<PAGE> 1
As filed with the Securities and Exchange Commission on February 25, 1997
SECURITIES ACT FILE NO. 33-22462
INVESTMENT COMPANY ACT FILE NO. 811-5576
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 11 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 13 [X]
(Check Appropriate Box or Boxes)
---------------------
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
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800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
---------------------
Copies to:
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COUNSEL FOR THE FUND:
BROWN & WOOD LLP PHILIP L. KIRSTEIN, ESQ.
ONE WORLD TRADE CENTER MERRILL LYNCH ASSET MANAGEMENT
NEW YORK, NEW YORK 10048-0557 P.O. BOX 9011
ATTENTION: THOMAS R. SMITH, JR., ESQ. PRINCETON, N.J. 08543-9011
</TABLE>
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK
APPROPRIATE BOX)
[X] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a) (1)
[ ] on (date) pursuant to paragraph (a) (1)
[ ] 75 days after filing pursuant to paragraph (a) (2)
[ ] on (date) pursuant to paragraph (a) (2) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
---------------------
The Registrant has registered an indefinite number of its shares under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act
of 1940. The notice required by such rule for the Registrant's most recent
fiscal year was filed on December 20, 1996.
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<PAGE> 2
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
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N-1A ITEM NO. LOCATION
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PART A
Item 1. Cover Page............................. Cover Page
Item 2. Synopsis............................... Fee Table
Item 3. Condensed Financial Information........ Financial Highlights; Performance Data
Item 4. General Description of Registrant...... Investment Objectives and Policies;
Additional Information
Item 5. Management of the Fund................. Fee Table; Management of the Fund;
Inside Back Cover Page
Item 5A. Management's Discussion of Fund
Performance.......................... Not Applicable
Item 6. Capital Stock and Other Securities..... Cover Page; Additional Information
Item 7. Purchase of Securities Being Offered... Cover Page; Fee Table; Merrill Lynch
Select PricingSM System; Purchase of
Shares; Shareholder Services;
Additional Information; Inside Back
Cover Page
Item 8. Redemption or Repurchase............... Fee Table; Merrill Lynch Select
PricingSM System; Shareholder Services;
Purchase of Shares; Redemption of
Shares
Item 9. Pending Legal Proceedings.............. Not Applicable
PART B
Item 10. Cover Page............................. Cover Page
Item 11. Table of Contents...................... Back Cover Page
Item 12. General Information and History........ Not Applicable
Item 13. Investment Objectives and Policies..... Investment Objectives and Policies
Item 14. Management of the Fund................. Management of the Fund
Item 15. Control Persons and Principal Holders
of Securities........................ Management of the Fund
Item 16. Investment Advisory and Other
Services............................. Management of the Fund; Purchase of
Shares; General Information
Item 17. Brokerage Allocation and Other
Practices............................ Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities..... General Information
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered............. Purchase of Shares; Redemption of
Shares; Determination of Net Asset
Value; Shareholder Services; General
Information
Item 20. Tax Status............................. Dividends, Distributions and Taxes
Item 21. Underwriters........................... Purchase of Shares
Item 22. Calculation of Performance Data........ Performance Data
Item 23. Financial Statements................... Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE> 3
PROSPECTUS
FEBRUARY 25, 1997
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 open-end management investment company that seeks 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
12. 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 "Risk Factors and
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 that 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 made 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 NOR HAS THE SECURITIES AND EXCHANGE 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 25, 1997 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission (the
"Commission") and is available, without charge, by calling or by writing the
Fund at the above telephone number or address. The Statement of Additional
Information is hereby incorporated by reference into this Prospectus.
------------------------
MERRILL LYNCH ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
<PAGE> 4
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
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CLASS A(a) CLASS B(b) CLASS C CLASS D
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SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price).... 5.25%(c) None None 5.25%(c)
Sales Charge Imposed on Dividend
Reinvestments.......................... None None None None
Deferred Sales Charge (as a percentage of
original purchase price or redemption
proceeds, whichever is lower).......... None(d) 4.0% during the first year, 1.0% for None(d)
decreasing 1.0% annually one year(f)
thereafter
to 0.0% after the fourth year(e)
Exchange Fee............................. None None None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS):
Investment Advisory Fees(g)............ 0.75% 0.75% 0.75% 0.75%
Rule 12b-1 Fees(h):
Account Maintenance Fees............. None 0.25% 0.25% 0.25%
Distribution Fees.................... None 0.75% 0.75% None
(Class B shares convert to Class
D
shares automatically after
approximately eight years and
cease
being subject to distribution
fees)
OTHER EXPENSES:
Custodial Fees....................... 0.02% 0.02% 0.02% 0.02%
Shareholder Servicing Costs(i)....... 0.13% 0.15% 0.15% 0.13%
Other................................ 0.03% 0.03% 0.03% 0.03%
----- ----- ----- -----
Total Other Expenses................. 0.18% 0.20% 0.20% 0.18%
----- ----- ----- -----
Total Fund Operating Expenses+........... 0.93% 1.95% 1.95% 1.18%
===== ===== ===== =====
</TABLE>
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(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and certain participants in
fee-based programs. See "Purchase of Shares -- Initial Sales Charge
Alternatives -- Class A and Class D Shares" -- page 33 and "Shareholder
Services -- Fee-Based Programs" -- page 44.
(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 35.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of Class
A shares by certain retirement plans and participants in connection with
certain fee-based programs. Class A 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 33.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more that
may not be subject to an initial sales charge may instead be subject to a
CDSC of 1.0% of amounts redeemed within the first year after purchase. Such
CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 44.
(e) The CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 44.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 44.
(g) See "Management of the Fund -- Management and Advisory Arrangements" -- page
29.
(h) See "Purchase of Shares -- Distribution Plans" -- page 38.
(i) See "Management of the Fund -- Transfer Agency Services" -- page 30.
+ For the fiscal year ended October 31, 1996, Merrill Lynch Asset Management
L.P. ("MLAM" or the "Manager") voluntarily waived a portion of the
management fees due from the Fund. Total Fund Operating Expenses in the Fee
Table above have been restated to assume the absence of any such waiver
because the Manager may discontinue or reduce such waiver of fees at any
time without notice. For the fiscal year ended October 31, 1996, the Manager
waived management fees totaling .07% for Class A shares, .08% for Class B
shares, .07% for Class C shares and .08% for Class D shares after which the
Total Fund Operating Expenses were .86% for Class A shares, 1.87% for Class
B shares, 1.88% for Class C shares and 1.10% for Class D shares.
2
<PAGE> 5
EXAMPLE:
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CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
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1 YEAR 3 YEARS 5 YEARS 10 YEARS
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An investor would pay the following expenses on a $1,000
investment including the maximum $52.50 initial sales
charge (Class A and Class D shares only) and assuming
(1) the Total Fund Operating Expenses for each class
set forth on page 2, (2) a 5% annual return throughout
the periods and (3) redemption at the end of the
period including any applicable CDSC for Class B and
Class C shares:
Class A............................................ $ 61 $81 $ 101 $161
Class B............................................ $ 60 $81 $ 105 $208*
Class C............................................ $ 30 $61 $ 105 $227
Class D............................................ $ 64 $88 $ 114 $188
An investor would pay the following expenses on the same
$1,000 investment assuming no redemption at the end of
the period:
Class A............................................ $ 61 $81 $ 101 $161
Class B............................................ $ 20 $61 $ 105 $208*
Class C............................................ $ 20 $61 $ 105 $227
Class D............................................ $ 64 $88 $ 114 $188
</TABLE>
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* Assumes conversion to Class D shares approximately eight years after purchase.
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR ANNUAL 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 Conduct
Rules 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 made directly
through the Fund's transfer agent are not subject to the processing fee. See
"Purchase of Shares" and "Redemption of Shares."
MERRILL LYNCH SELECT 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 registered investment companies advised by Merrill Lynch Asset Management,
L.P. ("MLAM" or the "Manager") or its affiliate, Fund Asset Management, L.P.
("FAM"). Funds advised by MLAM or FAM that utilize the Merrill Lynch Select
Pricing(SM) System are referred to herein as "MLAM-advised mutual funds."
3
<PAGE> 6
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
CDSCs, distribution 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, such charges will not affect the net asset
value of any other class or have any impact on investors choosing another sales
charge option. Dividends paid by the Fund for each class of shares 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 and distribution fees with respect to the
Class B and Class C shares in that the sales charges and distribution fees
applicable to each class provide for the financing of the distribution of the
shares of the Fund. The distribution-related revenues paid with respect to a
class will not be used to finance the distribution expenditures of another
class. Sales personnel may receive different compensation for selling different
classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) 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 Pricing(SM) System that the investor
believes is most beneficial under his or her particular circumstances. More
detailed information as to each class of shares is set forth under "Purchase of
Shares."
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ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
- -------------------------------------------------------------------------------------------------
A Maximum 5.25% initial No No No
sales charge(2)(3)
- -------------------------------------------------------------------------------------------------
B CDSC for a period of four 0.25% 0.75% B shares convert to
years at a rate of 4.0% D shares automatically
during after approximately
the first year decreasing eight years(5)
1.0%
annually to 0.0%(4)
- -------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(6) 0.25% 0.75% No
- -------------------------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(3)
- -------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs are imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares -- Initial Sales
Charge Alternatives -- Class A and Class D Shares -- Eligible Class A
Investors."
(Footnotes continued on following page)
4
<PAGE> 7
(3) Reduced for purchases of $25,000 or more, and waived for purchases of Class
A shares by certain retirement plans and participants in connection with
certain fee-based programs. Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but instead
may be subject to a 1.0% CDSC if redeemed within one year. Such CDSC may be
waived in connection with certain fee-based programs. A 0.75% sales charge
for 401(k) purchases over $1,000,000 will apply. See "Class A" and "Class D"
below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and 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.
(6) The CDSC may be waived in connection with certain fee-based programs.
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 fee-based 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 of 5.25% is
reduced for purchases of $25,000 and over, and waived for purchases by
certain retirement plans and participants in connection with certain
fee-based programs. Purchases of $1,000,000 or more may not be subject
to an initial sales charge but if the initial sales charge is waived
such purchases may be subject to a 1.0% CDSC if the shares are redeemed
within one year after purchase. Such CDSC may be waived in connection
with certain fee-based programs. Sales charges also are reduced under a
right of accumulation that takes into account the investor's holdings
of all classes of all MLAM-advised mutual funds. See "Purchase of
Shares -- Initial Sales Charge Alternatives -- Class A and Class D
Shares."
Class B: Class B shares do not incur a sales charge when they are purchased, but
they are subject to an ongoing account maintenance fee of 0.25% and an
ongoing distribution fee of 0.75% of the Fund's average net assets
attributable to the Class B shares, and a CDSC if they are redeemed
within four years of purchase. The CDSC may be modified in connection
with certain fee-based programs. Approximately eight years after
issuance, Class B shares will convert automatically into Class D shares
of the Fund, which are subject to an account maintenance fee but no
distribution fee; Class B shares of certain other MLAM-advised mutual
funds into which exchanges may be made convert into Class D shares
automatically after approximately ten years. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual
fund, the conversion period applicable to the Class B shares acquired
in the exchange will apply, 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
5
<PAGE> 8
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."
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 of 1.0% if they are redeemed within one year of purchase. Such
CDSC may be waived in connection with certain fee-based programs.
Although Class C shares are subject to a CDSC for only one year (as
compared to four years for Class B), Class C shares have no conversion
feature and, accordingly, an investor 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. The maximum initial sales charge of 5.25% is reduced
for purchases of $25,000 and over. Purchases of $1,000,000 or more may
not be subject to an initial sales charge but if the initial sales
charge is waived, such purchases may be subject to a 1.0% CDSC if the
shares are redeemed within one year after purchase. Such CDSC may be
waived in connection with certain fee-based programs. The schedule of
initial sales charges and reductions for Class D shares is the same as
the schedule for Class A shares, except that there is no waiver for
purchases in connection with certain fee-based programs. Class D shares
also will be issued upon conversion of Class B shares as described
above under "Class B." See "Purchase of Shares -- Initial Sales Charge
Alternatives -- Class A and Class D Shares."
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing(SM) System that the investor believes is most beneficial under his or
her particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because there is an account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative particularly
attractive because similar sales charge reductions are not available with
respect to the deferred sales charges imposed in connection with purchases of
Class B or Class C shares. Investors not qualifying for reduced initial sales
charges who expect to maintain their investment for an extended period of time
also may elect to purchase Class A or Class D shares, because over time the
accumulated ongoing account maintenance and distribution fees on Class B or
Class C shares may exceed the initial sales charge and, in the case of Class D
shares, the account maintenance fee. Although some investors 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
6
<PAGE> 9
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
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> 10
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, 1996,
are included in the Statement of Additional Information. The following per share
data and ratios have been derived from information provided in the Fund's
audited financial statements and reflect the acquisition by the Fund of the net
assets of Merrill Lynch Balanced Fund for Investment and Retirement, Inc.
("Balanced Fund") on March 4, 1996. 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 YEAR ENDED OCTOBER 31,
------------------------------------------------------------------
1996++ 1995++ 1994 1993 1992
---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...................... $ 14.21 $ 13.07 $ 13.52 $ 11.92 $ 12.16
---------- ---------- ---------- -------- --------
Investment income--net.................................... .78 .79 .60 .39 .36
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net....................... 1.59 1.04 (.31) 2.14 .89
---------- ---------- ---------- -------- --------
Total from investment operations.......................... 2.37 1.83 .29 2.53 1.25
---------- ---------- ---------- -------- --------
Less dividends and distributions:
Investment income--net................................... (.98) (.39) (.51) (.81) (.89)
Realized gain on investments--net........................ (.43) (.30) (.23) (.12) (.60)
---------- ---------- ---------- -------- --------
Total dividends and distributions......................... (1.41) (.69) (.74) (.93) (1.49)
---------- ---------- ---------- -------- --------
Net asset value, end of period............................ $ 15.17 $ 14.21 $ 13.07 $ 13.52 $ 11.92
========== ========== ========== ======== ========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share........................ 17.81% 14.81% 2.14% 22.61% 11.78%
========== ========== ========== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement............................ .86% .90% .89% .93% 1.07%
========== ========== ========== ======== ========
Expenses.................................................. .93% .90% .89% .93% 1.07%
========== ========== ========== ======== ========
Investment income--net.................................... 5.31% 5.98% 4.60% 3.90% 10.82%
========== ========== ========== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).................. $1,841,974 $1,487,805 $1,357,906 $917,806 $245,839
========== ========== ========== ======== ========
Portfolio turnover........................................ 51.26% 36.78% 57.04% 50.35% 59.56%
========== ========== ========== ======== ========
Average commission rate paid##............................ $ .0048 -- -- -- --
========== ========== ========== ======== ========
<CAPTION>
FOR THE
PERIOD
FEB. 3,
1989+ TO
OCT. 31,
1991 1990 1989
------- ------- --------
<S> <C<C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...................... $ 10.37 $ 10.79 $ 10.00
------- ------- -------
Investment income--net.................................... .55 .60 .45
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net....................... 2.24 (.16) .48
------- ------- -------
Total from investment operations.......................... 2.79 .44 .93
------- ------- -------
Less dividends and distributions:
Investment income--net................................... (.45) (.66) (.14)
Realized gain on investments--net........................ (.55) (.20) --
------- ------- -------
Total dividends and distributions......................... (1.00) (.86) (.14)
------- ------- -------
Net asset value, end of period............................ $ 12.16 $ 10.37 $ 10.79
======= ======= =======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share........................ 28.89% 3.91% 9.34%#
======= ======= =======
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement............................ 1.29% 1.29% 1.37%*
======= ======= =======
Expenses.................................................. 1.29% 1.29% 1.37%*
======= ======= =======
Investment income--net.................................... 8.96% 4.37% 5.31%*
======= ======= =======
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).................. $72,702 $49,691 $47,172
======= ======= =======
Portfolio turnover........................................ 81.21% 129.51% 88.59%
======= ======= =======
Average commission rate paid##............................ -- -- --
======= ======= =======
</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.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been converted into U.S.
dollars using the prevailing exchange rate on the date of the transaction.
Such commissions may significantly affect the rate shown.
8
<PAGE> 11
FINANCIAL HIGHLIGHTS -- (CONTINUED)
<TABLE>
<CAPTION>
CLASS B
------------------------------------------------------------
FOR THE YEAR ENDED OCTOBER 31,
------------------------------------------------------------
1996++ 1995++ 1994 1993 1992
---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $ 14.01 $ 12.91 $ 13.38 $ 11.83 $ 12.10
---------- ---------- ---------- ---------- --------
Investment income--net................................................ .62 .65 .46 .28 .22
Realized and unrealized gain (loss) on investments and foreign
currency transactions--net........................................... 1.59 1.01 (.31) 2.11 .91
---------- ---------- ---------- ---------- --------
Total from investment operations...................................... 2.21 1.66 .15 2.39 1.13
---------- ---------- ---------- ---------- --------
Less dividends and distributions:
Investment income--net............................................... (.84) (.26) (.39) (.72) (.80)
Realized gain on investments--net.................................... (.43) (.30) (.23) (.12) (.60)
---------- ---------- ---------- ---------- --------
Total dividends and distributions..................................... (1.27) (.56) (.62) (.84) (1.40)
---------- ---------- ---------- ---------- --------
Net asset value, end of period........................................ $ 14.95 $ 14.01 $ 12.91 $ 13.38 $ 11.83
========== ========== ========== ========== ========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.................................... 16.71% 13.54% 1.13% 21.42% 10.64%
========== ========== ========== ========== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement........................................ 1.87% 1.93% 1.91% 1.95% 2.09%
========== ========== ========== ========== ========
Expenses.............................................................. 1.95% 1.93% 1.91% 1.95% 2.09%
========== ========== ========== ========== ========
Investment income--net................................................ 4.29% 4.96% 3.58% 2.87% 11.95%
========== ========== ========== ========== ========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).............................. $8,660,279 $6,688,499 $6,457,130 $4,299,545 $958,949
========== ========== ========== ========== ========
Portfolio turnover.................................................... 51.26% 36.78% 57.04% 50.35% 59.56%
========== ========== ========== ========== ========
Average commission rate paid##........................................ $ .0048 -- -- -- --
========== ========== ========== ========== ========
<CAPTION>
FOR THE
PERIOD
FEB. 3,
1989+ TO
OCT. 31,
1991 1990 1989
-------- -------- --------
<S> <<C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $ 10.33 $ 10.73 $ 10.00
-------- -------- --------
Investment income--net................................................ .44 .49 .38
Realized and unrealized gain (loss) on investments and foreign
currency transactions--net........................................... 2.22 (.16) .47
-------- -------- --------
Total from investment operations...................................... 2.66 .33 .85
-------- -------- --------
Less dividends and distributions:
Investment income--net............................................... (.34) (.53) (.12)
Realized gain on investments--net.................................... (.55) (.20) --
-------- -------- --------
Total dividends and distributions..................................... (.89) (.73) (.12)
-------- -------- --------
Net asset value, end of period........................................ $ 12.10 $ 10.33 $ 10.73
======== ======== ========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.................................... 27.48% 2.93% 8.50%#
======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement........................................ 2.31% 2.31% 2.40%*
======== ======== ========
Expenses.............................................................. 2.31% 2.31% 2.40%*
======== ======== ========
Investment income--net................................................ 7.98% 3.35% 4.29%*
======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).............................. $161,328 $115,682 $113,649
======== ======== ========
Portfolio turnover.................................................... 81.21% 129.51% 88.59%
======== ======== ========
Average commission rate paid##........................................ -- -- --
======== ======== ========
</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.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been converted into U.S.
dollars using the prevailing exchange rate on the date of the transaction.
Such commissions may significantly affect the rate shown.
