<PAGE>
PROSPECTUS
FEBRUARY 27, 1996
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. For more
information on the Fund's investment objectives and policies, please see
"Investment Objective and Policies" on page 10. 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 9081, Princeton, New Jersey 08543-9081 [(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, 1996 (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):
Investment Advisory
Fees(e)............... 0.70% 0.70% 0.70% 0.70%
12b-1 Fees(f):
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(g)............ 0.13% 0.16% 0.18% 0.14%
Other................ 0.03% 0.03% 0.03% 0.03%
---- ---- ---- ----
Total Other Expenses. 0.20% 0.23% 0.25% 0.21%
---- ---- ---- ----
Total Fund Operating 0.90% 1.93% 1.95% 1.16%
Expenses.............. ==== ==== ==== ====
</TABLE>
- --------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and certain investment
programs. See "Purchase of Shares--Initial Sales Charge Alternatives--
Class A and Class D Shares"--page 30.
(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 32.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of
Class A shares by certain retirement plans in connection with certain
investment programs. 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 30.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more which
are not subject to an initial sales charge may instead be subject to a
CDSC of 1.0% of amounts redeemed within the first year of purchase.
(e) See "Management of the Fund--Management and Advisory Arrangements"--page
26.
(f) See "Purchase of Shares--Distribution Plans"--page 35.
(g) See "Management of the Fund--Transfer Agency Services"--page 27.
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 $80 $100 $157
Class B................. $60 $81 $104 $206*
Class C................. $30 $61 $105 $227
Class D................. $64 $87 $113 $186
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 $80 $100 $157
Class B................. $20 $61 $104 $206*
Class C................. $20 $61 $105 $227
Class D................. $64 $87 $113 $186
</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. (the "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 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 which utilize the Merrill Lynch Select
Pricing SM System are referred to herein as "MLAM-advised mutual funds".
3
<PAGE>
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The 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 0.25% 0.75% B shares convert to D shares
four years at a rate of automatically after
4.0% during the approximately eight
first year, decreasing 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 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, and waived for purchases of
Class A Shares by certain retirement plans in connection with certain
investment programs. Class A and Class D share purchases of $1,000,000 or
more may not be subject to an initial sales charge but instead 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 was modified. Also, Class B shares of certain other MLAM-
advised mutual funds into which exchanges may be made have a ten-year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
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 of the Fund 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 of the
Fund in a shareholder account are entitled to purchase additional
Class A shares of the Fund 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 to their directors and employees
and to members of the Boards of MLAM-advised mutual funds. The
maximum initial sales charge is 5.25%, which is reduced for purchases
of $25,000 and over, and waived for purchases by certain retirement
plans in connection with certain investment programs. Purchases of
$1,000,000 or more may not be subject to an initial sales charge but
if the initial sales charge is waived such purchases 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 the conversion and
holding periods 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, except that there is no waiver for purchases by
retirement plans in connection with certain investment programs. Class
D shares also will be issued upon conversion of Class B shares as
described above under "Class B". See "Purchase of Shares -- Initial
Sales Charge Alternatives -- Class A and Class D Shares".
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
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 and the independent
auditors' report thereon for the fiscal year ended October 31, 1995, 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,
1995++ 1994 1993 1992 1991 1990 1989
---------- ---------- -------- -------- ------- ------- --------
<S> <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........ $ 13.07 $ 13.52 $ 11.92 $ 12.16 $ 10.37 $ 10.79 $ 10.00
---------- ---------- -------- -------- ------- ------- -------
Investment
income -- net... .79 .60 .39 .36 .55 .60 .45
Realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions --
net............ 1.04 (.31) 2.14 .89 2.24 (.16) .48
---------- ---------- -------- -------- ------- ------- -------
Total from
investment
operations....... 1.83 .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.... $ 14.21 $ 13.07 $ 13.52 $ 11.92 $ 12.16 $ 10.37 $ 10.79
========== ========== ======== ======== ======= ======= =======
TOTAL INVESTMENT
RETURN:**
Based on net
asset value per
share............ 14.81% 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...... 5.98% 4.60% 3.90% 10.82% 8.96% 4.37% 5.31%*
========== ========== ======== ======== ======= ======= =======
SUPPLEMENTAL
DATA:
Net assets, end
of period
(in thousands)... $1,487,805 $1,357,906 $917,806 $245,839 $72,702 $49,691 $47,172
========== ========== ======== ======== ======= ======= =======
Portfolio
turnover......... 36.78% 57.04% 50.35% 59.56% 81.21% 129.51% 88.59%
========== ========== ======== ======== ======= ======= =======
<CAPTION>
CLASS B
---------------------------------------------------------------------------
FOR THE
PERIOD
FEB. 3,
FOR THE YEAR ENDED OCTOBER 31, 1989+ TO
----------------------------------------------------------------- OCT. 31,
1995++ 1994 1993 1992 1991 1990 1989
----------- ----------- ----------- --------- --------- --------- ---------
<S> <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........ $ 12.91 $ 13.38 $ 11.83 $ 12.10 $ 10.33 $ 10.73 $ 10.00
----------- ----------- ----------- --------- --------- --------- ---------
Investment
income -- net... .65 .46 .28 .22 .44 .49 .38
Realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions --
net............ 1.01 (.31) 2.11 .91 2.22 (.16) .47
----------- ----------- ----------- --------- --------- --------- ---------
Total from
investment
operations....... 1.66 .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.... $ 14.01 $ 12.91 $ 13.38 $ 11.83 $ 12.10 $ 10.33 $ 10.73
=========== =========== =========== ========= ========= ========= =========
TOTAL INVESTMENT
RETURN:**
Based on net
asset value per
share............ 13.54% 1.13% 21.42% 10.64% 27.48% 2.93% 8.50%#
=========== =========== =========== ========= ========= ========= =========
RATIOS TO AVERAGE
NET ASSETS:
Expenses,
excluding account
maintenance and
distribution
fees............. .93% .91% .95% 1.09% 1.31% 1.31% 1.40%*
=========== =========== =========== ========= ========= ========= =========
Expenses......... 1.93% 1.91% 1.95% 2.09% 2.31% 2.31% 2.40%*
=========== =========== =========== ========= ========= ========= =========
Investment
income--net...... 4.96% 3.58% 2.87% 11.95% 7.98% 3.35% 4.29%*
=========== =========== =========== ========= ========= ========= =========
SUPPLEMENTAL
DATA:
Net assets, end
of period
(in thousands)... $6,688,499 $6,457,130 $4,299,545 $958,949 $161,328 $115,682 $113,649
=========== =========== =========== ========= ========= ========= =========
Portfolio
turnover......... 36.78% 57.04% 50.35% 59.56% 81.21% 129.51% 88.59%
=========== =========== =========== ========= ========= ========= =========
<CAPTION>
CLASS C CLASS D
------------------ -------------------
FOR THE FOR THE
FOR THE PERIOD FOR THE PERIOD
YEAR OCT. 21, YEAR OCT. 21,
ENDED 1994+ TO ENDED 1994+ TO
OCT. 31, OCT. 31, OCT. 31, OCT. 31,
1995++ 1994 1995++ 1994
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
INCREASE (DE-
CREASE) IN NET
ASSET VALUE:
PER SHARE OPERAT-
ING
PERFORMANCE:
Net asset value,
beginning
of period........ $ 12.91 $12.91 $ 13.08 $13.07
--------- -------- --------- ---------
Investment
income -- net... .64 .01 .77 .01
Realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions --
net............ 1.02 (.01) 1.01 --
--------- -------- --------- ---------
Total from
investment
operations....... 1.66 -- 1.78 .01
--------- -------- --------- ---------
Less dividends
and
distributions:
Investment
income -- net... (.33) -- (.37) --
Realized gain on
investments --
net............ (.30) -- (.30) --
--------- -------- --------- ---------
Total dividends
and
distributions.... (.63) -- (.67) --
--------- -------- --------- ---------
Net asset value,
end of period.... $ 13.94 $12.91 $ 14.19 $13.08
========= ======== ========= =========
TOTAL INVESTMENT
RETURN:**
Based on net
asset value per
share............ 13.58% .00%# 14.43% .08%#
========= ======== ========= =========
RATIOS TO AVERAGE
NET ASSETS:
Expenses,
excluding account
maintenance and
distribution
fees............. .95% 1.44%* .91% 1.44%*
========= ======== ========= =========
Expenses......... 1.95% 2.44%* 1.16% 1.69%*
========= ======== ========= =========
Investment
income--net...... 4.80% 3.71%* 5.63% 4.46%*
========= ======== ========= =========
SUPPLEMENTAL
DATA:
Net assets, end
of period
(in thousands)... $102,361 $7,347 $256,525 $4,968
========= ======== ========= =========
Portfolio
turnover......... 36.78% 57.04% 36.78% 57.04%
========= ======== ========= =========
</TABLE>
- ----
*Annualized.
**Total investment returns exclude the effects of sales loads.
+Commencement of Operations.
++Based on average shares outstanding during the period.
#Aggregate total investment return.
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. Brokerage
commissions and 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. For
example, there may be no provisions under certain foreign laws comparable to
insider trading and similar investor protection provisions of the securities
laws that apply with respect to securities transactions consummated in the
United States.
9
<PAGE>
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.
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 North
and South America, 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 industry, including declines in the value of the real estate
investments of the trusts. Real estate values are
12
<PAGE>
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 return is based on the change in particular measurements of value or
rate (an "index"). As an illustration, the Fund may invest in a security that
pays interest and returns principal based on the change in the value of a
securities index or a basket of securities or a precious or industrial metal.
Interest and principal payable on a security also may 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. Examples of such types of securities are indexed or inverse
securities issued with respect to a stock market index in a particular country.
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 generally
will 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).
13
<PAGE>
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.
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 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.
14
<PAGE>
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 table below shows the dollar-weighted market value, by S&P rating
category, of the bonds held by the Fund at December 31, 1995:
<TABLE>
<CAPTION>
PERCENT OF
RATING TOTAL ASSETS
------ ------------
<S> <C>
AAA.......................................................... 17.93%
AA........................................................... .48%
A............................................................ .60%
BBB.......................................................... 2.38%
BB........................................................... 13.21%
B............................................................ 7.97%
CCC.......................................................... .85%
CC........................................................... 0%
D............................................................ .93%
Not Rated*................................................... 8.38%
-----
52.73%
=====
</TABLE>
- --------
* Bonds which are not rated by S&P. Such bonds may be rated by nationally
recognized statistical rating organizations other than S&P, or may not be
rated by any of such organizations. With respect to the percentage of the
Fund's assets invested in such securities, the Fund's Manager believes that
.02% are of comparable quality to bonds rated AAA, .40% are of comparable
quality to bonds rated AA, 1.11% are of comparable quality to bonds rated A,
2.27% are of comparable quality to bonds rated BBB, 1.79% are of comparable
quality to bonds rated BB, 2.61% are of comparable quality to bonds rated B
and .18% are of comparable quality to bonds rated CCC. This determination is
based on the Manager's own internal evaluation and does not necessarily
reflect how such securities would be rated by S&P if it were to rate the
securities.
15
<PAGE>
For a description of the above referenced ratings, see the Appendix to the
Statement of Additional Information. The above percentages are as of December
31, 1995; the rating composition of the portfolio will change over time.
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 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 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
16
<PAGE>
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 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
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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.
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
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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 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 "spread"). 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 "spreads" 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
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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 or option strategy 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 Commission has taken the position that purchased OTC options
and the assets used as cover for written OTC options are illiquid securities.
Therefore, the Fund has adopted an investment policy pursuant to which it will
not purchase or sell OTC options (including OTC options on futures contracts)
if, as a result of such transaction, the sum of the market value of OTC options
currently outstanding which are held by the Fund, the market value of the
underlying securities covered by OTC call options currently outstanding which
were sold by the Fund and margin deposits on the Fund's existing OTC options on
futures contracts exceeds 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
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
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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 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 in the event of bankruptcy of a broker with whom the Fund has
an open position in an option, a futures contract or related option.
The exchanges on which the Fund intends to conduct options transactions have
generally established limitations governing the maximum number of call or put
options on the same underlying security or currency (whether or not covered)
which may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through
one or more brokers). "Trading limits" are imposed on the maximum number of
contracts which any person may trade on a particular trading day. The Manager
does not believe that these trading and position limits will have any adverse
impact on the portfolio strategies for hedging the Fund's portfolio.
OTHER INVESTMENT POLICIES AND PRACTICES
Non-Diversified Status. The Fund is classified as non-diversified within the
meaning of the Investment Company Act of 1940, as amended (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 (the "Code"). 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 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
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the issuers, and the Fund may be more susceptible to any single economic,
political or regulatory occurrence than a diversified investment company.
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 or sell securities which it is entitled to receive 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 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
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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 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.
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Swap Agreements. The Fund is authorized to enter into equity swap agreements,
which are generally contracts in which one party agrees to make periodic
payments based on the change in market value of a specified equity security,
basket of equity securities or equity index in return for periodic payments
based on a fixed or variable interest rate or the change in market value of a
different equity security, basket of equity securities or equity index. For
example, swap agreements may be used to invest in a market without owning or
taking physical custody of securities in circumstances in which direct
investment is restricted for legal reasons or is otherwise impractical. The
swap agreement will be structured to provide for early termination in the
event, for example, that the Fund desires to lock in appreciation.
Swap agreements entail the risk that a party will default on its payment
obligations to the Fund thereunder. The Fund will seek to lessen the risk to
some extent by entering into a transaction only if the counterparty meets the
current credit requirement for OTC option counterparties. Swap agreements also
bear the risk that the Fund will not be able to meet its obligation to the
counterparty. The Fund, however, will deposit in a segregated account with its
custodian high quality liquid fixed income instruments or cash or cash
equivalents or other assets permitted to be so segregated by the Commission in
an amount equal to or greater than the market value of the liabilities under
the swap agreement or the amount it would have cost the Fund initially to make
an equivalent direct investment, plus or minus any amount the Fund is obligated
to pay or is to receive under the swap agreement. The Fund will enter into an
equity swap transaction only if, immediately following the time the Fund enters
into the transaction, the aggregate notional principal amount of equity swap
transactions to which the Fund is a party would not exceed 5% of the Fund's net
assets.
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). In
addition, the Fund has adopted non-fundamental restrictions which may be
changed by the Board of Directors without shareholder approval. As a non-
fundamental policy, the Fund may not 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, including to meet redemptions
or to settle securities transactions. In addition, the Fund will not purchase
securities while borrowings exceed 5% of its total assets (taken at market
value). The purchase of securities while borrowings are outstanding will have
the effect of leveraging the Fund. Such leveraging or borrowing increases the
Fund's exposure to capital risk, and borrowed funds are subject to interest
costs which will reduce net income.
As a non-fundamental policy, the Fund will not 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,
including repurchase agreements and purchase and sale contracts maturing in
more than seven days, if, regarding all such securities, more than 15% of its
total assets (or 10% of its total assets as presently required by certain state
laws) taken at market value would be invested in such securities.
Notwithstanding the foregoing, the Fund may purchase without regard to this
limitation securities that are
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not registered under the Securities Act of 1933, as amended (the "Securities
Act"), but that can be offered and sold to "qualified institutional buyers"
under Rule 144A under the Securities Act, provided that the Fund's Board of
Directors continuously determines, based on the trading markets for the
specific Rule 144A security, that it is liquid. The Board of Directors may
adopt guidelines and delegate to the Manager the daily function of determining
and monitoring liquidity of restricted securities. The Board has determined
that foreign securities which are freely tradeable in their primary market
offshore should be deemed liquid. The Board, however, will retain sufficient
oversight and be ultimately responsible for these determinations.
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 of the Manager and FAM; President and Director of
Princeton Services, Inc.; Executive Vice President of ML & Co.; 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.
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.
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* Interested person, as defined in the Investment Company Act, of the Fund.
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MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager acts as the Fund's investment adviser. The Manager 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 its affiliate, 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, 1996, the Manager and FAM had a total of
approximately $202.8 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 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. For the fiscal year ended
October 31, 1995, the Fund paid the Manager a fee at the rate of 0.70% 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 additional investment research and analysis required
in connection with investing globally. For the fiscal year ended October 31,
1995, the Manager received a fee of $55,558,045 (based on average net assets of
approximately $8.0 billion). At January 31, 1996, the net assets of the Fund
aggregated approximately $9.6 billion. At this asset level, the annual
management fee would aggregate approximately $65.4 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 ML & Co. 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, 1995,
the fee paid by the Manager to MLAM U.K. pursuant to such agreement aggregated
$7,391,028. At the Fund's January 31, 1996, asset level, the annual fee payable
by the Manager to MLAM U.K. would aggregate approximately $9.6 million. MLAM
U.K. has offices at Milton Gate, 1 Moor Lane, London EC2Y 9HA, 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 day-to-day management of the Fund's portfolio since it commenced
operations.
26
<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, 1995, the Fund
reimbursed the Manager $611,736 for such accounting services. For the fiscal
year ended October 31, 1995, the ratio of total expenses to average net assets
was 0.90% for Class A shares, 1.93% for Class B shares, 1.95% for Class C
shares and 1.16% 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
Merrill Lynch 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, 1995, the Fund paid
$12,576,510 to the Transfer Agent pursuant to the Transfer Agency Agreement. At
January 31, 1996, the Fund had 115,703 Class A shareholder accounts, 513,375
Class B shareholder accounts, 18,839 Class C shareholder accounts and 27,513
Class D shareholder accounts. At this level of accounts, the annual fee payable
to the Transfer Agent would aggregate approximately $9.0 million, plus
miscellaneous and out-of-pocket expenses.
27
<PAGE>
PURCHASE OF SHARES
The Distributor, an affiliate of both the Manager and Merrill Lynch, acts as
the distributor of shares of the Fund. Shares of the Fund are offered
continuously for sale by the Distributor and other eligible securities dealers
(including Merrill Lynch). Shares of the Fund may be purchased from securities
dealers or by mailing a purchase order directly to the Transfer Agent. The
minimum initial purchase is $1,000, and the minimum subsequent purchase is $50,
except that for retirement plans, the minimum initial purchase is $100 and the
minimum subsequent purchase is $1.
The Fund is offering its shares in four classes at a public offering price
equal to the next determined net asset value per share plus sales charges
imposed either at the time of purchase or on a deferred basis depending upon
the class of shares selected by the investor under the Merrill Lynch Select
PricingSM System, as described below. The applicable offering price for
purchase orders is based upon the net asset value of the Fund next determined
after receipt of the purchase orders by the Distributor. As to purchase orders
received by securities dealers prior to 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 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. 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 CDSC and ongoing distribution fees. A discussion
of the factors that investors should consider in determining the method of
purchasing shares under the Merrill Lynch Select PricingSM System is set forth
under "Merrill Lynch Select PricingSM System" on page 3.
Each Class A, Class B, Class C and Class D share of the Fund represents
identical interests in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The deferred sales charges and account maintenance fees that are imposed on
Class B and Class C shares, as well as the account maintenance fees that are
imposed on Class D shares, are imposed directly against those classes and not
against all assets of the Fund and, accordingly,
28
<PAGE>
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 0.25% 0.75% B shares convert to
four years, at a rate D shares automatically
of 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 are imposed if the redemption occurs within
the applicable CDSC time period. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives -- Class A and Class D Shares -- Eligible Class A Investors".
(3) Reduced for purchases of $25,000 or more, and waived for purchases of
Class A shares by certain retirement plans in connection with certain
investment programs. 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 was modified. Also, Class B shares of certain other MLAM-
advised mutual funds into which exchanges may be made have a ten-year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
29
<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.
** 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, and on Class A
purchases by certain retirement plan investors in connection with certain
investment programs. If the sales charge is waived in connection with a
purchase of $1,000,000 or more, 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, might have been subject to a CDSC
if the shares were 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 is 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 employer sponsored
retirement or savings plans.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and
Class D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act of 1933
(the "Securities Act"). During the fiscal year ended October 31, 1995, the Fund
sold 24,414,703 Class A shares for aggregate net proceeds of $317,656,099. The
gross sales charges for the sale of Class A shares of the Fund for that year
were $864,640, of which $52,270 and $812,370 were received by the Distributor
and Merrill Lynch, respectively. For the fiscal year ended October 31, 1995,
the Distributor received CDSCs of $16,611, 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
year ended October 31, 1995, the Fund sold 17,949,936 Class D shares for
aggregate net proceeds of $233,765,521. The gross sales charges for the sale of
Class D shares of the Fund for that year were $1,466,978, of which $89,085 and
$1,377,893 were received by the Distributor and Merrill Lynch, respectively.
For the fiscal year ended October 31, 1995, the Distributor received CDSCs of
$77, all of which were paid to Merrill Lynch, 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
30
<PAGE>
shares of the Fund in a shareholder account, including participants in the
Merrill Lynch Blueprint SM Program, are entitled to purchase additional Class
A shares of the Fund 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 ("MFA") 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 in their initial
offerings who wish to reinvest the net proceeds from a sale of their closed-
end fund shares of common stock in shares of the Fund also may purchase Class
A shares of the Fund if certain conditions set forth in the Statement of
Additional Information are met for closed-end funds that commenced operations
prior to October 21, 1994. In addition, Class A shares of the Fund and certain
other MLAM-advised mutual funds are offered at net asset value to shareholders
of Merrill Lynch Senior Floating Rate Fund, Inc. who wish to reinvest the net
proceeds from a sale of certain of their shares of common stock pursuant to a
tender offer conducted by 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 A and Class D shares are offered at net asset value to certain
employer sponsored retirement or savings plans and to Employee Access
AccountsSM available through employers which provide such plans.
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.
Class D shares of the Fund are offered at net asset value to shareholders of
Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income
Municipal Bond Fund, Inc. who wish to reinvest the net proceeds from a sale of
certain of their shares of common stock pursuant to tender offers conducted by
those funds in shares of the Fund.
Additional information concerning these reduced initial sales charges is set
forth in the Statement of Additional Information.
31
<PAGE>
DEFERRED SALES CHARGE ALTERNATIVES -- CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four-year CDSC,
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".
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.
32
<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, 1995, the Distributor received CDSCs of
$14,179,047 with respect to redemptions of Class B shares, all of which were
paid to Merrill Lynch.
In determining whether a CDSC is applicable to a redemption, the calculation
will be determined in the manner that results in the lowest possible rate
being charged. Therefore, it will be assumed that the redemption is first of
shares held for over four years or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the four-
year period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of
shares from a shareholder's account to another account will be assumed to be
made in the same order as a redemption.
