 7,478,773 7,884,375 1.0
120,000 IMC Fertilizer Group, Inc. 4,987,939 5,340,000 0.7
90,000 Rohm & Haas Co. 4,872,761 5,141,250 0.7
Packaging 150,000 Crown Cork & Seal Co., Inc. 4,484,320 5,775,000 0.8
Paper & Forest 135,000 Scott Paper Co. 6,002,300 8,251,875 1.1
Producers 85,000 Willamette Industries, Inc. 3,173,000 4,356,250 0.6
Total Basic Industry 38,647,059 44,400,000 5.9
Capital Spending
Auto & Truck 125,000 Consorcio G Groupo Dina, S.A. de C.V.
(ADR) (c) (1) 2,026,119 1,500,000 0.2
Communication 255,000 +++ADC Telecommunications, Inc. 8,983,466 10,200,000 1.4
Equipment 270,000 DSC Communications Corp. 7,169,181 7,695,000 1.0
75,000 +++General Data Comm Industries, Inc. 1,790,297 2,118,750 0.3
120,000 Motorola, Inc. 6,103,380 6,330,000 0.8
120,000 Tellabs, Inc. 2,539,049 5,100,000 0.7
Computer Services 435,000 Computer Sciences Corp. 12,394,300 18,922,500 2.5
Electrical Equipment 150,000 Siebe PLC (1) 1,309,386 1,277,370 0.2
100,000 W.W. Grainger 6,446,088 5,925,000 0.8
Electronics 210,000 Solectron Corp. 5,168,718 5,538,750 0.7
Engineering & 230,000 Empresas ICA Sociedad Controladora, S.A. de C.V.
Construction (ADR) (c) (1) 4,526,225 7,417,500 1.0
410,000 Huntington International Holdings PLC
(ADR) (c) (1) 9,996,548 1,998,750 0.3
Environmental 1,100,000 Wheelabrator Technologies, Inc. 12,362,975 16,912,500 2.3
Control
Multi-Industry 200,000 Allied-Signal Inc. 6,438,764 6,825,000 0.9
Office Equipment 610,000 Danka Business Systems PLC (ADR) (c) (1) 9,489,019 11,208,750 1.5
15,000 International Business Machines Corp. 1,063,730 1,042,500 0.1
Total Capital Spending 97,807,245 110,012,370 14.7
</TABLE>
50
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Shares Value Percent of
Industries Held US Stocks & Warrants Cost (Note 1a) Net Assets
<C> <C> <S> <C> <C> <C>
Consumer Goods & Services
Appliances 675,000 Singer Co. N.V. (ADR) (c) (1) $ 17,730,688 $ 22,781,250 3.0%
474,500 Sunbeam-Oster Inc. 9,420,127 11,565,938 1.5
Automotive 104,700 Magna International Inc. (ADR) (c) (1) 5,172,274 3,860,813 0.5
Equipment
Beverages 20,000 PanAmerican Beverage Inc. (ADR) (c) (1) 635,958 717,500 0.1
Consumer-- 90,000 Duracell International Inc. 3,713,033 4,106,250 0.5
Miscellaneous
Consumer--Services 180,000 Block (H & R), Inc. 7,774,923 8,257,500 1.1
Drugs & Hospital 60,000 Merck & Co., Inc. 2,143,314 2,130,000 0.3
Supply
Health Care 450,000 Humana Inc. 8,419,745 10,631,250 1.4
265,000 Physician Corp. of America 5,482,809 5,962,500 0.8
40,000 Vivra Inc. 727,950 1,090,000 0.1
Household Products 240,000 Procter & Gamble Co. 13,503,704 14,310,000 1.9
Photography 60,000 Eastman Kodak Co. 3,004,778 3,105,000 0.4
Retail 75,000 Phillips-Van Heusen Corp. 1,721,463 1,546,875 0.2