9
<PAGE> 12
FINANCIAL HIGHLIGHTS (CONCLUDED)
<TABLE>
<CAPTION>
CLASS C
------------------------------
FOR THE
PERIOD
FOR THE YEAR ENDED OCT. 21,
OCT. 31, 1994+ TO
------------------- OCT. 31,
1996++ 1995++ 1994
-------- -------- --------
<S> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................................... $ 13.94 $ 12.91 $ 12.91
---------- ---------- ----------
Investment income--net.................................................................. .61 .64 .01
Realized and unrealized gain (loss) on investments and foreign currency
transactions--net...................................................................... 1.58 1.02 (.01)
---------- ---------- ----------
Total from investment operations........................................................ 2.19 1.66 --
---------- ---------- ----------
Less dividends and distributions:
Investment income--net................................................................. (.87) (.33) --
Realized gain on investments--net...................................................... (.43) (.30) --
---------- ---------- ----------
Total dividends and distributions....................................................... (1.30) (.63) --
---------- ---------- ----------
Net asset value, end of period.......................................................... $ 14.83 $ 13.94 $ 12.91
========== ========== ==========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...................................................... 16.68% 13.58% .00%#
========== ========== ==========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reinbursement.......................................................... 1.88% 1.95% 2.44%*
========== ========== ==========
Expenses................................................................................ 1.95% 1.95% 2.44%*
========== ========== ==========
Investment income--net.................................................................. 4.24% 4.80% 3.71%*
========== ========== ==========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................................................ $385,753 $102,361 $ 7,347
========== ========== ==========
Portfolio turnover...................................................................... 51.26% 36.78% 57.04%
========== ========== ==========
Average commission rate paid##.......................................................... $ .0048 -- --
========== ========== ==========
<CAPTION>
CLASS D
--------------------------------
FOR THE
PERIOD
FOR THE YEAR ENDED OCT. 21,
OCT. 31, 1994+ TO
--------------------- OCT. 31,
1996++ 1995++ 1994
---------- -------- --------
<S> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................................... $ 14.19 $ 13.08 $ 13.07
---------- -------- --------
Investment income--net.................................................................. .77 .77 .01
Realized and unrealized gain (loss) on investments and foreign currency
transactions--net...................................................................... 1.57 1.01 --
---------- -------- --------
Total from investment operations........................................................ 2.34 1.78 .01
---------- -------- --------
Less dividends and distributions:
Investment income--net................................................................. (.95) (.37) --
Realized gain on investments--net...................................................... (.43) (.30) --
---------- -------- --------
Total dividends and distributions....................................................... (1.38) (.67) --
---------- -------- --------
Net asset value, end of period.......................................................... $ 15.15 $ 14.19 $ 13.08
========== ======== ========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...................................................... 17.59% 14.43% .08% #
========== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reinbursement.......................................................... 1.10% 1.16% 1.69% *
========== ======== ========
Expenses................................................................................ 1.18% 1.16% 1.69% *
========== ======== ========
Investment income--net.................................................................. 5.04% 5.63% 4.46% *
========== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................................................ $1,044,136 $256,525 $ 4,968
========== ======== ========
Portfolio turnover...................................................................... 51.26% 36.78% 57.04%
========== ======== ========
Average commission rate paid##.......................................................... $ .0048 -- --
========== ======== ========
</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.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been converted into U.S.
dollars using the prevailing exchange rate on the date of the transaction.
Such commissions may significantly affect the rate shown.
10
<PAGE> 13
RISK FACTORS AND 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 that 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.
11
<PAGE> 14
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 not established any 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,
such as Standard & Poor's Ratings Service ("S&P") and Moody's Investors Service,
Inc. ("Moody's"), and unrated securities of comparable quality (such lower rated
and unrated securities are referred to herein as "high yield/high risk
securities") are 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's Board of Directors has adopted a policy limiting the
Fund's investment in such high yield/high risk securities to 35% of the Fund's
total assets. Within this 35% limitation, the Fund generally will not invest
more than 5% of its total assets in high yield/high risk securities, including
Corporate Loans (as defined below), which are the subject of bankruptcy
proceedings or otherwise in default as to the repayment of principal or payment
of interest at the time of acquisition by the Fund. Such securities are
speculative and involve significant risk. See "Investment Objective and
Policies."
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
12
<PAGE> 15
changes and income. This objective is a fundamental policy which the Fund may
not change without a vote of a majority of the Fund's outstanding voting
securities. There can be no assurance that the Fund's investment objective will
be achieved. The Fund may employ a variety of instruments and techniques to
enhance income and to hedge against market and currency risk, as described under
"Portfolio Strategies Involving Options and Futures" below.
The Fund will invest in a portfolio of U.S. and foreign equity, debt and
money market securities. The composition of the portfolio among these securities
and markets will be varied from time to time by the Manager, in response to
changing market and economic trends. This fully managed investment approach
provides the Fund with the opportunity to benefit from anticipated shifts in the
relative performance of different types of securities and different capital
markets. For example, at times the Fund may emphasize 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. The Fund may
invest in individual securities, baskets of securities or particular
measurements of value or rate (an "index"), such as an index of the price of
treasury securities or an index representative of short-term interest rates.
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.
13
<PAGE> 16
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 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 S&P or
14
<PAGE> 17
Baa or better by 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 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 securities, it will be subject to the risks
associated with changes in the applicable index or 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
15
<PAGE> 18
of the U.S. Government or foreign governments) to promote economic
reconstruction or development ("supranational entities") such as the
International Bank for Reconstruction and Development (the "World Bank").
U.S. Government securities include: (i) U.S. Treasury obligations (bills,
notes and bonds), which differ in their interest rates, maturities and times of
issuance, all of which are backed by the full faith and credit of the U.S.; and
(ii) obligations issued or guaranteed by U.S. Government agencies or
instrumentalities, including government guaranteed mortgage-related securities,
some of which are backed by the full faith and credit of the U.S. Treasury
(e.g., direct pass-through certificates of the Government National Mortgage
Association), some of which are supported by the right of the issuer to borrow
from the U.S. Government (e.g., obligations of Federal Home Loan Banks) and some
of which are backed only by the credit of the issuer itself (e.g., obligations
of the Student Loan Marketing Association).
In the case of mortgage-related securities, prepayments occur when the
holder of an individual mortgage prepays the remaining principal before the
mortgage's scheduled maturity date. As a result of the pass-through of
prepayments of principal on the underlying securities, a mortgage-related
security is often subject to more rapid prepayment of principal than its stated
maturity would indicate. Because the prepayment characteristics of the
underlying mortgages vary, it is not possible to predict accurately the realized
yield or average life of a particular issue of pass-through certificates.
Prepayment rates are important because of their effect on the yield and price of
the securities. Accelerated prepayments adversely impact yields for pass-through
securities purchased at a premium (i.e., a price in excess of principal amount)
and may involve additional risk of loss of principal because the premium may not
have been fully amortized at the time the obligation is repaid. The opposite is
true for pass-through securities purchased at a discount. The Fund may purchase
mortgage-related securities at a premium or at a discount.
The obligations of foreign governmental entities have various kinds of
government support and include obligations issued or guaranteed by foreign
governmental entities with taxing power. These obligations may or may not be
supported by the full faith and credit of a foreign government. The Fund will
invest in foreign government securities of issuers considered stable by the
Manager. The Manager does not believe that the credit risk inherent in the
obligations of stable foreign governments is significantly greater than that of
U.S. Government securities.
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. 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/high risk
securities (which are sometimes referred to as "junk" bonds) involves
substantial risk. Investments in high yield/high risk securities will be made
only when, in the judgment of the Manager, such securities provide
16
<PAGE> 19
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/high risk securities 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/high risk securities. Although the Fund may invest in preferred stock
rated below investment grade, an investment in an equity security such as
preferred stock is not subject to the above noted percentage restriction
applicable to the Fund's investments in non-investment grade debt securities.
High yield/high risk securities 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/high risk securities frequently are
junior obligations of their issuers, so that in the event of the issuer's
bankruptcy, claims of the holders of high yield/high risk securities will be
satisfied only after satisfaction of the claims of senior securityholders.
High yield/high risk securities 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/high risk securities than on higher rated
fixed income securities. Like higher rated fixed income securities, high
yield/high risk securities 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/high risk securities 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/high risk securities 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/high risk securities 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.
Within the 35% limitation described above with respect to investment in
high yield/high risk securities, the Fund may purchase in the secondary market
senior collateralized loans and senior unsecured loans made by banks or other
financial institutions (the "Corporate Loans"). The Corporate Loans in which the
Fund invests primarily consist of direct obligations of U.S. or non-U.S.
corporations undertaken to finance the growth of that corporation's business or
to finance a capital restructuring. The Fund may invest in a Corporate Loan by,
among other means, acquiring participations in, assignments of or novations of a
Corporate Loan in the secondary market. Certain of the Corporate Loans in which
the Fund may invest are subject to many of the risks associated with high
yield/high risk securities described above.
The Fund from time to time may invest, within the 35% investment limitation
described above, in high yield/high risk securities, including Corporate Loans
purchased in the secondary market, which are the subject of bankruptcy
proceedings or otherwise in default as to the repayment of principal and/or
payment of interest at the time of acquisition by the Fund ("Distressed
Securities"). The Fund generally will not invest
17
<PAGE> 20
more than 5% of its total assets in Distressed Securities. Investment in
Distressed Securities is speculative and involves significant risk. Generally,
the Fund expects to make such investments when the Manager believes it is
reasonably likely that the issuer of the securities will make an exchange offer
or will be the subject of a plan of reorganization, such as the rescheduling or
other restructuring of debt by a corporate or government issuer. There can be no
assurance that such an exchange offer will be made or that such a plan of
reorganization will be adopted. In addition, a significant period of time may
pass between the time at which the Fund makes its investments in Distressed
Securities and the time that any such exchange offer or plan of reorganization
is completed. During this period, it is unlikely that the Fund will receive any
interest payments on the Distressed Securities, the Fund will be subject to
significant uncertainty as to whether or not the exchange offer or plan of
reorganization will be completed, and the Fund may be required to bear certain
expenses to protect its interest in the course of negotiations surrounding any
potential exchange offer or plan of reorganization. In addition, even if an
exchange offer is made or plan of reorganization is adopted with respect to
Distressed Securities held by the Fund, there can be no assurance that the
securities or other assets received by the Fund in connection with such exchange
offer or plan of reorganization will not have a lower value or income potential
than anticipated when the investment was made. Moreover, any securities received
by the Fund upon completion of an exchange offer or plan of reorganization may
be restricted as to resale. As a result of the Fund's participation in
negotiations with respect to any exchange offer or plan of reorganization with
respect to an issuer of Distressed Securities, the Fund may be restricted from
disposing of such securities.
The table below shows the average monthly dollar-weighted market value, by
S&P rating category, of the bonds held by the Fund for the year ended December
31, 1996:
<TABLE>
<CAPTION>
PERCENT OF
RATING TOTAL ASSETS
--------------------------------------------------------- ------------
<S> <C>
AAA...................................................... 12.42%
AA....................................................... .46%
A........................................................ .50%
BBB...................................................... 1.32%
BB....................................................... 10.34%
B........................................................ 6.67%
CCC...................................................... .98%
CC....................................................... --%
C........................................................ .01%
D........................................................ .17%
Not Rated*............................................... 8.97%
-----
41.84%
=====
</TABLE>
- ---------------
* Bonds which are not rated by S&P or which are sovereign bonds in which the
sovereign entity was 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
.17% are of comparable quality to bonds rated AAA, .37% are of comparable
quality to bonds rated AA, .91% are of comparable quality to bonds rated A,
1.79% are of comparable quality to bonds rated BBB, 2.26% are of comparable
quality to bonds rated BB, 2.97% are of comparable quality to bonds rated B
and .50% 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.
18
<PAGE> 21
The percentages on page 18 reflect the average monthly dollar-weighted
market value for the year ended December 31, 1996. The rating composition of the
portfolio will change over time. See the Appendix to the Statement of Additional
Information for a description of the ratings.
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 effects from movements in interest rates or 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 interest rates or in the equity, debt and
currency markets occur. Reference is made to the Statement of Additional
Information for further information concerning these strategies.
Writing Covered Options. The Fund is authorized to write (i.e., sell)
covered call options on the securities in which it may invest and to enter into
closing purchase transactions with respect to certain of such options. A covered
call option is an option where the Fund, in return for a premium, gives another
party a right to buy specified securities owned by the Fund at a specified
future date and price set at the time of the contract. The principal reason for
writing call options is to attempt to realize, through the receipt of premiums,
a greater return than would be realized on the securities alone. By writing
covered call options, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security
19
<PAGE> 22
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 (i.e., sell) 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 liquid 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 (premium paid) of all outstanding options on securities held by
the Fund would exceed 5% of the market value of the Fund's total assets.
Stock or Other Financial Index Options and Futures and Financial
Futures. The Fund is authorized to engage in transactions in stock or other
financial index options and futures and financial futures (including futures on
government bonds), and related options on such futures. The Fund may purchase or
write put and call options on stock or other financial indices to hedge against
the risks of market-wide stock or bond 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 or other financial 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 or other financial index futures
contracts and financial futures contracts ("futures contracts") as a hedge
against adverse changes in the market value of its portfolio securities as
described below. A futures contract is an agreement between two parties which
obligates the
20
<PAGE> 23
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 is authorized to sell financial futures contracts in anticipation
of an increase in the general level of interest rates or in anticipation of an
increase in interest rates in a particular market. 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 is also authorized to 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
invested or fully invested in any particular 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 has authority to purchase and write call and put options on
futures contracts (including financial futures) 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.
21
<PAGE> 24
The Fund also has authority to engage in options and futures transactions
on U.S. and foreign exchanges and in options in the over-the-counter markets
("OTC options"). In general, exchange-traded contracts are third-party contracts
(i.e., performance of the parties' obligations is guaranteed by an exchange or
clearing corporation) with standardized strike prices and expiration dates. OTC
options transactions are two-party contracts with prices and terms negotiated by
the buyer and seller. See "Restrictions on OTC Options" below for information as
to restrictions on the use of OTC options.
Foreign Currency Hedging. The Fund has authority to deal in forward foreign
exchange among currencies of the different countries in which it will invest and
multinational currency units as a hedge against possible variations in the
foreign exchange rates among these currencies. This is accomplished through
contractual agreements to purchase or sell a specified currency at a specified
future date and price set at the
time of the contract. The Fund's dealings in forward foreign exchange will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is the purchase or sale of forward foreign
currency with respect to specific receivables or payables of the Fund accruing
in connection with the purchase and sale of its portfolio securities, the sale
and redemption of shares of the Fund or the payment of dividends and
distributions by the Fund. Position hedging is the sale of forward foreign
currency with respect to portfolio security positions denominated or quoted in
such foreign currency. The Fund will not speculate in forward foreign exchange.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level the Manager anticipates.
The Fund is also authorized to purchase or sell listed or over-the-counter
("OTC") 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
22
<PAGE> 25
securities which it has committed or anticipates to purchase which are
denominated in such currency and, in the case of securities which have been sold
by the Fund but not yet delivered, the proceeds thereof in its denominated
currency. The Fund may not incur potential net liabilities of more than 20% of
its total assets from foreign currency options, futures or related options.
Restrictions on the Use of Futures Transactions. Regulations of the
Commodity Futures Trading Commission ("CFTC") applicable to the Fund provide
that the futures trading activities described herein will not result in the Fund
being deemed a "commodity pool", as defined under such regulations if the Fund
adheres to certain restrictions. In particular, the Fund may purchase and sell
futures contracts and options thereon (i) for bona fide hedging purposes and
(ii) for non-hedging purposes, if the aggregate initial margin and premiums
required to establish positions in such contracts and options does not exceed 5%
of the liquidation value of the Fund's portfolio, after taking into account
unrealized profits and unrealized losses on any such contracts and options.
These restrictions are in addition to other restrictions on the Fund's hedging
activities mentioned herein.
When the Fund purchases a futures contract, or writes a put option or
purchases a call option thereon, an amount of cash and cash equivalents will be
deposited in a segregated account with the Fund's custodian so that the amount
so segregated, plus the amount of initial and variation margin held in the
account of its broker, equals the market value of the futures contract, thereby
ensuring that the use of such futures contract or option strategy is
unleveraged.
Restrictions on OTC Options. The Fund will engage in OTC options, including
OTC stock index options, OTC 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% 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.
23
<PAGE> 26
Risk Factors in Options and Futures Transactions. Utilization of options
and futures transactions to hedge the portfolio involves the risk of imperfect
correlation in movements in the price of options and futures and movements in
the price of the securities or currencies which are the subject of the hedge. If
the price of the options or futures moves more or less than the price of the
hedged securities or currencies, the Fund will experience a gain or loss which
will not be completely offset by movements in the price of the subject of the
hedge. The successful use of options and futures also depends on the Manager's
ability to correctly predict price movements in the market involved in a
particular options or futures transaction. To compensate for imperfect
correlations, the Fund may purchase or sell stock index options or futures
contracts in a greater dollar amount than the hedged securities if the
volatility of the hedged securities is historically greater than the volatility
of the stock index options or futures contracts. Conversely, the Fund may
purchase or sell fewer stock index options or futures contracts if the
volatility of the price of the hedged securities is historically less than that
of the stock index options or futures contracts.
The Fund intends to enter into options and futures transactions, on an
exchange or in the OTC market, only if there appears to be a liquid secondary
market for such options or futures or, in the case of OTC 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 for the special
tax treatment afforded "regulated investment companies" under 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. Foreign government securities (unlike U.S. government securities) are
not exempt from the diversification requirements of the Code and the securities
of each foreign government issuer are considered to
24
<PAGE> 27
be the obligations of a single issuer. A fund that elects to be classified as
"diversified" under the Investment Company Act must satisfy the foregoing 5% and
10% requirements with respect to 75% of its total assets. To the extent that the
Fund assumes large positions in the securities of a small number of issuers, the
Fund's net asset value may fluctuate to a greater extent than that of a
diversified company as a result of changes in the financial condition or in the
market's assessment of the issuers, 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 "Risk Factors and 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 OTC transactions
conducted on an agency basis. In addition, consistent with the Conduct Rules 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 that 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 liquid 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 or a
stated number of shares of equity securities that 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 that 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 that is considered
25
<PAGE> 28
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% 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 liquid 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 financial institutions that
(i) have, in the opinion of the Manager, substantial capital relative to the
Fund's exposure, or (ii) have provided the Fund with a third-party guaranty or
other credit enhancement. 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% 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
26
<PAGE> 29
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.
Swap Agreements. The Fund is authorized to enter into equity swap
agreements, which are 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 that 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 that
cannot be readily resold because of legal or contractual restrictions or that
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 taken at market value would be invested
27
<PAGE> 30
in such securities. Notwithstanding the foregoing, the Fund may purchase without
regard to this limitation securities that are 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. While it is the policy of the Fund generally not to
engage in trading for short-term gains, the Manager and Merrill Lynch Asset
Management U.K. Limited, the Fund's sub-adviser ("MLAM U.K."), will effect
portfolio transactions without regard to holding period if, in their judgment,
such transactions are advisable in light of a change in circumstances of a
particular company or within a particular industry or in general market,
economic or financial conditions. As a result of the investment policies
described in the Prospectus, the Fund's portfolio turnover rate may be higher
than that of other investment companies. 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 Fund is
subject to the Federal income tax requirement that less than 30% of the Fund's
gross income be derived from the sale or other disposition of securities held
for less than three months. 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 its affiliate, FAM;
President and Director of Princeton Services, Inc.; Executive Vice President of
ML & Co.; and 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.
28
<PAGE> 31
RICHARD R. WEST -- Dean Emeritus, New York University Leonard N. Stern
School of Business Administration.
EDWARD D. ZINBARG -- Former Executive Vice President of The Prudential
Insurance Company of America.
- ---------------
* Interested person, as defined in the Investment Company Act, of the Fund.
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 and offers portfolio management
and portfolio analysis services to individuals and institutions. As of January
31, 1997, the Manager and FAM had a total of approximately $239.8 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 shall be equal to 0.75% of that portion of the average
daily net assets which does not exceed $2.5 billion; 0.70% of that portion of
the average daily net assets which exceeds $2.5 billion but does not exceed $5.0
billion; 0.65% of that portion of the average daily net assets which exceeds
$5.0 billion but does not exceed $7.5 billion; 0.625% of that portion of the
average daily net assets which exceeds $7.5 billion but does not exceed $10
billion; and 0.60% of that portion of the average daily net assets which exceeds
$10 billion. For the fiscal year ended October 31, 1996, the Fund paid the
Manager a fee at the effective rate of 0.68% 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, 1996, the Manager
earned a fee of $78,610,213 (based on average net assets of approximately $10.5
billion), of which $7,667,135 was voluntarily waived. Also, the Manager has
entered into a sub-advisory agreement (the "Sub-Advisory Agreement") with MLAM
U.K., an indirect, wholly owned subsidiary of ML & Co. and an affiliate of the
Manager, pursuant to which the Manager pays MLAM U.K. a fee for providing
investment advisory services to the Manager with respect to the Fund in an
amount to be determined from time to time by the Manager and MLAM U.K. but in no
event in excess of the amount the Manager actually receives for providing
services to the Fund pursuant to the Management Agreement. For the
29
<PAGE> 32
fiscal year ended October 31, 1996, the fee paid by the Manager to MLAM U.K.
pursuant to such agreement aggregated $9,422,273. 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 investment portfolio since it commenced
operations.
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, 1996, the Fund
reimbursed the Manager $600,636 for such accounting services. For the fiscal
year ended October 31, 1996, the ratio of total expenses to average net assets
for Class A, Class B, Class C and Class D shares was 0.93%, 1.95%, 1.95% and
1.18%, respectively.
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 that incorporates the Code of Ethics of the
Manager (together, the "Codes"). The Codes significantly restrict the personal
investing activities of all employees of the Manager and, as described below,
impose additional, more onerous, restrictions on fund investment personnel.
The Codes require that all employees of the Manager preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed investment.