To provide an example, assume an investor purchases 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net
asset value per share is $12 and, during such time, the investor has acquired
10 additional shares through dividend reinvestment. If at such time the
investor makes his or her first redemption of 50 shares (proceeds of $600), 10
shares will not be subject to 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).
In the event that Class B shares are exchanged by certain retirement plans
for Class A shares in connection with a transfer to the MFA program, the time
period that such Class A shares are held in the MFA program will be included
in determining the holding period of Class B shares reacquired upon
termination of participation in the MFA program (see "Shareholder Services --
Exchange Privilege").
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 and for any Class B shares that were acquired and held at the time
of the redemption in an Employee Access AccountSM available through employers
providing eligible 401(k) plans. The Class B CDSC also is waived for any Class
B shares 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.
33
<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. For the fiscal year ended October 31,
1995, the Distributor received CDSCs of $32,676 with respect to the redemption
of Class C shares, all of which were paid to Merrill Lynch.
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.
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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.
The Conversion Period is also modified for retirement plan investors who
participate in the MFA program. While participating in the MFA program, such
investors will hold Class A shares. If these Class A shares were acquired
through exchange of Class B shares (see "Shareholder Services -- Exchange
Privilege"), then the holding period for such Class A shares will be "tacked"
to the holding period for the Class B shares originally held for purposes of
calculating the Conversion Period of Class B shares acquired upon termination
of participation in the MFA program.
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, 1995, the Fund paid the Distributor
$63,684,524 pursuant to the Class B Distribution Plan (based on average net
assets subject to the Class B Distribution Plan of
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approximately $6.4 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 year ended October 31, 1995,
the Fund paid the Distributor $524,570 pursuant to the Class C Distribution
Plan (based on average net assets subject to the Class C Distribution Plan of
approximately $52.5 million), all of which was paid to Merrill Lynch for
providing account maintenance and distribution-related activities and services
in connection with Class C shares. For the fiscal year ended October 31, 1995,
the Fund paid the Distributor $401,709 pursuant to the Class D Distribution
Plan (based on average net assets subject to the Class D Distribution Plan of
approximately $160.7 million), all of which was paid to Merrill Lynch for
providing account maintenance services in connection with Class D shares. At
January 31, 1996, the net assets of the Fund subject to the Class B
Distribution Plan aggregated approximately $7.4 billion. At this asset level,
the annual fee payable pursuant to the Class B Distribution Plan would
aggregate approximately $74.1 million. At January 31, 1996, the net assets of
the Fund subject to the Class C Distribution Plan aggregated approximately
$174.5 million. At this asset level, the annual fee payable pursuant to the
Class C Distribution Plan would aggregate approximately $1.7 million. At
January 31, 1996, the net assets of the Fund subject to the Class D
Distribution Plan aggregated approximately $355.5 million. At this asset level,
the annual fee payable pursuant to the Class D Distribution Plan would
aggregate $888,664.
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, 1994, 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 $102,351,000 (1.66% of Class B net assets at
that date). As of October 31, 1995, for Class B shares, direct cash revenues
for the period since February 3, 1989 (commencement of operations) exceeded
direct cash expenses by $70,248,487 (1.05% of Class B net assets at that date).
Similar fully allocated accrual data was not calculated with respect to Class C
shares as of December 31, 1994 because the Fund commenced offering Class C
shares to the public on October 21, 1994. As of October 31, 1995, for Class C
shares, direct cash revenues for the period since October 21, 1994
(commencement of operations) exceeded direct cash expenses by $44,531 (.04% 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
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<PAGE>
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 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 fees and the
CDSCs). 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, Merrill Lynch Financial Data Services, Inc.,
P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption requests delivered
other than by mail should be delivered to Merrill Lynch Financial Data
Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Proper notice of redemption in
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<PAGE>
the case of shares deposited with the Transfer Agent may be accomplished by a
written letter requesting redemption. Proper notice of redemption in the case
of shares for which certificates have been issued may be accomplished by a
written letter as noted above accompanied by certificates for the shares to be
redeemed. 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 (generally, 4:00 p.m., New York time) 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 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. Repurchases 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
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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.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below which are designed to facilitate investment in shares of the
Fund. Certain of such services are not available to investors who place
purchase orders for the Fund's shares through the Merrill Lynch BlueprintSM
Program. Full details as to each of such services, copies of the various plans
described below and instructions as to how to participate in the various plans
and services, or to change options with respect thereto, can be obtained from
the Fund by calling the telephone number on the cover page hereof or from the
Distributor or Merrill Lynch. Certain of these services are available only to
U.S. investors.
Investment Account. Each shareholder whose account is maintained at the
Transfer Agent has an Investment Account and will receive statements, at least
quarterly, from the Transfer Agent. These statements will serve as transaction
confirmations for automatic investment purchases and the reinvestment of
ordinary income dividends and long-term capital gain distributions. The
statements will also show any other activity in the account since the preceding
statement. Shareholders will receive separate transaction confirmations for
each purchase or sale transaction other than automatic investment purchases and
the reinvestment of ordinary income dividends and long-term capital gain
distributions. A shareholder may make additions to his Investment Account at
any time by mailing a check directly to the Transfer Agent. Shareholders also
may maintain their accounts through Merrill Lynch. Upon the transfer of shares
out of a Merrill Lynch brokerage account, an Investment Account in the
transferring shareholder's name will be opened automatically, without charge,
at the Transfer Agent. Shareholders considering transferring their Class A or
Class D shares from Merrill Lynch to another brokerage firm or financial
institution should be aware that, if the firm to which the Class A or Class D
shares are to be transferred will not take delivery of shares of the Fund, a
shareholder either must redeem the Class A or Class D shares (paying any
applicable CDSC) so that the cash proceeds can be transferred to the account at
the new firm or such shareholder must continue to maintain an Investment
Account at the Transfer Agent for those Class A or Class D shares. Shareholders
interested in transferring their Class B or Class C shares from Merrill Lynch
and who do not wish to have an Investment Account maintained for such shares at
the Transfer Agent may request their new brokerage firm to maintain such shares
in an account registered in the name of the brokerage firm for the benefit of
the shareholder. If the new brokerage firm is willing to accommodate the
shareholder in this manner, the shareholder must request that he be issued
certificates for his shares and then must turn the certificates over to the new
firm for re-registration as described in the preceding sentence. Shareholders
considering transferring a tax-deferred retirement account such as an
individual retirement account from Merrill Lynch to another brokerage firm or
financial institution should be aware that, if the firm to which the retirement
account is to be transferred will not take delivery of shares of the Fund, a
shareholder must either redeem the shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm, or such
shareholder must continue to maintain a retirement account at Merrill Lynch for
those shares.
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Exchange Privilege. U.S. shareholders of each class of shares of the Fund
have an exchange privilege with certain other MLAM-advised mutual funds. There
is currently no limitation on the number of times a shareholder may exercise
the exchange privilege. The exchange privilege may be modified or terminated in
accordance with the rules of the Commission.
Under the Merrill Lynch Select PricingSM System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund in
his account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class
A shareholder wants to exchange Class A shares for shares of a second MLAM-
advised mutual fund, and the shareholder does not hold Class A shares of the
second fund in his account at the time of the exchange and is not otherwise
eligible to acquire Class A shares of the second fund, the shareholder will
receive Class D shares of the second fund as a result of the exchange. Class D
shares also may be exchanged for Class A shares of a second MLAM-advised mutual
fund at any time as long as, at the time of the exchange, the shareholder holds
Class A shares of the second fund in the account in which the exchange is made
or is otherwise eligible to purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the relative
net asset values per Class A or Class D share, respectively, plus an amount
equal to the difference, if any, between the sales charge previously paid on
the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the same
class of other MLAM-advised mutual funds.
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 for the newly acquired shares of the
other fund.
Class A, Class B, Class C and Class D shares also are exchangeable for shares
of certain MLAM-advised money market funds specifically designated as available
for exchange by holders of Class A, Class B, Class C or Class D shares. The
period of time that Class A, Class B, Class C or Class D shares are held in a
money market fund, however, will not count toward satisfaction of the holding
period requirement for reduction of any CDSC imposed on such shares, if any,
and with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange privilege is treated as a sale for Federal income
tax purposes. For further information, see "Shareholder Services -- Exchange
Privilege" in the Statement of Additional Information.
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The exchange privilege is modified with respect to certain retirement plans
which participate in the MFA program. Such retirement plans may exchange Class
B, Class C or Class D shares that have been held for at least one year for
Class A shares of the same Fund on the basis of relative net asset values in
connection with the commencement of participation in the MFA program, i.e., no
CDSC will apply. The one year holding period does not apply to shares acquired
through reinvestment of dividends. Upon termination of participation in the MFA
program, Class A shares will be reexchanged for the class of shares originally
held. For purposes of computing any CDSC that may be payable upon redemption of
Class B or Class C shares so reacquired, or the Conversion Period for Class B
shares so reacquired, the holding period for the Class A shares will be
"tacked" to the holding period for the Class B or Class C shares originally
held. The Fund's exchange privilege is also modified with respect to purchases
of Class A and Class D shares by non-retirement plan investors under the 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.
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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
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,
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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.
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) all or a portion of
distributions made before the losses were realized but in the same taxable year
would be recharacterized as returns of capital to shareholders, rather than as
ordinary income dividends, reducing each shareholder's tax basis in his Fund
shares for Federal income tax purposes and resulting in a capital gain for any
shareholder who received such a distribution greater than the shareholder's tax
basis in Fund shares (assuming the shares were held as a capital asset). 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
43
<PAGE>
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 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 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 a call option, the amount of the
premium received is recorded on the books of the Fund as an asset and an
equivalent liability. The amount of the liability is subsequently valued to
reflect the current market value of the option written, based upon the last
sale price in the case of exchange-traded options or, in the case of options
traded in the over-the-counter market, the last asked price. Options purchased
by the Fund are valued at their last sale price in the case of exchange-traded
options or, in the case of options traded in the over-the-counter market, the
last bid price.
Securities and assets for which market quotations are not readily available
are valued at fair value as determined in good faith under the direction of the
Board of Directors of the Fund.
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the 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 or from an excess of net
short-term capital gains over net long-term capital losses (together referred
to hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from an excess of net long-term capital
gains over net short-term capital losses (including gains or losses from
certain transactions in futures and options) ("capital gain dividends") are
taxable to shareholders as long-term capital gains, regardless of the length of
44
<PAGE>
time the shareholder has owned Fund shares. Any loss upon the sale or exchange
of Fund shares held for six months or less, however, will be treated as long-
term capital loss to the extent of any capital gain dividends received by the
shareholder. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. A portion of the Fund's ordinary income dividends may be eligible
for the dividends received deduction allowed to corporations under the Code, if
certain requirements are met. If the Fund pays a dividend in January which was
declared in the previous October, November or December to shareholders of
record on a specified date in one of such months, then such dividend will be
treated for tax purposes as being paid by the Fund and received by its
shareholders on December 31 of the year in which such dividend was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% U.S. withholding tax under existing
provisions of the Code applicable to foreign individuals and entities unless a
reduced rate of withholding or a withholding exemption is provided under
applicable treaty law. Nonresident shareholders are urged to consult their own
tax advisers concerning the applicability of the U.S. withholding tax.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes. Shareholders may be
able to claim U.S. foreign tax credits with respect to such taxes, subject to
certain conditions and limitations contained in the Code. For example, certain
retirement accounts cannot claim foreign tax credits on investments in foreign
securities held in the Fund. If more than 50% in value of the Fund's total
assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible, and intends, to file an election with
the Internal Revenue Service pursuant to which shareholders of the Fund will be
required to include their proportionate shares of such withholding taxes in
their U.S. income tax returns as gross income, treat such proportionate shares
as taxes paid by them, and deduct such proportionate shares in computing their
taxable incomes or, alternatively, use them as foreign tax credits against
their U.S. income taxes. No deductions for foreign taxes, however, may be
claimed by noncorporate shareholders who do not itemize deductions. A
shareholder that is a nonresident alien individual or a foreign corporation may
be subject to U.S. withholding tax on the income resulting from the Fund's
election described in this paragraph but may not be able to claim a credit or
deduction against such U.S. tax for the foreign taxes treated as having been
paid by such shareholder. The Fund will report annually to its shareholders the
amount per share of such withholding taxes.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer 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
45
<PAGE>
increase or decrease the amount of the Fund's investment company taxable income
available to be distributed to shareholders as ordinary income. Additionally,
if Code Section 988 losses exceed other investment company taxable income
during a taxable year, the Fund would not be able to make any ordinary income
dividend distributions, and all or a portion of distributions made before the
losses were realized but in the same taxable year would be recharacterized as a
return of capital to shareholders, thereby reducing the basis of each
shareholder's Fund shares and resulting in a capital gain for any shareholder
who received a distribution greater than the shareholder's tax basis in Fund
shares (assuming the shares were held as a capital asset).
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period of the acquired Class D shares will
include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of acquiring
the shares, then the loss the shareholder can recognize on the exchange will be
reduced (or the gain increased) to the extent any sales charge paid to the Fund
on the exchanged shares reduces any sales charge the shareholder would have
owed upon purchase of the new shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new
shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs 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. As of the date
of this Prospectus, 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 consists of 200,000,000 shares, and Class B and Class D each 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
46
<PAGE>
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 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 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.
As of November 20, 1995, the Fund and Merrill Lynch Balanced Fund for
Investment and Retirement, Inc. ("Balanced Fund") entered into an Agreement and
Plan of Reorganization (the "Agreement and Plan of Reorganization") pursuant to
which the Fund will acquire substantially all of the assets of Balanced Fund
and will assume substantially all the liabilities of Balanced Fund, in exchange
solely for an equal aggregate value of shares of the Fund. The Agreement and
Plan of Reorganization further provides for distribution of such shares of the
Fund to shareholders of Balanced Fund in liquidation of Balanced Fund. It is
currently anticipated that this transaction will be effected in March 1996.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts, the shareholder should notify in writing:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, FL 32232-5289
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch and/or mutual fund account numbers. If
you have any questions regarding this, please call your Merrill Lynch financial
consultant or Merrill Lynch Financial Data Services, Inc. at 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.
47
<PAGE>
[This page is intentionally left blank.]
48
<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 Merrill Lynch Financial
Data Services, Inc. as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price next to
be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the Right of Accumulation as outlined in the Statement of
Additional Information: Please list all funds. (Use a separate sheet of
paper if necessary.)
1. .................................. 4. ..................................
2. .................................. 5. ..................................
3. .................................. 6. ..................................
Name...........................................................................
First Name Initial Last Name
Name of Co-Owner (if any)......................................................
First Name Initial Last Name
Address........................................................................
................................................. 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 One: [_] Reinvest Select One: [_] Reinvest
[_] Cash [_] 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 Merrill Lynch Financial Data Services, Inc. amending or
terminating this service.
Signature of Depositor ........................................................
Signature of Depositor ............................... Date...................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED
CHECK MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD
ACCOMPANY THIS APPLICATION.
- -------------------------------------------------------------------------------
49
<PAGE>
MERRILL LYNCH GLOBAL 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.
- - - .....................................
Dealer Name and Address
- - -
This form when completed should be By ..................................
mailed to: Authorized Signature of Dealer
Merrill Lynch Global Allocation [_][_][_] [_][_][_][_] ............
Fund, Inc. Branch Code F/C No. F/C Last Name
c/o Merrill Lynch Financial Data
Services, Inc.
P.O. Box 45289 [_][_][_] [_][_][_][_][_]
Jacksonville, FL 32232-5289 Dealer's Customer Account No.
50
<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 MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING
OR TERMINATING THIS SERVICE.
Specify type of account (check one): [_] checking [_] savings
Name on your Account...........................................................
Bank Name......................................................................
Bank Number........................ Account Number............................
Bank Address...................................................................
...............................................................................
Signature of Depositor................................. Date..................
Signature of Depositor.........................................................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID"
OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHALL ACCOMPANY THIS APPLICATION.
51
<PAGE>
- -------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account 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
MERRILL LYNCH FINANCIAL DATA DRAWN BY MERRILL LYNCH FINANCIAL
SERVICES, INC. DATA SERVICES, INC.
You are hereby authorized to draw an
ACH debit each month on my bank
account for investment in Merrill
Lynch Global Allocation Fund, Inc.
as indicated below:
Amount of each ACH debit $........ To...............................Bank
(Investor's Bank)
Account Number ...................
Bank Address.........................
Please date and invest ACH debits on
the 20th of each month beginning
City...... State...... Zip Code......
.....................................
................(month)
As a convenience to me, I hereby
or as soon thereafter as possible. request and authorize you to pay and
I agree that you are drawing these charge to my account ACH debits
ACH debits voluntarily at my request drawn on my account by and payable
and that you shall not be liable for to Merrill Lynch Financial Data
any loss arising from any delay in Services, Inc. I agree that your
preparing or failure to prepare any rights in respect to each such debit
such debit. If I change banks or shall be the same as if it were a
desire to terminate or suspend this check drawn on you and signed
program, I agree to notify you personally by me. This authority is
promptly in writing. I hereby to remain in effect until revoked by
authorize you to take any action to me in writing. Until you receive
correct erroneous ACH debits of my such notice, you shall be fully
bank account or purchases of fund protected in honoring any such
shares including liquidating shares debit. I further agree that if any
of the Fund and crediting my bank such debit be dishonored, whether
account. I further agree that if a with or without cause and whether
debit is not honored upon intentionally or inadvertently, you
presentation, Merrill Lynch Financial shall be under no liability.
Data Services, Inc. is authorized to
discontinue immediately the Automatic ............ .....................
Investment Plan and to liquidate Date Signature of
sufficient shares held in my account Depositor
to offset the purchase made with the
returned dishonored debit. ............ .....................
Bank Signature of Depositor
............ ..................... Account (If joint account,
Date Signature of Number both must sign)
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.
52
<PAGE>
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53
<PAGE>
[This page is intentionally left blank.]
54
<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 9081
Princeton, New Jersey 08543-9081
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
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................................................... 16
Portfolio Strategies Involving Options and Futures........................ 16
Other Investment Policies and Practices................................... 21
Management of the Fund..................................................... 25
Board of Directors........................................................ 25
Management and Advisory Arrangements...................................... 26
Code of Ethics............................................................ 27
Transfer Agency Services.................................................. 27
Purchase of Shares......................................................... 28
Initial Sales Charge Alternatives--
Class A and Class D Shares............................................... 30
Deferred Sales Charge Alternatives--
Class B and Class C Shares............................................... 32
Distribution Plans........................................................ 35
Limitations on the Payment of Deferred Sales Charges...................... 37
Redemption of Shares....................................................... 37
Redemption................................................................ 37
Repurchase................................................................ 38
Reinstatement Privilege--
Class A and Class D Shares............................................... 38
Shareholder Services....................................................... 39
Performance Data........................................................... 42
Additional Information..................................................... 43
Dividends and Distributions............................................... 43
Determination of Net Asset Value.......................................... 43
Taxes..................................................................... 44
Organization of the Fund.................................................. 46
Shareholder Reports....................................................... 47
Shareholder Inquiries..................................................... 47
Authorization Form......................................................... 49
</TABLE>
Code # 10810-0296
[LOGO] MERRILL LYNCH
MERRILL LYNCH
GLOBAL ALLOCATION
FUND, INC.
[ART]
PROSPECTUS
February 27, 1996
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
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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.
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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.
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This Statement of Additional Information of the Fund is not a prospectus and
should be read in conjunction with the prospectus of the Fund, dated February
27, 1996 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling or by writing the Fund at the above telephone number or address. This
Statement of Additional Information has been incorporated by reference into
the Prospectus.
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MERRILL LYNCH ASSET MANAGEMENT--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
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The date of this Statement of Additional Information is February 27, 1996.
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INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to seek a high total investment return,
consistent with prudent risk, through a fully-managed investment policy
utilizing United States and foreign equity, debt and money market securities
the combination of which will be varied from time to time both with respect to
types of securities and markets in response to changing market and economic
trends. Reference is made to "Investment Objective and Policies" in the
Prospectus for a discussion of the investment objective and policies of the
Fund.
While it is the policy of the Fund generally not to engage in trading for
short-term gains, Merrill Lynch Asset Management, L.P. (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 rate for the fiscal years ended October 31, 1994,
and 1995 was 57.04% and 36.78%, 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
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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 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 at the then market price of three
ounces of gold. If at maturity, the market price of gold is $400 per ounce, the
amount payable on the note would be $1,200. Certain asset-based securities may
be payable at maturity in cash at the stated principal amount or, at the option
of the holder, directly in a stated amount of the asset to which it is related.
In such instance, because the Fund presently does not intend to invest directly
in natural resource assets, the Fund would sell the asset-based security in the
secondary market, to the extent one exists, prior to maturity if the value of
the stated amount of the asset exceeds the stated principal amount and thereby
realize the appreciation in the underlying asset.
REAL ESTATE-RELATED SECURITIES
The real estate-related securities which will be emphasized by the Fund are
equity securities of real estate investment trusts, which own income-producing
properties, and mortgage real estate investment trusts which make various types
of mortgage loans often combined with equity features. The securities of such
trusts generally pay above average dividends and may offer the potential for
capital appreciation. Such securities will be subject to the risks customarily
associated with the real estate industry, including declines in the value of
the real estate investments of the trusts. Real estate values are affected by
numerous factors including (i) governmental regulations (such as zoning and
environmental laws) and changes in tax laws, (ii) operating costs, (iii) the
location and the attractiveness of the properties, (iv) changes in economic
conditions (such as fluctuations in interest and inflation rates and business
conditions) and (v) supply and demand for improved real estate. Such trusts
also are dependent on management skill and may not be diversified in their
investments.
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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 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.
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options which means that so
long as the Fund is obligated as the writer of the option, it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S.
Government securities or other high grade liquid debt or equity securities
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<PAGE>
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 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 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
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options discussed below) if, as a result of such purchase, the aggregate cost
of all outstanding options on securities held by the Fund would exceed 5% of
the market value of the Fund's total assets.
Stock Index Options and Futures and Financial Futures. As described in the
Prospectus, the Fund is authorized to engage in transactions in stock index
options and futures and financial futures, and related options on such futures.
Set forth below is further information concerning futures transactions.
A futures contract is an agreement between two parties to buy and sell a
security, or, in the case of an index-based futures contract, to make and
accept a cash settlement for a set price on a future date. A majority of
transactions in futures contracts, however, do not result in the actual
delivery of the underlying instrument or cash settlement, but are settled
through liquidation, i.e., by entering into an offsetting transaction.