Tires & Rubber 196,100 Cooper Tire & Rubber Co. 4,764,741 4,583,837 0.6
Total Consumer Goods & Services 84,215,507 94,648,713 12.4
Credit-Sensitive & Financial Services
Banking 90,000 Banco Frances del Rio de la Plata S.A.(ADR)(c)(1) 2,964,448 2,700,000 0.4
165,000 BankAmerica Corp. 7,440,617 7,280,625 1.0
200,000 Bank of New York Co. 5,581,161 5,925,000 0.8
245,000 Espirito Santo Financial Holding S.A. (ADR) (c) (1) 3,447,435 3,430,000 0.5
130,000 Grupo Financiero Serfin S.A. (ADR) (c) (1) 3,204,369 2,957,500 0.4
Insurance 110,000 International Telephone & Telegraph Corp. 9,403,546 9,171,250 1.2
Total Credit-Sensitive & Financial Services 32,041,576 31,464,375 4.3
Energy
Energy--Related 350,000 California Energy Co., Inc. 6,244,403 5,993,750 0.8
Oil--Integrated 110,000 Mobil Oil Corp. 8,561,728 8,703,750 1.2
180,000 Phillips Petroleum Co. 5,854,415 6,165,000 0.8
70,000 Royal Dutch Petroleum Co. N.V. (ADR) (c) (1) 6,155,380 7,516,250 1.0
Total Energy 26,815,926 28,378,750 3.8
</TABLE>
51
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Shares Value Percent of
Industries Held US Stocks & Warrants Cost (Note 1a) Net Assets
<C> <C> <C> <S> <C> <C> <C>
Transports
Railroads 310,000 +++Southern Pacific Rail Co. $ 6,386,644 $ 5,812,500 0.8%
Total Transports 6,386,644 5,812,500 0.8
Utilities
Utilities-- 49,100 ALC Communications Corp. 1,456,673 1,608,025 0.2
Communications 180,000 GTE Corp. 5,790,102 5,467,500 0.7
515,750 LDDS Communications Inc. (Class A) 11,447,075 11,346,500 1.5
415,000 MCI Communications Corp. 11,820,141 10,530,625 1.4
170,000 Southwestern Bell Corp. 7,282,605 7,225,000 1.0
90,000 Sprint Corp. 3,364,449 3,431,250 0.5
200,000 Telefonos de Mexico, S.A. de C.V. (ADR) (c) (1) 9,342,788 12,500,000 1.7
Total Utilities 50,503,833 52,108,900 7.0
Total Investments in US Stocks & Warrants 336,417,790 366,825,608 48.9
Foreign Stocks & Warrants
Argentina
Banking 40,000 Banco de Galicia y Buenos Aires S.A. (ADR) (c) 1,261,974 1,250,000 0.2
Utilities-- 560,000 Telecom Argentina S.A. (Class B) 3,305,379 3,741,174 0.5
Communications
Australia
Banking 425,250 Coles Myer Ltd. 1,802,859 1,312,236 0.2
347,492 National Australia Bank Ltd. 2,199,488 2,653,727 0.4
Media/Publishing 80,000 News Corp. (ADR) (c) 4,079,037 4,050,000 0.5
Multi-Industry 308,963 Pacific Dunlop, Ltd. 1,154,171 937,394 0.1
Canada
Appliances 280,000 International Semi-Tech Corp. 2,947,648 1,775,457 0.2
Chemicals 90,000 NOVA Corp. (Class A) 949,140 990,000 0.1
Retail Stores 75,000 Hudson's Bay Company (Ordinary) 2,011,843 1,629,523 0.2
Chile
Banking 57,000 +++Banco O'Higgins (ADR) (c) 837,114 1,168,500 0.2
Utilities--Electric 96,600 Distribuidora Chilectra Metropolitana S.A.