The substantive restrictions applicable to all employees of the Manager include
a ban on acquiring any securities in a "hot" initial public offering and a
prohibition from profiting on short-term trading in securities. In addition, no
employee may purchase or sell any security 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 subsidiary of ML & Co., acts as the Fund's transfer agent pursuant to a
Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement (the "Transfer Agency Agreement"). Pursuant to the Transfer Agency
Agreement, the Transfer Agent is responsible for the issuance, transfer and
redemption of shares and the opening and maintenance of shareholder accounts.
Pursuant to the Transfer Agency Agreement, the Transfer Agent receives a fee of
up to $11.00 per Class A or Class D account and up to $14.00 per Class B or
Class C account and is entitled to reimbursement for out-of-pocket expenses
incurred by it under the Transfer Agency Agreement. The term "account" includes
a shareholder account maintained directly by the Transfer Agent
30
<PAGE> 33
and any other account representing a beneficial interest of a person in the
relevant share class or a record keeping system, provided the record keeping
system is maintained by a subsidiary of ML & Co. For the fiscal year ended
October 31, 1996, the Fund paid $14,771,388 to the Transfer Agent pursuant to
the Transfer Agency Agreement.
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
Pricing(SM) System, as described below. The applicable offering price for
purchase orders is based upon the net asset value of the Fund next determined
after receipt of the purchase orders by the Distributor. As to purchase orders
received by securities dealers prior to the close of business on the New York
Stock Exchange ("NYSE") (generally, 4:00 p.m., New York time), which includes
orders received after the close of business on the previous day, the applicable
offering price will be based on the net asset value determined as of 15 minutes
after the close of business on the NYSE on that day, provided the Distributor in
turn receives the orders from the securities dealer prior to 30 minutes after
the close of business on the NYSE on that day. If the purchase orders are not
received by the Distributor prior to 30 minutes after the close of business on
the NYSE, 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
Pricing(SM) 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 Pricing(SM) System is set forth
under "Merrill Lynch Select Pricing(SM) 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
31
<PAGE> 34
of the ongoing distribution fees and the additional incremental transfer agency
costs resulting from the deferred sales charge arrangements. The CDSCs,
distribution 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, 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 (except that Class B
shareholders may vote upon any material changes to expenses charged under the
Class D Distribution Plan). See "Distribution Plans" below. Each class has
different exchange privileges. See "Shareholder Services -- Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the 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 Pricing(SM) System.
<TABLE>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
- -------------------------------------------------------------------------------------------------
A Maximum 5.25% initial sales No No No
charge(2)(3)
- -------------------------------------------------------------------------------------------------
B CDSC for a period of four 0.25% 0.75% B shares convert
years, at a rate of 4.0% to D shares automatically
during the first year, after approximately
decreasing 1.0% annually to eight years(5)
0.0%(4)
- -------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(6) 0.25% 0.75% No
- -------------------------------------------------------------------------------------------------
D Maximum 5.25% initial sales 0.25% No No
charge(3)
- -------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs may be imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives -- Class A and Class D Shares -- Eligible Class A Investors."
(3) Reduced for purchases of $25,000 or more, and waived for purchases of Class
A shares by certain retirement plans and participants in connection with
certain fee-based programs. Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but instead
may be subject to a 1.0% CDSC if redeemed within one year. Such CDSC may be
waived in connection with certain fee-based programs. A 0.75% sales charge
for 401(k) purchases over $1,000,000 will apply.
(4) The CDSC may be modified in connection with certain fee-based programs.
(Footnotes continued on following page)
32
<PAGE> 35
(5) 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.
(6) The CDSC may be waived in connection with certain fee-based programs.
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible
to purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
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>
DISCOUNT TO
SALES LOAD AS SALES LOAD AS SELECTED DEALERS
PERCENTAGE OF PERCENTAGE* OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE THE NET AMOUNT INVESTED THE OFFERING PRICE
- ---------------------------------------- ---------------- ----------------------- ------------------
<S> <C> <C> <C>
Less than $25,000....................... 5.25% 5.54% 5.00%
$25,000 but less than $50,000........... 4.75 4.99 4.50
$50,000 but less than $100,000.......... 4.00 4.17 3.75
$100,000 but less than $250,000......... 3.00 3.09 2.75
$250,000 but less than $1,000,000....... 2.00 2.04 1.80
$1,000,000 and over**................... 0.00 0.00 0.00
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more and on Class A purchases in connection with certain
fee-based programs. If the sales charge is waived in connection with a
purchase of $1,000,000 or more, such purchases may be subject to a 1.0% CDSC
if the shares are redeemed within one year after purchase. Such CDSC may be
waived in connection with certain fee-based programs. 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. For the
fiscal year ended October 31, 1996, the Fund sold 26,663,921 Class A shares for
aggregate net proceeds of $385,379,581. The gross sales charges for the sale of
Class A shares of the Fund for that year were $1,093,106, of which $76,760 and
$1,016,346 were received by the Distributor and Merrill Lynch, respectively. For
the fiscal year ended October 31, 1996, the Distributor received CDSCs of
$19,080 with respect to redemptions within one year after purchase of Class A
shares purchased subject to a front-end sales charge waiver, all of which were
paid to Merrill Lynch. For the fiscal year ended October 31, 1996, the Fund sold
20,921,971 Class D shares for aggregate net proceeds of $291,938,712. The gross
sales charges for the sale of Class D shares of the Fund for that year were
$3,654,846, of which $241,734 and $3,413,112 were received by the Distributor
and Merrill Lynch, respectively. For the fiscal year ended October 31, 1996, the
Distributor received no CDSCs with respect to redemptions within one year after
purchase of Class D shares purchased subject to a front-end sales charge waiver.
33
<PAGE> 36
Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors that currently own Class A shares 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, collective investment trusts for which Merrill
Lynch Trust Company serves as trustee and purchases made in connection with
certain fee-based programs. In addition, Class A shares are offered at net asset
value to ML & Co. and its subsidiaries and their directors and employees and to
members of the Boards of MLAM-advised investment companies, including the Fund.
Certain persons who acquired shares of certain MLAM-advised closed-end funds in
their initial offerings who wish to reinvest the net proceeds from a sale of
their closed-end fund shares of common stock in shares of the Fund also may
purchase Class A shares of the Fund if certain conditions set forth in the
Statement of Additional Information are met. In addition, Class A shares of the
Fund and certain other MLAM-advised mutual funds are offered at net asset value
to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain
conditions set forth in the Statement of Additional Information are met, to
shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch
High Income Municipal Bond Fund, Inc. who wish to reinvest the net proceeds from
a sale of certain of their shares of common stock pursuant to a tender offer
conducted by such funds in shares of the Fund and certain other MLAM-advised
mutual funds.
Reduced Initial Sales Charges. No 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." See "Shareholder
Services -- Fee-Based Programs."
Class A and Class D shares are offered at net asset value to certain
employer sponsored retirement or savings plans and to Employee Access
Accounts(SM) available through qualified employers which provide such plans.
Class A shares are offered at net asset value to shareholders of Merrill Lynch
Senior Floating Rate Fund, Inc. and, subject to certain conditions, Class A and
Class D shares 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 in shares of the Fund the net
proceeds from a sale of certain of their shares of common stock pursuant to
tender offers conducted by those funds.
Class D shares are offered at net asset value without 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.
34
<PAGE> 37
Additional information concerning these reduced initial sales charges is
set forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES -- CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four-year CDSC
which declines each year, while Class C shares are subject only to a one-year
1.0% CDSC. On the other hand, approximately eight years after Class B shares are
issued, such Class B shares, together with shares issued upon dividend
reinvestment with respect to those shares, are automatically converted into
Class D shares of the Fund and thereafter will be subject to lower continuing
fees. See "Conversion of Class B Shares to Class D Shares" below. Both Class B
and Class C shares are subject to an account maintenance fee of 0.25% of net
assets and 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 that
are redeemed within four years of purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of the proceeds of
35
<PAGE> 38
redemption or the cost of the shares being redeemed. Accordingly, no CDSC will
be imposed on increases in net asset value above the initial purchase price. In
addition, no CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B CDSC
AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
----------------------------------------------------------------- ------------------
<S> <C>
0-1.............................................................. 4.00%
1-2.............................................................. 3.00
2-3.............................................................. 2.00
3-4.............................................................. 1.00
4 and thereafter................................................. 0.00
</TABLE>
For the fiscal year ended October 31, 1996, the Distributor received CDSCs of
$8,468,220 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).
The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended) of a shareholder. The
Class B CDSC also is waived on redemptions of shares by certain eligible 401(a)
and eligible 401(k) plans and in connection with certain group plans placing
orders through the Merrill Lynch Blueprint(SM) Program. The CDSC also is waived
for any Class B shares which are purchased by eligible 401(k) or eligible 401(a)
plans which are rolled over into a Merrill Lynch or Merrill Lynch Trust Company
custodied IRA and held in such account at the time of redemption. The Class B
CDSC also is waived for any Class B shares which are purchased by a Merrill
Lynch rollover IRA that was funded by a rollover from a terminated 401(k) plan
managed by the MLAM Private Portfolio Group and held in such account at the time
of redemption. Additional information concerning the waiver of the Class B CDSC
is set forth in the Statement of Additional
36
<PAGE> 39
Information. The terms of the CDSC may be modified in connection with certain
fee-based programs. See "Shareholder Services -- Fee-Based Programs."
Contingent Deferred Sales Charges -- Class C Shares. Class C shares that
are redeemed within one year after purchase may be subject to a 1.0% CDSC
charged as a percentage of the dollar amount subject thereto. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed
on increases in net asset value above the initial purchase price. In addition,
no Class C CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions. No Class C CDSC will be assessed in
connection with certain fee-based programs. See "Shareholder
Services -- Fee-Based Programs." For the fiscal year ended October 31, 1996, the
Distributor received CDSCs of $117,278 with respect to redemptions 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
37
<PAGE> 40
exchange will apply, and the holding period for the shares exchanged will be
tacked onto the holding period for the shares acquired.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the CDSC
normally imposed on purchases of Class B shares ("Class B Retirement Plans").
When the first share of any MLAM-advised mutual fund purchased by a Class B
Retirement Plan has been held for ten years (i.e., ten years from the date the
relationship between MLAM-advised mutual funds and the Class B Retirement Plan
was established), all Class B shares of all MLAM-advised mutual funds held in
that Class B Retirement Plan will be converted into Class D shares of the
appropriate funds. Subsequent to such conversion, that Class B Retirement Plan
will be sold Class D shares of the appropriate funds at net asset value.
The Conversion Period also may be modified for retirement plan investors
who participate in certain fee-based programs. See "Shareholder
Services -- Fee-Based Programs."
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or distribution
fees paid by the Fund to the Distributor with respect to such classes. The Class
B and Class C Distribution Plans provide for the payment of account maintenance
fees and distribution fees, and the Class D Distribution Plan provides for the
payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual rate
of 0.25% of the average daily net assets of the Fund attributable to shares of
the relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) in connection with account maintenance activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.75% of
the average daily net assets of the Fund attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services, and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C shares
through dealers without the assessment of an initial sales charge and at the
same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this regard, the
purpose and function of the ongoing distribution fees and the CDSC are the same
as those of the initial sales charge with respect to the Class A and Class D
shares of the Fund in that the deferred sales charges provide for the financing
of the distribution of the Fund's Class B and Class C shares.
For the fiscal year ended October 31, 1996, the Fund paid the Distributor
$78,009,323 pursuant to the Class B Distribution Plan (based on average net
assets subject to such Class B Distribution Plan of approximately $7.8 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, 1996, the Fund paid the Distributor
$2,485,555 pursuant to the Class C Distribution Plan (based
38
<PAGE> 41
on average net assets subject to such Class C Distribution Plan of approximately
$248.8 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, 1996, the Fund paid the
Distributor $1,852,841 pursuant to the Class D Distribution Plan (based on
average net assets subject to such Class D Distribution Plan of approximately
$740.3 million), all of which was paid to Merrill Lynch for providing account
maintenance activities in connection with Class D shares.
The payments under the Distribution Plans are based 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.
As of December 31, 1995, the fully allocated accrual expenses incurred by
the Distributor and Merrill Lynch for the period since the commencement of
operations of Class B shares exceeded fully allocated accrual revenues by
approximately $40,298,000 (.56% of Class B net assets at that date). As of
October 31, 1996, direct cash revenues for the period since the commencement of
operations of Class B shares exceeded direct cash expenses by $248,344,734
(2.87% of Class B net assets at that date). Similar fully allocated accrual data
for Class C shares is not presented because such revenues and expenses for the
period October 21, 1994 (commencement of operations) to December 31, 1995 are de
minimis. As of October 31, 1996, direct cash revenues for the period since the
commencement of operations of Class C shares exceeded direct cash expenses by
$1,715,166 (.44% of Class C net assets at that date). The foregoing includes the
operations of Balanced Fund, which the Fund acquired effective March 4, 1996.
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Directors of the Fund will approve the continuance of the Distribution
Plans from year to year. However, the Distributor intends to seek annual
continuation of the Distribution Plans. In their review of the Distribution
Plans, the Directors will be asked to take into consideration expenses incurred
in connection with the account maintenance and/or distribution of each class of
shares separately. The initial sales charges, the account maintenance fee, the
distribution fee and/or the CDSCs received with respect to 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."
39
<PAGE> 42
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the 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 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 redemption request 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
40
<PAGE> 43
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 NYSE
(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 NYSE on the same day. Dealers have the responsibility
of submitting such repurchase requests to the Fund not later than 30 minutes
after the close of business on the NYSE in order to obtain that day's closing
price.
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. However, a shareholder
whose order for repurchase is rejected by the Fund may redeem shares as set
forth above.
Redemption payments will be made within seven days of the proper tender of
the certificates, if any, and stock power or letter requesting redemption, in
each instance with signatures guaranteed as noted above.
REINSTATEMENT PRIVILEGE -- CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a
privilege to reinstate their accounts by purchasing Class A or Class D shares,
as the case may be, of the Fund at net asset value without a sales charge up to
the dollar amount redeemed. The reinstatement privilege may be exercised by
sending a notice of exercise along with a check for the amount to be reinstated
to the Transfer Agent within 30 days after the date the request for redemption
was accepted by the Transfer Agent or the Distributor. Alternatively, the
reinstatement privilege may be exercised through the investor's Merrill Lynch
Financial Consultant within 30 days after the date the request 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.
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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 or her 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.
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
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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 Pricing(SM) 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 or her 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 or her account at the time of the exchange and is not
otherwise eligible to acquire Class A shares of the second fund, the shareholder
will receive Class D shares of the second fund as a result of the exchange.
Class D shares also may be exchanged for Class A shares of a second MLAM-advised
mutual fund at any time as long as, at the time of the exchange, the shareholder
holds Class A shares of the second fund in the account in which the exchange is
made or is otherwise eligible to purchase Class A shares of the second fund.
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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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 after the close of business on the NYSE 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 PLANS
A Class A or Class D shareholder may elect to receive systematic withdrawal
payments from his or her Investment Account in the form of payments by check or
through automatic payment by direct deposit to his or her 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 PLAN
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 or her 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.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives
for securities transactions, (each referred to in this paragraph as a "Program")
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of shares
held therein or the automatic exchange thereof to another class at net asset
value, which may be shares of a money market fund. In addition, upon termination
of participation in a Program, shares that have been held for less than
specified periods within such Program may be subject to a fee based upon the
current value of such shares. These Programs also generally prohibit such shares
from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance fees)
in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such
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<PAGE> 47
Program) is available in such Program's client agreement and from Merrill Lynch
Investor Services at (800) MER-FUND or (800) 637-3863.
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 or Class C shares (such as investors in certain retirement
plans), performance data may take into account the reduced, and not the maximum,
sales charge or may not take into account the CDSC and therefore may reflect
greater total return since, due to the reduced sales charges or waiver of the
CDSC, a lower amount of expenses may be deducted. See "Purchase of Shares". The
Fund's total return may be expressed either as a percentage or as a dollar
amount in order to illustrate the effect of such total return on a hypothetical
$1,000 investment in the Fund at the beginning of each specified period.
Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or
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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 Index, the Dow Jones Industrial Average, or performance data published by
Lipper Analytical Services, Inc., Morningstar Publications, Inc., Money
Magazine, U.S. News & World Report, Business Week, CDA Investment Technology,
Inc., Forbes Magazine, Fortune Magazine or other industry publications. In
addition, from time to time the Fund may include the Fund's risk-adjusted
performance ratings assigned by Morningstar Publications, Inc. in advertising or
supplemental sales literature. As with other performance data, performance
comparisons should not be considered indicative of the Fund's relative
performance for any future period.
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
"Determination of Net Asset Value" below. Dividends and distributions will 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
Federal tax requirements that certain percentages of its ordinary income and
capital gains be distributed during the calendar year.
Gains or losses attributable to certain foreign currency transactions may
increase or decrease the amount of the Fund's income available for distribution
to shareholders. If such losses exceed other income during a taxable year, (a)
the Fund would not be able to make any ordinary income dividend distributions,
and (b) all or a portion of distributions made before the losses were realized
but in the same taxable year would be recharacterized as returns of capital to
shareholders, rather than as ordinary income dividends, thereby 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 cash payment.
Dividends and distributions are taxable to shareholders as described below
whether they are reinvested in shares of any portfolio or received in cash.
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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 NYSE (generally,
4:00 p.m., New York time), on each day during which the NYSE 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 that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. 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 OTC market are valued at the last
available bid price in the OTC market prior to the time of valuation. Securities
which are traded in both the OTC market and on a stock exchange will be valued
according to the broadest and most representative market. When the Fund writes
an option, the amount of the premium received is recorded on the books of the
Fund as an asset and an equivalent liability. The amount of the liability is
subsequently valued to reflect the current market value of the option written,
based upon the last sale price in the case of exchange-traded options or, in the
case of options traded in the OTC 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 OTC market, the
last bid price. Other investments, including futures contracts and related
options, will be stated at market value. Securities and assets for which market
quotations are not readily available are valued at fair value as determined in
good faith under the direction of the Board of Directors of the Fund.
Corporate Loans will be valued in accordance with guidelines established by
the Board of Directors. Under the Fund's current guidelines, Corporate Loans for
which an active secondary market exists to a reliable degree in the opinion of
the Manager and for which the Manager can obtain at least two quotations from
banks or dealers in Corporate Loans will be valued by the Manager by calculating
the mean of the bid and asked prices for such Corporate Loans provided by each
of two dealers, and then using the mean of those two means. If only one quote
for a particular Corporate Loan is available, such Corporate Loan will be valued
on the basis of the mean of the last available bid and asked prices provided by
the dealer. In the event no quotes are available, such Corporate Loan will be
valued by a Pricing Committee of the Board of Directors.
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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 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
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<PAGE> 51
in this paragraph but may not be able to claim a credit or deduction against
such U.S. tax for the foreign taxes treated as having been paid by such
shareholder. The Fund will report annually to its shareholders the amount per
share of such withholding taxes.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
Under Code Section 988, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that are not
"regulated futures contracts" and from unlisted options will generally be
treated as ordinary income or loss. Such Code Section 988 gains or losses will
generally increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company taxable
income during a taxable year, the Fund would not be able to make any ordinary
income dividend distributions, and 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.
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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 2,900,000,000 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 consists of
300,000,000 shares, Class B consists of 1,500,000,000 shares, Class C consists
of 200,000,000 shares, and Class D consists of 900,000,000 shares. Shares of
Class A, Class B, Class C and Class D Common Stock represent interests in the
same assets of the Fund and are identical in all respects except that Class B,
Class C and Class D shares bear certain expenses related to the account
maintenance associated with such shares, and Class B and Class C shares bear
certain expenses related to the distribution of such shares. Each class has
exclusive voting rights with respect to matters relating to account maintenance
and distribution expenditures, as applicable. See "Purchase of Shares". The
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 if such request
is in compliance with applicable Maryland law. 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.
On March 4, 1996, the Fund acquired substantially all of the assets of
Balanced Fund and assumed substantially all of the liabilities of Balanced Fund,
in exchange solely for an equal aggregate value of shares of the Fund, which
shares were subsequently distributed to shareholders of Balanced Fund in
liquidation of Balanced Fund.
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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.
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(This page intentionally left blank)
52
<PAGE> 55
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. -- AUTHORIZATION FORM (PART 1)
- --------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINTSM PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINTSM 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
<TABLE>
<S> <C> <C> <C> <C> <C>
Ordinary Income Dividends Long-Term Capital Gains
--------------------------------- ---------------------------------
SELECT [ ] Reinvest SELECT [ ] Reinvest
ONE: [ ] Cash ONE: [ ] Cash
--------------------------------- ---------------------------------
</TABLE>
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.