The purchase or sale of a futures contract differs from the purchase or sale
of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker and the relevant contract
market, which varies, but is typically between 2% and 15% of the value of the
futures contract, must be deposited with the broker. This amount is known as
"initial margin" and represents a "good faith" deposit assuring the performance
of both the purchaser and seller under the futures contract. Subsequent
payments to and from the broker, called "variation margin", are required to be
made on a daily basis as the price of the futures contract fluctuates, making
the long and short positions in the futures contract more or less valuable, a
process known as "mark to the market". At any time prior to the settlement date
of the futures contract, the position may be closed out by taking an opposite
position which will operate to terminate the position in the futures contract.
A final determination of variation margin is then made, additional cash is
required to be paid to or released by the broker and the purchaser realizes a
loss or gain. In addition, a nominal commission is paid on each completed sale
transaction.
An order has been obtained from the Commission exempting the Fund from the
provisions of Section 17(f) and Section 18(f) of the Investment Company Act of
1940, as amended (the "Investment Company Act"), in connection with its
strategy of investing in futures contracts. Section 17(f) relates to the
custody of securities and other assets of an investment company and may be
deemed to prohibit certain arrangements between the Fund and commodities
brokers with respect to initial and variation margin. Section 18(f) of the
Investment Company Act prohibits an open-end investment company such as the
Fund from issuing a "senior security" other than a borrowing from a bank. The
staff of the Commission has in the past indicated that a futures contract may
be a "senior security" under the Investment Company Act.
Foreign Currency Hedging. Generally, the foreign exchange transactions of the
Fund will be conducted on a spot, i.e., cash basis at the spot rate of
purchasing or selling currency prevailing in the foreign exchange market. This
rate under normal market conditions differs from the prevailing exchange rate
in an amount generally less than one tenth of one percent due to the costs of
converting from one currency to another. However, the Fund has authority to
deal in forward foreign exchange among currencies of the different countries in
which it will invest as a hedge against possible variations in the foreign
exchange rates among these currencies. This is accomplished through contractual
agreements to purchase or sell a specified currency at a specified future date
and price set at the time of the contract. The Fund's dealings in forward
foreign exchange will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or
sale of forward foreign currency with respect to specific receivables or
payables of the Fund accruing in connection with the purchase and sale of its
portfolio securities, the sale and redemption
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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. Alternatively, no such segregation of funds need be made when the
Fund "covers" its open positions. The position is considered "covered" if the
Fund holds securities denominated in the currency underlying the forward
contract, or in a demonstrably correlated currency, having a value equal to or
greater than the Fund's obligation under the forward contract. 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
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movements in the prices of the securities and currencies which are the subject
of the hedge. If the price of the options and futures contract moves more or
less than the prices of the hedged securities or currencies, the Fund will
experience a gain or loss which will not be completely offset by movements in
the prices of the securities and currencies which are the subject of the hedge.
The successful use of options and futures also depends on the Manager's ability
to correctly predict price movements in the market involved in a particular
options or futures transaction.
Prior to exercise or expiration, an exchange-traded option or futures
position can only be terminated by entering into a closing purchase or sale
transaction. This requires a secondary market on an exchange for call or put
options of the same series. The Fund will enter into an option or futures
transaction on an exchange 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 OTC 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 (the "Code") . 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
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value of its total assets will be invested in the securities of a single
issuer, and the Fund will not own more than 10% of the outstanding voting
securities of a single issuer. A fund which elects to be classified as
"diversified" under the Investment Company Act must satisfy the foregoing 5%
and 10% requirements with respect to 75% of its total assets. To the extent
that the Fund assumes large positions in the securities of a small number of
issuers, the Fund's net asset value may fluctuate to a greater extent than that
of a diversified investment 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 or sell securities which it is entitled to receive 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.
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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.
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
10
<PAGE>
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"). 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. In addition to the investment restrictions set forth
in the Prospectus, 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).
11
<PAGE>
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.
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
12
<PAGE>
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 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).
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 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
13
<PAGE>
New York and if the Fund has the unconditional contractual right to repurchase
such OTC option from the dealer at a predetermined price, then the Fund will
treat as illiquid such amount of the underlying securities as is equal to the
repurchase price less the amount by which the option is "in-the-money" (i.e.,
current market value of the underlying securities minus the option's strike
price). The repurchase price with the primary dealers is typically a formula
price which is generally based on a multiple of the premium received for the
option, plus the amount by which the option is "in-the-money". This policy as
to OTC options is not a fundamental policy of the Fund and may be amended by
the Directors of the Fund without the approval of the Fund's shareholders.
However, the Fund will not change or modify this policy prior to the change or
modification by the Commission staff of its position.
Portfolio securities of the Fund generally may not be purchased from, sold or
loaned to the Manager or its affiliates or any of their directors, general
partners, officers or employees, acting as principal, unless pursuant to a rule
or exemptive order under the Investment Company Act.
Because of the affiliation of the Manager with the Fund, the Fund is
prohibited from engaging in certain transactions involving such firm 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 certain portfolio transactions with the Manager or
any of 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 (63)--President and Director(1)(2)--President of the Manager
(which term as used herein includes its corporate predecessors) since 1977;
President of Fund Asset Management, L.P. ("FAM") (which term as used herein
includes its corporate predecessors) since 1977; President and Director of
Princeton Services, Inc. ("Princeton Services") since 1993; Executive Vice
President of Merrill Lynch & Co., Inc. ("ML & Co.") since 1990; Director of
Merrill Lynch Funds Distributor, Inc. (the "Distributor").
Donald Cecil (69)--Director(2)--1114 Avenue of the Americas, New York, New
York 10036. Special Limited Partner of Cumberland Partners (an 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 (69)--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 (64)--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, 1990; Adjunct
Professor, Wharton School, University of Pennsylvania, 1990; Partner, Small
Cities Cablevision, Inc.
Richard R. West (58)--Director(2)--Box 604, Genoa, Nevada 89491. Professor of
Finance since 1984, and Dean from 1984 to 1993, New York University Leonard N.
Stern School of Business Administration; Director of Bowne & Co., Inc.
(financial printers), Vornado, Inc. (real estate holding company), Smith-Corona
Corporation (manufacturer of typewriters and word processors) and Alexander's,
Inc. (real estate company).
Edward D. Zinbarg (61)--Director(2)--5 Hardwell Road, Short Hills, New Jersey
07078-2117. 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 (55)--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 (62)--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 (40)--Vice President(1)--Vice President of the Manager since
1985; Portfolio Manager since 1984.
Donald C. Burke (35)--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 (46)--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 (43)--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, 1996, the officers and Directors of the Fund as a group (12
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Director and officer of the Fund, and the
other officers of the Fund owned less than 1% of the outstanding shares of
common stock of ML & Co.
COMPENSATION OF DIRECTORS
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
15
<PAGE>
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, 1995, fees and
expenses paid to the unaffiliated Directors aggregated $38,977.
The following table sets forth for the fiscal year ended October 31, 1995,
compensation paid by the Fund to the non-interested Directors and for the
calendar year ending December 31, 1995, the aggregate compensation paid by all
registered investment companies advised by the Manager and its affiliate, FAM
("MLAM/FAM Advised Funds") to the non-interested Directors.
<TABLE>
<CAPTION>
PENSION OR AGGREGATE
RETIREMENT COMPENSATION
BENEFITS FROM FUND AND OTHER
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..................... $8,500 None $271,850
Edward H. Meyer.................. $7,500 None $239,225
Charles C. Reilly................ $7,500 None $269,600
Richard R. West.................. $7,500 None $294,600
Edward D. Zinbarg................ $7,500 None $155,063
</TABLE>
- --------
(1) In addition to the Fund, the Directors serve on the boards of other
MLAM/FAM Advised Funds as follows: Mr. Cecil (35 funds and portfolios); Mr.
Meyer (35 funds and portfolios); Mr. Reilly (54 funds and portfolios); Mr.
West (54 funds and portfolios); and Mr. Zinbarg (17 funds and portfolios).
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Fund--Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Manager or its affiliates act as an adviser. Because of different objectives or
other factors, a particular security may be bought for one or more clients when
one or more clients are selling the same security. If purchases or sales of
securities by the Manager for the Fund or other funds for which it acts as
investment adviser or for its other advisory clients arise for consideration at
or about the same time, transactions in such securities will be made, insofar
as feasible, for the respective funds and clients in a manner deemed equitable
to all. To the extent that transactions on behalf of more than one client of
the Manager or its affiliates during the same period may increase the demand
for securities being purchased or the supply of securities being sold, there
may be an adverse effect on price.
The Fund has entered into a management agreement with the Manager (the
"Management Agreement"). As discussed in the Prospectus, the Management
Agreement provides that the Manager is entitled to receive for its services to
the Fund monthly compensation at the annual rate of 0.75% of the average daily
net assets of the Fund. The Manager has agreed to waive a portion of its
management fee payable by the Fund so that such fee is 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. For the
fiscal year ended
16
<PAGE>
October 31, 1995, the Fund paid the Manager a fee at the rate of 0.70% of
average daily net assets. For the fiscal years ended October 31, 1993, 1994 and
1995, the total management fees paid by the Fund to the Manager aggregated
$18,984,493, $49,037,363 and $55,558,045, 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, 1993, 1994 and
1995, the fees paid by MLAM to MLAM U.K. pursuant to such arrangement
aggregated $2,293,281, $6,509,464 and $7,391,028, 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 FAM 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,
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, 1993, 1994 and 1995, the amount of such reimbursement was
$213,891, $570,246 and $611,736, 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 in connection with the distribution of Class B, Class C and Class D
shares 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".
17
<PAGE>
The Manager is a limited partnership, the partners of which are ML & Co. and
Princeton Services. 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 its affiliate, FAM. Funds advised by the
Manager or FAM which utilize the Merrill Lynch Select PricingSM System are
referred to herein as "MLAM-advised mutual funds".
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offering of each class of shares
of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the
offering of each class of shares of the Fund. After the prospectuses,
statements of additional information and periodic reports have been prepared,
set in type and mailed to shareholders, the Distributor pays for the printing
and distribution of copies thereof used in connection with the offering to
dealers and investors. The Distributor also pays for other supplementary sales
literature and advertising costs. The Distribution Agreements are subject to
the same renewal requirements and termination provisions as the Management
Agreement described above.
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
For the fiscal years ended October 31, 1993, 1994 and 1995, the Fund sold its
Class A shares through the Distributor and Merrill Lynch, as a dealer. For the
period October 21, 1994 (commencement of
18
<PAGE>
operations) to October 31, 1994 and the fiscal year ended October 31, 1995, the
Fund sold its Class D shares through the Distributor and Merrill Lynch as a
dealer. For the fiscal year ended October 31, 1993, the Fund sold 51,001,581
Class A shares for aggregate net proceeds to the Fund of $652,336,461. 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. For the fiscal year ended October 31,
1994, the Fund sold 51,696,255 Class A shares for aggregate net proceeds to the
Fund of $691,831,423. 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. For the
fiscal year ended October 31, 1995, the Fund sold 24,414,703 Class A shares for
aggregate net proceeds to the Fund of $317,656,099. The gross sales charges for
the sale of Class A shares for the fiscal year ended October 31, 1995, were
$864,640, of which the Distributor received $52,270 and Merrill Lynch received
$812,370. For the period October 21, 1994 (commencement of operations) to
October 31, 1994, the Fund sold 385,289 Class D shares for aggregate net
proceeds to the Fund of $5,017,907. The gross sales charges for the sale of
Class D shares for the 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. For the fiscal year ended October 31, 1995, the
Fund sold 17,949,936 Class D shares for aggregate net proceeds to the Fund of
$233,765,521. The gross sales charges for the sale of Class D shares for the
fiscal year ended October 31, 1995, were $1,466,978, of which the Distributor
received $89,085 and Merrill Lynch received $1,377,893.
For the fiscal year ended October 31, 1995, the Distributor received CDSCs of
$16,611, all of which were paid to Merrill Lynch, with respect to redemptions
within one year after purchase of Class A shares purchased subject to front-end
sales charge waivers. For the fiscal year ended October 31, 1995, the
Distributor received CDSCs of $77, all of which were paid to Merrill Lynch,
with respect to redemptions within one year of purchase of 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 the Manager or its
affiliate, FAM, who purchased such closed-end fund shares prior to October 21,
1994 (the date the Merrill Lynch Select PricingSM System commenced operations)
and wish to reinvest the net proceeds from a sale of their closed-end fund
shares of common stock in Eligible Class A Shares, if
19
<PAGE>
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.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund,
Inc. will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond
Fund, Inc. will receive Class D shares of the Fund. In order to exercise this
investment option, a shareholder of one of the above-referenced continuously
offered closed-end funds (an "eligible fund") must sell his or her shares of
common stock of the eligible fund (the "eligible shares") back to the fund in
connection with a tender offer conducted by the eligible fund and reinvest the
proceeds immediately in the designated class of shares of the Fund. This
investment option is available only with respect to eligible shares as to which
no Early Withdrawal Charge or CDSC (each as defined in the eligible fund's
prospectus) is applicable. Purchase orders from eligible fund shareholders
wishing to exercise this investment option will be accepted only on the day
that the related tender offer terminates and will be effected at the net asset
value of the designated class of the Fund on such day.
REDUCED INITIAL SALES 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
20
<PAGE>
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.
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 of 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
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
21
<PAGE>
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.
Employee Access AccountsSM. Class A or Class D shares are offered at net
asset value to Employee Access Accounts available through employers that
provide employer sponsored retirement or savings plans that are eligible to
purchase such shares at net asset value. The initial minimum for such accounts
is $500 except that the initial minimum for shares purchased for such accounts
pursuant to the Automatic Investment Program is $50.
Purchase Privilege of Certain Persons. Directors of the Fund, members of the
Boards of other MLAM-advised investment companies, directors and employees of
ML & Co. and its subsidiaries (the term "subsidiaries" when used herein with
respect to ML & Co. includes MLAM, FAM and certain other entities directly or
indirectly wholly owned and controlled by ML & Co.) and their directors and
employees and any trust, pension, profit-sharing or other benefit plan for
such persons may purchase Class A shares of the Fund at net asset value.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that
it will purchase Class D shares of the Fund with proceeds from a redemption of
a mutual fund that was sponsored by the financial consultant's previous firm
and was subject to a sales charge either at the time of purchase or on a
deferred basis; and second, the investor also must establish that such
redemption had been made within 60 days prior to the investment in the Fund,
and the proceeds from the redemption had been maintained in the interim in
cash or a money market fund.
Class D shares of the Fund are also offered at net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch financial consultant and who has invested in a mutual fund sponsored by
a non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated, if the following conditions are satisfied:
first, the investor must purchase Class D shares of the Fund with proceeds
from a redemption of shares of such other mutual fund and the shares of such
other fund were subject to a sales charge either at the time of purchase or on
a deferred basis; and second, such purchase of Class D shares must be made
within 90 days after such notice 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
the other mutual fund and that such shares have been outstanding for a period
of no less than six months; and second, such purchase of Class D shares must
be made within 60 days after
22
<PAGE>
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.
EMPLOYER-SPONSORED RETIREMENT OR SAVINGS PLANS AND CERTAIN OTHER ARRANGEMENTS
Certain employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class A or Class D shares at net asset value, based
on the number of employees or number of employees eligible to participate in
the plan, the aggregate amount invested by the plan in specified investments
and/or the services provided by Merrill Lynch to the plan. Certain other plans
may purchase Class B shares with a waiver of the CDSC upon redemption, based on
similar criteria. Such Class B shares will convert into Class D shares
approximately ten years after the plan purchases the first share of any MLAM-
advised mutual fund. Minimum purchase requirements may be waived or varied for
such plans. Additional information regarding purchases by employer-sponsored
retirement or savings plans and certain other arrangements is available toll-
free from Merrill Lynch Business Financial Services at (800) 237-7777.
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares -- Distribution 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 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
23
<PAGE>
provides that, so long as the Distribution Plan remains in effect, the
selection and nomination of Directors who are not "interested persons" of the
Fund, as defined in the Investment Company Act (the "Independent Directors"),
shall be committed to the discretion of the Independent Directors then in
office. In approving each Distribution Plan in accordance with Rule 12b-1, the
Independent Directors concluded that there is a reasonable likelihood that such
Distribution Plan will benefit the Fund and its related class of shareholders.
Each Distribution Plan can be terminated at any time, without penalty, by the
vote of a majority of the Independent Directors or by the vote of the holders
of a majority of the outstanding related class of voting securities of the
Fund. A Distribution Plan cannot be amended to increase materially the amount
to be spent by the Fund without the approval of the related class of
shareholders, and all material amendments are required to be approved by the
vote of the Directors, including a majority of the Independent Directors who
have no direct or indirect financial interest in such Distribution Plan, cast
in person at a meeting called for that purpose. Rule 12b-1 further requires
that the Fund preserve copies of each Distribution Plan and any report made
pursuant to such plan for a period of not less than six years from the date of
such Distribution Plan or such report, the first two years in an easily
accessible place.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on
certain asset-backed sales charges such as the distribution fee and the CDSC
borne by the Class B and Class C shares but not the account maintenance fee.
The maximum sales charge rule is applied separately to each class. As
applicable to the Fund, the maximum sales charge rule limits the aggregate of
distribution fee payments and CDSCs payable by the Fund to (1) 6.25% of
eligible gross sales of Class B shares and Class C shares, computed separately
(defined to exclude shares issued pursuant to dividend reinvestments and
exchanges), plus (2) interest on the unpaid balance for the respective class,
computed separately, at the prime rate plus 1% (the unpaid balance being the
maximum amount payable minus amounts received from the payment of the
distribution fee and the CDSC). In connection with the Class B shares, the
Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any time.
To the extent payments would exceed the voluntary maximum, the Fund will not
make further payments of the distribution fee with respect to Class B shares,
and any CDSCs will be paid to the Fund rather than to the Distributor; however,
the Fund will continue to make payments of the account maintenance fee. In
certain circumstances the amount payable pursuant to the voluntary maximum may
exceed the amount payable under the NASD formula. In such circumstances payment
in excess of the amount payable under the NASD formula will not be made.
24
<PAGE>
The following table sets forth comparative information as of October 31,
1995, indicating the maximum allowable payments that can be made under the
NASD maximum sales charge rule with respect to Class B and Class C shares and
the Distributor's voluntary maximum, with respect to Class B shares, for the
periods indicated.
DATA CALCULATED AS OF OCTOBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
ANNUAL
DISTRIBUTION
ALLOWABLE ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT NET
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID ASSET
SALES (1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
---------- --------- ---------- -------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES, FOR THE
PERIOD FEBRUARY 3, 1989
(COMMENCEMENT OF
OPERATIONS) TO OCTOBER
31, 1995:
Under NASD Rule As
Adopted................ $6,428,414 $401,776 $61,716 $463,492 $136,096 $327,396 $50,164
Under Distributor's
Voluntary Waiver....... $6,428,414 $401,776 $32,142 $433,918 $136,096 $297,822 $50,164
CLASS C SHARES, FOR THE
PERIOD OCTOBER 21, 1994
(COMMENCEMENT OF
OPERATIONS) TO OCTOBER
31, 1995:
Under NASD Rule As
Adopted................ $ 99,901 $ 6,244 $ 319 $ 6,563 $ 427 $ 6,136 $ 768
</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. See "Purchase of Shares -- Distribution Plans" in the Prospectus.
(4) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any CDSC payments) is amortizing
the unpaid balance. No assurance can be given that payments of the
distribution fee will reach either the NASD maximum or, with respect to
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.
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
25
<PAGE>
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,
1993, 1994 and 1995, the Distributor received CDSCs of $1,701,006, $6,842,598
and $14,179,047, respectively, with respect to redemptions of Class B shares,
all of which was paid to Merrill Lynch. For the period October 21, 1994
(commencement of operations) to October 31, 1994, the Distributor received no
CDSCs with respect to redemptions of Class C shares. For the fiscal year ended
October 31, 1995, the Distributor received CDSCs of $32,676 with respect to
redemptions of Class C shares, all of which was paid to Merrill Lynch.
Merrill Lynch Blueprint SM 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
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.
Employee Access AccountsSM. The CDSC is also waived for any Class B shares
that were acquired and held at the time of redemption by Employee Access
AccountsSM available through employers that provide eligible 401(k) plans. The
minimum initial purchase for such accounts is $500, except that the initial
minimum for shares purchased for such accounts pursuant to the Automatic
Investment Program is $50.
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
26
<PAGE>
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, 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. For the
fiscal year ended October 31, 1995, the Fund paid total brokerage commissions
of $2,708,489, of which $157,708 or 5.82% was paid to Merrill Lynch for
effecting 5.66% of the aggregate dollar amount of transactions in which the
Fund paid brokerage commissions.
The Fund anticipates that its brokerage transactions involving securities of
companies domiciled in countries other than the United States will be conducted
primarily on the principal stock exchanges of such countries. Brokerage
commissions and other transaction costs on foreign stock exchange transactions
are generally higher than in the United States, although the Fund will endeavor
to achieve the best net results in effecting its portfolio transactions. There
is generally less governmental supervision and regulation of foreign stock
exchanges and brokers than in the United States.
The Fund invests in certain securities traded in the over-the-counter market
and, where possible, deals directly with the dealers who make a market in the
securities involved except in those circumstances in which better prices and
execution are available elsewhere. Under the Investment Company Act, persons
affiliated with the Fund and persons who are affiliated with such affiliated
persons are prohibited from dealing with the Fund as principal in the purchase
and sale of securities unless a permissive order allowing such transactions is
obtained from the Commission. Since transactions in the over-the-counter market
usually involve transactions with dealers acting as principal for their own
accounts, affiliated persons of the Fund, including Merrill Lynch and any of
its affiliates, will not serve as the Fund's dealer in such transactions.
However, affiliated persons of the Fund may serve as its broker in listed or
over-the-counter transactions conducted on an agency basis provided that, among
other things, the fee or commission received by such affiliated broker is
reasonable and fair compared to the fee or commission received by non-
affiliated brokers in connection with comparable transactions.
The Fund's ability and decisions to purchase or sell portfolio securities may
be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are redeemable on a
daily basis in U.S. dollars, the Fund intends to manage its portfolio so as to
give reasonable assurance that it will be able to obtain U.S. dollars to the
extent necessary to meet anticipated redemptions.
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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.
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), 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
28
<PAGE>
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.
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 gain
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 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
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<PAGE>
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 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 SM 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) or 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
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<PAGE>
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. 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
Merrill Lynch 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
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<PAGE>
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 for 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
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
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<PAGE>
"tacked" to the holding period for 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 Special Value Fund Class B shares for more than five
years.
The exchange privilege is modified with respect to certain retirement plans
which participate in the Merrill Lynch Mutual Fund Adviser ("MFA") program.