(ADR) (c)++++ 2,696,793 4,745,475 0.6
Denmark
Utilities-- 80,000 Tele Danmark A/S 1,882,080 2,180,000 0.3
Communications
</TABLE>
52
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Shares Value Percent of
Industries Held Foreign Stocks & Warrants Cost (Note 1a) Net Assets
<C> <C> <C> <S> <C> <C> <C>
France
Industrial 3,123 +++Eramet $ 183,452 $ 201,457 0.0%
Insurance 42,900 Compagnie UAP 1,165,352 1,086,662 0.1
Oil--Integrated 153,826 Societe Nationale Elf Aquitaine (ADR) (c) 5,483,913 5,537,736 0.7
Utilities--Water 15,413 Compagnie Generale des Eaux 1,445,264 1,361,634 0.2
Hong Kong
Banking 283,415 HSBC Holdings PLC 1,715,599 3,163,646 0.4
Electrical 1,300,000 Johnson Electric Co. 2,603,189 3,659,389 0.5
Equipment
Multi--Industry 660,000 Hutchison Whampoa, Ltd. 1,685,630 3,117,761 0.4
Real Estate 225,000 Wharf Holdings Ltd. 948,314 905,626 0.1
Italy
Banking 90,000 Instituto Mobilare (ADR) (c) 1,976,579 1,890,000 0.3
Japan
Chemicals 65,000 Sekisui Chemical Co. 663,408 684,211 0.1
Electronics 90,000 Mitsubishi Electric Corp. 556,016 643,117 0.1
Tools 30,000 +++Makita Electric Work 609,699 582,996 0.1
Mexico
Multi-Industry 465,000 +++Grupo Carso, S.A. de C.V. (ADR) (c)++++ 4,106,100 10,520,625 1.4
Retail Stores 430,000 CIFRA, S.A. de C.V. 'C' 1,129,713 1,203,949 0.2
Portugal
Banking 100,000 Banco Commercial Portugal (New) (ADR) (c) 1,342,303 1,350,000 0.2
97,000 Banco Commercial Portugal (Registered) 1,233,051 1,332,215 0.2
Spain
Oil--Integrated 60,000 Repsol S.A. 1,616,190 1,832,489 0.2
Sweden
Appliances 12,000 Electrolux AB 'B' Free 610,647 568,302 0.1
Telecommunications 40,000 Ericsson (LM) Telephone Co. 2,085,490 2,140,000 0.3
</TABLE>
53
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Shares Value Percent of
Industries Held Foreign Stocks & Warrants Cost (Note 1a) Net Assets
<C> <C> <C> <S> <C> <C> <C>
United Kingdom
Financial Services 100,000 Reuters Holding PLC (ADR) (c) $ 2,571,186 $ 4,475,000 0.6%
Multi-Industry 50,000 Hanson PLC Sponsored (ADR) (c) 1,106,687 906,250 0.1
Oil--Integrated 35,000 British Petroleum Co. PLC (ADR) (c) 2,578,350 2,651,250 0.4
Total Investments in Foreign Stocks &
Warrants 62,543,658 76,247,801 10.2
Total Investments in US & Foreign Stocks
& Warrants 398,961,448 443,073,409 59.1
<CAPTION>
Face
Amount* Short-Term Securities
<C> <C> <S> <C> <C> <C>
Commercial $ 20,000,000 B.A.T. Capital Corp., 4.92% due 10/26/1994 19,931,667 19,931,667 2.7
Paper** 24,881,000 General Electric Capital Corp., 4.95%
due 10/03/1994 24,874,157 24,874,157 3.3
Total Investments in Short-Term Securities 44,805,824 44,805,824 6.0
Total Investments 697,141,337 731,114,526 97.5
<CAPTION>
Number of Premiums
Shares Issue Received
<C> <C> <S> <C> <C> <C>
Options Written
Call Options 1,000 General DataComm Industries, Inc.,
Written expiring October 1994 at US$30 (1,783) (1,125) 0.0
Total Options Written (1,783) (1,125) 0.0
Total Investments, Net of Options Written $697,139,554 731,113,401 97.5
============
Other Assets Less Liabilities 18,685,289 2.5
------------ ------
Net Assets $749,798,690 100.0%
============ ======
<FN>
(a)Real Estate Mortgage Investment Conduits (REMIC).
(b)Represents the yield-to-maturity on this zero coupon issue.
These securities are purchased at a deep discount and
amortized to maturity.
(c)American Depositary Receipt (ADR).
*Denominated in US dollars unless otherwise indicated.
**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.
(1)Consistent with the general policy of the Securities and
Exchange Commission, the nationality or domicile of an issuer
for determination of foreign issuer status may be (i) the country
under whose laws the issuer is organized, (ii) the country in
which the issuer's securities are principally traded, or (iii) the
country in which the issuer derives a significant proportion
(at least 50%) of its revenue or profits from goods produced or
sold, investments made, or services performed in the country,
or in which at least 50% of the assets of the issuer are situated.
See Notes to Financial Statements.
++Separate Trading of Registered Interest and Principal of Securities
(STRIPS).
++++Restricted securities as to resale. The value of the Fund's investment
in restricted securities was approximately $15,266,000, representing
2.0% of net assets.