- --------------------------------------------------------------------------------
53
<PAGE> 56
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. -- AUTHORIZATION FORM (PART
1) -- (CONTINUED)
- --------------------------------------------------------------------------------
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is my
correct Social Security Number or Taxpayer Identification Number and (2) that I
am not subject to backup withholding (as discussed 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 UNDERREPORTING AND IF
YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO
OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
<TABLE>
<S> <C>
............................................................. ............................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
- --------------------------------------------------------------------------------
4. LETTER OF INTENTION -- CLASS A AND D SHARES ONLY (See terms and conditions in
the Statement of Additional Information)
<TABLE>
<S> <C>
......................,
19 . . . .
Dear Sir/Madam: Date of initial purchase
</TABLE>
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.
<TABLE>
<S> <C>
By:.............................................................. ...............................................................
Signature of Owner Signature of Co-Owner
(If registered in joint names, both must sign)
</TABLE>
In making purchases under this letter, the following are the related accounts
on which reduced offering prices are to apply:
<TABLE>
<S> <C>
(1) Name ................................................... (2) Name....................................................
Account Number ............................................ Account Number..............................................
</TABLE>
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
- --- Branch Office, Address, Stamp
- ---
=
=
===
This form when completed should be mailed to:
Merrill Lynch Global Allocation Fund, Inc.
c/o Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289
We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our agent in
connection with transactions under this authorization form and agree to notify
the Distributor of any purchases or sales made under a Letter of Intention,
Automatic Investment Plan or Systematic Withdrawal Plan. We guarantee the
shareholder's signature.
...............................................................
Dealer Name and Address
By .............................................................................
Authorized Signature of Dealer
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- --------- ------------
..............................
- --------- ------------
Branch-Code F/C No. F/C Last Name
- --------- ---------------
- --------- ---------------
Dealer's Customer Account No.
</TABLE>
54
<PAGE> 57
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.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
1. ACCOUNT REGISTRATION
------------------------------------
Name of Owner........................................................
------------------------------------
Social Security No.
or Taxpayer Identification No.
Name of Co-Owner (if any)............................................
Address.............................................................
.................................................................... Account Number........................
(if existing account)
<CAPTION>
Name of Owner......................................................
Name of Co-Owner (if any)...........................................
Address.............................................................
....................................................................
</TABLE>
- --------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN -- CLASS A AND 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.
55
<PAGE> 58
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. -- AUTHORIZATION FORM (PART
2) -- (CONTINUED)
- --------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account 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.
MERRILL LYNCH FINANCIAL 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 $...................................................
Account Number...............................................................
Please date and invest ACH debits on the 20th of each month beginning
............... or as soon thereafter as possible.
(month)
I agree that you are drawing these ACH debits voluntarily at my request and
that you shall not be liable for any loss arising from any delay in preparing or
failure to prepare any such debit. If I change banks or desire to terminate or
suspend this program, I agree to notify you promptly in writing. I hereby
authorize you to take any action to correct erroneous ACH debits of my bank
account or purchases of Fund shares including liquidating shares of the Fund and
crediting my bank account. I further agree that if a debit is not honored upon
presentation, Merrill Lynch Financial Data Services, Inc. is authorized to
discontinue immediately the Automatic Investment Plan and to liquidate
sufficient shares held in my account to offset the purchase made with the
dishonored debit.
................. .......................................
Date Signature of Depositor
.......................................
Signature of Depositor
(If joint account, both must sign)
AUTHORIZATION TO HONOR ACH DEBITS DRAWN BY
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
To..........................................................................Bank
(Investor's Bank)
Bank Address....................................................................
City............................................ State .......... Zip ..........
As a convenience to me, I hereby request and authorize you to pay and charge
to my account ACH debits drawn on my account by and payable to Merrill Lynch
Financial Data Services, Inc. I agree that your rights in respect to each such
debit shall be the same as if it were a check drawn on you and signed personally
by me. This authority is to remain in effect until revoked by me in writing.
Until you receive such notice, you shall be fully protected in honoring any such
debit. I further agree that if any such debit be dishonored, whether with or
without cause and whether intentionally or inadvertently, you shall be under no
liability.
................. .......................................
Date Signature of Depositor
................. .......................................
Bank Account Signature of Depositor
Number (If joint account, both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED
"VOID" SHOULD ACCOMPANY THIS APPLICATION.
56
<PAGE> 59
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 LLP
One World Trade Center
New York, New York 10048-0557
<PAGE> 60
- ------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION 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 Pricing(SM) System... 3
Financial Highlights...................... 8
Risk Factors and Special Considerations... 11
Investment Objective and Policies......... 12
Equity Securities....................... 14
Debt Securities......................... 15
Money Market Securities................. 19
Portfolio Strategies Involving Options
and Futures........................... 19
Other Investment Policies and
Practices............................. 24
Management of the Fund.................... 28
Board of Directors...................... 28
Management and Advisory Arrangements.... 29
Code of Ethics.......................... 30
Transfer Agency Services................ 30
Purchase of Shares........................ 31
Initial Sales Charge Alternatives --
Class A and Class D Shares............ 33
Deferred Sales Charge Alternatives --
Class B and Class C Shares............ 35
Distribution Plans...................... 38
Limitations on the Payment of Deferred
Sales Charges......................... 40
Redemption of Shares...................... 40
Redemption.............................. 40
Repurchase.............................. 41
Reinstatement Privilege --
Class A and Class D Shares............ 41
Shareholder Services...................... 42
Investment Account...................... 42
Exchange Privilege...................... 42
Automatic Reinvestment of Dividends and
Capital Gains Distributions........... 44
Systematic Withdrawal Plans............. 44
Automatic Investment Plan............... 44
Fee-Based Programs...................... 44
Performance Data.......................... 45
Additional Information.................... 46
Dividends and Distributions............. 46
Determination of Net Asset Value........ 47
Taxes................................... 48
Organization of the Fund................ 50
Shareholder Reports..................... 51
Shareholder Inquiries................... 51
Authorization Form........................ 53
</TABLE>
Code # 10810-0297
[MERRILL LYNCH LOGO]
MERRILL LYNCH
GLOBAL ALLOCATION
FUND, INC.
PROSPECTUS [MLYNCH COMPASS]
February 25, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE> 61
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
-------------------------
Merrill Lynch Global Allocation Fund, Inc. (the "Fund") is a
non-diversified open-end management investment company that seeks high total
investment return, consistent with prudent risk, through a fully-managed
investment policy utilizing United States and foreign equity, debt and money
market securities, the combination of which will be varied from time to time
both with respect to types of securities and markets in response to changing
market and economic trends. Total investment return is the aggregate of capital
value changes and income. There can be no assurance that the Fund's investment
objective will be achieved. The Fund may employ a variety of instruments and
techniques to enhance income and to hedge against market and currency risk.
-------------------------
Pursuant to the Merrill Lynch Select Pricing (SM) System, the Fund offers
four classes of shares each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares and other relevant circumstances.
-------------------------
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the prospectus of the Fund, dated
February 25, 1997 (the "Prospectus"), which has been filed with the Securities
and Exchange Commission (the "Commission") and can be obtained, without charge,
by calling or by writing the Fund at the above telephone number or address. This
Statement of Additional Information has been incorporated by reference into the
Prospectus.
-------------------------
MERRILL LYNCH ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
-------------------------
The date of this Statement of Additional Information is February 25, 1997.
<PAGE> 62
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. The portfolio turnover rate is
calculated by dividing the lesser of the Fund's annual sales or purchases of
portfolio securities (exclusive of purchases or sales of securities whose
maturities at the time of acquisition were one year or less) by the monthly
average value of the securities in the portfolio during the year. The portfolio
turnover rates for the fiscal years ended October 31, 1995 and 1996 were 36.78%
and 51.26%, 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 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
2
<PAGE> 63
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.
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
adverse effects from movements in interest rates or in the
3
<PAGE> 64
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 or she may
be required to sell his or her securities since he or she may be assigned an
exercise notice at any time prior to the termination of his or her 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 liquid 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.
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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 ("NYSE"), 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 is authorized to purchase put options to
hedge against a decline in the market value of its securities. 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 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 cost. A
closing sale transaction cancels out the Fund's position as the purchaser of an
option by means of an offsetting sale of an identical option prior to the
expiration of the option it has purchased. In certain circumstances, the Fund
may purchase call options on securities held in its portfolio on which it has
written call options or on securities which it intends to purchase. The Fund may
purchase either exchange traded options or OTC options. The Fund will not
purchase options on securities (including stock index options discussed below)
if, as a result of such purchase, the aggregate cost (premium paid) of all
outstanding options on securities held by the Fund would exceed 5% of the market
value of the Fund's total assets.
Stock or Other Financial Index Options and Futures and Financial
Futures. As described in the Prospectus, the Fund is authorized to engage in
transactions in stock or other financial index options and futures and financial
futures (including futures on government bonds), and related options on such
futures. Set forth below is further information concerning futures transactions.
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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 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
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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
("OTC") foreign currency options, foreign currency futures and related options
on foreign currency futures as a short or long hedge against possible variations
in foreign exchange rates. Such transactions may be effected with respect to
hedges on non-U.S. dollar denominated securities owned by the Fund, sold by the
Fund but not yet delivered, or committed or anticipated to be purchased by the
Fund. As an illustration, the Fund may use such techniques to hedge the stated
value in U.S. dollars of an investment in a yen denominated security. In such
circumstances, for example, the Fund may purchase a foreign currency put option
enabling it to sell a specified amount of Japanese yen for dollars at a
specified price by a future date. To the extent the hedge is successful, a loss
in the value of the yen relative to the dollar will tend to be offset by an
increase in the value of the put option. To offset, in whole or part, the cost
of acquiring such a put option, the Fund may also sell a call option which, if
exercised, requires it to sell a specified amount of yen for dollars at a
specified price by a future date (a technique called a "straddle"). By selling
such call option in this illustration, the Fund gives up the opportunity to
profit without limit from increases in the relative value of the yen to the
dollar. The Manager believes that "straddles" of the type which may be utilized
by the Fund constitute hedging transactions and are consistent with the policies
described above.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates. The cost to the Fund of
engaging in foreign currency transactions varies with such factors as the
currencies involved, the length of the contract period and the market conditions
then prevailing. Since transactions in foreign currency exchange usually are
conducted on a principal basis, no fees or commissions are involved.
Risk Factors in Options and Futures Transactions. Utilization of options
and futures transactions involves the risk of imperfect correlation in movements
in the prices of options and futures contracts and movements in the prices of
the securities and currencies which are the subject of the hedge. If the price
of the options and futures contract moves more or less than the prices of the
hedged securities or currencies, the Fund will experience a gain or loss which
will not be completely offset by movements in the prices of the securities and
currencies which are the subject of the hedge. The successful use of options and
futures also depends on the Manager's ability to correctly predict price
movements in the market involved in a particular options or futures transaction.
Prior to exercise or expiration, an exchange-traded option or futures
position can only be terminated by entering into a closing purchase or sale
transaction. This requires a secondary market on an exchange for call or put
options of the same series. The Fund will enter into an option or futures
transaction on an exchange only
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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 its portfolio effectively. 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 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.
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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 liquid 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 or a
stated number of shares of equity securities 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% 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 liquid securities denominated
in U.S. dollars or non-U.S. currencies in an aggregate amount equal to the
purchase price of the securities underlying the commitment.
There can be no assurance that the securities subject to a standby
commitment will be issued, and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since the issuance of
the security underlying the commitment is at the option of the issuer, the Fund
may bear the risk of a decline in the value of such security and may not benefit
from an appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement and
the related commitment fee will be recorded on the date on which the security
can reasonably be expected to be issued, and the value of the security will
thereafter be reflected in the calculation of the Fund's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment fee.
In the event the security is not issued, the commitment fee will be recorded as
income on the expiration date of the standby commitment.
Repurchase Agreements and Purchase and Sale Contracts. The Fund may invest
in securities pursuant to repurchase agreements and purchase and sale contracts.
Repurchase agreements may be entered into only with financial institutions which
(i) have, in the opinion of the Manager, substantial capital relative to the
Fund's exposure, or (ii) have provided the Fund with a third-party guaranty or
other credit enhancement. Under a repurchase agreement or a purchase and sale
contract, the counterparty agrees, upon entering into the contract, 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
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market fluctuations during such period although it may be affected by currency
fluctuations. Such agreements usually cover short periods, such as under one
week. Repurchase agreements may be construed to be collateralized loans by the
purchaser to the seller secured by the securities transferred to the purchaser.
In the case of a repurchase agreement, as a purchaser, the Fund will require the
seller to provide additional 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 or possible losses in connection with the
disposition of the collateral. 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 shall be dependent upon
intervening fluctuations of the market value of such securities and the accrued
interest on the securities. In such event, the Fund would have rights against
the seller for breach of contract with respect to any losses arising from market
fluctuations following the failure of the seller to perform. The Fund may not
invest more than 15% of its total assets in repurchase agreements or purchase
and sale contracts maturing in more than seven days together with all other
illiquid investments.
Lending of Portfolio Securities. Subject to the investment restrictions
stated below, the Fund may lend securities from its portfolio to approved
borrowers and receive therefor collateral in cash or securities issued or
guaranteed by the U.S. Government. Such collateral will be maintained at all
times in an amount equal to at least 100% of the current market value of the
loaned securities. The purpose of such loans is to permit the borrower to use
such securities for delivery to purchasers when such borrower has sold short. If
cash collateral is received by the Fund, it is invested in short-term money
market securities, and a portion of the yield received in respect of such
investment is retained by the Fund. Alternatively, if securities are delivered
to the Fund as collateral, the Fund and the borrower negotiate a rate for the
loan premium to be received by the Fund for lending its portfolio securities. In
either event, the total yield on the Fund's portfolio is increased by loans of
its portfolio securities. The Fund will have the right to regain record
ownership of loaned securities to exercise beneficial rights such as voting
rights, subscription rights and rights to dividends, interest or other
distributions. Such loans are terminable at any time. The Fund may pay
reasonable finder's, administrative and custodial fees in connection with such
loans. With respect to the lending of portfolio securities, there is the risk of
failure by the borrower to return the securities involved in such transactions.
High Yield/High Risk Securities. 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/high risk securities"). Issuers of high yield/high risk securities may be
highly leveraged and may not have available to them more traditional methods of
financing. Therefore, the risks associated with acquiring the securities of such
issuers generally are greater than is the case with higher rated securities. For
example, during an economic downturn or a sustained period of rising interest
rates, issuers of high yield/high risk securities may be more likely to
experience financial stress, especially if such issuers are highly leveraged.
During such periods, such issuers may not have sufficient revenues to meet their
interest payment obligations. The issuer's ability to service its debt
obligations also may be adversely affected by specific issuer developments or
the issuer's inability to meet specific projected business forecasts or the
unavailability of additional financing. The risk of loss due to default by the
issuer is significantly greater for the holder of high yield/high risk
securities because such securities may be unsecured and may be subordinated to
other
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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. Within this 35% limitation,
the Fund may purchase in the secondary market senior collateralized loans and
senior unsecured loans made by banks or other financial institutions (the
"Corporate Loans"). In addition, within this limitation, the Fund generally will
not invest more than 5% of its total assets in high yield/high risk securities,
including Corporate Loans purchased in the secondary market, which are the
subject of bankruptcy proceedings or otherwise in default as to the repayment of
principal or payment of interest at the time of acquisition by the Fund.
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/high risk
securities because there may be a thin trading market for such securities. The
secondary trading market for high yield/high risk securities is generally not as
liquid as the secondary market for higher rated securities. Reduced secondary
market liquidity may have an adverse impact on market price and the Fund's
ability to dispose of particular issues when necessary to meet the Fund's
liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the issuer.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high
yield/high risk securities, 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).
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,
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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. [The Fund does intend to engage,
from time to time, in short sales against the box and in short sales which
are covered by securities immediately convertible or exchangeable into the
security which is being sold short.]
c. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Directors of the Fund
has otherwise determined to be liquid pursuant to applicable law.
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.
d. 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
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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, taken at market value, together
with all other assets of the Fund which are illiquid or are not otherwise
readily marketable. However, if the OTC option is sold by the Fund to a primary
U.S. Government securities dealer recognized by the Federal Reserve Bank of New
York and if the Fund has the unconditional contractual right to repurchase such
OTC option from the dealer at a predetermined price, then the Fund will treat as
illiquid such amount of the underlying securities as is equal to the repurchase
price less the amount by which the option is "in-the-money" (i.e., current
market value of the underlying securities minus the option's strike price). The
repurchase price with the primary dealers is typically a formula price which is
generally based on a multiple of the premium received for the option, plus the
amount by which the option is "in-the-money". This policy as to OTC options is
not a fundamental policy of the Fund and may be amended by the Directors of the
Fund without the approval of the Fund's shareholders. However, the Fund will not
change or modify this policy prior to the change or modification by the
Commission staff of its position.
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.
13
<PAGE> 74
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
Information about the Directors and executive officers of the Fund,
including their ages and their principal occupations for at least the last five
years, is set forth below. Unless otherwise noted, the address of each executive
officer and Director is P.O. Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (64) -- 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") since 1977.
DONALD CECIL (70) -- 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 (70) -- 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.
CHARLES C. REILLY (65) -- 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 from 1990 to 1991;
Adjunct Professor, Wharton School, University of Pennsylvania from 1989 to 1990;
Partner, Small Cities Cable Television since 1986.
RICHARD R. WEST (59) -- Director(2) -- Box 604, Genoa, Nevada 89491.
Professor of Finance since 1984, Dean from 1984 to 1993 and currently Dean
Emeritus of 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 (62) -- 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 (56) -- Executive Vice President(1)(2) -- Executive Vice
President of the Manager and FAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of the Distributor since
1986 and Director thereof since 1991; President of Princeton Administrators,
L.P. since 1988.
NORMAN R. HARVEY (63) -- Senior Vice President(1)(2) -- Senior Vice
President of the Manager and FAM since 1982.
14
<PAGE> 75
BRYAN N. ISON (41) -- Vice President(1) -- Vice President of the Manager
since 1985; Portfolio Manager since 1984.
DONALD C. BURKE (36) -- Vice President(1)(2) -- Vice President and Director
of Taxation of the Manager since 1990.
GERALD M. RICHARD (47) -- 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.
JAMES W. HARSHAW, III (38) -- Secretary(1)(2) -- Attorney associated with
the Manager since 1994; associate at Sullivan & Cromwell from 1990 to 1994;
judicial clerk for the United States Court of Appeals for the Third Circuit from
1989 to 1990.
- ---------------
(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, 1997, 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 (each a
"non-affiliated Director") a fee of $3,500 per year plus $500 per Board 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 (the "Committee"), which consists of all of the
non-affiliated Directors, at a rate of $500 per Committee meeting attended. The
Chairman of the Committee receives an additional fee of $250 per Committee
meeting attended. For the fiscal year ended October 31, 1996, fees and expenses
paid to the non-affiliated Directors aggregated $38,593.
The following table sets forth for the fiscal year ended October 31, 1996,
compensation paid by the Fund to the non-affiliated Directors and for the
calendar year ended December 31, 1996, the aggregate compensation paid by all
registered investment companies advised by the Manager and its affiliate, FAM
("MLAM/FAM Advised Funds") to the non-affiliated Directors.
<TABLE>
<CAPTION>
PENSION OR AGGREGATE
RETIREMENT COMPENSATION
BENEFITS FROM FUND AND OTHER
ACCRUED AS MLAM/FAM
NAME OF COMPENSATION PART OF FUND'S ADVISED FUNDS PAID
DIRECTOR FROM FUND EXPENSES TO DIRECTORS(1)
- ----------------------------------------------- ------------ -------------- -------------------
<S> <C> <C> <C>
Donald Cecil................................... $8,500 None $ 268,933
Edward H. Meyer................................ $6,500 None $ 227,933
Charles C. Reilly.............................. $7,500 None $ 293,833
Richard R. West................................ $7,500 None $ 269,833
Edward D. Zinbarg.............................. $7,500 None $ 127,833
</TABLE>
(footnote on the following page)
15
<PAGE> 76
- ---------------
(1) The Directors serve on the boards of MLAM/FAM Advised funds as follows: Mr.
Cecil (36 registered investment companies consisting of 36 portfolios); Mr.
Meyer (36 registered investment companies consisting of 36 portfolios); Mr.
Reilly (41 registered investment companies consisting of 54 portfolios); Mr.
West (41 registered investment companies consisting of 54 portfolios) and
Mr. Zinbarg (18 registered investment companies consisting of 18
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 that
portion of the average daily net assets which does not exceed $2.5 billion;
0.70% of that portion of the average daily net assets which exceeds $2.5 billion
but does not exceed $5.0 billion; 0.65% of that portion of the average daily net
assets which exceeds $5.0 billion but does not exceed $7.5 billion; 0.625% of
that portion of the average daily net assets which exceeds $7.5 billion but does
not exceed $10 billion; and 0.60% of that portion of the average daily net
assets which exceeds $10 billion. For the fiscal year ended October 31, 1996,
the Fund paid the Manager a fee at the effective rate of 0.68% of average daily
net assets. For the fiscal years ended October 31, 1994, 1995 and 1996 the total
management fees paid by the Fund to the Manager aggregated $49,037,363,
$55,558,045 and $70,943,078 (after giving effect to the Manager's voluntary
waiver of fees), 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 for providing investment advisory services to the Manager
with respect to the Fund in an amount to be determined from time to time by the
Manager and MLAM U.K. but in no event in excess of the amount the Manager
actually receives for providing services to the Fund pursuant to the Management
Agreement. For the fiscal years ended October 31, 1994, 1995 and 1996, the fees
paid by MLAM to MLAM U.K. pursuant to such arrangement aggregated $6,509,464,
$7,391,028 and $9,422,273, respectively.