Such retirement plans may exchange Class B, Class C or Class D shares that have
been held for at least one year for Class A shares of the same fund on the
basis of relative net asset values in connection with the commencement of
participation in the MFA program, i.e., no CDSC will apply. The one year
holding period does not apply to shares acquired through reinvestment of
dividends. Upon termination of participation in the MFA program, Class A shares
will be re-exchanged for the class of shares originally held. For purposes of
computing any CDSC that may be payable upon redemption of Class B or Class C
shares so reacquired, or the conversion period for Class B shares so
reacquired, the holding period for the Class A shares will be "tacked" to the
holding period for the Class B or Class C shares originally held.
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 that Fund will be aggregated with previous holding periods
for purposes of reducing the CDSC. Thus, for example, an investor may exchange
Class B shares of the Fund for shares of Merrill Lynch Institutional Fund
("Institutional Fund") after having held the Fund Class B shares for two and a
half years and three years later decide to redeem the shares of Institutional
Fund for cash. At the time of this redemption, the 2% CDSC that would have been
due had the Class B shares of the Fund been redeemed for cash rather than
exchanged for shares of Institutional Fund will be payable. If instead of such
redemption the shareholder exchanged such shares for Class B shares of a fund
which the shareholder continued to hold for an additional two and half years,
any subsequent redemption would 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.
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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.
Merrill Lynch Asset Income
Fund, Inc. ...................
A high level of current income through
investment primarily in United States fixed
income securities.
Merrill Lynch Basic Value
Fund, Inc. ...................
Capital appreciation and, secondarily, income
through investment in securities, primarily
equities, that are undervalued and therefore
represent basic investment value.
Merrill Lynch California
Insured Municipal Bond Fund...
A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and California
income taxes as is consistent with prudent
investment management through investment in
a portfolio consisting primarily of insured
California Municipal Bonds.
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Merrill Lynch California
Limited Maturity Municipal
Bond Fund..................... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and California income taxes as is
consistent with prudent investment
management through investment in a portfolio
primarily of intermediate-term investment
grade California Municipal Bonds.
Merrill Lynch California
Municipal Bond Fund...........
A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and California
income taxes as is consistent with prudent
investment management.
Merrill Lynch Capital Fund, The highest total investment return
Inc. ......................... consistent with prudent risk through a fully
managed investment policy utilizing equity,
debt and convertible securities.
Merrill Lynch Colorado
Municipal Bond Fund...........
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Colorado
income taxes as is consistent with prudent
investment management.
Merrill Lynch Connecticut
Municipal Bond Fund...........
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Connecticut
income taxes as is consistent with prudent
investment management.
Merrill Lynch Corporate Bond
Fund, Inc. ...................
Current income from three separate
diversified portfolios of fixed income
securities.
Merrill Lynch Developing
Capital Markets Fund, Inc.....
Long-term 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.
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Merrill Lynch Federal
Securities Trust..............
High current return through investments in
U.S. Government and Government agency
securities, including GNMA mortgage-backed
certificates and other mortgage-backed
Government securities.
Merrill Lynch Florida Limited
Maturity Municipal Bond Fund..
A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal income taxes as is consistent with
prudent investment management while serving
to offer shareholders the opportunity to own
securities exempt from Florida intangible
personal property taxes through investment
in a portfolio primarily of intermediate-
term investment grade Florida Municipal
Bonds.
Merrill Lynch Florida
Municipal Bond Fund...........
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal income taxes as
is consistent with prudent investment
management, while seeking to offer
shareholders the opportunity to own
securities exempt from Florida intangible
personal property taxes.
Merrill Lynch Fund For
Tomorrow, Inc.................
Long-term growth through investment in a
portfolio of good quality securities,
primarily common stock, potentially
positioned to benefit from demographic and
cultural changes as they affect consumer
markets.
Merrill Lynch Fundamental
Growth Fund, Inc. ............
Long-term growth of capital through
investment in a diversified portfolio of
equity securities placing particular
emphasis on companies that have exhibited an
above-average growth rate in earnings.
Merrill Lynch Fundamental
Value Portfolio............... A portfolio of Merrill Lynch Asset Builder
(available only for 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 and invested in equities.
by certain CBA (R) Accounts
and CMA (R) Sub-Accounts)
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<PAGE>
Merrill Lynch Global Bond Fund
for Investment and
Retirement.................... High total investment return from investment
in a global portfolio of debt instruments
denominated in various currencies and
multinational currency units.
Merrill Lynch Global
Convertible Fund, Inc. .......
High total return from investment primarily
in an internationally diversified portfolio
of convertible debt securities, convertible
preferred stock and "synthetic" convertible
securities consisting of a combination of
debt securities or preferred stock and
warrants or options.
Merrill Lynch Global Holdings,
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 Asset Builder
(available only for 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 and equity, debt and money market securities,
by certain CBA (R) Accounts the combination of which will vary depending
and CMA (R) Sub-Accounts) 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.
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.
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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 Growth
Opportunity Portfolio......... A portfolio of Merrill Lynch Asset Builder
(available only for Program, Inc., a series fund, whose
exchanges by certain objective is to seek long-term growth of
individual retirement capital by investing in a portfolio of
accounts for which Merrill equity securities placing particular
Lynch acts as custodian and emphasis on companies that have exhibited
by certain CBA (R) Accounts above-average growth rates in earnings.
and CMA (R) Sub-Accounts)
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.
38
<PAGE>
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.
39
<PAGE>
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.
40
<PAGE>
Merrill Lynch Pacific Fund, Capital appreciation by investing in equity
Inc. ......................... securities of corporations domiciled in Far
Eastern and Western Pacific countries,
including Japan, Australia, Hong Kong and
Singapore.
Merrill Lynch Pennsylvania
Limited Maturity Municipal
Bond Fund.....................
A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and Pennsylvania income taxes as is
consistent with prudent investment
management through investment in a portfolio
of intermediate-term investment grade
Pennsylvania Municipal Bonds.
Merrill Lynch Pennsylvania
Municipal Bond Fund...........
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Pennsylvania
personal income taxes as is consistent with
prudent investment management.
Merrill Lynch Phoenix Fund,
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 Asset Builder
(available only for 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 and such as corporate bonds and notes,
by certain CBA (R) Accounts convertible securities, preferred stocks and
and CMA (R) Sub-Accounts) 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.
41
<PAGE>
Merrill Lynch Special Value
Fund, Inc. ...................
Long-term growth of capital from investments
in securities, primarily common stocks, of
relatively small companies believed to have
special investment value and emerging growth
companies regardless of size.
Merrill Lynch Strategic
Dividend Fund.................
Long-term total return from investment in
dividend paying common stocks which yield
more than Standard & Poor's 500 Composite
Stock Price Index.
Merrill Lynch Technology Fund,
Inc. .........................
Capital appreciation through worldwide
investment in equity securities of companies
that derive or are expected to derive a
substantial portion of their sales from
products and services in technology.
Merrill Lynch Texas Municipal
Bond Fund.....................
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal income taxes as
is consistent with prudent investment
management by investing primarily in a
portfolio of long-term, investment grade
obligations issued by the State of Texas,
its political subdivisions, agencies and
instrumentalities.
Merrill Lynch U.S. Government
Securities Portfolio.......... A portfolio of Merrill Lynch Asset Builder
(available only for 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 and including GNMA mortgage-backed certificates
by certain CBA (R) Accounts and other mortgage-backed government
and CMA (R) Sub-Accounts) 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.
42
<PAGE>
Class A Share Money Market Funds:
Merrill Lynch Ready
AssetsTrust...................
Preservation of capital, liquidity and the
highest possible current income consistent
with the foregoing objectives from the
short-term money market securities in which
the Trust invests.
Merrill Lynch Retirement
Reserves Money Fund
(available only for exchanges
within certain retirement
plans)........................
Currently the only portfolio of Merrill Lynch
Retirement Series Trust, a series fund,
whose objectives are current income,
preservation of capital and liquidity
available from investing in a diversified
portfolio of short-term money market
securities.
Merrill Lynch U.S.A.
Government Reserves...........
Preservation of capital, current income and
liquidity available from investing in direct
obligations of the U.S. Government and
repurchase agreements relating to such
securities.
Merrill Lynch U.S. Treasury
Money Fund....................
Preservation of capital, liquidity and
current income through investment
exclusively in a diversified portfolio of
short-term marketable securities which are
direct obligations of the U.S. Treasury.
Class B, Class C and Class D Share Money Market Funds:
Merrill Lynch Government Fund.. A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
consistent with liquidity and security of
principal from investment in securities
issued or guaranteed by the U.S. Government,
its agencies and instrumentalities and in
repurchase agreements secured by such
obligations.
Merrill Lynch Institutional
Fund..........................
A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide maximum current
income consistent with liquidity and the
maintenance of a high quality portfolio of
money market securities.
Merrill Lynch Institutional
Tax-Exempt Fund...............
A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
exempt from Federal income taxes,
preservation of capital and liquidity
available from investing in a diversified
portfolio of short-term, high quality
municipal bonds.
43
<PAGE>
Merrill Lynch Treasury Fund.... A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
consistent with liquidity and security of
principal from investment in direct
obligations of the U.S. Treasury and up to
10% of its total assets in repurchase
agreements secured by such obligations.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, shareholders should contact their Merrill
Lynch financial consultant, who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other funds described above
with shares for which certificates have not been issued, may exercise the
exchange privilege by wire through their securities dealers. The Fund reserves
the right to require a properly completed Exchange Application. This exchange
privilege may be modified or terminated in accordance with the rules of the
Commission. The Fund reserves the right to limit the number of times an
investor may exercise the exchange privilege. Certain funds may suspend the
continuous offering of their shares at any time and thereafter may resume such
offering from time to time. The exchange privilege is available only to U.S.
shareholders in states where the exchange legally may be made.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all of its net investment income, if
any. Dividends from such net investment income are paid at least annually. All
net realized long- or short-term capital gains, if any, are distributed to the
Fund's shareholders at least annually. From time to time, the Fund may declare
a special distribution at or about the end of the calendar year in order to
comply with a Federal income tax requirement that certain percentages of its
ordinary income and capital gains be distributed during the taxable year.
Premiums from expired call options written by the Fund and net gains from
closing purchase transactions are treated as short-term capital gains for
Federal income tax purposes. See "Shareholder Services--Automatic Reinvestment
of Dividends and Capital Gains Distributions" for information concerning the
manner in which dividends and distributions may be reinvested automatically in
shares of the Fund. Shareholders may elect in writing to receive any such
dividends or distributions, or both, in cash. Dividends and distributions are
taxable to shareholders as described below whether they are invested in shares
of the Fund or received in cash. The per share dividends and distributions on
Class B and Class C shares will be lower than the per share dividends and
distributions on Class A and Class D shares as a result of the account
maintenance, distribution and higher transfer agency fees applicable with
respect to the Class B and Class C shares; similarly, the per share dividends
and distributions on Class D shares will be lower than the per share dividends
and distributions on Class A shares as a result of the account maintenance fees
applicable with respect to the Class D shares. See "Determination of Net Asset
Value".
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the 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.
44
<PAGE>
Dividends paid by the Fund from its ordinary income or from an excess of net
short-term capital gains over net long-term capital losses (together referred
to hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from an excess of net long-term capital
gains over net short-term capital losses (including gains or losses from
certain transactions in 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 Commission rule permitting the issuance and
sale of multiple classes of stock) that is based on the gross income allocable
to Class A, Class B, Class C and Class D shareholders during the taxable year,
or such other method as the Internal Revenue Service may prescribe. If the Fund
pays a dividend in January which was declared in the previous October, November
or December to shareholders of record on a specified date in one of such
months, then such dividend will be treated for tax purposes as being paid by
the Fund and received by its shareholders on December 31 of the year in which
such dividend was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% U.S. withholding tax under existing
provisions of the Code applicable to foreign individuals and entities unless a
reduced rate of withholding or a withholding exemption is provided under
applicable treaty law. Nonresident shareholders are urged to consult their own
tax advisers concerning the applicability of the U.S. withholding tax.
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
45
<PAGE>
proportionate shares in computing their taxable incomes or, alternatively, use
them as foreign tax credits against their U.S. income taxes. No deductions for
foreign taxes, however, may be claimed by noncorporate shareholders who do not
itemize deductions. A shareholder that is a nonresident alien individual or a
foreign corporation may be subject to U.S. withholding tax on the income
resulting from the Fund's election described in this paragraph but may not be
able to claim a credit or deduction against such U.S. tax for the foreign taxes
treated as having been paid by such shareholder. The Fund will report annually
to its shareholders the amount per share of such withholding taxes. For this
purpose, the Fund will allocate foreign taxes and foreign source income among
the Class A, Class B, Class C and Class D shareholders according to a method
similar to that described above for the allocation of dividends eligible for
the dividends received deduction.
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period of the acquired Class D shares will
include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of acquiring
the shares, then the loss the shareholder can recognize on the exchange will be
reduced (or the gain increased) to the extent any 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 Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income
and capital gains in the manner necessary to minimize imposition of the 4%
excise tax, there can be no assurance that sufficient amounts of the Fund's
taxable income and capital gains will be distributed to avoid entirely the
imposition of the tax. In such event, the Fund will be liable for the tax only
on the amount by which it does not meet the foregoing distribution
requirements.
The Fund may invest in securities rated in the medium to lower rating
categories of nationally recognized rating organizations, and in unrated
securities ("high yield securities"), as previously described. Some of these
high yield securities may be purchased at a discount and may therefore cause
the Fund to accrue 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
46
<PAGE>
last day of the taxable year. Unless such contract is a forward foreign
exchange contract, or is a non-equity option or a regulated futures contract
for a non-U.S. currency for which the Fund elects to have gain or loss treated
as ordinary gain or loss under Code Section 988 (as described below), gain or
loss from Section 1256 contracts will be 60% long-term and 40% short-term
capital gain or loss. Application of these rules to Section 1256 contracts held
by the Fund may alter the timing and character of distributions to
shareholders. The mark-to-market rules outlined above, however, will not apply
to certain transactions entered into by the Fund solely to reduce the risk of
changes in price or interest or currency exchange rates with respect to its
investments.
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The
Fund may, nonetheless, elect to treat the gain or loss from certain forward
foreign exchange contracts as capital. In this case, gain or loss realized in
connection with a forward foreign exchange contract that is a Section 1256
contract will be characterized as 60% long-term and 40% short-term capital gain
or loss.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's sales of securities and transactions in options, futures
and forward foreign exchange contracts. Under Section 1092, the Fund may be
required to postpone recognition for tax purposes of losses incurred in certain
sales of securities and certain closing transactions in options, futures and
forward foreign exchange contracts.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the
Fund may be restricted in effecting closing transactions within three months
after entering into an option or futures contract.
Special Rules for Certain Foreign Currency Transactions. In general, gains
from "foreign currencies" and from foreign currency options, foreign currency
futures and forward foreign exchange contracts relating to investments in
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 all or a portion
of distributions made before the losses were realized but in the same taxable
year would be recharacterized as a return of capital to shareholders, thereby
reducing the basis of each shareholder's Fund shares and resulting in a capital
gain for any shareholder who
47
<PAGE>
received a distribution greater than the shareholder's tax basis in Fund shares
(assuming the shares were held as a capital asset). These rules and the mark-
to-market rules described above, however, will not apply to certain
transactions entered into by the Fund solely to reduce the risk of currency
fluctuations with respect to its investments.
----------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs which
are derived from interest on U.S. Government obligations. State law varies as
to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data 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
$1,000 THE $1,000 THE $1,000 THE $1,000 OF 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>
One Year Ended
October 31,
1995........... 8.78% $1,087.80 (9.54)% $1,095.40 12.58% $1,125.80 8.42 % $1,084.20
Five Years Ended
October 31,
1995........... 14.44% $1,962.80 14.48 % $1,966.30
Inception
(February 3,
1989) to
October 31,
1995........... 12.63% $2,230.00 12.37 % $2,196.00
Inception
(October 21,
1994) to
October 31,
1995........... 13.20% $1,135.80 (8.27)% $1,085.10
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended
October 31,
1995........... 14.81% $1,148.10 13.54 % $1,135.40 13.58% $1,135.80 14.43 % $1,144.30
Year Ended
October 31,
1994........... 2.14% $1,021.40 1.13 % $1,011.30
Year Ended
October 31,
1993........... 22.61% $1,226.10 21.42 % $1,214.20
Year Ended
October 31,
1992........... 11.78% $1,117.80 10.64 % $1,106.40
Year Ended
October 31,
1991........... 28.89% $1,288.90 27.48 % $1,274.80
Year Ended
October 31,
1990........... 3.91% $1,039.10 2.93 % $1,029.30
Inception
(February 3,
1989) to
October 31,
1989........... 9.34% $1,093.40 8.50 % $1,085.00
Inception
(October 21,
1994) to
October 31,
1994........... 0.00% $1,000.00 0.08 % $1,000.80
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Inception
(February 3,
1989) to
October 31,
1995........... 123.00% $2,230.00 119.60 % $2,196.00
Inception
(October 21,
1994) to
October 31,
1995........... 13.58% $1,135.80 8.51 % $1,085.10
</TABLE>
*Information as to Class C and Class D shares is presented only for the
period October 21, 1994 to October 31, 1995. Prior to October 21, 1994, no
Class C or Class D shares were publicly issued.
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 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 CDSCs, 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. At the date of
this Statement of Additional Information, the Fund 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 consists of 200,000,000 shares and
Class B and Class D each consists of 900,000,000 shares. Each share of Class
A, Class B, Class C and Class D Common Stock represents an interest in the
same assets of the Fund and is 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 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 shareholders be held upon the written request of at least
10% of the outstanding shares of the Fund entitled to vote at such meeting.
Shareholders may call a special meeting for the purpose of voting on the
removal of Directors. A director may be removed at a special meeting of
shareholders by a vote of a majority of the votes entitled to be cast for the
election of Directors. 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, 1995, 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.............. $1,487,805,515 $6,688,498,717 $102,361,445 $256,524,782
============== ============== ============ ============
Number of Shares Out-
standing............... 104,728,579 477,317,223 7,343,836 18,073,722
============== ============== ============ ============
Net Asset Value Per
Share (net assets
divided by number of
shares outstanding).... $ 14.21 $ 14.01 $ 13.94 $ 14.19
Sales Charge (for Class
A and Class D shares:
5.25% of offering price
(5.54% of net asset
value per share))*..... .79 ** ** .79
-------------- -------------- ------------ ------------
Offering Price.......... $ 15.00 $ 14.01 $ 13.94 $ 14.98
============== ============== ============ ============
</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 and Class C 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 approval by the independent Directors 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
Merrill Lynch Financial Data Services, Inc., 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, 1996.
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 RATINGS GROUP'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>
INVESTMENT GRADE
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
GRADE having 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 or based on other
circumstances.
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,
B as 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.
N.R. indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate
a particular type of obligation as a matter of policy.
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, 1995, 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, 1995 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Global Allocation Fund, Inc. as of October 31, 1995, 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 1, 1995
59
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
Shares Value Percent of
COUNTRY Industries 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 $ 10,858,220 0.1%
Food 7,916,000 Goodman Fielder Wattie Ltd. 8,324,587 7,955,960 0.1
Insurance 1,614,136 GIO Australia Holdings, Ltd. 2,786,184 3,416,629 0.0
Multi-Industry 1,500,000 Pacific Dunlop, Ltd. 4,092,789 3,631,878 0.0
Tobacco 2,099,800 Rothmans Holdings, Ltd. 7,893,919 7,834,060 0.1
1,242,300 WD & HO Wills Holdings, Ltd. 1,389,502 1,797,186 0.0
-------------- -------------- ------
9,283,421 9,631,246 0.1
Total Common Stocks in Australia 30,101,377 35,493,933 0.3
Canada Beverage 1,000,000 Cott Corp. (USD) 9,340,461 8,125,000 0.1
Metals 100,000 Inco Ltd. (USD) 2,132,000 3,437,500 0.0
Natural Resources 300,000 Canadian Pacific, Ltd. (USD) 3,503,161 4,800,000 0.1
440,000 Horsham Corp. (USD) 3,550,742 5,940,000 0.1
-------------- -------------- ------
7,053,903 10,740,000 0.2
Oil & Related 353,000 ++++International Petroleum Corp. (USD) 1,000,196 816,313 0.0
Telecommunications 100,000 BCE Telecommunications, Inc. (USD) 3,375,484 3,362,500 0.0
Total Common Stocks in Canada 22,902,044 26,481,313 0.3
Denmark Banking 53,500 Unidanmark A/S 1,870,730 2,462,002 0.0
Total Common Stocks in Denmark 1,870,730 2,462,002 0.0
Finland Banking 4,194,000 ++++Kansallis-Osake-Pankki 4,512,421 3,365,653 0.0
1,483,915 ++++Unitas Bank Ltd. 4,285,282 3,607,516 0.0
-------------- -------------- ------
8,797,703 6,973,169 0.0
Machinery & 146,200 ++++Rauma OY 2,638,513 3,195,364 0.0
Equipment
Metals 432,500 Outokumpu OY 5,980,994 6,890,519 0.1
Paper & Forest 1,500,000 Enso-Gutzeit OY 12,019,454 11,789,558 0.1
Products 353,000 Kymmene OY 10,505,815 9,664,841 0.1
539,650 Metsa Serla OY 22,185,795 20,124,788 0.2
560,700 Repola OY 'S' 7,792,828 10,878,385 0.1
-------------- -------------- ------
52,503,892 52,457,572 0.5
Total Common Stocks in Finland 69,921,102 69,516,624 0.6
France Automobiles 103,270 Peugeot S.A. 13,810,642 13,467,702 0.2
Banking 215,600 Compagnie de Suez S.A. 8,482,839 8,148,175 0.1
155,000 Compagnie Financiere de Paribas 8,115,596 8,536,186 0.1
86,500 Societe Generale 9,605,405 9,899,376 0.1
-------------- -------------- ------
26,203,840 26,583,737 0.3
Industrial 82,400 Alcatel Alsthom Cie Generale
d'Electricite S.A. 8,193,087 7,044,782 0.1
67,500 ++++Compagnie de Saint-Gobain S.A. 8,118,392 8,056,608 0.1
109,700 Elf Aquitaine (Elf) S.A. 7,494,754 7,478,780 0.1
-------------- -------------- ------
23,806,233 22,580,170 0.3
Insurance 297,500 Assurances Generales de France
S.A. (AGF) 8,136,183 8,587,880 0.1
Metals/Steel 815,200 ++++Usinor-Sacilor 14,749,052 12,183,356 0.1
</TABLE>
60
<PAGE>
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
Multi-Industry 31,862 EuraFrance S.A. 9,052,946 10,665,241 0.1
Total Common Stocks in France 95,758,896 94,068,086 1.1
Germany Banking 55,680 Bayerische Vereinsbank AG 1,339,965 1,579,476 0.0
Capital Goods 369,636 ++++Kloeckner Werke AG 17,229,762 16,524,161 0.2
Chemicals 34,000 BASF AG 6,821,542 7,478,645 0.1
32,000 Bayer AG 7,646,190 8,528,474 0.1
-------------- -------------- ------
14,467,732 16,007,119 0.2
Electronics 22,000 Siemens AG 11,059,372 11,557,517 0.1
Machinery & 36,579 Mannesmann AG 9,993,612 12,063,675 0.1
Equipment
Utilities-- 440,000 Veba Vereinigte Elektriz 16,576,809 18,100,513 0.2
Electric
Total Common Stocks in Germany 70,667,252 75,832,461 0.8
Hong Kong Multi-Industry 1,343,500 Hutchison Whampoa Limited 7,053,220 7,403,066 0.1
Utilities-- 460,300 China Light & Power Co., Ltd. 550,630 2,453,028 0.0
Electric
Total Common Stocks in Hong Kong 7,603,850 9,856,094 0.1
Indonesia Paper & Pulp 2,060,000 ++++Asia Pacific Resources International
Holdings Ltd. (USD) 15,467,500 14,935,000 0.2
Total Common Stocks in Indonesia 15,467,500 14,935,000 0.2
Ireland Building & 689,200 CRH PLC 2,349,738 4,560,398 0.1
Construction
Packaging & 1,179,300 Jefferson Smurfit Group PLC 3,583,738 3,174,897 0.0
Containers
Total Common Stocks in Ireland 5,933,476 7,735,295 0.1
Italy Banking 1,591,400 Istituto Mobiliare Italiano S.p.A.