<CAPTION>
Value
Issue Acquisition Date Cost (Note 1a)
<S> <C> <C> <C>
Distribuidora Chilectra
Metropolitana S.A.
(ADR) 2/12/1992-2/26/1992 $ 2,696,793 $ 4,745,475
Grupo Carso,
S.A. de C.V. (ADR) 9/24/1991-1/24/1992 4,106,100 10,520,625
------------ ------------
Total $ 6,802,893 $ 15,266,100
============ ============
+++Non-income producing security.
</TABLE>
54
<PAGE>
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of September 30, 1994
<C> <S> <C> <C>
Assets: Investments, at value (identified cost--$697,141,337) (Note 1a) $731,114,526
Cash 1,193,921
Receivables:
Securities sold $ 39,659,730
Interest 3,297,249
Dividends 676,737
Capital shares sold 251,850 43,885,566
------------
Prepaid registration fees and other assets (Note 1d) 126,383
------------
Total assets 776,320,396
------------
Liabilities: Options written, at value (premiums received--$1,783) (Notes 1a & 1c) 1,125
Payables:
Securities purchased 23,288,459
Capital shares redeemed 1,805,947
Distributor (Note 2) 592,475
Investment adviser (Note 2) 396,063 26,082,944
------------
Accrued expenses and other liabilities 437,637
------------
Total liabilities 26,521,706
------------
Net Assets: Net assets $749,798,690
============
Net Assets Class A Shares of Common Stock, $0.01 par value, 500,000,000 shares authorized $ 34,246
Consist of: Class B Shares of Common Stock, $0.01 par value, 500,000,000 shares authorized 604,020
Paid-in capital in excess of par 652,263,675
Undistributed investment income--net 3,227,255
Undistributed realized capital gains on investments and foreign currency transactions--net 59,682,149
Unrealized appreciation on investments and foreign currency transactions--net 33,987,345
------------
Net assets $749,798,690
============
Net Asset Class A--Based on net assets of $39,962,564 and 3,424,576 shares outstanding $ 11.67
Value: ============
Class B--Based on net assets of $709,836,126 and 60,402,048 shares outstanding $ 11.75
============
See Notes to Financial Statements.
</TABLE>
55
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations for the Year Ended September 30, 1994
<C> <S> <C> <C>
Investment Interest and discount earned (net of $91,991 foreign withholding tax) $ 21,932,818
Income Dividends (net of $259,965 foreign withholding tax) 6,678,142
(Notes 1d Other 204,094
& 1e): ------------
Total income 28,815,054
------------
Expenses: Distribution fees--Class B (Note 2) 7,779,195
Investment advisory fees (Note 2) 5,173,680
Transfer agent fees--Class B (Note 2) 1,174,407
Custodian fees 190,179
Printing and shareholder reports 182,011
Accounting services (Note 2) 98,036
Transfer agent fees--Class A (Note 2) 53,139
Professional fees 51,144
Registration fees (Note 1f) 49,492
Directors' fees and expenses 48,967
Pricing fees 4,640
Amortization of organization expenses (Note 1f) 2,683
Other 23,017
------------
Total expenses 14,830,590
------------
Investment income--net 13,984,464
------------
Realized & Realized gain from:
Unrealized Investments--net $ 66,568,356
Gain (Loss) Foreign currency transactions--net 1,285 66,569,641
on Investment ------------
& Foreign Change in unrealized appreciation/depreciation on:
Currency Investments--net (72,110,568)
Transactions-- Foreign currency transactions--net 49,571 (72,060,997)
Net (Notes 1b, ------------ ------------
1e & 3): Net realized and unrealized loss on investments and foreign currency transactions (5,491,356)
------------
Net Increase in Net Assets Resulting from Operations $ 8,493,108
============
See Notes to Financial Statements.