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 its
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
16
<PAGE> 77
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, 1994, 1995 and 1996, the amount of such reimbursement
was $570,246, $611,736 and $600,636, 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."
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
Pricing(SM) 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 (except that Class B shareholders
may vote upon any material changes to expenses charged under the Class D
Distribution Plan). Each class has different exchange privileges. See
"Shareholder Services -- Exchange Privilege."
The Merrill Lynch Select Pricing(SM) System is used by more than 50
registered investment companies advised by the Manager, or its affiliate, FAM.
Funds advised by the Manager or FAM that utilize the Merrill Lynch Select
Pricing(SM) System are referred to herein as "MLAM-advised mutual funds."
17
<PAGE> 78
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, 1994, 1995 and 1996, the Fund sold
its Class A shares through the Distributor and Merrill Lynch, as a dealer. For
the period October 21, 1994 (commencement of operations) to October 31, 1994 and
for the fiscal years ended October 31, 1995 and 1996, the Fund sold its Class D
shares through the Distributor and Merrill Lynch as a dealer. The gross sales
charges for the sale of Class A shares for the fiscal year ended October 31,
1994, were $10,514,692, of which the Distributor received $623,860 and Merrill
Lynch received $9,890,832. The gross sales charges for the sale of 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. The gross
sales charges for the sale of Class A shares for the fiscal year ended October
31, 1996, were $1,093,106, of which the Distributor received $76,760 and Merrill
Lynch received $1,016,346. 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. 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. The gross
sales charges for the sale of Class D shares for the fiscal year ended October
31, 1996, were $3,654,846, of which the Distributor received $241,734 and
Merrill Lynch received $3,413,112.
For the fiscal year ended October 31, 1994, the Distributor received no
CDSCs with respect to redemptions within one year after purchase of Class A
shares purchased subject to a front-end sales charge waiver. For the fiscal year
ended October 31, 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 a front-end sales charge waiver.
For the fiscal year ended October 31, 1996 the Distributor received CDSCs of
$19,080, all of which were paid to Merrill Lynch, with respect to redemptions
within one year after purchase of Class A shares purchased subject to a
front-end sales charge waiver. For the period October 21, 1994 (commencement of
operations) to October 31, 1994, the Distributor received no CDSCs with respect
to redemptions within one year after purchase of Class D shares purchased
subject to a front-end sales charge waiver. 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 after purchase of
Class D shares purchased subject to a front-end sales charge waiver. For the
fiscal year ended October 31, 1996 the Distributor received no CDSC's with
respect to redemptions within one year after purchase of Class D shares
purchased subject to a front-end sales charge waiver.
The term "purchase", as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by
18
<PAGE> 79
an individual, his or her spouse and their children under the age of 21 years
purchasing shares for his, her or their own account and to single purchases by a
trustee or other fiduciary purchasing shares for a single trust estate or single
fiduciary account (including a pension, profit-sharing or other employee benefit
trust created pursuant to a plan qualified under Section 401 of the Code)
although more than one beneficiary is involved. The term "purchase" also
includes purchases by any "company," as that term is defined in the Investment
Company Act, but does not include purchases by any such company which has not
been in existence for at least six months or which has no purpose other than the
purchase of shares of the Fund or shares of other registered investment
companies at a discount; provided, however, that it shall not include purchases
by any group of individuals whose sole organizational nexus is that the
participants therein are credit cardholders of a company, policyholders of an
insurance company, customers of either a bank or broker-dealer or clients of an
investment adviser. The term "purchase" also includes purchases by employee
benefit plans not qualified under Section 401 of the Code, including purchases
of shares of the Fund by employees or by employers on behalf of employees, by
means of a payroll deduction plan or otherwise. Purchases by such a company or
non-qualified employee benefit plan will qualify for the above quantity
discounts only if the Fund and the Distributor are able to realize economies of
scale in sales effort and sales related expense by means of the company,
employer or plan making the Fund's Prospectus available to individual investors
or employees and forwarding investments by such persons to the Fund and by any
such employees or plan bearing the expense of any payroll deduction plan.
Closed-End Fund Investment Option. Class A shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class A Shares") are offered at net asset
value to shareholders of certain closed-end funds advised by the Manager or its
affiliate, FAM, who purchased such closed-end fund shares prior to October 21,
1994 (the date the Merrill Lynch Select Pricing(SM) System commenced operations)
and wish to reinvest the net proceeds from a sale of their closed-end fund
shares of common stock in Eligible Class A Shares, if the conditions set forth
below are satisfied. Alternatively, closed-end fund shareholders who purchased
such shares on or after October 21, 1994, and wish to reinvest the net proceeds
from a sale of their closed-end fund shares are offered Class A shares (if
eligible to buy Class A shares) or Class D shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class D Shares"), if the following
conditions are met. First, the sale of the closed-end fund shares must be made
through Merrill Lynch, and the net proceeds therefrom must be immediately
reinvested in Eligible Class A or Class D shares. Second, the closed-end fund
shares must either have been acquired in the initial public offering or be
shares representing dividends from shares of common stock acquired in such
offering. Third, the closed-end fund shares must have been continuously
maintained in a Merrill Lynch securities account. Fourth, there must be a
minimum purchase of $250 to be eligible for the investment option.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund,
Inc. will receive Class D shares of the Fund, except that shareholders already
owning Class A shares of the Fund will be eligible to purchase additional Class
A shares pursuant to this option, if such additional Class A shares will be held
in the same account as the existing Class A shares and the other requirements
pertaining to the reinvestment privilege are met. In order to exercise this
investment option, a shareholder of one of the above-referenced continuously
offered closed-end funds (an "eligible fund") must sell his or her shares of
common stock of the eligible fund (the "eligible shares") back
19
<PAGE> 80
to the eligible fund in connection with a tender offer conducted by the eligible
fund and reinvest the proceeds immediately in the designated class of shares of
the Fund. This investment option is available only with respect to eligible
shares as to which no Early Withdrawal Charge or Contingent Deferred Sales
Charge (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 but its
execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intention may be included under a subsequent Letter 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
20
<PAGE> 81
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 Blueprint(SM) Program. Class D shares of the Fund are offered
to participants in the Merrill Lynch Blueprint(SM) Program ("Blueprint"). In
addition, participants in Blueprint who own Class A shares of the Fund may
purchase additional Class A shares of the Fund through Blueprint. Blueprint is
directed to small investors, group 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
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 Blueprint(SM) 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 Accounts(SM). Class A or Class D shares are offered at net
asset value to Employee Access Accounts available through qualified 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, ML & Co. and its
subsidiaries (the term "subsidiaries" when used herein with
21
<PAGE> 82
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 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).
22
<PAGE> 83
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 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 Conduct Rules of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on certain
asset-backed sales charges such as the distribution fee and
23
<PAGE> 84
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.
The following table sets forth comparative information as of October 31,
1996, with respect to Class B and Class C shares, indicating the maximum
allowable payments that can be made under the NASD maximum sales charge rule
and, with respect to Class B shares, the Distributor's voluntary maximum for the
periods indicated.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF OCTOBER 31, 1996(1)
---------------------------------------------------------------------------------------------
(IN THOUSANDS)
ANNUAL
DISTRIBUTION
ALLOWABLE ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(2) CHARGES BALANCE(3) PAYABLE DISTRIBUTOR(4) BALANCE LEVEL(5)
----------- --------- ---------- ---------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES, FOR THE PERIOD
FEBRUARY 3, 1989 (COMMENCEMENT
OF OPERATIONS) TO OCTOBER 31,
1996:
Under NASD Rule As Adopted........ $11,560,377 $722,524 $282,758 $1,005,282 $354,541 $650,741 $ 64,952
Under Distributor's Voluntary
Waiver.......................... $11,560,377 $722,524 $ 57,801 $ 780,325 $354,541 $425,784 $ 64,952
CLASS C SHARES, FOR THE PERIOD
OCTOBER 21, 1994 (COMMENCEMENT
OF OPERATIONS) TO OCTOBER 31,
1996:
Under NASD Rule As Adopted........ $ 370,872 $ 23,179 $ 1,679 $ 24,858 $ 2,418 $ 22,440 $ 2,893
</TABLE>
- ---------------
(1) Includes information for Merrill Lynch Balanced Fund for Investment and
Retirement, Inc. ("Balanced Fund") for the periods indicated. Effective
March 4, 1996, the Fund acquired substantially all of the assets and assumed
substantially all of the liabilities of Balanced Fund.
(2) Purchase price of all eligible Class B or Class C shares sold during periods
indicated other than shares acquired through dividend reinvestment and the
exchange privilege.
(3) 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.
(4) 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.
24
<PAGE> 85
(5) 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 NYSE
is restricted as determined by the Commission or such Exchange is closed (other
than customary weekend and holiday closings), for any period during which an
emergency exists as defined by the Commission as a result of which disposal of
portfolio securities or determination of the net asset value of the Fund is not
reasonably practicable, and for such other periods as the Commission may by
order permit for the protection of shareholders of the Fund.
DEFERRED SALES CHARGES -- CLASS B AND CLASS C SHARES
As discussed in the Prospectus under "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares", while Class B shares
redeemed within four years of purchase are subject to a CDSC, under most
circumstances, the charge is waived (i) on redemptions of Class B shares in
connection with certain post-retirement withdrawals from an Individual
Retirement Account ("IRA") or other retirement plan or (ii) on redemptions of
Class B shares following the death or disability of a Class B shareholder.
Redemptions for which the waiver applies are: (a) any partial or complete
redemption in connection with a tax-free distribution following retirement under
a tax-deferred retirement plan or attaining age 59 1/2 in the case of an IRA or
other retirement plan, or part of a series of equal periodic payments (not less
frequently than annually) made for the life (or life expectancy) or any
redemption resulting from the tax-free return of an excess contribution to an
IRA or (b) any partial or complete redemption following the death or disability
(as defined in the Code) of a Class B shareholder (including one who owns the
Class B shares as joint tenant with his or her spouse), provided the redemption
is requested within one year of the death or initial determination of
disability. For the fiscal years ended October 31, 1994, 1995 and 1996, the
Distributor received CDSCs of $6,842,598, $14,179,047 and $8,468,220,
respectively, with respect to redemptions of Class B shares, all of which were
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 years ended October 31, 1995
and 1996, the Distributor received CDSCs of $32,676 and $117,278, respectively,
with respect to redemptions of Class C shares, all of which were 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
25
<PAGE> 86
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 Accounts (SM). The CDSC is also waived for any Class B
shares that were acquired and held at the time of redemption by Employee Access
Accounts (SM) 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 facilities of the firm involved and the
firm's risk in positioning a block of securities. While the Manager generally
seeks reasonably competitive commission rates, the Fund does not necessarily pay
the lowest commission or spread available. The Fund has no obligation to deal
with any broker or group of brokers in the execution of transactions in
portfolio 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 Conduct Rules 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, 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. For the fiscal year
ended October 31, 1996, the Fund paid total brokerage commissions of $4,122,526,
of which $197,361 or 4.79% was paid to Merrill Lynch for effecting 3.76% 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
26
<PAGE> 87
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 may invest in certain securities traded in the OTC market and
intends, where possible, to deal 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 OTC 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 OTC
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. See "Investment Objective and
Policies -- Investment Restrictions."
The Fund's ability and decisions to purchase or sell portfolio securities
may be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are redeemable on a daily
basis in U.S. dollars, the Fund intends to manage its portfolio so as to give
reasonable assurance that it will be able to obtain U.S. dollars to the extent
necessary to meet anticipated redemptions. Under present conditions, it is not
believed that these considerations will have any significant effect on its
portfolio strategy.
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the U.S. national securities exchanges from executing
exchange transactions for their affiliates and institutional accounts which they
manage unless the member (i) has obtained prior express authorization from the
account to effect such transactions, (ii) at least annually furnishes the
account with a statement disclosing the aggregate compensation received by the
member in effecting such transactions, and (iii) complies with any rules the
Commission has prescribed with respect to the requirements of clauses (i) and
(ii). To the extent Section 11(a) would apply to Merrill Lynch acting as a
broker for the Fund in any of its portfolio transactions executed on any such
securities exchange of which it is a member, appropriate consents have been
obtained from the Fund and annual statements as to aggregate compensation will
be provided to the Fund.
As a non-fundamental restriction, the Fund will not purchase or retain the
securities of any issuer, if those individual officers and Directors of the
Fund, the officers and general partner of the Manager, the directors of such
general partner or the officers and directors of any subsidiary thereof each
owning beneficially more than one-half of one percent of the securities of such
issuer own in the aggregate more than five percent of the securities of such
issuer.
The Board of Directors has considered the possibility 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 Board of Directors made a
determination not to seek such recapture. The Directors will reconsider this
matter from time to time.
27
<PAGE> 88
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 NYSE
(generally, 4:00 p.m., New York time), on each day the NYSE is open for trading.
The NYSE 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 Class B, Class C and Class D shares generally will be lower
than the per share net asset value of Class A shares 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 B and Class C
shares generally will be lower than the per share net asset value of Class D
shares reflecting the daily expense accruals of the distribution fees and higher
transfer agency fees applicable with respect to Class B and Class C shares of
the Fund. It is expected, however, that the per share net asset value of the
four classes will tend to converge (although not necessarily meet) immediately
after the payment of dividends or distributions, which will differ by
approximately the amount of the expense accrual differentials between the
classes.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. 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 OTC market are valued at the last
available bid price in the OTC market prior to the time of valuation. When the
Fund writes an option, the amount of the premium received is recorded on the
books of the Fund as an asset and an equivalent liability. The amount of the
liability is subsequently valued to reflect the current market value of the
option written, based upon the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC 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 OTC
market, the last bid price.
Corporate Loans will be valued in accordance with guidelines established by
the Board of Directors. Under the Fund's current guidelines, Corporate Loans for
which an active secondary market exists to a reliable degree in the opinion of
the Manager and for which the Manager can obtain at least two quotations from
banks or dealers in Corporate Loans will be valued by the Manager by calculating
the mean of the last available bid and asked prices for such Corporate Loans
provided by each of two dealers, and then using the mean of those two means. If
only one quote for a particular Corporate Loan is available, such Corporate Loan
will be valued on the basis of the mean of the bid and asked prices provided by
the dealer. In the event no quotes are available, such Corporate Loan will be
valued by a Pricing Committee of the Board of Directors.
28
<PAGE> 89
Securities and assets for which market quotations are not readily available
are valued at fair value as determined in good faith under the direction of the
Board of Directors of the Fund. Such valuations and procedures will be reviewed
periodically by the Board of Directors.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designed to facilitate investment in its shares. Full details as to each of such
services and copies of the various plans described below can be obtained from
the Fund, the Distributor or Merrill Lynch. Certain of these services are
available only to U.S. investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the transfer agent has an
Investment Account and will receive 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 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 or her shares, and then must turn the certificates over to
the new firm for re-registration as described in the preceding sentence.
Shareholders considering transferring a tax-deferred retirement account such as
an IRA from Merrill Lynch to another brokerage firm or financial institution
should be aware that, if the firm to which the retirement account is to be
transferred will not take delivery of shares of the Fund, a shareholder must
either redeem the shares (paying any applicable CDSC) so that the cash proceeds
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.
29
<PAGE> 90
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 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 NYSE (generally, 4:00 p.m., New
York time) on the 24th day of each month or the 24th day of the last month of
each quarter, whichever is applicable. If the NYSE is not open for business on
such date, the 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
30
<PAGE> 91
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) or 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 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) or CBA(R) Systematic Redemption
Program, eligible shareholders should contact their Merrill Lynch Financial
Consultant.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds. Under the Merrill Lynch
Select Pricing(SM) 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 or her account in
which the exchange is made at the time of the exchange or is otherwise eligible
to purchase Class A shares of the second fund. If the Class A shareholder wants
to exchange Class A shares for shares of a second MLAM-advised mutual fund, but
does not hold Class A shares of the second fund in his or her account at the
time of the exchange and is not otherwise eligible to acquire Class A shares of
the second fund, the shareholder will receive Class D shares of the second fund
as a result of the exchange. Class D shares also may be exchanged for Class A
shares of a second MLAM-advised mutual fund at any time as long as, at the time
of the exchange, the shareholder holds Class A shares of the second fund in the
account in which the exchange is made or is otherwise eligible to purchase Class
A shares of the second fund. Class B, Class C and Class D shares are
exchangeable with shares of the same class of other MLAM-advised mutual funds.
For purposes of computing the CDSC that may be payable upon a disposition of the
shares acquired in the exchange, the holding period for the previously owned
shares of the Fund is "tacked" to the holding period 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 as follows: Class A shares may be exchanged for shares of
Merrill
31
<PAGE> 92
Lynch Ready Assets Trust, Merrill Lynch Retirement Reserves Money Fund
(available only for exchanges within certain retirement plans), Merrill Lynch
U.S.A. Government Reserves and Merrill Lynch U.S. Treasury Money Fund; Class B,
Class C and Class D shares may be exchanged for shares of Merrill Lynch
Government Fund, Merrill Lynch Institutional Fund, Merrill Lynch Institutional
Tax-Exempt Fund and Merrill Lynch Treasury Fund. Shares with a net asset value
of at least $100 are required to qualify for the exchange privilege, and any
shares utilized in an exchange must have been held by the shareholder for at
least 15 days. It is contemplated that the exchange privilege may be applicable
to other new mutual funds whose shares may be distributed by the Distributor.
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 certain money market funds with a reduced or without a sales charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively, of another
MLAM-advised mutual fund ("new Class B or Class C shares") on the basis of
relative net asset value per Class B or Class C share, without the payment of
any CDSC that might otherwise be due on redemption of the outstanding shares.
Class B shareholders of the Fund exercising the exchange privilege will continue
to be subject to the Fund's CDSC schedule if such schedule is higher than the
CDSC schedule relating to the new Class B shares acquired through use of the
exchange privilege. In addition, Class B shares of the Fund acquired through use
of the exchange privilege will be subject to the Fund's CDSC schedule if such
schedule is higher than the CDSC schedule relating to the Class B shares of the
fund from which the exchange has been made. For purposes of computing the sales
charge that may be payable on a disposition of the new Class B or Class C
shares, the holding period for the outstanding Class B or Class C shares is
"tacked" to the holding period 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.
32
<PAGE> 93
Shareholders also may exchange shares of the Fund into shares of certain
money market funds advised by the Manager or its affiliates, but the period of
time that Class B or Class C shares are held in a money market fund will not
count towards satisfaction of the holding period requirement for purposes of
reducing the CDSC or with respect to Class B shares, towards satisfaction of the
conversion period. However, shares of a money market fund 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 a half years,
any subsequent redemption would not incur a CDSC.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, 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 Federal tax requirements that certain percentages of its ordinary
income and capital gains be distributed during the taxable year. 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 Class B and
33
<PAGE> 94
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
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.
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
34
<PAGE> 95
identification number is on file with the Fund or who, to the Fund's knowledge,
have furnished an incorrect number. When establishing an account, an investor
must certify under penalty of perjury that such number is correct and that such
investor is not otherwise subject to backup withholding.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes. Shareholders may be
able to claim U.S. foreign tax credits with respect to such taxes, subject to
certain conditions and limitations contained in the Code. For example, certain
retirement accounts cannot claim foreign tax credits on investments in foreign
securities held in the Fund. If more than 50% in value of the Fund's total
assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible, and intends, to file an election with
the Internal Revenue Service pursuant to which shareholders of the Fund will be
required to include their proportionate shares of such withholding taxes in
their U.S. income tax returns as gross income, treat such proportionate shares
as taxes paid by them, and deduct such proportionate shares in computing their
taxable incomes or, alternatively, use them as foreign tax credits 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,
35
<PAGE> 96
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/high risk securities"), as previously described. Some of
these high yield/high risk securities may be purchased at a discount and may
therefore cause the Fund to accrue and distribute income before amounts due
under the obligations are paid. In addition, a portion of the interest payments
on such high yield/high risk securities may be treated as dividends for Federal
income tax purposes; in such case, if the issuer of such high yield/high risk
securities is a domestic corporation, dividend payments by the Fund will be
eligible for the dividends received deduction to the extent of the deemed
dividend portion of such interest payments.
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 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
36
<PAGE> 97
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 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.
37
<PAGE> 98
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.