(Ordinary) 8,921,238 8,710,547 0.1
Building & 1,922,200 ++++Filippo Fochi S.p.A. 6,101,165 603,972 0.0
Construction
Multi-Industry 9,117,595 ++++Compagnie Industriali Riunite
S.p.A. (CIR) 7,816,550 5,746,841 0.1
Telecommunications 3,000,000 Societa Finanziaria Telefonica S.p.A.
(STET) 4,365,656 8,511,909 0.1
8,666,863 Societa Finanziaria Telefonica S.p.A.
(STET) RISP 16,268,796 18,926,255 0.2
3,958,000 ++++Societa Italiana Esercizio Telecom
S.p.A. (S.I.P.) 1,927,558 6,019,204 0.1
3,958,000 Telecom Italia Mobile 1,395,818 6,653,459 0.1
-------------- -------------- ------
23,957,828 40,110,827 0.5
Total Common Stocks in Italy 46,796,781 55,172,187 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
61
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Shares Value Percent of
COUNTRY Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Japan Automobiles & 2,042,000 Suzuki Motor Corp. $ 18,995,725 $ 20,620,196 0.2%
Equipment
Beverage 1,017,000 Chukyo Coca-Cola Bottling Co., Ltd. 12,207,036 9,870,882 0.1
565,000 Hokkaido Coca-Cola Bottling Co., Ltd. 7,764,597 6,924,020 0.1
690,000 Kinki Coca-Cola Bottling Co., Ltd. 10,868,372 8,320,588 0.1
1,041,000 Mikuni Coca-Cola Bottling Co., Ltd. 14,998,840 12,757,353 0.2
904,000 Sanyo Coca-Cola Bottling Co., Ltd. 13,028,710 12,230,588 0.1
-------------- -------------- ------
58,867,555 50,103,431 0.6
Capital Goods 3,808,000 Mitsubishi Heavy Industries, Ltd. 23,136,107 29,456,000 0.3
Electrical 453,000 Chudenko Corp. 14,271,558 16,565,588 0.2
Construction 650,000 Kinden Corporation 13,009,801 11,151,961 0.1
31,000 Taihei Dengyo Kaisha Ltd. 638,911 516,667 0.0
-------------- -------------- ------
27,920,270 28,234,216 0.3
Electrical 578,000 Murata Manufacturing Co., Ltd. 18,778,882 20,343,333 0.2
Equipment 1,360,000 Sumitomo Electric Industries 15,481,185 15,733,333 0.2
-------------- -------------- ------
34,260,067 36,076,666 0.4
Insurance 2,345,000 Dai-Tokyo Fire & Marine Insurance
Co., Ltd. 15,209,869 15,104,559 0.2
665,000 Fuji Fire & Marine Insurance
Co., Ltd. 3,727,641 3,233,725 0.0
2,384,000 Koa Fire & Marine Insurance
Co., Ltd. 13,551,678 13,065,255 0.2
620,000 Mitsui Marine & Fire Insurance
Co., Ltd. 5,004,638 3,738,235 0.0
1,669,000 Nichido Fire & Marine Insurance
Co., Ltd. 10,892,520 12,517,500 0.2
1,351,000 Nippon Fire & Marine Insurance
Co., Ltd. 6,970,280 7,284,804 0.1
2,408,000 Sumitomo Marine & Fire Insurance
Co., Ltd. 18,939,904 17,233,725 0.2
2,075,000 Tokio Marine & Fire Insurance
Co., Ltd. 22,188,264 21,360,294 0.3
1,130,000 Yasuda Fire & Marine Insurance
Co., Ltd. 8,101,705 6,868,627 0.1
-------------- -------------- ------
104,586,499 100,406,724 1.3
Office Equipment 1,407,000 Canon, Inc. 19,624,604 24,139,706 0.3
Packaging & 901,000 Toyo Seikan Kaisha, Ltd. 23,045,380 25,881,667 0.3
Containers
Pharmaceuticals 1,061,000 Sankyo Pharmaceuticals Co., Ltd. 23,391,365 23,404,412 0.3
384,000 Taisho Pharmaceuticals Co. 7,984,458 6,964,706 0.1
-------------- -------------- ------
31,375,823 30,369,118 0.4
Restaurants 324,000 Mos Food Services, Inc. 8,807,909 8,131,765 0.1
270,000 ++++Ohsho Food Service Corp. 6,049,787 5,267,647 0.1
-------------- -------------- ------
14,857,696 13,399,412 0.2
Retail Stores 448,000 Ito Yokado Co., Ltd. 20,618,869 24,552,157 0.3
100,000 Sangetsu Co., Ltd. 3,160,832 2,274,510 0.0
-------------- -------------- ------
23,779,701 26,826,667 0.3
Steel 250,000 Maruichi Steel Tube Ltd. 4,805,476 4,583,333 0.1
Total Common Stocks in Japan 385,254,903 390,097,136 4.7
Mexico Foods 600,000 Grupo Industrial Maseca (ADR)++ (USD) 7,107,853 5,775,000 0.1
Total Common Stocks in Mexico 7,107,853 5,775,000 0.1
Netherlands Airlines 253,060 KLM Royal Dutch Airlines N.V. 6,265,070 8,370,001 0.1
Banking 897,150 ABN AMRO Holdings N.V. 29,821,445 37,760,948 0.4
</TABLE>
62
<PAGE>
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
Chemicals 39,650 Akzo N.V. 4,293,427 4,523,302 0.1
218,208 European Vinyls Corp. International
N.V. 9,502,443 6,857,095 0.1
-------------- -------------- ------
13,795,870 11,380,397 0.2
Electronics 608,500 Philips Electronics N.V. 20,703,210 23,564,309 0.3
Insurance 325,000 Aegon N.V. 7,013,035 12,358,748 0.1
346,700 ++++Amev N.V. 13,640,015 21,811,814 0.3
800,965 Internationale Nederlanden Groep N.V. 30,066,279 47,848,404 0.6
-------------- -------------- ------
50,719,329 82,018,966 1.0
Miscellaneous-- 10,000 ++++Nijverdal Ten Cate N.V. 501,699 447,562 0.0
Manufacturing
Paper & Forest 229,920 ++++Koninklijke KNP (Warrants) (a) 793,687 68,602 0.0
Products
Telecommunications 97,000 ++++Koninklijke PTT Nederland N.V. 3,443,046 3,417,661 0.0
Total Common Stocks in the Netherlands 126,043,356 167,028,446 2.0
Norway Energy & Petroleum 193,100 Norsk Hydro A.S. 8,087,966 7,704,118 0.1
Total Common Stocks in Norway 8,087,966 7,704,118 0.1
Singapore Paper & Pulp 1,715,000 ++++Asia Pulp & Paper Company Ltd. (ADR)++
(USD) 19,722,500 17,578,750 0.2
Total Common Stocks in Singapore 19,722,500 17,578,750 0.2
Spain Banking 326,000 Argentaria S.A. 12,974,203 11,521,607 0.1
587,481 Banco de Santander S.A. (Ordinary) 21,323,786 25,628,527 0.3
61,775 Banco Popular Espanol S.A. 6,511,311 9,822,200 0.1
83,000 ++++Bank Intercontinental S.A. 4,607,612 7,200,820 0.1
-------------- -------------- ------
45,416,912 54,173,154 0.6
Energy & 618,500 Repsol S.A. 18,566,656 18,486,531 0.2
Petroleum 212,500 Repsol S.A. (ADR)++ (USD) 6,126,375 6,295,313 0.1
-------------- -------------- ------
24,693,031 24,781,844 0.3
Insurance 30,000 Mapfre S.A. 1,130,028 1,537,515 0.0
Manufacturing 192,000 ++++Grupo Fosforera Espanola S.A. 1,670,398 928,905 0.0
Multi-Industry 45,750 Corporacion Financiera Alba S.A. 1,611,658 2,532,288 0.0
Real Estate 236,708 Metrovacesa 5,888,465 7,220,613 0.1
Toll Roads 154,000 Autopista Espana (ACESA) 1,363,246 1,439,606 0.0
Utilities-- 100,000 Empresa Nacional de Electricidad S.A. 3,759,956 4,977,450 0.1
Electric 591,800 Iberdrola I S.A. 3,310,030 4,464,584 0.1
-------------- -------------- ------
7,069,986 9,442,034 0.2
Total Common Stocks in Spain 88,843,724 102,055,959 1.2
Sweden Appliances 232,464 Electrolux AB 'B' Free 11,264,721 9,951,280 0.1
Automotive & 797,500 Volvo AB 16,028,098 17,971,188 0.2
Equipment
Banking 965,750 Stadshypotek AB 14,244,129 17,541,093 0.2
Electrical Equipment 120,000 ASEA AB 'B' Free 6,532,086 11,847,520 0.1
Industrial 200,000 SKF AB 'A' 3,713,376 3,723,076 0.0
458,500 SKF AB 'B' Free 8,471,575 8,707,927 0.1
-------------- -------------- ------
12,184,951 12,431,003 0.1
Multi-Industry 150,000 Svedala Industry AB Free 2,403,461 3,809,746 0.0
Paper & Forest 209,850 ++++Mo och Domsjo AB 12,519,310 10,691,301 0.1
Products 500,000 Stora Kopparbergs Bergslags AB 6,400,698 6,066,955 0.1
-------------- -------------- ------
18,920,008 16,758,256 0.2
Total Common Stocks in Sweden 81,577,454 90,310,086 0.9
</TABLE>
63
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Shares Value Percent of
COUNTRY Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Switzerland Chemicals 33,040 Ciba-Geigy AG (Registered) $ 16,539,906 $ 28,655,656 0.3%
Electrical 9,335 BBC Brown Boveri & Cie (Bearer) 6,132,164 10,847,181 0.1
Equipment
Financial 162,000 CS Holdings AG 15,391,757 16,580,201 0.2
Services
Pharmaceuticals 1,260 Roche Holdings AG 8,104,008 9,171,519 0.1
Total Common Stocks in Switzerland 46,167,835 65,254,557 0.7
United Automotive Parts 1,036,000 Turner & Newall PLC 2,948,994 2,351,153 0.0
Kingdom
Conglomerates 50,000 Hanson PLC Sponsored (ADR)++ (USD) 947,577 775,000 0.0
Environmental 940,000 ++++Waste Management International PLC
(ADR)++ (USD) 9,206,375 9,517,500 0.1
Food & Beverage 1,360,600 Grand Metropolitan PLC 8,858,753 9,424,835 0.1
35,000 Grand Metropolitan PLC (ADR)++ (USD) 1,031,100 962,500 0.0
230,300 Tate & Lyle PLC 1,555,052 1,635,345 0.0
290,300 Unilever 4,372,100 5,642,455 0.1
-------------- -------------- ------
15,817,005 17,665,135 0.2
Industrial--Other 1,148,000 Tomkins PLC 3,813,189 4,529,827 0.1
Insurance 339,800 Prudential Corp. PLC 1,639,768 2,125,392 0.0
Oil/Integrated-- 518,100 British Petroleum Company PLC (The) 3,783,528 3,814,191 0.0
International
Pharmaceuticals 500,000 SmithKline Beecham Corp. PLC
(ADR)++ (USD) 13,633,894 25,937,500 0.3
300,000 Zeneca Group PLC 2,825,141 5,591,393 0.1
-------------- -------------- ------
16,459,035 31,528,893 0.4
Steel 1,500,000 British Steel PLC 4,081,599 3,872,698 0.0
Telecommunications 84,600 Vodafone Group PLC 307,947 349,205 0.0
Total Common Stocks in the
United Kingdom 59,005,017 76,528,994 0.8
United States Apparel 155,000 Authentic Fitness Corp. 2,681,739 3,177,500 0.0
860,000 ++++Fruit of the Loom, Inc. 23,555,786 14,942,500 0.2
373,900 Liz Claiborne, Inc. 8,022,626 10,609,413 0.1
-------------- -------------- ------
34,260,151 28,729,413 0.3
Automobiles 350,000 General Motors Corp. 13,282,191 15,312,500 0.2
Automotive 438,800 ++++Collins & Aikman Group Inc. 3,416,149 3,510,400 0.0
284,900 Snap-On, Inc. 9,013,519 12,072,638 0.1
-------------- -------------- ------
12,429,668 15,583,038 0.1
Banking 300,000 Bank of New York 7,966,376 12,600,000 0.2
319,000 Bankers Trust Co. 7,620,125 7,935,125 0.1
129,500 Banknorth Group, Inc. 1,865,422 4,111,625 0.1
200,000 Barnett Banks Inc. 8,134,897 11,050,000 0.1
400,000 California Federal Bank 3,469,896 5,900,000 0.1
396,700 Charter One Financial, Inc. 7,456,798 11,206,775 0.1
800,000 Chemical Banking Corp. (c) 29,541,409 45,500,000 0.5
1,017,100 City National Corp. 7,293,719 13,476,575 0.2
1,000,000 Comerica Inc. 26,977,513 33,625,000 0.4
400,000 CoreStates Financial Corp. 10,816,733 14,550,000 0.2
707,800 First of America Bank 25,666,256 30,169,975 0.4
1,250,000 First Commerce Corp. 31,823,468 38,437,500 0.5
1,406,102 KeyCorp 41,572,512 47,455,943 0.6
</TABLE>
64
<PAGE>
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
707,900 Mellon Bank Corp. 25,343,868 35,483,488 0.4
450,000 NBD Bancorp, Inc. 13,768,555 17,100,000 0.2
642,900 Onbancorp, Inc. 17,898,523 18,804,825 0.2
368,000 Oriental Bank and Trust+++++ 5,050,248 5,428,000 0.1
45,000 Premier Bancorp. 708,437 922,500 0.0
1,100,000 Republic New York Corp. 49,526,909 64,487,500 0.8
71,800 Roosevelt Financial Group, Inc. 1,115,413 1,139,825 0.0
450,000 Southern National Corp. 8,670,728 11,587,500 0.1
-------------- -------------- ------
332,287,805 430,972,156 5.3
Communications 185,700 Comsat Corp. 4,308,767 3,690,788 0.0
104,500 GTE Corp. 3,514,166 4,310,625 0.1
-------------- -------------- ------
7,822,933 8,001,413 0.1
Computers 100,000 Boole & Babbage, Inc. 1,329,492 3,575,000 0.0
500,000 Borland International Corp. 5,038,547 6,750,000 0.1
100,000 International Business Machines Corp. 4,312,572 9,725,000 0.1
1,100,000 ++++Unisys Corp. 12,291,367 6,187,500 0.1
-------------- -------------- ------
22,971,978 26,237,500 0.3
Conglomerates 125,000 ++++ADT Limited 1,434,405 1,750,000 0.0
Construction & 153,800 Centex Corp. 3,880,118 5,036,950 0.1
Housing 500,000 ++++K. Hovnanian Enterprises, Inc.
(Class A) 4,920,209 3,437,500 0.0
-------------- -------------- ------
8,800,327 8,474,450 0.1
Construction 700,000 TJ International, Inc. 12,547,379 12,075,000 0.1
Products
Energy & Petroleum 163,900 Ashland Coal, Inc. 4,132,919 3,892,625 0.0
49,500 Cabot Oil & Gas Corp. (Class A) 529,030 662,063 0.0
200,000 Gerrity Oil & Gas Corp. 2,532,464 725,000 0.0
130,000 Helmerich & Payne, Inc. (c) 2,773,423 3,363,750 0.0
46,400 Mitchell Energy Development Corp.
(Class A) 675,717 765,600 0.0
174,350 Mitchell Energy Development Corp.
(Class B) 2,755,451 2,833,188 0.0
50,000 Murphy Oil Corp. 1,899,720 1,893,750 0.0
106,100 ++++Nuevo Energy Co. 2,048,791 2,347,463 0.0
1,500,000 Occidental Petroleum Corp. 28,058,743 32,250,000 0.4
61,200 Pennzoil Co. 3,775,844 2,310,300 0.0
235,828 Plains Resources, Inc.+++ 1,381,815 1,621,318 0.0
1,094,247 Santa Fe Energy Resources, Inc. 10,119,883 9,711,442 0.1
211,514 ++++Transamerica Refining Corp.
(Warrants) (a) 531,220 740,299 0.0
1,170,600 ++++TransTexas Gas Corp. 14,138,400 18,144,300 0.2
600,000 USX-Marathon Group 10,542,976 10,650,000 0.1
138,800 Unocal Corp. 3,272,336 3,643,500 0.0
-------------- -------------- ------
89,168,732 95,554,598 0.8
Financial Services 737,800 Student Loan Marketing Association 31,844,221 43,437,975 0.5
</TABLE>
65
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Shares Value Percent of
COUNTRY Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
United States Food & Tobacco 300,000 Philip Morris Companies, Inc. $ 14,792,859 $ 25,350,000 0.3%
(concluded) 212,462 RJR Nabisco, Inc. 5,842,716 6,533,207 0.1
-------------- -------------- ------
20,635,575 31,883,207 0.4
Healthcare 360,000 ++++Advocat, Inc.+++++ 3,422,500 3,870,000 0.0
Services 600,000 Baxter International, Inc. 12,857,880 23,175,000 0.3
400,000 ++++Beverly Enterprises, Inc. 4,291,401 4,700,000 0.1
546,500 US Surgical Corp. 11,871,438 13,389,250 0.2
-------------- -------------- ------
32,443,219 45,134,250 0.6
Index-Related USD 40,800 Republic of Austria Stock Index
Growth Notes due 8/15/1996 432,941 683,400 0.0
Industrial 200,000 ++++American Standard, Inc. 6,011,000 5,350,000 0.1
915,000 BW/IP Holdings, Inc. 15,816,387 14,868,750 0.2
179,802 Cooper Industries, Inc. 6,534,892 6,068,318 0.1
-------------- -------------- ------
28,362,279 26,287,068 0.4
Insurance 913,400 Ace, Ltd. 20,951,269 31,055,600 0.4
200,000 Aetna Life & Casualty Co. 10,524,804 14,075,000 0.2
150,000 Alexander & Alexander Services, Inc. 2,461,336 3,356,250 0.0
510,000 American General Corp. 13,187,448 16,766,250 0.2
571,000 Horace Mann Educators, Inc. 13,654,588 15,202,875 0.2
640,200 Lincoln National Corp. 23,466,317 28,568,925 0.3
680,000 PartnerRe Holdings, Ltd. 13,404,414 18,020,000 0.2
-------------- -------------- ------
97,650,176 127,044,900 1.5
Metals 140,000 Aluminum Co. of America 4,698,667 7,140,000 0.1
200,000 Nucor Corporation 8,824,828 9,625,000 0.1
132,800 Reynolds Metals Co. 5,801,771 6,689,800 0.1
-------------- -------------- ------
19,325,266 23,454,800 0.3
Multi-Industry 90,000 Loews Corp. 7,934,294 13,196,250 0.2
Natural Resources 210,519 Freeport-McMoRan Copper & Gold Inc.