</TABLE>
56
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year Ended Sept. 30,
Increase (Decrease) in Net Assets: 1994 1993
<C> <S> <C> <C>
Operations: Investment income--net $ 13,984,464 $ 16,570,858
Realized gain on investments and foreign currency transactions--net 66,569,641 82,929,610
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net (72,060,997) 14,121,027
------------ ------------
Net increase in net assets resulting from operations 8,493,108 113,621,495
------------ ------------
Dividends & Investment income--net:
Distributions Class A (1,253,348) (994,119)
to Share- Class B (14,802,935) (17,314,603)
holders Realized gain on investments--net:
(Note 1g): Class A (4,103,194) (1,508,643)
Class B (75,192,306) (59,542,543)
------------ ------------
Net decrease in net assets resulting from dividends
and distributions to shareholders (95,351,783) (79,359,908)
------------ ------------
Capital Share Net decrease in net assets derived from capital
Transactions share transactions (34,985,543) (69,858,642)
(Note 4): ------------ ------------
Net Assets: Total decrease in net assets (121,844,218) (35,597,055)
Beginning of year 871,642,908 907,239,963
------------ ------------
End of year* $749,798,690 $871,642,908
============ ============
*Undistributed investment income--net $ 3,227,255 $ 4,746,266
============ ============
See Notes to Financial Statements.
</TABLE>
57
<PAGE>
FINANCIAL INFORMATION (concluded)
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. Class A
For the Year Ended September 30,
Increase (Decrease) in Net Asset Value: 1994* 1993 1992 1991 1990
<C> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 13.02 $ 12.57 $ 11.94 $ 10.61 $ 11.93
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .32 .43 .47 .70 .64
Realized and unrealized gain (loss) on investments
and foreign currency transactions (1)--net (.07) 1.29 .61 1.63 (1.41)
-------- -------- -------- -------- --------
Total from investment operations .25 1.72 1.08 2.33 (.77)
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.37) (.39) (.45) (.62) (.55)
Realized gain on investments--net (1.23) (.88) -- (.38) --
-------- -------- -------- -------- --------
Total dividends and distributions (1.60) (1.27) (.45) (1.00) (.55)
-------- -------- -------- -------- --------
Net asset value, end of year $ 11.67 $ 13.02 $ 12.57 $ 11.94 $ 10.61
======== ======== ======== ======== ========
Total Based on net asset value per share 1.81% 14.62% 9.23% 23.14% (6.86%)
Investment ======== ======== ======== ======== ========
Return:**
Ratios to Expenses .83% .83% .81% .85% .83%
Average ======== ======== ======== ======== ========
Net Assets: Investment income--net 2.68% 3.09% 3.18% 3.64% 5.12%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $ 39,963 $ 40,688 $ 20,320 $ 12,839 $ 44,511
Data: ======== ======== ======== ======== ========
Portfolio turnover 59.15% 79.55% 65.40% 173.76% 163.56%
======== ======== ======== ======== ========
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. Class B
For the Year Ended September 30,
Increase (Decrease) in Net Asset Value: 1994* 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 13.09 $ 12.62 $ 11.99 $ 10.60 $ 11.91
Operating --------- --------- --------- --------- ----------
Performance: Investment income--net .20 .24 .29 .39 .50
Realized and unrealized gain (loss) on
investments and foreign currency
transactions (1)--net (.07) 1.37 .66 1.83 (1.39)
--------- --------- --------- --------- ----------
Total from investment operations .13 1.61 .95 2.22 (.89)
--------- --------- --------- --------- ----------
Less dividends and distributions:
Investment income--net (.24) (.26) (.32) (.45) (.42)
Realized gain on investments--net (1.23) (.88) -- (.38) --
--------- --------- --------- --------- ----------
Total dividends and distributions (1.47) (1.14) (.32) (.83) (.42)
--------- --------- --------- --------- ----------
Net asset value, end of year $ 11.75 $ 13.09 $ 12.62 $ 11.99 $ 10.60
========= ========= ========= ========= ==========
Total Based on net asset value per share 0.76% 13.49% 8.01% 21.91% (7.79%)
Investment ========= ========= ========= ========= ==========
Return:**
Ratios to Expenses, excluding distribution fees .86% .85% .85% .90% .86%
Average ========= ========= ========= ========= ==========
Net Assets: Expenses 1.86% 1.85% 1.85% 1.90% 1.86%
========= ========= ========= ========= ==========
Investment income--net 1.65% 1.99% 2.10% 3.37% 3.90%
========= ========= ========= ========= ==========
Supplemental Net assets, end of year (in thousands) $ 709,836 $ 830,955 $ 886,920 $ 986,895 $1,171,567
Data: ========= ========= ========= ========= ==========
Portfolio turnover 59.15% 79.55% 65.40% 173.76% 163.56%
========= ========= ========= ========= ==========
<FN>
*Based on average shares outstanding during the year.