Set forth in the tables below is total return information for Class A,
Class B, Class C and Class D shares of the Fund for the periods indicated.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS D SHARES
--------------------------- --------------------------- --------------------------- ---------------------------
REDEEMABLE REDEEMABLE REDEEMABLE REDEEMABLE
VALUE OF A VALUE OF A VALUE OF A VALUE OF A
EXPRESSED AS A HYPOTHETICAL EXPRESSED AS A HYPOTHETICAL EXPRESSED AS A HYPOTHETICAL EXPRESSED AS A HYPOTHETICAL
PERCENTAGE $1,000 PERCENTAGE $1,000 PERCENTAGE $1,000 PERCENTAGE $1,000
BASED ON A INVESTMENT BASED ON A INVESTMENT BASED ON A INVESTMENT BASED ON A INVESTMENT
HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END
$1,000 OF $1,000 OF $1,000 OF $1,000 OF
PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD
- ---------- -------------- ---------- -------------- ---------- -------------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
One Year
Ended
October
31,
1996.... 11.62% $1,116.20 12.71% $1,127.10 15.68% $1,156.80 11.41% $1,114.10
Five Years
Ended
October
31,
1996.... 12.40% $1,794.10 12.48% $1,800.20
Inception
(February
3, 1989)
to
October
31,
1996.... 13.29% $2,627.20 12.93% $2,562.90
Inception
(October
21,
1994) to
October
31,
1996.... 14.90% $1,325.30 12.77% $1,275.90
</TABLE>
38
<PAGE> 99
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS D SHARES
--------------------------- --------------------------- --------------------------- ---------------------------
REDEEMABLE REDEEMABLE REDEEMABLE REDEEMABLE
VALUE OF A VALUE OF A VALUE OF A VALUE OF A
EXPRESSED AS A HYPOTHETICAL EXPRESSED AS A HYPOTHETICAL EXPRESSED AS A HYPOTHETICAL EXPRESSED AS A HYPOTHETICAL
PERCENTAGE $1,000 PERCENTAGE $1,000 PERCENTAGE $1,000 PERCENTAGE $1,000
BASED ON A INVESTMENT BASED ON A INVESTMENT BASED ON A INVESTMENT BASED ON A INVESTMENT
HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END
$1,000 OF $1,000 OF $1,000 OF $1,000 OF
PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD
- ---------- -------------- ---------- -------------- ---------- -------------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Year Ended
October
31,
1996.... 17.81 % $1,178.10 16.71 % $1,167.10 16.68 % $1,166.80 17.59 % $1,175.90
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
Inception
(October
21,
1994) to
October
31,
1994.... 0.00 % $1,000.00 0.08 % $1,000.80
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
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Inception
(February
3, 1989)
to
October
31,
1996.... 162.72% $2,627.20 156.29% $2,562.90
Inception
(October
21,
1994) to
October
31,
1996.... 32.53% $1,325.30 27.59% $1,275.90
</TABLE>
In order to reflect the reduced sales charges, in the case of Class A or
Class D shares, or the waiver of the CDSC in the case of Class B shares 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.
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 2,900,000,000 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
39
<PAGE> 100
Stock, of which Class A consists of 300,000,000 shares, Class B consists of
1,500,000,000 shares, Class C consists of 200,000,000 shares and Class D
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, 1996 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................... $1,841,974,296 $8,660,279,417 $385,752,514 $1,044,135,659
============== ============== ============ ==============
Number of Shares
Outstanding................ 121,392,667 579,336,002 26,018,395 68,909,658
============== ============== ============ ==============
Net Asset Value Per Share
(net assets divided by
number of shares
outstanding)............... $ 15.17 $ 14.95 $ 14.83 $ 15.15
Sales Charge (for Class A and
Class D shares: 5.25% of
offering price (5.54% of
net asset value per
share))*................... .84 ** ** .84
-------------- -------------- ------------ --------------
Offering Price............... $ 16.01 $ 14.95 $ 14.83 $ 15.99
============== ============== ============ ==============
</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.
40
<PAGE> 101
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 LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on October 31 of each year. The Fund sends
to its shareholders at least semi-annually reports showing the Fund's portfolio
and other information. An annual report, containing financial statements audited
by independent auditors, is sent to shareholders each year. After the end of
each year, shareholders will receive Federal income tax information regarding
dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the 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.
41
<PAGE> 102
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, 1997.
42
<PAGE> 103
APPENDIX
RATINGS OF FIXED INCOME SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") CORPORATE RATINGS
Aaa Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt 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.
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
43
<PAGE> 104
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
DESCRIPTION OF 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.
44
<PAGE> 105
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.
45
<PAGE> 106
DESCRIPTION OF STANDARD & POOR'S RATINGS SERVICES ("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.
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
GRADE Debt rated "BB", "B", "CCC", "CC" and "C" is regarded as 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.
46
<PAGE> 107
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.
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.
47
<PAGE> 108
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.
48
<PAGE> 109
II. Nature of, and provisions of, the issue.
III. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangement under the laws of bankruptcy and other
laws affecting creditors' rights.
AAA This is the highest rating that may be assigned by Standard & Poor's to a
preferred stock issue and indicates an extremely strong capacity to pay
the preferred stock obligations.
AA A preferred stock issue rated "AA" also qualifies as a high-quality fixed
income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated "AAA".
A An issue rated "A" is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.
BBB An issue rated "BBB" is regarded as backed by an adequate capacity to pay
the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to make
payments for a preferred stock in this category than for issues in the
"A" category.
BBB
CCC Preferred stock rated "BB", "B", and "CCC" are regarded, on balance, as
predominately speculative with respect to the issuer's capacity to pay
preferred stock obligations. "BB" indicates the lowest degree of
speculation and "CCC" the highest degree of speculation. While such
issues will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to
adverse conditions.
CC The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C A preferred stock rated "C" is a non-paying issue.
D A preferred stock rated "D" is a non-paying issue with the issuer in
default on debt instruments.
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.
49
<PAGE> 110
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, 1996, 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, 1996 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, 1996, 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 10, 1996
50
<PAGE> 111
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in US dollars)
Shares Value Percent of
COUNTRY Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
Argentina Oil--Related 600,000 Yacimientos Petroliferos Fiscales
S.A. (ADR)++ (USD) $ 12,973,690 $ 13,650,000 0.1%
Total Common Stocks in Argentina 12,973,690 13,650,000 0.1
Australia Banking 2,645,800 Westpac Banking Corp. 5,614,396 15,096,935 0.1
Foods 7,916,000 Goodman Fielder Wattie Ltd. 8,324,587 9,284,676 0.1
Insurance 1,614,135 GIO Australia Holdings, Ltd. 2,786,182 4,157,406 0.1
Multi-Industry 1,500,000 Pacific Dunlop, Ltd. 4,092,789 3,328,500 0.0
Tobacco 2,099,800 Rothmans Holdings, Ltd. 7,893,919 13,479,141 0.1
1,242,300 ++++WD & HO Wills Holdings, Ltd. 1,389,502 2,018,272 0.0
--------------- --------------- ------
9,283,421 15,497,413 0.1
Total Common Stocks in Australia 30,101,375 47,364,930 0.4
</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 Krone
ECU European Currency Unit
ESP Spanish Peseta
FRF French Franc
GBP Great Britain Pound
ITL Italian Lira
JPY Japanese Yen
NLG Netherlands Guilder
NOK Norwegian Krone
NZD New Zealand Dollar
SKR Swedish Kroner
USD United States Dollar
51
<PAGE> 112
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
Shares Value Percent of
COUNTRY Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Brazil Telecommunications 35,000 Telecomunicacoes Brasileiras S.A.--
Telebras PN (ADR)++ (USD) $ 1,953,385 $ 2,607,500 0.0%
Total Common Stocks in Brazil 1,953,385 2,607,500 0.0
Canada Beverages 1,828,600 Cott Corp. (USD) 14,957,451 13,028,775 0.1
Metals--Non-Ferrous 100,000 Inco Ltd. (USD) 2,132,000 3,175,000 0.1
Natural Resources 200,000 Canadian Pacific, Ltd. (USD) 2,278,861 5,050,000 0.0
440,000 Horsham Corp. (USD) 3,550,742 7,590,000 0.1
--------------- --------------- ------
5,829,603 12,640,000 0.1
Oil--Related 353,000 ++++International Petroleum Corp. (USD) 1,000,196 1,544,375 0.0
Paper 3,250,000 ++++Repap Enterprises Inc. 12,879,320 12,593,750 0.1
Specialty Retailing 280,000 Semi-Tech Corporation (Class A) 4,108,297 1,023,193 0.0
Telecommunications 100,000 BCE Telecommunications, Inc. (USD) 3,375,484 4,600,000 0.0
4,200,000 ++++Rogers Communications Inc. 37,036,561 33,828,026 0.3
--------------- --------------- ------
40,412,045 38,428,026 0.3
Total Common Stocks in Canada 81,318,912 82,433,119 0.7
Denmark Banking 53,500 Unidanmark A/S 1,870,730 2,466,965 0.0
Total Common Stocks in Denmark 1,870,730 2,466,965 0.0
Finland Metals 366,700 Outokumpu OY 5,258,735 6,193,436 0.1
Paper & Forest 1,500,000 ++++Enso-Gutzeit OY 12,019,454 11,756,524 0.1
Products 2,909,250 Metsa-Serla OY 'B' 23,657,400 20,232,563 0.1
1,112,722 ++++UPM-Kymmene OY (o) 20,695,413 22,601,321 0.2
--------------- --------------- ------
56,372,267 54,590,408 0.4
Telecommunications 350,000 Nokia Corp. (ADR)++ (USD) 11,590,063 16,231,250 0.1
Equipment 186,360 Nokia OY 8,998,615 8,615,663 0.1
--------------- --------------- ------
20,588,678 24,846,913 0.2
Total Common Stocks in Finland 82,219,680 85,630,757 0.7
France Automobiles 94,304 Peugeot S.A. 11,413,010 9,840,642 0.1
Banking 215,600 Compagnie de Suez S.A. 8,482,839 9,290,411 0.1
173,900 Compagnie Financiere de Paribas S.A. 9,343,179 11,201,124 0.1
351,386 Societe Generale 38,014,799 37,905,495 0.3
--------------- --------------- ------
55,840,817 58,397,030 0.5
Electronics 245,690 ++++SGS-Thomson Microelectronics N.V. 11,523,824 13,030,546 0.1
Engineering & 119,340 Bouygues S.A. 12,009,424 11,705,497 0.1
Construction
Foods/Food 61,600 Groupe Danone S.A. 9,786,153 8,441,991 0.1
Processing
Industrial 113,700 Alcatel Alsthom Cie Generale
d'Electricite S.A. 10,964,472 9,705,392 0.1
196,400 Elf Aquitaine (Elf) S.A. 14,173,233 15,718,767 0.1
--------------- --------------- ------
25,137,705 25,424,159 0.2
Insurance 473,125 Assurances Generales de France
S.A. (AGF) 12,930,023 13,968,294 0.1
</TABLE>
52
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<TABLE>
<S> <C> <C> <S> <C> <C> <C>
Metals/Steel 1,038,723 Usinor-Sacilor S.A. 15,498,579 15,424,868 0.1
Multi-Industry 33,455 EuraFrance S.A. 9,052,946 14,638,773 0.1
Total Common Stocks in France 163,192,481 170,871,800 1.4
Germany Automotive 58,500 Volkswagen AG 21,917,683 23,052,425 0.2
Banking 55,680 Bayerische Vereinsbank AG 1,339,965 2,095,682 0.0
113,150 Deutsche Bank AG 5,287,453 5,245,087 0.0
223,500 Deutsche Bank AG (Warrants) (a) 1,916,447 1,211,222 0.0
--------------- --------------- ------
8,543,865 8,551,991 0.0
Capital Goods 369,636 ++++Kloeckner-Werke AG 17,229,762 12,898,540 0.1
Chemicals 291,530 Bayer AG 10,121,411 11,024,616 0.1
101,451 Henkel KGaA 4,390,556 4,512,360 0.0
203,950 Hoechst AG 6,797,383 7,676,262 0.1
--------------- --------------- ------
21,309,350 23,213,238 0.2
Engineering & 30,480 Philipp Holzmann AG 11,661,385 7,554,028 0.1
Construction
Retail 27,715 Karstadt AG 10,815,610 10,116,314 0.1
Total Common Stocks in Germany 91,477,655 85,386,536 0.7
Hong Kong Agriculture 36,108,000 C.P. Pokphand Co. Ltd. (Ordinary) 12,675,471 12,025,881 0.1
Banking 290,123 HSBC Holdings PLC 1,815,621 5,910,156 0.0
Multi-Industry 889,500 Hutchison Whampoa Ltd. 4,867,725 6,212,637 0.1
Real Estate 817,000 Cheung Kong Holdings Ltd. 5,904,073 6,551,639 0.1
Transportation-- 215,000 ++++Guangshen Railway Company Ltd. (ADR)++
Railway (USD) 4,085,000 4,004,375 0.0
Total Common Stocks in Hong Kong 29,347,890 34,704,688 0.3
Indonesia Paper & Pulp 2,669,600 ++++Asia Pacific Resources International
Holdings Ltd. (ADR)++ (USD)+++++++ 18,325,968 14,682,800 0.1
1,715,000 ++++Asia Pulp & Paper Company Ltd. (ADR)++
(USD)+++++++ 19,722,500 16,935,625 0.2
--------------- --------------- ------
38,048,468 31,618,425 0.3
Total Common Stocks in Indonesia 38,048,468 31,618,425 0.3
Italy Banking 1,813,400 Istituto Mobiliare Italiano S.p.A.
(Ordinary) 13,339,979 14,361,018 0.1
Building & 931,597 ++++Filippo Fochi S.p.A. 2,918,176 68,830 0.0
Construction
Insurance 10,785,989 Istituto Nazionale della Assicurazioni
(INA) S.p.A. 15,495,280 14,906,423 0.1
97,000 ++++Mediolanum S.p.A. 747,016 962,065 0.0
--------------- --------------- ------
16,242,296 15,868,488 0.1
Multi-Industry 9,117,595 ++++Compagnie Industriali Riunite
S.p.A. (CIR) 7,816,550 4,312,498 0.0
27,176,500 ++++MontEdison S.p.A. 22,271,980 17,784,213 0.2
--------------- --------------- ------
30,088,530 22,096,711 0.2
Oil--Related 3,968,900 Ente Nazionale Idrocarburi S.p.A. 17,038,269 19,021,082 0.2
Telecommunications 3,000,000 Societa Finanziaria Telefonica S.p.A.
(STET) 4,365,656 10,370,077 0.1
8,666,863 Societa Finanziaria Telefonica S.p.A.
(STET) RISP 16,268,796 23,097,913 0.2
3,958,000 Telecom Italia Mobile S.p.A. 1,395,818 8,185,454 0.1
3,958,000 Telecom Italia S.p.A. 7,779,466 8,825,147 0.1
--------------- --------------- ------
29,809,736 50,478,591 0.5
Total Common Stocks in Italy 109,436,986 121,894,720 1.1
</TABLE>
53
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<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
Shares Value Percent of
COUNTRY Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Japan Automobiles & 2,092,000 Suzuki Motor Corp. $ 19,599,205 $ 21,333,802 0.2%
Equipment
Beverages 1,017,000 Chukyo Coca-Cola Bottling Co., Ltd. 12,207,036 9,834,725 0.1
565,000 Hokkaido Coca-Cola Bottling Co., Ltd. 7,764,597 7,152,527 0.1
690,000 Kinki Coca-Cola Bottling Co., Ltd. 10,868,372 9,038,242 0.1
1,041,000 Mikuni Coca-Cola Bottling Co., Ltd. 14,998,840 13,727,473 0.1
904,000 Sanyo Coca-Cola Bottling Co., Ltd. 13,028,710 12,397,714 0.1
--------------- --------------- ------
58,867,555 52,150,681 0.5
Capital Goods 3,868,000 Mitsubishi Heavy Industries, Ltd. 23,624,404 29,753,846 0.3
Chemicals 215,000 Shin-Etsu Chemical Co., Ltd. 4,188,896 3,685,714 0.0
Electrical 453,000 Chudenko Corp. 14,271,558 13,898,637 0.1
Construction 777,000 Kinden Corporation 13,982,160 10,860,923 0.1
34,000 Taihei Dengyo Kaisha Ltd. 637,020 427,429 0.0
--------------- --------------- ------
28,890,738 25,186,989 0.2
Electrical Equipment 77,000 Advantest Corporation 3,441,308 2,910,769 0.0
593,000 Murata Manufacturing Co., Ltd. 19,275,913 19,080,264 0.2
75,000 Tokyo Electron Limited 2,928,405 1,931,868 0.0
--------------- --------------- ------
25,645,626 23,922,901 0.2
Financial Services 360,000 Nomura Securities Co., Ltd. 7,080,991 5,949,890 0.1
Industrial 28,000 Miura Kogyo Co., Ltd. 466,635 428,308 0.0
13,200 Nitto Kohki Co., Ltd. 489,424 434,004 0.0
--------------- --------------- ------
956,059 862,312 0.0
Insurance 2,497,000 Dai-Tokyo Fire & Marine Insurance
Co., Ltd. 16,307,882 15,607,622 0.1
665,000 Fuji Fire & Marine Insurance
Co., Ltd. 3,727,641 3,022,462 0.0
2,384,000 Koa Fire & Marine Insurance
Co., Ltd. 13,551,678 13,979,147 0.1
620,000 Mitsui Marine & Fire Insurance
Co., Ltd. 5,004,638 4,033,407 0.0
1,804,000 Nichido Fire & Marine Insurance
Co., Ltd. 11,275,948 11,260,132 0.1
1,351,000 Nippon Fire & Marine Insurance
Co., Ltd. 6,970,280 7,126,154 0.1
2,408,000 Sumitomo Marine & Fire Insurance
Co., Ltd. 18,939,904 17,274,092 0.1
2,368,000 Tokio Marine & Fire Insurance
Co., Ltd. 25,707,953 26,021,978 0.2
1,130,000 Yasuda Fire & Marine Insurance
Co., Ltd. 8,101,705 7,182,330 0.1
--------------- --------------- ------
109,587,629 105,507,324 0.8
Office Equipment 1,612,000 Canon, Inc. 23,455,745 30,893,714 0.3
Packaging & 912,000 Toyo Seikan Kaisha, Ltd. 23,384,016 28,863,297 0.2
Containers
Pharmaceuticals 1,061,000 Sankyo Pharmaceuticals Co., Ltd. 23,391,365 26,303,473 0.2
384,000 Taisho Pharmaceuticals Co. 7,984,458 7,629,363 0.1
--------------- --------------- ------
31,375,823 33,932,836 0.3
Restaurants 356,000 Mos Food Services, Inc. 8,797,607 7,448,615 0.1
310,000 Ohsho Food Service Corp. 6,834,314 5,423,297 0.0
--------------- --------------- ------
15,631,921 12,871,912 0.1
Retail Stores 460,000 Ito Yokado Co., Ltd. 21,319,319 22,969,670 0.2
100,000 Sangetsu Co., Ltd. 3,160,832 2,136,264 0.0
--------------- --------------- ------
24,480,151 25,105,934 0.2
Steel 266,000 Maruichi Steel Tube Ltd. 5,107,698 4,396,308 0.0
</TABLE>
54
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<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Total Common Stocks in Japan 401,876,457 404,417,460 3.4
Mexico Conglomerates 433,800 Grupo Carso, S.A. de C.V.
(ADR)++ (USD) 3,832,850 3,904,200 0.0
Finance 6,054 Grupo Financiero Inbursa, S.A. de C.V.
(ADR)++ (USD) 121,464 96,869 0.0
Foods 700,000 Grupo Industrial Maseca (ADR)++ (USD) 7,969,925 12,775,000 0.2
Telecommunications 433,800 ++++Global Telecommunications Solutions,
Inc. (ADR)++ (USD) 2,060,550 1,952,100 0.0
Total Common Stocks in Mexico 13,984,789 18,728,169 0.2
Netherlands Airlines 156,260 KLM Royal Dutch Airlines N.V. 4,486,455 3,721,573 0.0
Chemicals 117,720 Akzo N.V. 14,550,083 14,837,314 0.1
288,070 European Vinyls Corp.