(Class B) 3,665,657 4,789,307 0.1
Oil Services 150,000 Arethusa (Offshore) Ltd. 1,610,522 2,906,250 0.0
149,800 ++++Atwood Oceanics, Inc. 1,238,663 2,902,375 0.0
3,614,375 Noble Drilling Corp. 25,124,880 25,300,625 0.3
-------------- -------------- ------
27,974,065 31,109,250 0.3
Pharmaceuticals/ 424,300 ++++Alteon Inc. 3,930,388 3,871,738 0.0
Biotechnology 435,000 ++++Applied Immune Sciences, Inc. 6,160,143 5,002,500 0.1
600,000 Bristol-Myers Squibb Co. 33,254,124 45,750,000 0.5
450,000 Merck & Co., Inc. 15,115,266 25,875,000 0.3
-------------- -------------- ------
58,459,921 80,499,238 0.9
Pollution Control 646,900 WMX Technologies, Inc. 16,148,443 18,194,063 0.2
Publishing 175,000 Gannett Co., Inc. 8,375,486 9,515,625 0.1
301,500 New York Times Co. (Class A) 7,158,778 8,366,625 0.1
140,138 Times Mirror Co. (Class A) 3,016,629 4,064,002 0.1
-------------- -------------- ------
18,550,893 21,946,252 0.3
Real Estate 44,200 CBL & Associates Properties, Inc. 911,625 939,250 0.0
Investment Trusts 504,600 Carr Realty Corp. 10,031,714 9,587,400 0.1
500,000 First Union Real Estate Investments 3,764,840 3,562,500 0.0
</TABLE>
66
<PAGE>
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
661,300 Mid-America Realty Investments 6,616,640 5,207,738 0.1
100,000 Mid-Atlantic Realty Trust Co. 917,500 825,000 0.0
830,000 Prime Residential, Inc. 13,262,250 14,525,000 0.2
400,000 Taubman Centers, Inc. 3,807,537 3,850,000 0.0
-------------- -------------- ------
39,312,106 38,496,888 0.4
Restaurants 300,000 Buffets, Inc. 3,157,818 3,750,000 0.0
Retail Stores 608,500 Baker (J.), Inc. 10,187,765 3,498,875 0.0
643,200 ++++Burlington Coat Factory Warehouse 7,035,315 7,155,600 0.1
516,900 ++++Buttrey Food & Drug Stores Co.+++++ 4,084,486 3,812,138 0.0
105,000 Dayton-Hudson Corp. 6,995,242 7,218,750 0.1
1,110,000 ++++Filene's Basement Corp.+++++ 10,092,619 3,607,500 0.0
1,373,500 ++++Payless Cashways, Inc. 17,027,625 7,897,625 0.1
936,600 ++++The Vons Companies, Inc. 15,500,535 23,766,225 0.3
-------------- -------------- ------
70,923,587 56,956,713 0.6
Savings Banks 257,500 Bankers Corp. 1,552,137 4,345,313 0.1
320,000 ++++Brooklyn Bancorp, Inc. (e) 8,076,252 12,600,000 0.2
1,550,768 ++++Dime Bancorp, Inc. 10,588,158 16,476,910 0.2
196,400 Downey Savings & Loan Association 2,896,670 4,001,650 0.1
1,700,553 Glendale Federal Savings Bank 14,904,352 27,208,848 0.3
770,194 Glendale Federal Savings Bank
(Warrants) (a) -- 5,295,084 0.1
-------------- -------------- ------
38,017,569 69,927,805 1.0
Specialty Retailing 400,000 Sotheby's Holdings, Inc. (Class A) 4,879,559 5,550,000 0.1
830,000 ++++Toys 'R' Us, Inc. 20,640,978 18,156,250 0.2
-------------- -------------- ------
25,520,537 23,706,250 0.3
Telecommunications 123,057 ++++Cox Communication, Inc. 1,820,315 2,307,319 0.0
Textiles 2,825,200 ++++Burlington Industries, Inc.+++++ 37,451,653 31,430,350 0.4
Utilities-- 1,250,000 Allegheny Power System, Inc. 27,315,551 32,968,750 0.4
Electric & Gas 125,000 CMS Energy Corp. 2,290,025 3,453,125 0.0
2,101,000 Centerior Energy Corp. 28,664,979 21,010,000 0.3
100,000 Consolidated Edison Company, Inc. 2,923,495 3,037,500 0.0
1,780,000 Entergy Corp. 47,516,856 50,730,000 0.6
475,000 FPL Group, Inc. 14,363,265 19,890,625 0.2
300,000 General Public Utilities Corp. 8,663,891 9,375,000 0.1
40,446 ++++Great Bay Power Corp. 2,549,753 313,456 0.0
1,500,000 Niagara Mohawk Power Corp. 23,789,306 16,125,000 0.2
844,600 Texas Utilities Co. 26,942,999 31,039,050 0.4
1,148,800 Unicom Corporation 27,549,620 37,623,200 0.4
-------------- -------------- ------
212,569,740 225,565,706 2.6
Utilities--Gas 115,650 Atmos Energy Corp. 1,445,257 2,110,612 0.0
Total Common Stocks in the
United States 1,328,651,101 1,564,601,671 18.3
Total Investments in Common Stocks 2,517,484,717 2,878,487,712 33.2
</TABLE>
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<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Shares Value Percent of
COUNTRY Industries Held Equity Closed-End Funds Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Austria Financial Services 320,000 Austria Fund (USD) $ 2,642,432 $ 2,520,000 0.0%
Total Equity Closed-End Funds
in Austria 2,642,432 2,520,000 0.0
Ireland Financial Services 150,000 Irish Investment Fund, Inc. (USD) 1,086,041 1,687,500 0.0
Total Equity Closed-End Funds
in Ireland 1,086,041 1,687,500 0.0
Italy Financial Services 150,000 Italy Fund (USD) 1,198,520 1,125,000 0.0
Total Equity Closed-End Funds
in Italy 1,198,520 1,125,000 0.0
Portugal Financial Services 39,500 ++++Capital Portugal Fund 2,052,116 3,532,470 0.0
25,600 Jakarta Growth Fund (USD) 158,080 227,200 0.0
40,000 Portugal Fund (USD) 360,368 465,000 0.0
-------------- -------------- ------
2,570,564 4,224,670 0.0
Total Equity Closed-End Funds
in Portugal 2,570,564 4,224,670 0.0
Spain Financial Services 300,100 Growth Fund of Spain, Inc. (USD) 2,630,827 3,151,050 0.0
Total Equity Closed-End Funds
in Spain 2,630,827 3,151,050 0.0
United States Financial Services 166,666 European Warrant Fund 1,363,723 1,187,495 0.0
Total Equity Closed-End Funds
in the United States 1,363,723 1,187,495 0.0
Total Investments in Equity Closed-
End Funds 11,492,107 13,895,715 0.0
Preferred Stocks
Germany Multi-Industry 45,000 R.W.E. AG 8,725,424 12,781,179 0.2
Total Preferred Stocks in Germany 8,725,424 12,781,179 0.2
New Zealand Finance 5,585,700 Brierly Investments, Ltd.
(9% Convertible) 3,515,477 3,980,884 0.1
Total Preferred Stocks in New Zealand 3,515,477 3,980,884 0.1
Norway Financial Services 175,000 A/S Eksportfinans (8.70%) (USD) 4,377,500 4,571,875 0.1
Total Preferred Stocks in Norway 4,377,500 4,571,875 0.1
Spain Banking 225,000 Santander Overseas Bank (8%, Series D)
(USD) 5,463,250 5,568,750 0.1
Total Preferred Stocks in Spain 5,463,250 5,568,750 0.1
United Engineering 750,000 AMEC PLC (6.50% Convertible) 968,501 747,259 0.0
Kingdom
Retail Stores 545,000 ++++Signet Group (Convertible)
(ADR)++ (USD) 2,194,907 4,223,750 0.1
Total Preferred Stocks in the
United Kingdom 3,163,408 4,971,009 0.1
United States Automobiles & 20,000 Ford Motor Co. (8.40% Convertible,
Equipment Series A) 1,000,000 1,880,000 0.0
Banking 55,000 California Federal Bank (10.625%) 5,500,000 6,022,500 0.1
100,000 First Nationwide Bank (11.50%) 10,000,000 11,400,000 0.1
100,000 Fourth Financial Corp. (Convertible,
Class A) 2,500,000 3,200,000 0.0
</TABLE>
68
<PAGE>
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
130,300 Marine Midland Banks, Inc. (Adjustable
Rate, Series A) 5,219,925 5,847,212 0.1
100,000 Onbancorp, Inc. (6.75% Convertible,
Series B) 2,668,750 2,650,000 0.0
-------------- -------------- ------
25,888,675 29,119,712 0.3
Energy & 150,000 ++++Grant Tensor Corp. (9.75% Convertible) 1,853,375 2,250,000 0.0
Petroleum 64,219 Santa Fe Energy Resources, Inc. (7%) 954,075 1,163,969 0.0
460,000 Santa Fe Energy Resources, Inc.
(Convertible, Class A) 4,082,500 4,485,000 0.1
-------------- -------------- ------
6,889,950 7,898,969 0.1
Health Care 1,080,000 US Surgical Corp. (Convertible) 24,354,000 31,185,000 0.4
Homebuilding & 165,800 Beazer Homes USA, Inc. (Exchangable,
Construction Series A) 4,145,000 4,621,675 0.1
Natural Resources 85,000 Alumax Inc. (Convertible, Series A) 7,240,312 10,561,250 0.1
150,000 Cyprus Amax Minerals Co. (Convertible,
Series A) 9,188,313 9,000,000 0.1
348,700 Freeport-McMoRan Copper & Gold, Inc.
(Convertible) 7,918,834 8,325,212 0.1
219,000 Freeport-McMoRan Inc.
(Convertible--Gold) 7,703,330 7,336,500 0.1
-------------- -------------- ------
32,050,789 35,222,962 0.4
Oil Service 447,200 Noble Drilling Corp. (Convertible) 10,745,382 10,732,800 0.1
Paper & Forest 200,000 Boise Cascade Corp. (Convertible,
Products Series G) 4,225,000 6,100,000 0.1
288,200 James River Corp. of Virginia
(9% Convertible, Series P) 4,971,450 8,790,100 0.1
-------------- -------------- ------
9,196,450 14,890,100 0.2
Publishing 59,862 Times Mirror Company (Convertible,
Series B) 1,340,838 1,444,171 0.0
Real Estate 728,000 Catellus Development Corp.
(7.25% Convertible Exchangeable,
Series B) 33,521,250 27,664,000 0.3
Real Estate 666,000 National Health Investors, Inc.
Investment (8.50% Convertible) 16,650,000 18,065,250 0.2
Trusts 585,000 Prime Retail, Inc. (8.50% Convertible,
Series B) 10,456,875 10,749,375 0.1
835,500 Prime Retail, Inc. (10.50%) 19,316,161 16,292,250 0.2
-------------- -------------- ------
46,423,036 45,106,875 0.5
Savings Banks 619,900 Glendale Federal Savings Bank
(8.75% Convertible, Series E) 15,070,337 26,113,287 0.3
Total Preferred Stocks in the
United States 210,625,707 235,879,551 2.7
Total Investments in Preferred Stocks 235,870,766 267,753,248 3.3
</TABLE>
69
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Currency Face Value Percent of
COUNTRY Industries Denomination Amount Fixed-Income Securities Cost (Note 1a) Net Assets
<S> <S> <S> <C> <S> <C> <C> <C>
Argentina Banking USD 22,000,000 Banco de Galicia y Buenos Aires S.A.
de C.V., 9% due 11/01/2003 $ 21,506,460 $ 16,610,000 0.2%
Banco Rio de la Plata:
USD 47,500,000 (Class 3), 8.50% due 7/15/1998 47,908,125 44,531,250 0.5
USD 56,000,000 8.75% due 12/15/2003 47,165,825 42,910,000 0.5
-------------- -------------- ------
116,580,410 104,051,250 1.2
Government Republic of Argentina:
Obliga- USD 145,000,000 Discount Notes, 6.875% due
tions 3/31/2023 105,765,218 81,743,750 1.0
USD 165,000,000 Floating Rate Bonds, Series L,
6.812% due 3/31/2005 86,090,000 97,968,750 1.2
USD 22,500,000 Global Bonds, 8.375% due 12/20/2003 16,943,750 16,368,750 0.2
USD 324,000,000 Par Bonds, 5% due 3/31/2023 163,326,307 154,305,000 1.8
-------------- -------------- ------
372,125,275 350,386,250 4.2
Total Fixed-Income Securities in
Argentina 488,705,685 454,437,500 5.4
Australia Building & USD 26,410,000 Lend Lease Finance International,
Construction 4.75% due 6/01/2003 28,765,793 30,899,700 0.4
Food USD 14,000,000 Burns, Philp & Company Ltd.,
Processing Convertible Bonds, 5.50% due 4/30/2004 11,976,950 11,900,000 0.1
Total Fixed-Income Securities
in Australia 40,742,743 42,799,700 0.5
Brazil Government USD 35,000,000 Brazil Exit Bonds, 6% due 9/15/2013 19,572,768 17,762,500 0.2
Obligations Republic of Brazil:
USD 37,050,000 6.687% due 1/01/2001 (d) 28,959,563 31,677,750 0.4
USD 5,000,000 Discount Notes, 6.812% due 4/15/2024 3,100,000 2,968,750 0.0
USD 200,000,000 Par Z-L Step Up, 4.25% due 4/15/2024 77,492,950 97,000,000 1.1
-------------- -------------- ------
129,125,281 149,409,000 1.7
Media/ USD 15,000,000 Abril S.A., 12% due 10/25/2003 15,030,000 14,981,250 0.2
Publishing
Total Fixed-Income Securities
in Brazil 144,155,281 164,390,250 1.9
Canada Cable CAD 7,545,000 Rogers Cablesystem Inc., 9.65% due
1/15/2014 4,397,424 4,850,960 0.1
Hotel/ USD 23,500,000 Four Seasons Hotel, Inc., 9.125% due
Leisure 7/01/2000+++ 23,401,875 22,971,250 0.3
Industria USD 77,000,000 International Semi-Tech Micro-
electronics Inc., 11.50% due
8/15/2003 (b) 45,133,076 39,847,500 0.5
Oil & Mark Resources Inc., Convertible
Related Bonds:
CAD 7,250,000 7% due 4/15/2002 5,052,564 4,701,826 0.1
CAD 1,250,000 8% due 11/30/2004 943,556 866,567 0.0
CAD 14,500,000 Talisman Energy Inc. (Ex-Warrants),
8.50% due 12/01/2000 11,040,982 10,754,752 0.1
-------------- -------------- ------
17,037,102 16,323,145 0.2
Paper & CAD 2,000,000 Macmillan Bloedel Limited,
Forest Convertible Bonds, 5% due 5/01/2007 1,024,416 1,177,786 0.0
Products
Real Olympia & York Inc.+++:
Estate CAD 57,194,000 Series 1, 10.70% due 11/04/1995 29,626,733 29,097,954 0.3
CAD 34,000,000 Series 2, 11% due 11/04/1998 18,060,242 17,297,801 0.2
-------------- -------------- ------
47,686,975 46,395,755 0.5
Resources CAD 52,000,000 Sherritt, Inc., 11% due 3/31/2004 37,605,634 39,440,924 0.5
</TABLE>
70
<PAGE>
<TABLE>
<S> <S> <S> <C> <S> <C> <C> <C>
USD 32,500,000 Sifto Canada, Inc., 8.50% due
7/15/2000 32,375,188 30,468,750 0.4
-------------- -------------- ------
69,980,822 69,909,674 0.9
Total Fixed-Income Securities
in Canada 208,661,690 201,476,070 2.5
France Auto- FRF 5,500 Peugeot, Convertible Bonds, 2% due
mobiles 1/01/2001 992,341 1,088,852 0.0
Banking FRF 58,000 Societe Generale, Convertible Bonds
(New), 3.50% due 1/01/2000 7,499,838 8,632,613 0.1
Government ECU 2,000,000 Credit Local de France, 8.683% due
Obligations 10/16/2001 (b) 1,696,399 1,682,925 0.0
Government of France:
FRF 285,000,000 7.75% due 10/25/2005 58,508,973 60,156,618 0.7
FRF 832,000,000 8.50% due 10/25/2019 160,403,364 180,912,519 2.1
ECU 151,000,000 8.25% due 4/25/2022 173,488,921 195,134,057 2.3
-------------- -------------- ------
394,097,657 437,886,119 5.1
Industrial FRF 30,000 Alcatel Alsthom, Convertible Bonds,
2.50% due 1/01/2004 3,926,887 4,627,843 0.1
Insurance FRF 35,500 Finaxa, Convertible Bonds, 3% due
1/01/2001 9,060,172 10,436,687 0.1
Multi- FRF 8,713 Compagnie Generale des Eaux,
Industry Convertible Bonds, 6% due 1/01/1998 4,859,722 5,743,855 0.1
Total Fixed-Income Securities
in France 420,436,617 468,415,969 5.5
Germany Banking DEM 2,310,000 Commerzbank AG, Floating Rate
Convertible Bonds, 2% due 6/15/2001 1,556,456 2,311,973 0.0
Government DEM 275,000,000 Bundesrepublic Deutscheland, 7.75% due
Obligations 10/01/2004 200,300,000 209,656,179 2.5
DEM 137,000,000 Treuhandanstalt, 7.50% due 9/09/2004 88,369,351 104,066,558 1.2
-------------- -------------- ------
288,669,351 313,722,737 3.7
Government DEM 64,000,000 Baden-Wuerttemberg, 6.20% due
Obligations 11/22/2013 37,148,769 44,282,460 0.5
--Regional DEM 57,500,000 Freie Hansestadt Hamburg, 6.08% due
11/29/2018 33,152,404 39,539,436 0.5
DEM 168,000,000 Land Hessen, 6% due 11/29/2013 96,916,825 114,626,993 1.3
DEM 110,000,000 Mecklenberg Vorpommern, 6.15% due
6/16/2023 61,012,437 73,291,572 0.9
DEM 134,950,000 Nordrhein-Westfalen, 6.125% due
12/21/2018 77,420,913 92,797,338 1.1
Rheinland-Pfalz:
DEM 33,000,000 5.75% due 2/24/2014 18,324,663 22,046,199 0.3
DEM 64,000,000 6.08% due 11/29/2018 36,935,547 43,781,321 0.5
DEM 47,000,000 Sachsen-Anhalt, 6% due 1/10/2014 26,915,615 31,783,884 0.4
-------------- -------------- ------
387,827,173 462,149,203 5.5
Industrial USD 1,000,000 Siemens Corp. (with Warrants), 8% due
6/24/2002 (a) 1,318,750 1,360,200 0.0
Utilities USD 5,875,000 Veba International Finance (Warrants),
--Electric 6% due 4/06/2000 (a) 7,083,300 10,535,050 0.1
Total Fixed-Income Securities
in Germany 686,455,030 790,079,163 9.3
Hong Kong Industrial USD 11,300,000 Johnson Electric Holdings Ltd.,
Convertible Bonds, 4.50% due 11/05/2000 10,093,905 10,113,500 0.1%
Retail USD 11,500,000 Dairy Farm International Holdings Ltd.