**Total investment returns exclude the effect of sales loads.
(1)Foreign currency transaction amounts have been reclassified to conform to 1994 presentation.
See Notes to Financial Statements.
</TABLE>
58
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Retirement Benefit Investment Pro-
gram, Inc., Full Investment Portfolio does business
under the name Merrill Lynch Balanced Fund for
Investment and Retirement. Merrill Lynch Balanced
Fund for Investment and Retirement (the "Fund")
is registered under the Investment Company Act
of 1940 as a diversified, open-end management
investment company. The Fund offers both Class A
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. On
September 27, 1994, shareholders approved the
implementation of the Merrill Lynch Select Pricing sm
System, which will offer two new classes of shares,
Class C and Class D. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities
and options which are traded on 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.
Securities traded in the over-the-counter market
are valued at the last quoted bid prices at the close
of trading on the New York Stock Exchange on
each day by brokers that make markets in the
securities. Portfolio securities which are traded both
in the over-the-counter market and on a stock ex-
change are valued according to the broadest and
most representative market. Short-term securities
are valued at amortized cost, which approximates
market value. Securities and assets for which market
quotations are not readily available are valued at
fair value as determined in good faith by or under
the direction of the Board of Directors of the Fund.
(b) Foreign currency transactions--Transactions
denominated in foreign currencies are recorded at the
exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies
are valued at the exchange rate at the end of the
period. Foreign currency transactions are the result
of settling (realized) and valuing (unrealized) assets
and liabilities expressed in foreign currencies into
US dollars. Realized and unrealized gains or losses
from investments include the effects of foreign
exchange sales on investments.
The Fund is authorized to enter into forward foreign
exchange contracts as a hedge against either spe-
cific transactions or portfolio positions. Such con-
tracts are not entered on the Fund's records. However,
the effect on operations is recorded from the date
the Fund enters into such contracts. Premium or
discount is amortized over the life of the contracts.
The Fund may also purchase or sell listed or over-
the-counter foreign currency options, foreign
currency futures and related options on foreign
currency futures as a short or long hedge against
possible variations in foreign exchange rates. Such
transactions may be effected with respect to hedges
on non-US dollar denominated securities owned by
the Fund, sold by the Fund but not yet delivered, or
committed or anticipated to be purchased by the Fund.
(c) Options--When the Fund sells an option, an
amount equal to the premium received by the Fund
is reflected as an asset and an equivalent liability.
The amount of the liability is subsequently marked
to market to reflect the current market value of the
option written.
When a security is sold through an exercise of an
option, the related premium received is deducted from
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 loss or gain to
the extent the cost of the closing transaction is less
than or greater than the premium paid or received).
Written and purchased options are non-income
producing investments.
(d) Income taxes--It is the Fund's policy to comply
with the requirements of the Internal Revenue Code
applicable to regulated investment companies and
to distribute substantially all of its taxable income
to its shareholders. Therefore, no Federal income tax
provision is required. Under the applicable foreign
tax law, a withholding tax may be imposed on interest,
dividends and capital gains at various rates.
(e) Security transactions and investment income--
Security transactions are recorded on the dates the
transactions are entered into (the trade dates). Divi-
dend income is recorded on the ex-dividend date,
except that if the ex-dividend date has passed, certain
dividends from foreign securities are recorded as
59
<PAGE>
soon as the Fund is informed of the ex-dividend date.
Interest income (including amortization of discount)
is recognized on the accrual basis. Realized gains
and losses on security transactions are determined
on the identified cost basis.
(f) Prepaid registration fees--Prepaid registration
fees are charged to expense as the related shares
are issued.
(g) Dividends and distributions--Dividends and
distributions paid by the Fund are recorded on the
ex-dividend dates.
(h) Reclassifications--Certain 1993 amounts have
been reclassified to conform to the 1994 presentation.
Undistributed realized capital gains-net in the
amount of $552,808 has been reclassified to undis-
tributed investment income-net.