International N.V. 11,384,340 7,964,678 0.1
--------------- --------------- ------
25,934,423 22,801,992 0.2
Computer Software 111,200 Getronics N.V. 1,347,831 2,733,620 0.0
Electronics 475,125 Philips Electronics N.V. 17,151,017 16,749,676 0.2
Distribution
Forest Products 385,900 Koninklijke KNP N.V. 9,018,462 8,508,318 0.1
Insurance 202,000 Aegon N.V. 4,358,871 10,276,838 0.1
480,937 Fortis Amev N.V. (j) 7,946,583 14,374,524 0.1
1,766,537 Internationale Nederlanden Groep N.V. 27,430,540 55,090,377 0.5
--------------- --------------- ------
39,735,994 79,741,739 0.7
Miscellaneous-- 10,000 Nijverdal Ten Cate N.V. 501,699 488,121 0.0
Manufacturing
Telecommunications 100,000 Royal PTT Nederland N.V. 3,450,311 3,619,643 0.0
Total Common Stocks in the Netherlands 101,626,192 138,364,682 1.2
Norway Banking 4,785,400 Christiania Bank Og Kreditkasse 10,697,335 13,133,096 0.1
2,434,000 Den Norske Bank ASA 7,189,721 8,092,212 0.1
--------------- --------------- ------
17,887,056 21,225,308 0.2
Multi-Industry 201,900 Orkla A.S. (Class A) 10,201,072 12,918,358 0.1
Total Common Stocks in Norway 28,088,128 34,143,666 0.3
Portugal Banking 152,400 Espirito Santo Financial Holdings S.A.
(ADR)++ (USD) 1,851,275 1,847,850 0.0
Total Common Stocks in Portugal 1,851,275 1,847,850 0.0
Spain Banking 326,000 Argentaria S.A. 12,974,203 12,786,319 0.1
166,022 Banco Central Hispanoamericano S.A. 3,302,502 3,880,966 0.0
527,481 Banco de Santander S.A. (Ordinary) 19,029,577 27,102,295 0.2
83,000 Bank Intercontinental S.A. 4,607,612 9,955,052 0.1
--------------- --------------- ------
39,913,894 53,724,632 0.4
Energy & Petroleum 212,500 Repsol S.A. (ADR)++ (USD) 6,126,375 6,932,813 0.1
Engineering & 54,450 Fomento de Construciones y
Construction Contratas S.A. 4,508,276 4,425,024 0.0
Insurance 30,000 Mapfre S.A. 1,130,028 1,482,586 0.0
3,388 Mapfre S.A. (New Shares) 142,730 167,433 0.0
--------------- --------------- ------
1,272,758 1,650,019 0.0
Manufacturing 173,000 ++++Grupo Fosforera Espanola S.A. 1,501,871 488,547 0.0
Multi-Industry 45,750 Corporacion Financiera Alba S.A. 1,611,658 3,875,902 0.0
Real Estate 236,708 Immobiliaria Metropolitana Vasco
Central S.A. 5,888,465 8,262,869 0.1
Toll Roads 154,000 Autopista Concesionaria Espanola S.A.
(ACESA) 1,363,246 1,769,768 0.0
Utilities--Electric 177,525 Empresa Nacional de Electricidad S.A.
(Endesa) 8,449,066 10,875,983 0.1
591,800 Iberdrola I S.A. 3,310,030 6,290,312 0.1
--------------- --------------- ------
11,759,096 17,166,295 0.2
Total Common Stocks in Spain 73,945,639 98,295,869 0.8
</TABLE>
55
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<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
Shares Value Percent of
COUNTRY Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
Sweden Appliances 232,464 Electrolux AB 'B' Free $ 11,264,721 $ 12,956,952 0.1%
Automotive & 43,916 Scania AB (Warrants) (a) 60,444 41,465 0.0
Equipment
Banking 624,309 Sparbanken Sverige AB (Class A) 7,147,870 9,887,784 0.1
400,245 Stadshypotek AB 5,908,034 10,514,317 0.1
--------------- --------------- ------
13,055,904 20,402,101 0.2
Financial Services 43,916 Investor AB (B Shares) 1,083,977 1,772,290 0.0
Industrial 200,000 SKF AB 'A' 3,713,376 4,370,669 0.0
Insurance 447,335 Skandia Forsakring AB Free 10,636,443 12,568,843 0.1
Metals/Steel 550,800 Avesta Sheffield AB 5,089,653 5,536,100 0.1
Multi-Industry 349,005 Svedala Industri AB Free 4,583,190 5,474,380 0.0
Paper & Forest 609,900 Mo och Domsjo AB (Class B) 16,502,175 16,811,376 0.2
Products
1,110,275 Stora Kopparbergs Bergslags AB 13,078,920 14,541,026 0.1
--------------- --------------- ------
29,581,095 31,352,402 0.3
Pharmaceutical-- 349,700 Astra AB 'A' Free 15,134,947 16,083,058 0.2
Prescription
Real Estate 83,000 Tornet Fastighets AB 550,422 1,055,433 0.0
Total Common Stocks in Sweden 94,754,172 111,613,693 1.0
Switzerland Chemicals 20,047 Ciba-Geigy AG (Registered) 11,156,861 24,784,166 0.2
Conglomerates 301,993 Oerlikon-Buehrle Holding Ltd. 32,057,825 29,913,949 0.3
Electronic Components 69,850 Societe Suisse pour la Microelectronique
et l'Horlogerie AG (Registered) 9,809,595 9,844,668 0.1
Financial Services 205,911 CS Holdings AG (Registered) 21,126,362 20,641,785 0.2
Pharmaceuticals 2,630 Sandoz AG (Registered) 2,847,980 3,051,000 0.0
Photographic Services 12,273 Fotolabo S.A. 5,097,333 4,814,088 0.0
Total Common Stocks in Switzerland 82,095,956 93,049,656 0.8
United Beverages 1,451,980 Cadbury Schweppes PLC 11,384,259 12,068,750 0.1
Kingdom
Chemicals 1,470,000 Inspec Group PLC 4,431,923 5,188,691 0.0
Computers 405,654 Misys PLC 5,011,176 5,988,019 0.1
Conglomerates 50,000 Hanson PLC (ADR)++ (USD) 580,001 318,750 0.0
9,636,600 Hanson PLC (Ordinary) 15,568,156 12,696,664 0.1
--------------- --------------- ------
16,148,157 13,015,414 0.1
Consumer--Goods 1,117,550 Unilever Capital Corp. PLC 21,408,324 23,467,886 0.2
Environmental 940,000 ++++Waste Management International PLC
(ADR)++ (USD) 9,206,375 8,577,500 0.1
Food & Beverage 2,568,645 Grand Metropolitan PLC 16,811,528 19,365,762 0.2
35,000 Grand Metropolitan PLC (ADR)++ (USD) 1,031,100 1,071,875 0.0
631,110 Matthew Clark PLC 6,157,510 3,141,283 0.0
2,604,000 Tesco PLC 11,166,028 14,083,591 0.1
--------------- --------------- ------
35,166,166 37,662,511 0.3
Insurance 1,200,000 Prudential Corp. PLC 7,670,325 9,056,909 0.1
Pharmaceuticals 912,400 Glaxo Wellcome PLC 11,999,915 14,277,137 0.1
Retail/Food 7,217,320 Asda Group PLC 13,279,197 13,794,139 0.1
</TABLE>
56
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<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Steel 1,500,000 British Steel PLC 4,081,599 4,166,129 0.0
Telecommunications 1,750,000 Cable & Wireless International PLC 11,412,098 13,919,630 0.1
Tobacco 963,660 ++++Imperial Tobacco Group PLC 6,391,138 5,635,124 0.0
12,500 ++++Imperial Tobacco Group PLC (ADR)++
(USD) 238,391 143,750 0.0
--------------- --------------- ------
6,629,529 5,778,874 0.0
Utilities--Water 1,703,000 Southwest Water PLC 13,068,875 16,094,280 0.1
Total Common Stocks in the
United Kingdom 170,897,918 183,055,869 1.4
United States Apparel 860,000 ++++Fruit of the Loom, Inc. 23,555,786 31,282,500 0.3
100,000 Liz Claiborne, Inc. 2,016,276 4,225,000 0.0
--------------- --------------- ------
25,572,062 35,507,500 0.3
Automobiles 165,308 Ford Motor Company 4,906,268 5,165,875 0.0
350,000 General Motors Corp. 13,282,191 18,856,250 0.2
--------------- --------------- ------
18,188,459 24,022,125 0.2
Automotive 588,800 ++++Collins & Aikman Group Inc. 4,337,565 3,532,800 0.0
Banking 300,000 Bank of New York Company, Inc. (The) 3,992,662 9,937,500 0.1
319,000 Bankers Trust Co. 7,620,125 8,174,375 0.1
129,500 Banknorth Group, Inc. 1,865,422 4,467,750 0.0
400,000 Barnett Banks Inc. 8,134,897 15,250,000 0.0
400,000 Charter One Financial, Inc. 8,614,401 17,350,000 0.1
500,000 Chase Manhattan Corporation
(New) (c) (e) 18,301,364 42,875,000 0.4
707,100 CoreStates Financial Corp. 22,202,461 34,382,738 0.3
450,000 First Chicago NBD Corporation 13,768,555 22,950,000 0.2
1,250,000 First Commerce Corp. 31,823,468 44,375,000 0.4
375,000 First of America Bank 13,449,625 20,390,625 0.2
1,306,102 KeyCorp 38,550,870 60,897,006 0.5
807,900 Mellon Bank Corp. 30,483,478 52,614,488 0.4
500,000 Onbancorp, Inc. 13,615,887 18,187,500 0.2
441,600 Oriental Bank and Trust+++++++ 5,050,248 8,280,000 0.1
1,100,000 Republic New York Corp. 49,526,909 83,875,000 0.7
500,000 Roosevelt Financial Group, Inc. 8,121,946 8,625,000 0.1
450,000 Southern National Corp. 8,670,728 15,581,250 0.1
--------------- --------------- ------
283,793,046 468,213,232 3.9
Broadcast--Media 450,000 ++++CAI Wireless Systems Inc. 1,964,997 1,575,000 0.0
Business Data 1,136,400 ++++Information Resources, Inc. 13,553,605 14,205,000 0.1
Systems
Chemicals 50,000 du Pont (E.I.) de Nemours & Co. 3,466,125 4,637,500 0.0
141,237 ++++Millennium Chemicals Inc. 5,430,534 2,860,038 0.0
--------------- --------------- ------
8,896,659 7,497,538 0.0
Computer Software 100,000 ++++Progress Software Corporation 1,560,000 1,537,500 0.0
Computer Software 240,000 Electronic Data Systems Corp. 9,927,011 10,800,000 0.1
Services
Computers 200,000 ++++Bay Networks Inc. 3,962,000 4,050,000 0.0
150,000 Boole & Babbage, Inc. 1,329,492 4,500,000 0.1
2,400,000 ++++Borland International Corp.+++++++ 33,535,053 12,150,000 0.1
1,200,000 ++++Stratus Computer, Inc.+++++++ 23,632,111 26,850,000 0.2
1,100,000 ++++Unisys Corp. 12,291,367 6,875,000 0.1
--------------- --------------- ------
74,750,023 54,425,000 0.5
Construction & 153,800 Centex Corp. 3,880,118 4,633,225 0.1
Housing 500,000 ++++K. Hovnanian Enterprises, Inc.
(Class A) 4,920,209 3,000,000 0.0
--------------- --------------- ------
8,800,327 7,633,225 0.1
Construction 700,000 TJ International, Inc. 12,547,379 13,300,000 0.1
Products
Consumer-- 400,000 ++++Department 56, Inc. 8,951,325 8,800,000 0.1
Miscellaneous
</TABLE>
57
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<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
Shares Value Percent of
COUNTRY Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
United States Electronics 88,600 Harris Corp. $ 5,200,236 $ 5,548,575 0.1%
(continued) 711,200 ++++MEMC Electronic Materials, Inc. 14,904,748 13,779,500 0.1
1,200,000 ++++Silicon Valley Group, Inc. 21,598,334 19,950,000 0.2
250,000 ++++Tencor Instruments 4,838,940 4,718,750 0.0
150,000 Texas Instruments, Inc. 6,217,287 7,218,750 0.1
200,000 ++++VLSI Technology, Inc. 2,203,726 3,425,000 0.0
--------------- --------------- ------
54,963,271 54,640,575 0.5
Energy & Petroleum 163,900 Ashland Coal, Inc. 4,132,919 3,872,137 0.0
49,500 Cabot Oil & Gas Corp. (Class A) 529,030 767,250 0.0
175,000 Chevron Corp. 9,028,140 11,506,250 0.1
130,000 Helmerich & Payne, Inc. (c) 2,773,423 7,036,250 0.1
46,400 Mitchell Energy Development Corp.
(Class A) 675,717 916,400 0.0
174,350 Mitchell Energy Development Corp.
(Class B) 2,755,451 3,617,763 0.0
125,000 Mobil Oil Corp. 9,757,153 14,593,750 0.1
50,000 Murphy Oil Corp. 1,899,720 2,468,750 0.0
106,100 ++++Nuevo Energy Co. 2,048,791 5,291,738 0.1
1,500,000 Occidental Petroleum Corp. 28,058,743 36,750,000 0.3
61,200 Pennzoil Co. 3,775,844 3,121,200 0.0
235,828 ++++Plains Resources, Inc. 1,381,815 3,301,592 0.0
1,094,247 ++++Santa Fe Energy Resources, Inc. 10,119,883 15,593,020 0.1
211,514 ++++Transamerica Refining Corp.
(Warrants) (a) 531,220 423,028 0.0
1,750,000 ++++TransTexas Gas Corp. 20,397,690 23,187,500 0.2
600,000 USX-Marathon Group 10,542,976 13,125,000 0.1
138,800 Unocal Corp. 3,272,336 5,083,550 0.1
--------------- --------------- ------
111,680,851 150,655,178 1.2
Financial Services 350,000 Student Loan Marketing Association 14,540,800 28,962,500 0.2
Food & Tobacco 184,900 Philip Morris Companies, Inc. 9,231,602 17,126,363 0.1
212,462 RJR Nabisco, Inc. 5,842,716 6,134,840 0.1
--------------- --------------- ------
15,074,318 23,261,203 0.2
Gaming 1,235,000 ++++Scientific Games Holdings Corp. 27,568,304 27,941,875 0.2
Healthcare Services 360,000 ++++Advocat, Inc.+++++++ 3,422,500 2,430,000 0.0
90,000 Allegiance Corporation 760,858 1,687,500 0.0
450,000 Baxter International, Inc. 9,088,023 18,731,250 0.2
1,644,200 ++++Beverly Enterprises, Inc. 17,698,104 20,346,975 0.2
1,589,100 ++++Community Psychiatric Centers 13,254,793 14,103,262 0.1
700,000 ++++Humana, Inc. 13,206,455 12,775,000 0.1
435,600 United Healthcare Corporation 14,094,605 16,498,350 0.1
196,500 US Surgical Corp. 3,287,430 8,228,438 0.1
--------------- --------------- ------
74,812,768 94,800,775 0.8
Home Appliances 230,000 Singer Co. 6,382,382 4,398,750 0.0
Hotel/Leisure 114,000 ++++ITT Corp. 4,221,738 4,788,000 0.0
Industrial 200,000 ++++American Standard, Inc. 6,011,000 7,525,000 0.1
15,000 ++++Bar Technologies Ltd. (Warrants) (a) 838,256 825,000 0.0
915,000 BW/IP Holdings, Inc. 15,816,387 12,352,500 0.1
179,802 Cooper Industries, Inc. 6,534,892 7,237,031 0.1
75,000 Crane Co. 2,691,213 3,487,500 0.0
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C> <C> <C>
150,000 Millipore Corporation 5,280,930 5,250,000 0.0
--------------- --------------- ------
37,172,678 36,677,031 0.3
Insurance 800,000 ACE, Ltd. 20,685,921 43,800,000 0.4
340,000 Aetna Inc. (l) 18,752,639 22,737,500 0.2
150,000 Alexander & Alexander Services, Inc. 2,461,336 2,287,500 0.0
510,000 American General Corp. 13,187,448 18,997,500 0.1
571,000 Horace Mann Educators, Inc. 13,654,588 19,556,750 0.2
114,000 ITT Hartford Group Inc. 4,188,594 7,182,000 0.0
640,200 Lincoln National Corp. 23,466,317 31,049,700 0.3
350,000 PartnerRe Holdings, Ltd. 6,790,237 10,018,750 0.1
1,289,500 ++++Risk Capital Holdings Inc. 23,395,906 23,049,813 0.2
--------------- --------------- ------
126,582,986 178,679,513 1.5
Machinery-- 50,000 York International Corp. (New) 2,252,358 2,418,750 0.0
Diversified
Machinery/ 166,800 AGCO Corp. 3,363,402 4,232,550 0.0
Agricultural
Manufacturing 200,000 ITT Industries Inc. 4,175,065 4,650,000 0.0
Metals 305,000 Aluminum Co. of America 13,814,815 17,880,625 0.1
1,350,000 Lukens Inc.+++++++ 25,689,657 18,562,500 0.2
220,700 ++++National Steel Corp. 1,968,085 1,903,538 0.0
200,000 Nucor Corporation 8,824,828 9,475,000 0.1
132,800 Reynolds Metals Co. 5,801,771 7,470,000 0.1
--------------- --------------- ------
56,099,156 55,291,663 0.5
Multi-Industry 180,000 Loews Corp. 7,934,294 14,872,500 0.1
Multimedia & 512,800 ++++U S West Media Group 7,933,766 8,012,500 0.1
Telecommunications
Natural Resources 210,519 Freeport-McMoRan Copper & Gold Inc.
(Class B) 3,665,657 6,394,515 0.1
Oil Services 100,000 ++++Diamond Offshore Drilling Inc. 5,150,000 6,087,500 0.1
260,000 Halliburton Company 7,813,589 14,722,500 0.1
3,000,000 ++++Noble Drilling Corp. 20,058,552 55,875,000 0.5
100,000 Tidewater Inc. 3,404,066 4,375,000 0.0
150,000 ++++Western Atlas, Inc. 9,013,408 10,406,250 0.1
--------------- --------------- ------
45,439,615 91,466,250 0.8
Pharmaceuticals/ 21,600 ++++Alteon, Inc. 169,431 170,100 0.0
Biotechnology 150,000 American Home Products Corporation 6,263,569 9,187,500 0.1
350,000 Bristol-Myers Squibb Co. 18,929,586 37,012,500 0.3
450,000 Merck & Co., Inc. 17,543,253 33,356,250 0.3
500,000 SmithKline Beecham Corp. PLC (ADR)++ 11,603,072 31,312,500 0.3
--------------- --------------- ------
54,508,911 111,038,850 1.0
Photography 160,000 Eastman Kodak Co. 8,746,145 12,760,000 0.1
Pollution Control 646,900 WMX Technologies, Inc. 16,148,443 22,237,188 0.2
Publishing 175,000 Gannett Co., Inc. 8,375,486 13,278,125 0.1
301,500 New York Times Co. (Class A) 7,158,778 10,891,688 0.1
--------------- --------------- ------
15,534,264 24,169,813 0.2
Real Estate 830,000 Ambassador Apartments Inc. 13,262,250 16,807,500 0.1
Investment Trusts 300,000 CarrAmerica Realty Corp. (p) 5,880,781 7,537,500 0.1
475,000 First Union Real Estate Investments 3,570,053 3,562,500 0.0
661,300 Mid-America Realty Investments+++++++ 6,616,640 6,199,688 0.1
100,000 Mid-Atlantic Realty Trust Co. 917,500 1,012,500 0.0
1,251,325 Prime Retail, Inc.+++++++ 13,982,561 14,546,653 0.1
400,000 Taubman Centers, Inc. 3,807,537 4,500,000 0.1
--------------- --------------- ------
48,037,322 54,166,341 0.5
</TABLE>
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<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
Shares Value Percent of
COUNTRY Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
United States Restaurants 500,000 ++++Buffets, Inc. $ 5,071,633 $ 5,500,000 0.0%
(concluded) 1,000,000 Darden Restaurants Inc. 7,811,638 8,375,000 0.1
--------------- --------------- ------
12,883,271 13,875,000 0.1
Retail Stores 608,500 Baker (J.), Inc. 10,187,765 3,194,625 0.0
443,200 ++++Burlington Coat Factory Warehouse 4,846,377 5,429,200 0.1
516,900 ++++Buttrey Food & Drug Stores Co.+++++++ 4,084,486 4,135,200 0.0
60,000 Dayton-Hudson Corp. 1,306,978 2,077,500 0.0
1,110,000 ++++Filene's Basement Corp.+++++++ 10,092,619 4,578,750 0.1
700,000 The Limited, Inc. 12,951,591 12,862,500 0.1
1,373,500 ++++Payless Cashways, Inc. 17,027,625 2,575,313 0.0
--------------- --------------- ------
60,497,441 34,853,088 0.3
Savings Banks 257,500 Bankers Corp. 1,552,137 4,956,875 0.0
1,400,000 ++++Dime Bancorp, Inc. 9,542,668 20,825,000 0.2
206,220 Downey Savings & Loan Association 2,896,670 5,361,720 0.0
1,822,700 ++++Glendale Federal Savings Bank 18,883,707 33,492,112 0.3
770,194 ++++Glendale Federal Savings Bank
(Warrants) (a) -- 6,450,375 0.1
--------------- --------------- ------
32,875,182 71,086,082 0.6
Specialty Retailing 400,000 Sotheby's Holdings, Inc. (Class A) 4,879,559 6,800,000 0.0
1,030,000 Toys 'R' Us, Inc. 25,002,909 34,891,250 0.3
--------------- --------------- ------
29,882,468 41,691,250 0.3
Telecommunications 27,750 ++++American Telecasting Inc.