(Preferred), 6.50% due 5/10/2049 9,118,375 8,653,750 0.1
Total Fixed-Income Securities in
Hong Kong 19,212,280 18,767,250 0.2
Indonesia Industrial USD 2,000,000 PT Indorayon, Convertible Bonds,
5.50% due 10/01/2002 2,363,125 2,170,000 0.0
Total Fixed-Income Securities
in Indonesia 2,363,125 2,170,000 0.0
</TABLE>
71
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Currency Face Value Percent of
COUNTRY Industries Denomination Amount Fixed-Income Securities Cost (Note 1a) Net Assets
<S> <S> <S> <C> <S> <C> <C> <C>
Italy Telecom- Softe SA-LUX:
munica- ITL 11,500,000,000 Convertible Bonds, 4.25% due
tions 7/30/1998 $ 7,894,814 $ 8,383,083 0.1%
ITL 16,760,000,000 (Ex-Warrants), 8.75% due 3/24/1997 10,756,360 10,151,001 0.1
Total Fixed-Income Securities in Italy 18,651,174 18,534,084 0.2
Japan Auto- JPY 400,000,000 Toyota Motor Corp., Convertible Bonds,
mobiles 1.20% due 1/28/1998 2,477,431 4,176,471 0.1
& Equipment
Elec- JPY 988,000,000 Matsushita Electric Works, Convertible
tronics Bonds, 2.70% due 5/31/2002 9,691,544 11,061,725 0.1
Insurance JPY 13,000,000 Mitsui Marine & Fire Insurance Co.,
Ltd., 0.70% due 3/31/2003 118,211 124,265 0.0
JPY 8,000,000 Nichido Fire & Marine Insurance Co.,
Ltd., 1% due 3/31/2003 75,240 78,431 0.0
-------------- -------------- ------
193,451 202,696 0.0
Total Fixed-Income Securities
in Japan 12,362,426 15,440,892 0.2
Korea Energy USD 6,250,000 Ssangyong Oil Corp., 3.75% due
12/31/2008 6,681,062 6,531,250 0.1
Total Fixed-Income Securities in Korea 6,681,062 6,531,250 0.1
Mexico Government USD 165,500,000 Banco Nacional (BNCE), 7.25% due
Obligations 2/02/2004 134,186,200 120,401,250 1.4
USD 32,500,000 Petroleos Mexicanos, 8.625% due
12/01/2023+++ 15,772,500 22,343,750 0.3
United Mexican States:
USD 18,583,000 8.50% due 9/15/2002 15,096,445 15,377,432 0.2
USD 85,000,000 Floating Notes, Series A, 6.765% due
12/31/2019 72,678,394 56,843,750 0.7
USD 38,000,000 Floating Notes, Series B, 7.187% due
12/31/2019 32,685,337 25,412,500 0.3
USD 25,000,000 Par Bonds, Series B, 6.25% due
12/31/2019 11,703,858 14,656,250 0.2
United Mexican States, Rights:
USD 83,460,000 (Series A) -- -- 0.0
USD 130,764,000 (Series B) -- -- 0.0
Total Fixed-Income Securities
in Mexico 282,122,734 255,034,932 3.1
New Zealand Utilities NZD 2,000,000 Natural Gas Corp. Holdings, Convertible
--Gas Bonds, 10.50% due 10/14/1997 1,186,318 2,626,402 0.0
Total Fixed-Income Securities in
New Zealand 1,186,318 2,626,402 0.0
Portugal Banking ECU 19,300,000 Banco Commercial Portuguese, Convertible
Bonds, 8.75% due 5/21/2002 26,468,747 26,072,023 0.3
Total Fixed-Income Securities
in Portugal 26,468,747 26,072,023 0.3
Singapore Paper & USD 19,500,000 APP International Finance, 11.75% due
Forest 10/01/2005 19,500,000 19,792,500 0.2
Products
Total Fixed-Income Securities
in Singapore 19,500,000 19,792,500 0.2
South Africa Metals USD 5,000,000 Samancor Ltd., 7% due 6/30/2004 4,793,750 4,825,000 0.1
Total Fixed-Income Securities in
South Africa 4,793,750 4,825,000 0.1
Spain Government ESP 30,275,000,000 Government of Spain, 10% due 2/28/2005 218,935,863 235,919,086 2.8
Obligations
Total Fixed-Income Securities
in Spain 218,935,863 235,919,086 2.8
</TABLE>
72
<PAGE>
<TABLE>
<S> <S> <S> <C> <S> <C> <C> <C>
Sweden Industrial ECU 7,000,000 SKF--AB Lyons, Convertible Bonds,
8.01% due 7/26/2002 (b) 5,450,776 5,344,794 0.1
Multi- ECU 1,000,000 Investor International Placements,
Industry Convertible Bonds, 7.25% due 6/21/2001 1,001,412 1,585,818 0.0
Total Fixed-Income Securities
in Sweden 6,452,188 6,930,612 0.1
Switzerland Chemicals USD 24,945,000 Ciba-Geigy Corp., Convertible Bonds,
6.25% due 3/15/2016+++ 25,632,050 24,945,000 0.3
Industrial CHF 1,401,000 Ciba-Geigy AG, Convertible Bonds,
2% due 8/09/1998 1,178,587 1,949,954 0.0
Newspaper/ CHF 3,020,000 News International PLC, 5.375% due
Publishing 4/30/1996 1,115,703 2,691,195 0.0
Total Fixed-Income Securities in
Switzerland 27,926,340 29,586,149 0.3
Taiwan Metals/ USD 2,220,000 Tung Ho Steel Enterprise, Convertible
Steel Bonds, 4% due 7/26/2001 2,243,700 2,597,400 0.0
Total Fixed-Income Securities
in Taiwan 2,243,700 2,597,400 0.0
United Building GBP 3,250,000 Redland Capital PLC, Convertible Bonds,
Kingdom Materials 7.25% due 1/28/2002 5,382,804 4,780,084 0.1
Energy GBP 29,990,000 Elf Enterprises Finance PLC,
Convertible Bonds, 8.75% due 6/27/2006 48,109,352 46,954,893 0.6
Financial GBP 3,550,000 SG Warburg Group, Convertible Bonds,
Services 6.50% due 8/04/2008 5,416,350 4,772,176 0.1
GBP 11,600,000 TransAtlantic Holdings PLC,
Convertible Bonds, 5.50% due 4/30/2009 14,179,895 14,584,593 0.2
-------------- -------------- ------
19,596,245 19,356,769 0.3
Food & GBP 750,000 Allied Domecq PLC, 6.75% due 7/07/2008 1,119,092 1,147,576 0.0
Beverage
Foods GBP 7,750,000 Tate & Lyle International, Convertible
Bonds, 5.75% due 3/21/2001 10,092,554 10,448,773 0.1
Government GBP 32,000,000 U.K.T.N., Bond, 6.75% due 11/26/2004 47,302,702 46,749,140 0.6
Obligations
Industrial USD 2,000,000 HIH Capital Ltd., Convertible Bonds,
7.50% due 9/25/2006 1,665,000 1,440,000 0.0
USD 1,890,000 HIH Capital Ltd., Convertible Bonds
(Bearer), 7.50% due 9/25/2006+++ 1,005,400 1,379,700 0.0
-------------- -------------- ------
2,670,400 2,819,700 0.0
Multi- GBP 4,875,000 English China Clays PLC, Convertible
Industry Bonds, 6.50% due 9/30/2003 8,364,034 7,208,675 0.1
GBP 6,375,000 Hanson PLC, 9.50% due 1/31/2006 11,769,997 10,157,678 0.1
-------------- -------------- ------
20,134,031 17,366,353 0.2
Real GBP 500,000 Land Securities PLC, Convertible Bonds,
Estate 6.75% due 12/31/2002 679,603 769,004 0.0
Retail GBP 8,350,000 Sainsbury (J.) PLC, Convertible Bonds,
8.50% due 11/19/2005 16,072,715 16,506,906 0.2
Utilities GBP 2,000,000 National Power PLC, Convertible Bonds,
6.25% due 9/23/2008 3,262,275 3,597,912 0.0
Total Fixed-Income Securities in the
United Kingdom 174,421,773 170,497,110 2.1
</TABLE>
73
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Currency Face Value Percent of
COUNTRY Industries Denomination Amount Fixed-Income Securities Cost (Note 1a) Net Assets
<S> <S> <S> <C> <S> <C> <C> <C>
United Aerospace USD 2,750,000 Rohr Industries, Inc., Convertible
States Bonds, 7.75% due 5/15/2004 $ 2,750,000 $ 3,932,500 0.1%
Airlines USAir Inc.:
USD 4,337,927 9.33% due 1/01/2006 4,229,913 3,871,600 0.0
USD 19,300,000 10.375% due 3/01/2013 17,593,625 18,528,000 0.2
USD 7,500,000 USAir Pass Thru, 9.625% due
9/01/2003 (d) 7,495,625 7,181,250 0.1
-------------- -------------- ------
29,319,163 29,580,850 0.3
Banking USD 14,250,000 Berkeley Federal Bank, 12% due
6/15/2005 14,250,000 14,570,625 0.2
USD 3,000,000 Roosevelt Financial Group, Inc.,
9.50% due 8/01/2002 3,000,000 3,005,400 0.0
-------------- -------------- ------
17,250,000 17,576,025 0.2
Building & USD 39,250,000 United International Holdings, Inc.,
Construction 14% due 11/15/1999 (b) (i) 22,718,503 24,335,000 0.3
Building USD 15,000,000 DalTile International, Inc., 11.955%
Materials due 7/15/1998 (b) 10,581,301 11,325,000 0.1
USD 41,100,000 Tarkett AG, 9% due 3/01/2002 39,413,750 43,566,000 0.5
-------------- -------------- ------
49,995,051 54,891,000 0.6
Cable/ USD 15,000,000 Bell Cablemedia PLC, 11.875% due
Telecom- 9/15/2005+++ 8,549,312 9,000,000 0.1
munications
Chemicals USD 10,000,000 Laroche Industries Inc., 13% due
8/15/2004 10,325,000 10,600,000 0.1
Computers USD 15,225,000 Dell Computer Corp., 11% due 8/15/2000 15,322,187 16,823,625 0.2
Energy USD 12,374,000 Transamerican Refining Corp., 18.29%
due 2/15/2002 (b) 7,776,958 8,599,930 0.1
USD 30,000,000 TransTexas Gas Corp., 11.50% due
6/15/2002 30,000,000 31,350,000 0.4
-------------- -------------- ------
37,776,958 39,949,930 0.5
Financial CHF 4,010,000 Chrysler Financial Corp., 5.75% due
Services 6/18/1996 1,914,011 3,599,943 0.0
USD 20,000,000 First City Financial Corp., Ltd., 9%
due 9/30/1997 19,877,500 19,900,000 0.2
Lomas Mortgage USA, Inc.:
USD 11,000,000 9.75% due 10/01/1997 10,465,250 5,472,500 0.1
USD 7,500,000 10.25% due 10/01/2002 7,000,000 3,731,250 0.0
USD 2,008,000 US Trails, Senior Secured Notes, 12%
due 7/15/1998 1,642,685 1,265,040 0.0
-------------- -------------- ------
40,899,446 33,968,733 0.3
Health USD 7,200,000 Cetus (Chiron) Corp., Convertible
Care Bonds, 5.25% due 5/21/2002 5,220,250 6,840,000 0.1
USD 8,500,000 Mediq/PRN, Senior Notes, 11.125% due
7/01/1999 8,845,000 8,202,500 0.1
-------------- -------------- ------
14,065,250 15,042,500 0.2
Home- USD 31,950,000 Baldwin Co., 10.375% due 8/01/2003+++ 30,215,562 14,377,500 0.2
building & USD 37,500,000 Beazer Homes USA, Inc., 9% due
Construc- 3/01/2004 35,597,000 36,000,000 0.4
tion USD 18,500,000 K. Hovnanian Enterprises, 9.75% due
6/01/2005 17,970,000 15,725,000 0.2
USD 30,000,000 MDC Holdings Inc., 11.125% due
12/15/2003 28,916,500 28,275,000 0.3
USD 28,250,000 Presley Companies, Senior Notes,
12.50% due 7/01/2001 28,190,312 22,882,500 0.3
USD 3,500,000 Webb (Del E.) Corp., 9% due 2/15/2006 2,734,375 3,246,250 0.0
-------------- -------------- ------
143,623,749 120,506,250 1.4
Hospital USD 1,000,000 Novacare, Inc., Convertible Bonds,
Management 5.50% due 1/15/2000 857,500 860,000 0.0
Industrial USD 22,000,000 AM General Corp., 12.875% due
5/01/2002 21,834,060 21,780,000 0.3
USD 10,000,000 Acetex Corporation, 9.75% due
10/01/2003+++ 9,956,300 10,275,000 0.1
USD 20,000,000 Crown Packaging Ltd., 10.75% due
11/01/2000 20,000,000 19,800,000 0.2
</TABLE>
74
<PAGE>
<TABLE>
<S> <S> <S> <C> <S> <C> <C> <C>
USD 10,000,000 Easco Corp., 10% due 3/15/2001 10,005,000 9,900,000 0.1
USD 22,000,000 Envirotest Systems Corp., 9.125% due
3/15/2001 20,517,210 17,380,000 0.2
USD 27,250,000 Genmar Holdings, Inc., 13.50% due
7/15/2001 27,127,100 26,705,000 0.3
USD 8,590,000 Hanson America, Convertible Bonds,
2.39% due 3/01/2001 6,647,976 6,914,950 0.1
USD 2,350,000 MDC Holdings, Inc., Convertible Bonds,
8.75% due 12/15/2005 2,021,000 2,350,000 0.0
USD 9,000,000 Merisel, Inc., 12.50% due 12/31/2004 9,000,000 6,750,000 0.1
USD 30,500,000 Plastic Specialties & Technology,
Inc., 11.25% due 12/01/2003 30,540,000 27,450,000 0.3
USD 7,500,000 Portola Packaging Inc., 10.75% due
10/01/2005 7,526,250 7,668,750 0.1
-------------- -------------- ------
165,174,896 156,973,700 1.8
Insurance USD 7,750,000 Horace Mann Educators, Inc.,
Convertible Bonds, 6.50% due
12/01/1999 (b) 7,682,500 7,846,875 0.1
USD 22,500,000 Mutual Life Insurance Co., N.Y.,
11.25% due 8/15/2024 (b) 14,859,187 17,662,500 0.2
USD 12,500,000 Nacolah Holding Corp., 9.50% due
12/01/2003 12,500,000 12,250,000 0.1
-------------- -------------- ------
35,041,687 37,759,375 0.4
Leisure & USD 5,000,000 Rio Hotel & Casino Inc., 10.625%
Tourism due 7/15/2005+++ 5,000,000 4,900,000 0.1
Merchand- USD 12,000,000 Price Club Co., Convertible Bonds,
ising 5.50% due 2/28/2012 11,213,250 11,700,000 0.1
Oil & PDV America, Inc.:
Related USD 35,000,000 7.25% due 8/01/1998 34,856,150 33,862,500 0.4
USD 10,000,000 7.75% due 8/01/2000 10,062,500 9,550,000 0.1
USD 6,000,000 USX Marathon Oil Co., 7% due 6/15/2017 5,650,000 5,625,000 0.1
-------------- -------------- ------
50,568,650 49,037,500 0.6
Packaging USD 13,450,000 Anchor Glass Container Corp., 10.25%
& Container due 6/30/2002 12,815,164 12,037,750 0.1
Real USD 24,500,000 Alexander Haagen Properties Inc.,
Estate Exchangeable Debentures, 7.25% due
12/27/2003 24,348,750 23,213,750 0.3
USD 25,000,000 First Washington Realty, 8.25% due
6/26/1999 25,000,000 24,750,000 0.3
LTC Properties, Inc.:
USD 10,000,000 8.25% due 1/01/1999 10,000,000 10,000,000 0.1
USD 10,000,000 8.50% due 1/01/2001 10,000,000 9,950,000 0.1
USD 27,000,000 Malan Realty Investors, Inc.,
Convertible Bonds, 8.50% due 7/01/2003 27,000,000 27,675,000 0.3
USD 23,845,781 RTC Commercial Mortgage, Class E,
8.25% due 12/25/2020 (d) 23,480,642 23,070,793 0.3
-------------- -------------- ------
119,829,392 118,659,543 1.4
</TABLE>
75
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Currency Face Value Percent of
COUNTRY Industries Denomination Amount Fixed-Income Securities Cost (Note 1a) Net Assets
<S> <S> <S> <C> <S> <C> <C> <C>
United States Real USD 7,000,000 Centerpoint Properties Corp.,
(concluded) Estate Convertible Bonds, 8.22% due 1/15/2004 $ 7,000,000 $ 8,855,000 0.1%
Investment USD 30,000,000 First Union Real Estate, 8.875% due
Trusts 10/01/2003 29,756,100 27,675,000 0.3
USD 12,500,000 Liberty Property Trust, Convertible
Bonds, 8% due 7/01/2001 12,500,000 12,812,500 0.2
Meditrust, Convertible Bonds:
USD 5,000,000 7% due 3/01/1998 5,035,000 5,562,500 0.1
USD 5,000,000 8.549% due 2/01/2000 (Series A) 5,000,000 5,250,000 0.1
USD 14,000,000 7.50% due 3/01/2001 14,000,000 14,140,000 0.2
USD 5,000,000 Mid-Atlantic Realty Trust, Convertible
Bonds, 7.625% due 9/15/2003 4,875,000 4,237,500 0.1
USD 5,000,000 National Health Investors, Inc.,
Convertible Bonds, 7.375% due 4/01/1998 5,125,000 5,475,000 0.1
USD 24,500,000 Nationwide Health Properties Inc.,
Convertible Bonds, 6.25% due 1/01/1999 24,300,000 24,377,500 0.3
USD 5,500,000 Sizeler Property Investors, Inc.,
Convertible Bonds, 8% due 7/15/2003 5,505,000 4,785,000 0.1
-------------- -------------- ------
113,096,100 113,170,000 1.6
Resources USD 32,500,000 Freeport-McMoRan Resources, 8.75% due
2/15/2004 31,378,750 32,825,000 0.4
Savings USD 15,000,000 Crossland Federal Savings Bank, 9% due
Banks 9/01/2003 15,634,250 15,975,000 0.2
USD 21,400,000 First Federal Financial Corporation,
11.75% due 10/01/2004 21,401,250 21,614,000 0.3
-------------- -------------- ------
37,035,500 37,589,000 0.5
Steel USD 23,625,000 NS Group, Inc., 13.50% due
7/15/2003 (g) 22,545,928 19,608,750 0.2
Super- USD 41,650,000 Eagle Food Centers Inc., 8.625% due
markets 4/15/2000 37,200,837 23,740,500 0.3
USD 4,000,000 Pueblo Xtra International Inc., 9.50%
due 8/01/2003 3,666,250 3,820,000 0.0
USD 10,000,000 TLC Beatrice International Holdings
Inc., 11.50% due 10/01/2005 10,000,000 9,775,000 0.1
-------------- -------------- ------
50,867,087 37,335,500 0.4
Tele- USD 41,750,000 American Telecasting Inc., 13.308%
communi- due 8/15/2000 (b) (f)+++ 21,351,378 23,484,375 0.3
cations USD 20,500,000 Busse Broadcasting, 11.625% due
10/15/2000+++ 19,671,800 19,782,500 0.2
USD 7,000,000 CAI Wireless Systems Inc., 12.25%
due 9/15/2002 7,000,000 7,420,000 0.1
USD 19,500,000 Call Net Enterprise, Inc., 13.07%
due 12/01/2004 (b) 11,546,121 13,796,250 0.2
USD 46,500,000 CellNet Data Systems (Warrants),
9.1479% due 6/15/2005 (b) (h)+++ 25,975,588 26,272,500 0.3
USD 100,000,000 Geotek Communications Inc., 15%
due 7/15/2005 (b) (j)+++ 50,728,618 51,500,000 0.6
Nextel Communications, Inc. (b):
USD 3,000,000 11.21% due 9/01/2003 2,217,161 1,740,000 0.0
USD 33,500,000 9.96% due 8/15/2004 22,961,426 16,750,000 0.2
CAD 5,000,000 Rogers Communications Inc., 7.50%
due 9/01/1999 3,394,000 3,428,997 0.0
-------------- -------------- ------
164,846,092 164,174,622 1.9
Textiles USD 12,500,000 Consoltex Group, Inc., 11% due
& Apparel 10/01/2003 12,530,000 11,875,000 0.1
USD 23,500,000 Salant Corp., Secured, 10.50%
due 12/31/1998 23,030,000 19,622,500 0.2
USD 18,250,000 Texfi Industries, Inc., 8.75%
due 8/01/1999 17,930,300 14,873,750 0.2
-------------- -------------- ------
53,490,300 46,371,250 0.5
Trans- USD 8,625,000 Eletson Holdings Inc., 9.25% due
portation 11/15/2003 8,658,437 8,495,625 0.1
USD 22,000,000 OMI Corp., 10.25% due 11/01/2003 21,910,000 19,360,000 0.2
-------------- -------------- ------
</TABLE>
76
<PAGE>
<TABLE>
<S> <S> <S> <C> <S> <C> <C> <C>
30,568,437 27,855,625 0.3
Utilities-- CTC Mansfield Funding Corp.:
Electric USD 5,500,000 10.25% due 3/30/2003 5,620,000 5,603,125 0.1
USD 5,000,000 11.125% due 9/30/2016 5,350,000 5,187,500 0.1
USD 30,000,000 California Energy Co., Inc., 10.25%
due 1/15/2004 (b) 26,526,120 26,850,000 0.3
USD 8,000,000 Calpine Corp., Inc., 9.25% due
2/01/2004 7,277,500 7,040,000 0.1
Cleveland Electric Illuminating
Company Inc., First Mortgage:
USD 5,000,000 9.30% due 7/26/1999 5,437,500 5,043,750 0.1
USD 12,500,000 9.25% due 7/29/1999 13,562,500 12,593,750 0.2
USD 3,000,000 9.05% due 8/15/2001 3,093,750 2,985,000 0.0
USD 7,500,000 7.625% due 8/01/2002 7,462,500 6,881,250 0.1
USD 5,000,000 7.375% due 6/01/2003 4,700,000 4,468,750 0.1
El Paso Funding:
USD 4,050,000 9.20% due 7/02/1997 3,286,000 2,551,500 0.0
USD 25,000,000 10.375% due 1/02/2011 21,170,000 15,750,000 0.2
USD 62,040,000 10.75% due 4/01/2013 52,996,150 39,085,200 0.5
USD 7,500,000 Public Service Company of New Mexico,
First PV Funding, 10.30% due 1/15/2014 7,137,750 7,650,000 0.1
USD 22,818,000 Public Service Company of New Mexico,
EIP Funding, 10.25% due 10/01/2012 22,818,000 23,559,585 0.3
Toledo Edison Co.:
USD 2,000,000 9.30% due 4/01/1998 2,130,000 2,007,500 0.0
USD 13,925,000 7.25% due 8/01/1999 13,925,000 13,054,687 0.2
USD 3,000,000 9.50% due 4/01/2001 3,221,250 3,030,000 0.0
USD 1,500,000 7.85% due 3/31/2003 1,296,450 1,374,375 0.0
USD 2,000,000 7.91% due 4/01/2003 1,992,500 1,832,500 0.0
-------------- -------------- ------
209,002,970 186,548,472 2.4
Total Fixed-Income Securities
in the United States 1,505,926,322 1,433,612,500 17.0
Total Investments in Fixed-Income
Securities 4,318,404,848 4,370,535,842 51.8
Short-Term Securities
Canada Foreign CAD 84,700,000 Canada Treasury Bill, 6.41% due
Government 11/16/1995 62,831,628 62,948,863 0.7
Obligations*
Total Short-Term Investments in Canada 62,831,628 62,948,863 0.7
Mexico Foreign Mexican Cetes (Certificados de la
Government Tesoreria de la Federacion):
Obliga- MXN 76,000,000 49% due 12/14/1995 10,346,929 10,145,796 0.1
tions* MXN 212,150,560 24.749% due 2/22/1996 31,290,927 26,002,657 0.3
MXN 82,186,000 26.249% due 2/15/1996 12,466,938 10,156,752 0.1
MXN 18,653,450 60.149% due 2/01/1996 2,557,316 2,342,863 0.0
Total Short-Term Investments in Mexico 56,662,110 48,648,068 0.5
</TABLE>
77
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<CAPTION>
Currency Face Value Percent of
COUNTRY Denomination Amount Short-Term Securities Cost (Note 1a) Net Assets
<S> <S> <S> <C> <S> <C> <C> <C>
United States Commer- USD 50,000,000 ABN AMRO North America Finance, Inc.,
cial 5.70% due 11/17/1995 $ 49,873,333 $ 49,873,333 0.6%
Paper* Ciesco L.P.:
USD 50,000,000 5.75% due 11/16/1995 49,880,208 49,880,208 0.6
USD 50,000,000 5.68% due 12/04/1995 49,739,667 49,739,667 0.6
USD 50,000,000 Deutsche Bank Financial, Inc., 5.70%
due 11/22/1995 49,833,750 49,833,750 0.6
du Pont (E.I.) de Nemours & Co.:
USD 50,000,000 5.67% due 11/10/1995 49,929,125 49,929,125 0.6
USD 50,000,000 5.65% due 11/22/1995 49,835,208 49,835,208 0.6
USD 36,271,000 General Electric Capital Corp., 5.85%
due 11/01/1995 36,271,000 36,271,000 0.4
Goldman Sachs Group L.P.:
USD 50,000,000 5.72% due 11/02/1995 49,992,056 49,992,056 0.6
USD 70,000,000 5.73% due 11/02/1995 69,988,858 69,988,858 0.8
Matterhorn Capital Corp.:
USD 2,332,000 5.75% due 11/01/1995 2,332,000 2,332,000 0.0
USD 26,555,000 5.72% due 11/28/1995 26,441,079 26,441,079 0.3
USD 20,000,000 Sheffield Receivables Corp., 5.75%
due 11/03/1995 19,993,611 19,993,611 0.2
USD 120,000,000 UBS Finance Delaware Inc., 5.88%
due 11/01/1995 120,000,000 120,000,000 1.4
Wal-Mart Stores, Inc.:
USD 41,000,000 5.70% due 11/28/1995 40,824,725 40,824,725 0.5
USD 50,000,000 5.67% due 12/04/1995 49,740,125 49,740,125 0.6
Total Investments in United States
Commercial Paper 714,674,745 714,674,745 8.4
US USD 30,000,000 Federal Home Loan Bank, 5.63%
Government due 11/02/1995 29,995,308 29,995,308 0.4
Agency USD 50,000,000 Federal National Mortgage Association,
Obligations* 5.62% due 11/13/1995 49,906,333 49,906,333 0.6
Total Investments in US Government
Agency Obligations 79,901,641 79,901,641 1.0
Total Investments in Short-Term
Securities 914,070,124 906,173,317 10.6
Total Investments $7,997,322,562 8,436,845,834 98.9
==============
Unrealized Depreciation on Forward Foreign Exchange Contracts** (27,065,122) (0.3)
Variation Margin on Futures Contracts*** 432,750 0.0
Other Assets Less Liabilities 124,976,997 1.4
-------------- ------
Net Assets $8,535,190,459 100.0%
============== ======
<FN>
</TABLE>
78
<PAGE>
<TABLE>
<CAPTION>
(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)Security held as collateral in connection with open futures contracts.
(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)Each $1,000 face amount contains one warrant of American Telecasting Inc.
(g)Each $1,000 face amount contains one warrant of NS Group, Inc.
(h)Each $1,000 face amount contains four warrants of CellNet Data Systems.