2. Investment Advisory Agreement and
Transaction with Affiliates:
The Fund has entered into an Investment Advisory
Agreement with Merrill Lynch Asset Management,
L.P. ("MLAM"). Effective January 1, 1994, the invest-
ment advisory business of MLAM was reorganized
from a corporation to a limited partnership. Both
prior to and after the reorganization, ultimate con-
trol of MLAM was vested with Merrill Lynch & Co.,
Inc. ("ML & Co."). The general partner of MLAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-
owned subsidiary of ML & Co. The limited partners
are ML & Co. and Merrill Lynch Investment Manage-
ment, Inc. ("MLIM"), which is also an indirect
wholly-owned subsidiary of ML & Co. The Fund has
also entered into a Distribution Agreement and a
Distribution Plan with Merrill Lynch Funds Dis-
tributor, 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 person-
nel, facilities, equipment and certain other services
necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee based upon
the average daily value of the Fund's net assets
at the following annual rates: 0.65% of the average
daily net assets not exceeding $500 million; 0.60%
of the average daily net assets exceeding $500 mil-
lion but not exceeding $1.5 billion; 0.55% of the
average daily net assets exceeding $1.5 billion but
not exceeding $2.5 billion; 0.50% of the average
daily net assets exceeding $2.5 billion but not
exceeding $3.5 billion; and 0.45% of the average
daily net assets exceeding $3.5 billion. The most
restrictive annual expense limitation requires
that the Adviser reimburse the Fund to the extent
the Fund's expenses (excluding interest, taxes,
distribution fees, brokerage fees and commissions,
and extraordinary items) exceed 2.5% of the Fund's
first $30 million of average daily net assets, 2.0% of
the next $70 million of average daily net assets,
and 1.5% of the average daily net assets in excess
thereof. No payment will be made to MLAM during
any fiscal year which will cause such expenses to
exceed the most restrictive expense limitation
applicable at the time of such payment.
Pursuant to a distribution plan (the "Distribution
Plan") adopted by the Fund in accordance with Rule
12b-1 under the Investment Company Act of 1940,
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 assets of the Class B Shares of the Fund. Pursu-
ant to a sub-agreement with the Distributor, Merrill
Lynch, Pierce, Fenner, & Smith Inc. ("MLPF&S"),
a subsidiary of ML & Co., also provides account
maintenance and distribution services to the Fund.
The ongoing account maintenance fee compensates
the Distributor and MLPF&S for providing account
maintenance services to Class B shareholders.
The ongoing distribution fee compensates the
Distributor and MLPF&S for providing shareholder
and distribution services and bearing certain
distribution-related expenses of the Fund.
For the year ended September 30, 1994, MLFD
earned underwriting discounts of $3,336, and
MLPF&S received dealer concessions of $51,587 on
sales of the Fund's Class A Shares.
MLPF&S received contingent deferred sales charges
of $163,949 relating to transactions in Class B Shares
and $75,348 in commissions on the execution of
portfolio security transactions for the Fund during
the period.
Financial Data Services, Inc. ("FDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's
transfer agent.
Accounting services are provided to the Fund by
MLAM at cost.
Certain officers and/or directors of the Fund are
officers and/or directors of MLAM, MLIM, PSI,
MLPF&S, FDS, MLFD, and/or ML & Co.
60
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
3. Investments:
Purchases and sales of investments, excluding
short-term securities, for the year ended Septem-
ber 30, 1994 were $455,609,366 and $600,829,358,
respectively.
Net realized and unrealized gains (losses) as of
September 30, 1994 were as follows:
Realized Unrealized
Gains Gains
(Losses) (Losses)
Long-term investments $66,532,102 $33,973,189
Options written 36,254 658
Foreign currency
transactions (241,606) 13,498
Forward foreign exchange
contracts 242,891 --
----------- -----------
Total $66,569,641 $33,987,345
=========== ===========
As of September 30, 1994, net unrealized apprecia-
tion for Federal income tax purposes aggregated
$33,973,847, of which $64,172,617 related to appre-
ciated securities and $30,198,770 related to de-
preciated securities. The aggregate cost of invest-
ments less premiums received for options written
at September 30, 1994 for Federal income tax
purposes was $697,139,554.
Transactions in call options written for the year
ended September 30, 1994 were as follows:
Number of Premiums
Shares Received
Outstanding options at
beginning of year -- --
Options written 32,500 $ 48,779
Options closed (10,400) (10,154)
Options exercised (7,500) (23,007)
Options expired (13,600) (13,835)
----------- -----------
Outstanding options at
end of year 1,000 $1,783
=========== ===========
4. Capital Share Transactions:
Net decrease in net assets derived from capital
share transactions was $34,985,543 and $69,858,642
for the years ended September 30, 1994 and
September 30, 1993, respectively.
Transactions in capital shares for Class A and Class B
Shares were as follows:
Class A Shares for the Year Dollar
Ended September 30, 1994 Shares Amount
Shares sold 1,518,510 $ 18,698,722
Shares issued to share-
holders in reinvestment of
dividends and distributions 428,291 5,110,279
------------ -------------
Total issued 1,946,801 23,809,001
Shares redeemed (1,648,302) (19,908,322)
------------ -------------
Net increase 298,499 $ 3,900,679
============ =============
Class A Shares for the Year Dollar
Ended September 30, 1994 Shares Amount
Shares sold 2,695,028 $ 33,091,210
Shares issued to share-
holders in reinvestment
of distributions 161,050 1,956,633
------------ -------------
Total issued 2,856,078 35,047,843
Shares redeemed (1,346,924) (17,015,867)
------------ -------------
Net increase 1,509,154 $ 18,031,976
============ =============
Class B Shares for the Year Dollar
Ended September 30, 1994 Shares Amount
Shares sold 2,858,236 $ 35,039,885
Shares issued to share-
holders in reinvestment of
dividends and distributions 6,329,365 76,402,900
------------ -------------
Total issued 9,187,601 111,442,785
Shares redeemed (12,275,154) (150,329,007)
------------ -------------
Net decrease (3,087,553) $ (38,886,222)
============ =============
Class B Shares for the Year Dollar
Ended September 30, 1994 Shares Amount
Shares sold 2,722,243 $ 34,400,436
Shares issued to share-
holders in reinvestment
of distributions 5,336,253 65,136,704
------------ -------------
Total issued 8,058,496 99,537,140
Shares redeemed (14,832,136) (187,427,758)
------------ -------------
Net decrease (6,773,640) $ (87,890,618)
============ =============
5. Loan Securities:
At September 30, 1994, the Fund held a US Treasury
Bond having an value of approximately $4,169,000 as
collateral for portfolio securities loaned having a
market value of approximately $4,050,000.
6. Commitments:
At September 30, 1994, the Fund had entered into
forward foreign exchange contracts under which it
had agreed to purchase and sell various foreign
currencies with values of approximately $183,000
and $772,000.
61
<PAGE>
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62
<PAGE>
[This Page Intentionally Left Blank]
63
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies.......................................... 2
Management of the Fund..................................................... 2
Purchase of Shares......................................................... 5
Initial Sales Charge Alternatives--
Class A and Class D Shares............................................... 6
Reduced Initial Sales Charges............................................. 6
Distribution Plans........................................................ 10
Limitations on the Payment of Deferred Sales Charges...................... 11
Redemption of Shares....................................................... 12
Deferred Sales Charge--
Class B Shares........................................................... 13
Determination of Net Asset Value........................................... 14
Shareholder Services....................................................... 14
Investment Account........................................................ 15
Automatic Investment Plans................................................ 15
Automatic Reinvestment of Dividends and Capital Gains Distributions....... 15
Systematic Withdrawal Plans--
Class A and Class D Shares............................................... 16
Retirement Plans.......................................................... 17
Exchange Privilege........................................................ 17
Dividends, Distributions and Taxes......................................... 29
Dividends and Distributions............................................... 29
Taxes..................................................................... 29
Performance Data........................................................... 32
Investment Practices and Restrictions...................................... 34
Portfolio Strategies Involving Options and Futures........................ 34
Other Investment Policies and Practices................................... 39
General Information........................................................ 45
Description of Shares..................................................... 45
Computation of Offering Price Per Share................................... 46
Independent Auditors...................................................... 46
Custodian................................................................. 46
Transfer Agent............................................................ 46
Legal Counsel............................................................. 46
Reports to Shareholders................................................... 46
Additional Information.................................................... 47
Independent Auditors' Report............................................... 48
Financial Statements....................................................... 49
</TABLE>
Code #10332-0195
Merrill Lynch
Balanced Fund for
Investment and
Retirement, Inc.
STATEMENT OF
ADDITIONAL
INFORMATION
January 31, 1995
Distributor:
Merrill Lynch
Funds Distributor, Inc.