(i)Each $1,000 face amount contains one warrant of United International Holdings, Inc.
(j)Each $1,000 face amount contains 30 warrants of Geotek Communications, Inc.
++American Depositary Receipts (ADR).
++++Non-income producing security.
+++Restricted securities. The value of the Fund's investment in restricted securities was
approximately $279,249,000, representing 3.3% of net assets.
Acquisition Value
Issue Date Cost (Note 1a)
<S> <C> <C> <C>
Acetex Corporation, 9.75% due 10/01/2003 9/22/1995 9,956,300 10,275,000
American Telecasting Inc., 13.308% due
8/15/2000 8/07/1995 21,351,378 23,484,375
Baldwin Co., 10.375% due 8/01/2003 7/15/1993 30,215,562 14,377,500
Bell Cablemedia PLC, 11.875% due
9/15/2000 9/13/1995 8,549,312 9,000,000
Busse Broadcasting, 11.625% due
10/15/2000 10/19/1995 19,671,800 19,782,500
Cell Net Data Systems 9.1479% due
6/15/2005 6/06/1995 25,975,588 26,272,500
Ciba-Geigy Corp., Convertible Bonds,
6.25% due 3/15/2016 3/23/1993 25,632,050 24,945,000
Four Seasons Hotel, Inc., 9.125%
due 7/01/2000 6/23/1993 23,401,875 22,971,250
Geotek Communications Inc., 15%
due 7/15/2000 7/31/1995 50,728,618 51,500,000
HIH Capital Ltd., Convertible Bonds
(Bearer), 7.50% due 9/25/2006 7/23/1992 1,005,400 1,379,700
Olympia & York Inc.:
Series 1, 10.70% due 11/04/1995 8/19/1993 29,626,733 29,097,954
Series 2, 11% due 11/04/1998 8/19/1993 18,060,242 17,297,807
Petroleos Mexicanos, 8.625%
due 12/01/2023 2/28/1995 15,772,500 22,343,750
Plains Resources, Inc. 7/14/1994 1,381,815 1,621,318
Rio Hotel & Casino Inc., 10.625%
due 7/15/2005 7/18/1995 5,000,000 4,900,000
$286,329,173 $279,248,654
============ ============
+++++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>
Healthcare
Services Advocat, Inc. (50,000) $(475,000) --
Textiles Burlington Industries, Inc. -- -- --
Retail Stores Buttrey Food &
Drug Stores Co. -- -- --
Retail Stores Filene's Basement Corp. -- -- --
Banking Oriental Bank and Trust(1) 73,600 -- $102,598
(1)Oriental Band and Trust had a 5-for-4 split.
*Commercial Paper and certain US and Foreign Government Agency Obligations
are traded on a discount basis. The interest rates shown are the rates in effect on
October 31, 1995.
**Forward Foreign Exchange Contracts as of October 31, 1995 were as follows:
<CAPTION>
Unrealized
Foreign Expiration Appreciation
Currency Sold Date (Depreciation)
<S> <C> <S> <C>
CHF 58,000,000 November 1995 $ (2,577,874)
DEM 603,000,000 November 1995 (15,209,505)
DEM 305,000,000 December 1995 (2,434,954)
DEM 170,000,000 January 1996 (1,123,327)
ECU 40,000,000 November 1995 221,720
ECU 21,000,000 December 1995 (434,007)
ECU 75,000,000 January 1996 (597,415)
ESP 10,000,000,000 November 1995 (1,150,531)
ESP 8,500,000,000 December 1995 (1,037,515)
ESP 6,000,000,000 January 1996 575,017
FRF 516,000,000 November 1995 (3,042,421)
FRF 395,000,000 December 1995 (1,577,228)
FRF 515,000,000 January 1996 (1,748,158)
GBP 87,000,000 November 1995 (1,136,088)
GBP 35,000,000 December 1995 (21,790)
NLG 153,500,000 November 1995 (2,553,909)
NLG 6,000,000 December 1995 (7,299)
JPY 15,600,000,000 November 1995 3,423,925
JPY 10,500,000,000 December 1995 2,171,176
JPY 8,000,000,000 January 1996 1,195,061
Total (USD Commitment--$2,092,687,555) Unrealized
Depreciation--Net On Forward Foreign Exchange Contracts $(27,065,122)
============
***Financial Futures Contracts purchased as of October 31, 1995 were as follows:
<CAPTION>
Number of Expiration Value
Contracts Issue Date (Note 1a)
<C> <S> <S> <C>
330 Standard & Poor's 500 Index December 1995 $ (96,335,250)
400 US Treasury Notes December 1995 (44,612,500)
Total Financial Futures Contracts Purchased
(Total Contract Price--$139,435,250) $(140,947,750)
=============
See Notes to Financial Statements.
</TABLE>
79
<PAGE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of October 31, 1995
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$7,997,322,562) (Note 1a) $8,436,845,834
Foreign cash (Note 1c) 50,278,102
Receivables:
Interest $113,737,861
Capital shares sold 22,871,472
Securities sold 19,725,752
Dividends 7,457,274
Variation margin (Note 1d) 432,750
Forward foreign exchange contracts (Note 1d) 203,953 164,429,062
------------
Prepaid registration fees and other assets (Note 1g) 128,947
--------------
Total assets 8,651,681,945
--------------
Liabilities: Unrealized depreciation on forward foreign exchange contracts (Note 1d) 27,065,122
Payables:
Securities purchased 57,357,061
Capital shares redeemed 9,269,931
Distributor (Note 2) 6,024,422
Investment adviser (Note 2) 5,181,615
Forward foreign exchange contracts (Note 1d) 3,079,630 80,912,659
--------------
Accrued expenses and other liabilities 8,513,705
--------------
Total liabilities 116,491,486
--------------
Net Assets Net assets $8,535,190,459
==============
Net Assets Class A Shares of Common Stock, $0.10 par value, 200,000,000
Consist of: shares authorized $ 10,472,858
Class B Shares of Common Stock, $0.10 par value, 900,000,000
shares authorized 47,731,722
Class C Shares of Common Stock, $0.10 par value, 200,000,000
shares authorized 734,384
Class D Shares of Common Stock, $0.10 par value, 900,000,000
shares authorized 1,807,372
Paid-in capital in excess of par 7,638,461,949
Undistributed investment income--net 159,653,484
Undistributed realized capital gains on investments and foreign
currency transactions--net 264,914,793
Unrealized appreciation on investments and foreign currency
transactions--net 411,413,897
--------------
Net assets $8,535,190,459
==============
Net Asset Class A--Based on net assets of $1,487,805,515 and 104,728,579 shares
Value: outstanding $ 14.21
==============
Class B--Based on net assets of $6,688,498,717 and 477,317,223 shares
outstanding $ 14.01
==============
Class C--Based on net assets of $102,361,445 and 7,343,836 shares
outstanding $ 13.94
==============
Class D--Based on net assets of $256,524,782 and 18,073,722 shares
outstanding $ 14.19
==============
See Notes to Financial Statements.
</TABLE>
80
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended October 31, 1995
<S> <S> <C> <C>
Investment Interest and discount earned (net of $40,585 foreign withholding tax) $ 447,094,943
Income Dividends (net of $3,856,493 foreign withholding tax) 102,011,176
(Notes 1e & 1f): Other 501,626
--------------
Total income 549,607,745
--------------
Expenses: Account maintenance and distribution fees--Class B (Note 2) 63,684,524
Investment advisory fees (Note 2) 55,558,045
Transfer agent fees--Class B (Note 2) 10,321,194
Custodian fees 3,297,038
Transfer agent fees--Class A (Note 2) 1,934,396
Printing and shareholder reports 1,098,612
Accounting services (Note 2) 611,736
Account maintenance and distribution fees--Class C (Note 2) 524,570
Account maintenance fees--Class D (Note 2) 401,709
Professional fees 270,676
Transfer agent fees--Class D (Note 2) 227,369
Registration fees (Note 1g) 133,227
Transfer agent fees--Class C (Note 2) 93,551
Directors' fees and expenses 38,977
Pricing fees 16,564
Other 107,625
--------------
Total expenses 138,319,813
--------------
Investment income--net 411,287,932
--------------
Realized & Realized gain (loss) from:
Unrealized Investments--net $ 265,092,014
Gain (Loss) on Foreign currency transactions--net (13,781,168) 251,310,846
Investments & --------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net 368,963,114
(Notes 1c, 1d, Foreign currency transactions--net 6,443,069 375,406,183
1f & 3): -------------- --------------
Net realized and unrealized gain on investments and foreign currency
transactions 626,717,029
--------------
Net Increase in Net Assets Resulting from Operations $1,038,004,961
==============
See Notes to Financial Statements.
</TABLE>
81
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended
October 31,
Increase (Decrease) in Net Assets: 1995 1994
<S> <S> <C> <C>
Operations: Investment income--net $ 411,287,932 $ 261,655,320
Realized gain on investments and foreign currency transactions--net 251,310,846 27,450,270
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net 375,406,183 (244,977,781)
-------------- --------------
Net increase in net assets resulting from operations 1,038,004,961 44,127,809
-------------- --------------
Dividends & Investment income--net:
Distributions to Class A (40,572,591) (42,294,885)
Shareholders Class B (127,353,416) (157,338,890)
(Note 1h): 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 dividends and distributions
to shareholders (356,666,151) (297,080,431)
-------------- --------------
Capital Share Net increase in net assets derived from capital share transactions 26,500,607 2,862,952,855
Transactions -------------- --------------
(Note 4):
Net Assets: Total increase in net assets 707,839,417 2,610,000,233
Beginning of year 7,827,351,042 5,217,350,809
-------------- --------------
End of year* $8,535,190,459 $7,827,351,042
============== ==============
<FN>
*Undistributed investment income--net (Note 1i) $ 159,653,484 $ 93,144,339
See Notes to Financial Statements.
============== ==============
</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: 1995++++ 1994 1993 1992 1991
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 13.07 $ 13.52 $ 11.92 $ 12.16 $ 10.37
Operating ---------- ---------- ---------- ---------- --------
Performance: Investment income--net .79 .60 .39 .36 .55
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net 1.04 (.31) 2.14 .89 2.24
---------- ---------- ---------- ---------- --------
</TABLE>
82
<PAGE>
<TABLE>
<CAPTION>
<S> <S> <C> <C> <C> <C> <C>
Total from investment operations 1.83 .29 2.53 1.25 2.79
---------- ---------- ---------- ---------- --------
Less dividends and distributions:
Investment income--net (.39) (.51) (.81) (.89) (.45)
Realized gain on investments--net (.30) (.23) (.12) (.60) (.55)
---------- ---------- ---------- ---------- --------
Total dividends and distributions (.69) (.74) (.93) (1.49) (1.00)
---------- ---------- ---------- ---------- --------
Net asset value, end of year $ 14.21 $ 13.07 $ 13.52 $ 11.92 $ 12.16
========== ========== ========== ========== ========
Total Investment Based on net asset value per share 14.81% 2.14% 22.61% 11.78% 28.89%
Return:* ========== ========== ========== ========== ========
Ratios to Average Expenses .90% .89% .93% 1.07% 1.29%
Net Assets: ========== ========== ========== ========== ========
Investment income--net 5.98% 4.60% 3.90% 10.82% 8.96%
========== ========== ========== ========== ========
Supplemental Net assets, end of year (in thousands) $1,487,805 $1,357,906 $ 917,806 $ 245,839 $ 72,702
Data: ========== ========== ========== ========== ========
Portfolio turnover 36.78% 57.04% 50.35% 59.56% 81.21%
========== ========== ========== ========== ========
<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: 1995++++ 1994 1993 1992 1991
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 12.91 $ 13.38 $ 11.83 $ 12.10 $ 10.33
Operating ---------- ---------- ---------- ---------- --------
Performance: Investment income--net .65 .46 .28 .22 .44
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net 1.01 (.31) 2.11 .91 2.22
---------- ---------- ---------- ---------- --------
Total from investment operations 1.66 .15 2.39 1.13 2.66
---------- ---------- ---------- ---------- --------
Less dividends and distributions:
Investment income--net (.26) (.39) (.72) (.80) (.34)
Realized gain on investments--net (.30) (.23) (.12) (.60) (.55)
---------- ---------- ---------- ---------- --------
Total dividends and distributions (.56) (.62) (.84) (1.40) (.89)
---------- ---------- ---------- ---------- --------
Net asset value, end of year $ 14.01 $ 12.91 $ 13.38 $ 11.83 $ 12.10
========== ========== ========== ========== ========
Total Investment Based on net asset value per share 13.54% 1.13% 21.42% 10.64% 27.48%
Return:* ========== ========== ========== ========== ========
Ratios to Average Expenses, excluding account maintenance
Net Assets: and distribution fees .93% .91% .95% 1.09% 1.31%
========== ========== ========== ========== ========
Expenses 1.93% 1.91% 1.95% 2.09% 2.31%
========== ========== ========== ========== ========
Investment income--net 4.96% 3.58% 2.87% 11.95% 7.98%
========== ========== ========== ========== ========
Supplemental Net assets, end of year (in thousands) $6,688,499 $6,457,130 $4,299,545 $ 958,949 $161,328
Data: ========== ========== ========== ========== ========
Portfolio turnover 36.78% 57.04% 50.35% 59.56% 81.21%
========== ========== ========== ========== ========
<FN>
*Total investment returns exclude the effects of sales loads.
++++Based on average shares outstanding during the period.
See Notes to Financial Statements.
</TABLE>
83
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS (concluded)
<CAPTION>
The following per share data and ratios have been derived Class C Class D
from information provided in the financial statements. For the For the Period For the For the Period
Year Ended Oct. 21, 1994++ Year Ended Oct. 21, 1994++
Increase (Decrease) in Net Asset Value: Oct. 31, 1995++++ to Oct. 31, 1994 Oct. 31, 1995++++ to Oct. 31, 1994
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning
Operating of period $ 12.91 $ 12.91 $ 13.08 $ 13.07
Performance: ---------- ---------- ---------- ----------
Investment income--net .64 .01 .77 .01
Realized and unrealized gain
(loss) on investments and foreign
currency transactions--net 1.02 (.01) 1.01 --
---------- ---------- ---------- ----------
Total from investment operations 1.66 -- 1.78 .01
---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.33) -- (.37) --
Realized gain on investments--net (.30) -- (.30) --
---------- ---------- ---------- ----------
Total dividends and distributions (.63) -- (.67) --
---------- ---------- ---------- ----------
Net asset value, end of period $ 13.94 $ 12.91 $ 14.19 $ 13.08
========== ========== ========== ==========
Total Investment Based on net asset value per share 13.58% .00%+++ 14.43% .08%+++
Return:** ========== ========== ========== ==========
Ratios to Average Expenses, excluding account
Net Assets maintenance and distribution fees .95% 1.44%* .91% 1.44%*
========== ========== ========== ==========
Expenses 1.95% 2.44%* 1.16% 1.69%*
========== ========== ========== ==========
Investment income--net 4.80% 3.71%* 5.63% 4.46%*
========== ========== ========== ==========
Supplemental Net assets, end of period
Data: (in thousands) $ 102,361 $ 7,347 $ 256,525 $ 4,968
========== ========== ========== ==========
Portfolio turnover 36.78% 57.04% 36.78% 57.04%
========== ========== ========== ==========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
+++Aggregate total investment return.
++Commencement of Operations.
++++Based on average shares outstanding during the period.
See Notes to Financial Statements.
</TABLE>
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,
84
<PAGE>
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 signifi-
cant 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 valua-
tion. 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
Fund's 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 instruments--The Fund may engage in
various portfolio strategies to seek to increase its return by hedging
its portfolio against adverse movements in the equity, debt, and
currency markets. Losses may arise due to changes in the value
of the contract or if the counterparty does not perform under
the contract.
* Forward foreign exchange contracts--The Fund is authorized to
enter into forward foreign exchange contracts as a hedge against
either specific transactions or portfolio positions. Such contracts
are not entered on the Fund's records. However, the effect on opera-
tions is recorded from the date the Fund enters into such contracts.
Premium or discount is amortized over the life of the contracts.
* Foreign currency options and futures--The Fund may also pur-
chase 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 subse-
quently marked to market to reflect the current value of the option
written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the closing
transaction exceeds the premium paid or received).
Written and purchased options are non-income producing
investments.
* Financial futures contracts--The Fund may purchase or sell
interest rate futures contracts and options on such futures contracts
for the purpose of hedging the market risk on existing securities or
the intended purchase of securities. Futures contracts are contracts
for delayed delivery of securities at a specific future date and at a
specific price or yield. Upon entering into a contract, the Fund
85
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
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 require-
ments of the Internal Revenue Code applicable to regulated invest-
ment companies and to distribute substantially all of its taxable
income to its shareholders. Therefore, no Federal income tax provi-
sion 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 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.
(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.
(i) Reclassification--Generally accepted accounting principles
require that certain components of net assets be reclassified to
reflect permanent differences between financial reporting and tax
purposes. Accordingly, current year's permanent book/tax differences
of $172,212,947 have been reclassified from undistributed net
investment income to undistributed net realized capital gains.
These reclassifications have no effect on net assets or net asset
values per share.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). The general
partner of MLAM is Princeton Services, Inc. ("PSI"), an indirect
wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."),
which is the limited partner. The Fund has also entered into a
Distribution Agreement and Distribution Plans with Merrill Lynch
Funds Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio
and provides the necessary personnel, facilities, equipment and
certain other services necessary to the operations of the Fund. For
such services, the Fund pays a monthly fee 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%,
further reduce from 0.70% to 0.65% for average daily net assets
in excess of $5 billion, further reduce from 0.65% to 0.625% for
average daily net assets in excess of $7.5 billion, and further
reduce from 0.625% to 0.60% for average daily net assets in
excess of $10 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 year ended October 31, 1995, MLAM paid
MLAM U.K. a fee of $7,391,028 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 MLAM reimburse the Fund
to the extent the Fund's expenses (excluding interest, taxes, distri-
bution 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:
Account Maintenance Fee Distribution Fee
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
86
<PAGE>
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, 1995, MLFD earned underwriting
discounts and direct commissions and MLPF&S earned dealer con-
cessions on sales of the Fund's Class A and Class D Shares
as follows:
MLFD MLPF&S
Class A $52,270 $ 812,370
Class D $89,085 $1,377,893
For the year ended October 31, 1995, MLPF&S received contingent
deferred sales charges of $14,179,047 and $32,676 relating to trans-
actions in Class B and Class C Shares, respectively.
In addition, MLPF&S received $157,708 in commissions on the
execution of portfolio security transactions for the Fund for the
year ended October 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 year ended October 31, 1995 were $2,761,369,695 and
$3,584,406,074, respectively.
Net realized and unrealized gains (losses) as of October 31, 1995 were
as follows:
Realized Unrealized
Gains Gains
(Losses) (Losses)
Long-term investments $ 283,293,007 $ 447,420,079
Short-term investments (5,110,824) (7,896,807)
Financial futures contracts (13,090,169) (1,512,500)
Forward foreign exchange contracts (49,256,462) (27,065,122)
Foreign currency transactions 35,475,294 468,247
-------------- --------------
Total $ 251,310,846 $ 411,413,897
============== ==============
As of October 31, 1995, net unrealized appreciation for Federal
income tax purposes aggregated $429,092,579, of which $792,944,037
related to appreciated securities and $363,851,458 related to de-
preciated securities. At October 31, 1995, the aggregate cost of invest-
ments for Federal income tax purposes was $8,007,753,255.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions
was $26,500,607 and $2,862,952,855 for the years ended October 31,
1995 and October 31, 1994, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the
Year Ended Dollar
October 31, 1995 Shares Amount
Shares sold 24,414,703 $ 317,656,099
Shares issued to shareholders in
reinvestment of dividends and
distributions 5,067,208 63,395,842
------------ --------------
Total issued 29,481,911 381,051,941
Shares redeemed (28,613,955) (374,649,790)
------------ --------------
Net increase 867,956 $ 6,402,151
============ ==============
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 B Shares for the
Year Ended Dollar
October 31, 1995 Shares Amount
Shares sold 72,755,968 $ 948,196,109
Shares issued to shareholders in
reinvestment of dividends and
distributions 19,807,279 244,145,118
------------ --------------
Total issued 92,563,247 1,192,341,227
Shares redeemed (113,281,364) (1,461,389,244)
Automatic conversion of shares (2,225,942) 29,811,621)
------------ --------------
Net decrease (22,944,059) $ (298,859,638)
============ ==============
87
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
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 C Shares for the Year Dollar
Ended October 31, 1995 Shares Amount
Shares sold 7,879,395 $ 102,536,056
Shares issued to shareholders in
reinvestment of dividends and
distributions 91,498 1,150,744
------------ --------------
Total issued 7,970,893 103,686,800
Shares redeemed (1,196,074) (15,541,838)
------------ --------------
Net increase 6,774,819 $ 88,144,962
============ ==============
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 Year Dollar
Ended October 31, 1995 Shares Amount
Shares sold 17,949,936 $ 233,765,521
Automatic conversion of shares 2,199,761 29,811,621
Shares issued to shareholders in
reinvestment of dividends and
distributions 416,394 5,268,928
------------ --------------
Total issued 20,566,091 268,846,070
Shares redeemed (2,872,272) (38,032,938)
------------ --------------
Net increase 17,693,819 $ 230,813,132
============ ==============
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, 1995, the Fund had entered into foreign exchange
contracts, in addition to the contracts listed on the Schedule of
Investments, under which it had agreed to purchase and sell various
foreign currency with an approximate value of $7,000,000 and
$4,265,000, respectively.
88
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91
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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................................................. 15
Management and Advisory Arrangements...................................... 16
Purchase of Shares......................................................... 18
Initial Sales Charge Alternatives--Class A and Class D Shares............. 18
Reduced Initial Sales Charges............................................. 20
Employer-Sponsored Retirement or
Savings Plans and Certain Other
Arrangements............................................................ 23
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........................ 25
Portfolio Transactions and Brokerage....................................... 26
Determination of Net Asset Value........................................... 28
Shareholder Services....................................................... 29
Investment Account........................................................ 29
Automatic Investment Plans................................................ 30
Automatic Reinvestment of Dividends and Capital Gains Distributions....... 30
Systematic Withdrawal Plans--Class A and Class D Shares................... 30
Exchange Privilege........................................................ 31
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 # 10811-0296
[LOGO] MERRILL LYNCH
MERRILL LYNCH
GLOBAL ALLOCATION
FUND, INC.
[ART]
STATEMENT OF
ADDITIONAL
INFORMATION
February 27, 1996
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 306 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission file due to ASCII-incompatibility and cross-
references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