(Warrants) (a) -- 388,500 0.0
185,700 Comsat Corp. 4,308,767 4,363,950 0.0
800,000 ++++DSC Communications Corp. 12,249,518 11,100,000 0.1
104,500 GTE Corp. 3,514,166 4,402,063 0.1
884,700 ++++Geotek Communications, Inc. 9,078,786 6,414,075 0.1
3,000,000 ++++Geotek Communications, Inc.
(Warrants) (a)+++ 14,200,634 7,875,000 0.1
923,200 ++++PLD Telekom Inc. 6,224,563 6,116,200 0.0
180,000 SBC Communications Inc. 8,015,735 8,752,500 0.1
--------------- --------------- ------
57,592,169 49,412,288 0.5
Textiles 2,825,200 ++++Burlington Industries, Inc. 37,451,653 32,136,650 0.3
Utilities-- 1,250,000 Allegheny Power System, Inc. 27,315,551 37,343,750 0.3
Electric & Gas 125,000 CMS Energy Corp. 2,290,025 3,953,125 0.0
2,101,000 Centerior Energy Corp. 28,664,979 20,484,750 0.2
100,000 Consolidated Edison Company, Inc. 2,923,495 2,925,000 0.0
4,512,285 ++++El Paso Electric Company 23,689,496 23,689,496 0.2
1,780,000 Entergy Corp. 47,516,856 49,840,000 0.4
475,000 FPL Group, Inc. 14,363,265 21,850,000 0.2
47,570 Great Bay Power Corp. 2,549,753 416,237 0.0
1,500,000 Niagara Mohawk Power Corp. 23,789,306 12,750,000 0.1
844,600 Texas Utilities Co. 26,942,999 34,206,300 0.3
1,148,800 Unicom Corporation 27,549,620 29,868,800 0.3
--------------- --------------- ------
227,595,345 237,327,458 2.0
Utilities--Gas 115,650 Atmos Energy Corp. 1,445,257 2,746,687 0.0
Total Common Stocks in the
United States 1,679,903,738 2,150,693,743 18.0
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Total Investments in Common Stocks 3,290,965,516 3,912,840,097 32.8
Equity Closed-End Funds
Austria Financial Services 320,000 ++++Austria Fund (USD) 2,642,432 2,800,000 0.0
Total Equity Closed-End Funds in Austria 2,642,432 2,800,000 0.0
Indonesia Financial Services 25,600 ++++Jakarta Growth Fund (USD) 158,080 198,400 0.0
Total Equity Closed-End Funds in Indonesia 158,080 198,400 0.0
Ireland Financial Services 150,000 ++++Irish Investment Fund, Inc. (USD) 1,086,041 2,100,000 0.0
Total Equity Closed-End Funds in Ireland 1,086,041 2,100,000 0.0
Italy Financial Services 150,000 Italy Fund (USD) 1,198,520 1,237,500 0.0
Total Equity Closed-End Funds in Italy 1,198,520 1,237,500 0.0
Portugal Financial Services 39,500 ++++Capital Portugal Fund 2,052,116 4,105,449 0.1
40,000 Portugal Fund (USD) 360,368 515,000 0.0
Total Equity Closed-End Funds in Portugal 2,412,484 4,620,449 0.1
Spain Financial Services 300,100 ++++Growth Fund of Spain, Inc. (USD) 2,630,827 3,638,712 0.0
Total Equity Closed-End Funds in Spain 2,630,827 3,638,712 0.0
United States Financial Services 166,666 ++++European Warrant Fund (USD) 1,363,723 1,770,826 0.0
Total Equity Closed-End Funds in the
United States 1,363,723 1,770,826 0.0
Total Investments in Equity
Closed-End Funds 11,492,107 16,365,887 0.1
Preferred Stocks
Australia Publishing 600,000 The News Corporation Ltd. (ADR)++ (USD) 10,451,056 10,650,000 0.1
Total Preferred Stocks in Australia 10,451,056 10,650,000 0.1
Germany Chemicals 913,059 Henkel KGaA 37,778,082 41,003,476 0.3
Multi-Industry 450,000 RWE AG 8,725,424 15,286,498 0.1
Total Preferred Stocks in Germany 46,503,506 56,289,974 0.4
New Zealand Financial Services 3,085,700 Brierly Investments, Ltd. (9% Convertible) 1,988,414 2,594,623 0.0
Total Preferred Stocks in New Zealand 1,988,414 2,594,623 0.0
Norway Financial Services 175,000 A/S Eksportfinans (8.70% Convertible)
(USD) 4,377,500 4,768,750 0.0
Total Preferred Stocks in Norway 4,377,500 4,768,750 0.0
Portugal Banking 450,000 BCP International Bank, (8% Convertible)
(USD) 22,407,400 22,781,250 0.2
Total Preferred Stocks in Portugal 22,407,400 22,781,250 0.2
Spain Banking 225,000 Santander Overseas Bank (8% Convertible,
Series D) (USD) 5,463,250 5,681,250 0.1
Total Preferred Stocks in Spain 5,463,250 5,681,250 0.1
United Retail Stores 545,000 ++++Signet Group (Convertible) (ADR)++
Kingdom (USD) 2,194,907 7,698,125 0.1
Total Preferred Stocks in the
United Kingdom 2,194,907 7,698,125 0.1
</TABLE>
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<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
Shares Value Percent of
COUNTRY Industries Held Preferred Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
United States Banking 100,000 Boatmen's Bancshares, Inc.
(Convertible) $ 2,500,000 $ 5,212,500 0.0%
55,000 California Federal Bank (10.625%) 5,500,000 5,940,000 0.1
229,000 HSBC Americas Inc. (Series A) 9,384,078 10,190,500 0.1
100,000 Onbancorp, Inc. (6.75% Convertible,
Series B) 2,668,750 2,875,000 0.0
--------------- --------------- ------
20,052,828 24,218,000 0.2
Cable Television 1,000,000 Diva Systems Corp. (Convertible,
Series C)++++ 8,410,000 8,892,500 0.1
Energy & Petroleum 150,000 ++++Grant Tensor Corp. (9.75% Convertible) 1,853,375 2,681,250 0.0
64,219 Santa Fe Energy Resources, Inc.
(7% Convertible) 954,075 1,565,338 0.0
460,000 Santa Fe Energy Resources, Inc.
(Convertible, Class A) 4,082,500 5,750,000 0.1
--------------- --------------- ------
6,889,950 9,996,588 0.1
Healthcare 1,080,000 US Surgical Corp. (Convertible) 24,354,000 43,200,000 0.4
Natural Resources 85,000 Alumax Inc. (Convertible, Series A) 7,240,312 11,368,750 0.1
150,000 Cyprus Amax Minerals Co. (Convertible,
Series A) 9,188,313 8,137,500 0.1
348,700 Freeport-McMoRan Copper & Gold, Inc.
(Convertible) 7,918,834 9,502,075 0.1
219,000 Freeport-McMoRan Inc.
(Convertible--Gold) 7,703,330 7,199,625 0.0
--------------- --------------- ------
32,050,789 36,207,950 0.3
Oil Services 447,200 Noble Drilling Corp. (Convertible) 10,745,382 20,906,600 0.2
Paper & Forest 200,000 Boise Cascade Corp. (Convertible,
Products Series G) 4,225,000 5,175,000 0.0
288,200 James River Corp. of Virginia
(9% Convertible, Series P) 4,971,450 8,501,900 0.1
--------------- --------------- ------
9,196,450 13,676,900 0.1
Real Estate 728,000 Catellus Development Corp.
(7.25% Exchangeable, Series B)+++ 33,521,250 38,402,000 0.3
319,200 First Union Real Estate Investments
(Convertible) 7,980,000 8,418,900 0.1
--------------- --------------- ------
41,501,250 46,820,900 0.4
Real Estate 290,000 Criimi Mae Inc. (10.875% Convertible,
Investment Trusts Series B) 7,250,000 7,830,000 0.0
350,000 National Health Investors, Inc.
(8.50% Convertible) 8,750,000 10,850,000 0.1
835,500 Prime Retail, Inc. (10.50%)+++++++ 19,316,161 20,156,437 0.2
--------------- --------------- ------
35,316,161 38,836,437 0.3
Savings Banks 619,900 Glendale Federal Savings Bank
(8.75% Convertible, Series E) 15,070,337 29,987,663 0.2
Total Preferred Stocks in the
United States 203,587,147 272,743,538 2.3
Total Investments in Preferred Stocks 296,973,180 383,207,510 3.2
<CAPTION>
Currency Face
Denomination Amount Fixed-Income Securities
<S> <C> <C> <C> <C>
Argentina Banking USD 15,500,000 Banco de Galicia y Buenos Aires S.A.
de C.V., 9% due 11/01/2003 $ 15,020,750 $ 14,337,500 0.1%
Banco Rio de la Plata:
USD 42,500,000 (Class 3), 8.50% due 7/15/1998 42,868,125 42,712,500 0.4
USD 50,000,000 8.75% due 12/15/2003 41,565,950 46,312,500 0.4
--------------- --------------- ------
99,454,825 103,362,500 0.9
Government Republic of Argentina:
Obligations USD 86,240,000 Floating Rate Bonds, Series L,
6.625% due 3/31/2005 (d) 55,202,175 70,824,600 0.6
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C>
USD 145,000,000 Floating Rate Discount Notes, 6.437%
due 3/31/2023 106,073,973 104,400,000 0.8
USD 13,000,000 Global Bonds, 8.375% due 12/20/2003 8,237,000 11,537,500 0.1
USD 280,000,000 Par 'L' Bonds, 5.25% due 3/31/2023 138,411,142 166,250,000 1.4
--------------- --------------- ------
307,924,290 353,012,100 2.9
Total Fixed-Income Securities
in Argentina 407,379,115 456,374,600 3.8
Australia Building & USD 26,410,000 Lend Lease Finance International,
Construction Convertible Bonds, 4.75% due 6/01/2003 28,765,793 37,626,327 0.3
Total Fixed-Income Securities
in Australia 28,765,793 37,626,327 0.3
Brazil Government USD 35,000,000 Brazil Exit Bonds, 6% due 9/15/2013 19,728,704 23,931,250 0.2
Obligations USD 30,940,000 Republic of Brazil, Floating Rate
Bonds, 6.687% due 1/01/2001 (d) 24,054,712 29,663,725 0.3
--------------- --------------- ------
43,783,416 53,594,975 0.5
Media/ USD 15,000,000 Abril S.A., 12% due 10/25/2003+++ 15,030,000 15,562,500 0.1
Publishing
Natural USD 11,500,000 Companhia Vale Do Rio Doce, 10% due
Resources 4/02/2004+++ 11,485,878 11,830,625 0.1
Total Fixed-Income Securities in Brazil 70,299,294 80,988,100 0.7
Canada Cable/ CAD 7,545,000 Rogers Cablesystem Inc., 9.65% due
Telecommuni- 1/15/2014 4,397,424 5,007,868 0.1
cations
Chemicals USD 18,800,000 Acetex Corporation, 9.75% due
10/01/2003 18,514,300 17,766,000 0.2
Hotel/ USD 21,000,000 Four Seasons Hotel, Inc., 9.125% due
Leisure 7/01/2000+++ 20,917,750 21,131,250 0.2
Paper & CAD 2,000,000 MacMillan Bloedel Limited, Convertible
Forest Bonds, 5% due 5/01/2007 1,024,416 1,237,974 0.0
Products
Real Estate CAD 16,501,370 First Place Tower, Inc., 10.28% due
12/15/2015 (s) 26,246,648 24,058,601 0.2
CAD 14,369,400 First Place Tower Mortgage, Inc.,
9.22% due 12/15/2015 11,258,329 12,055,765 0.1
--------------- --------------- ------
37,504,977 36,114,366 0.3
Natural USD 27,750,000 Sifto Canada, Inc., 8.50% due
Resources 7/15/2000 27,625,187 27,437,812 0.2
CAD 27,500,000 Viridian, Inc., 11% due 3/31/2004 (r) 19,868,804 23,789,992 0.2
--------------- --------------- ------
47,493,991 51,227,804 0.4
Telecom- CAD 5,000,000 Rogers Communications Inc.,
munications Convertible Bonds, 7.50% due
9/01/1999 3,394,000 3,616,974 0.0
Total Fixed-Income Securities
in Canada 133,246,858 136,102,236 1.2
France Automobiles FRF 5,500 Peugeot S.A., Convertible Bonds, 2%
due 1/01/2001 992,341 1,168,527 0.0
Banking ECU 2,000,000 Credit Local de France, 0% due
10/16/2001 (b) 1,851,954 1,925,788 0.0
FRF 58,000 Societe Generale, Convertible Bonds,
3.50% due 1/01/2000 7,499,838 8,976,272 0.1
--------------- --------------- ------
9,351,792 10,902,060 0.1
Government ECU 123,500,000 Government of France OAT, 8.25% due
Obligations 4/25/2022 141,242,404 175,925,760 1.5
Industrial FRF 30,000 Alcatel Alsthom, Convertible Bonds,
2.50% due 1/01/2004 3,926,887 5,103,959 0.0
Insurance FRF 35,500 Finaxa, Convertible Bonds, 3% due
1/01/2001 9,060,172 11,565,057 0.1
Multi- FRF 8,713 Compagnie Generale des Eaux,
Industry Convertible Bonds, 6% due 1/01/1998 4,859,722 5,748,622 0.1
Total Fixed-Income Securities
in France 169,433,318 210,413,985 1.8
</TABLE>
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<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
Currency Face Value Percent of
COUNTRY Industries Denomination Amount Fixed-Income Securities Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C> <C>
Germany Banking DEM 2,310,000 Commerzbank AG, Floating Rate
Convertible Bonds, 0% due
6/15/2001 (b) $ 1,556,456 $ 2,245,727 0.0%
USD 5,000,000 Landes Kredit Bank, 7.875% due
4/15/2004 4,972,067 5,350,450 0.1
--------------- --------------- ------
6,528,523 7,596,177 0.1
Building USD 41,100,000 Tarkett AG, 9% due 3/01/2002 39,413,750 42,024,750 0.3
Materials
Financial USD 5,875,000 Veba International Finance
Services (with Warrants), 6% due
4/06/2000 (a) 2,965,841 5,816,250 0.0
Government Bundesrepublik Deutscheland:
Obligations DEM 31,000,000 5.75% due 8/20/1998 22,444,131 21,236,854 0.2
DEM 130,500,000 7.375% due 1/03/2005 99,256,229 94,233,230 0.8
DEM 258,000,000 6.25% due 1/04/2024 152,113,077 158,217,038 1.3
DEM 265,000,000 Deutsche Bundespost, 7.75% due
10/01/2004 197,119,542 194,104,487 1.6
--------------- --------------- ------
470,932,979 467,791,609 3.9
Government DEM 64,000,000 Baden-Wuerttemberg, 6.20% due
Obligations 11/22/2013 37,148,769 43,282,797 0.4
--Regional DEM 55,000,000 Freie Hansestadt Hamburg, 6.08% due
11/29/2018 31,730,765 36,469,169 0.3
DEM 170,500,000 Land Hessen, 6% due 11/29/2013 98,586,862 113,054,425 0.9
DEM 110,000,000 Mecklenberg-Vorpommern, 6.15% due
6/16/2023 61,012,437 70,902,782 0.6
DEM 134,950,000 Nordrhein-Westfalen, 6.125% due
12/21/2018 77,420,913 89,482,080 0.7
Rheinland-Pfalz:
DEM 33,000,000 5.75% due 2/24/2014 18,324,663 21,488,930 0.2
DEM 64,000,000 6.08% due 11/29/2018 36,935,547 42,436,851 0.4
DEM 47,000,000 Sachsen-Anhalt, 6% due 1/10/2014 26,915,615 30,512,260 0.3
--------------- --------------- ------
388,075,571 447,629,294 3.8
Industrial USD 1,000,000 Siemens Corp. (with Warrants), 8% due
6/24/2002 (a) 1,318,750 1,328,000 0.0
Total Fixed-Income Securities
in Germany 909,235,414 972,186,080 8.1
Hong Kong Industrial USD 11,300,000 Johnson Electric Holdings Ltd.,
Convertible Bonds, 4.50% due
11/05/2000 10,093,904 10,452,500 0.1
Retail USD 12,000,000 Dairy Farm International Holdings Ltd.
(Convertible Preferred), 6.50% due
5/10/2049 9,525,875 8,130,000 0.0
Total Fixed-Income Securities
in Hong Kong 19,619,779 18,582,500 0.1
India Chemicals Reliance Industries Limited:
USD 15,000,000 8.125% due 9/27/2005 14,137,500 14,925,000 0.1
USD 11,450,000 Convertible Bonds, 3.50% due
11/03/1999 11,808,875 12,022,500 0.1
--------------- --------------- ------
25,946,375 26,947,500 0.2
Total Fixed-Income Securities
in India 25,946,375 26,947,500 0.2
Indonesia Paper & USD 19,500,000 APP International Finance, 11.75%
Forest due 10/01/2005 19,500,000 20,133,750 0.2
Products RAPP International Finance
Company B.V.:
USD 3,250,000 11.50% due 12/15/2000 3,220,165 3,355,625 0.0
USD 24,750,000 13.25% due 12/15/2005 24,090,165 26,915,625 0.2
Total Fixed-Income Securities
in Indonesia 46,810,330 50,405,000 0.4
Italy Government USD 5,000,000 Republic of Italy, 8.75%
Obligations due 2/08/2001 5,373,050 5,482,820 0.0
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
USD 17,735,000 Republic of Italy/INA, Convertible
Bonds, 5% due 6/28/2001 17,761,250 17,735,000 0.2
--------------- --------------- ------
23,134,300 23,217,820 0.2
Telecom- Softe SA-LUX:
munica- ITL 11,500,000,000 Convertible Bonds, 4.25%
tions due 7/30/1998 7,894,814 11,341,447 0.1
ITL 16,760,000,000 (Ex-Warrants), 8.75% due 3/24/1997 10,756,360 11,056,138 0.1
--------------- --------------- ------
18,651,174 22,397,585 0.2
Total Fixed-Income Securities
in Italy 41,785,474 45,615,405 0.4
Japan Beverages JPY 1,004,000,000 Sanyo Coca-Cola Bottling Inc.,
#1 Convertible Bonds, 0.90%
due 6/30/2003 9,358,932 8,870,505 0.1
JPY 100,000,000 Shikoku Coca-Cola Bottling Co., Ltd.,
#1 Convertible Bonds, 2.40% due
3/29/2002 1,036,246 989,890 0.0
--------------- --------------- ------
10,395,178 9,860,395 0.1
Chemicals USD 4,700,000 Shin-Etsu Chemical Co., Ltd.,
(with Warrants) 3.375% due
8/08/2000 (a) 4,676,500 4,688,250 0.0
Computers CHF 13,000,000 NEC Corporation, Convertible Bonds,
1% due 3/31/1999 (t) 11,909,536 11,715,896 0.1
Electronics JPY 988,000,000 Matsushita Electric Works, Ltd.,
#8 Convertible Bonds, 2.70% due
5/31/2002 9,691,544 10,422,857 0.1
Insurance JPY 13,000,000 Mitsui Marine & Fire Insurance
Co., Ltd., #3 Convertible Bonds,
0.70% due 3/31/2003 118,211 114,400 0.0
JPY 117,000,000 Nichido Fire & Marine Insurance
Co., Ltd., #5 Convertible Bonds,
1% due 3/31/2003 1,109,381 1,023,429 0.0
--------------- --------------- ------
1,227,592 1,137,829 0.0
Pharma- JPY 710,000,000 Yamanouchi Pharmaceutical Co.,
ceuticals Ltd., Convertible Bonds, 1.25%
due 3/31/2014 (t) 7,563,563 7,310,971 0.1
Total Fixed-Income Securities
in Japan 45,463,913 45,136,198 0.4
Malaysia Multi- USD 15,500,000 Renong BHD, Convertible Bonds,
Industry 2.50% due 1/15/2005 17,544,487 17,708,750 0.1
Total Fixed-Income Securities
in Malaysia 17,544,487 17,708,750 0.1
Mexico Government USD 80,000,000 Banco Nacional (BNCE), 7.25%
Obligations due 2/02/2004 57,670,000 67,600,000 0.6
USD 45,150,000 Petroleos Mexicanos, 8.625% due
12/01/2023+++ 25,007,000 35,273,437 0.3
USD 31,434,000 United Mexican States, 8.50%
due 9/15/2002 26,780,921 29,665,837 0.2
Total Fixed-Income Securities
in Mexico 109,457,921 132,539,274 1.1
New Zealand Utilities-- NZD 1,760,000 Natural Gas Corp. Holdings,
Gas Convertible Bonds, 10.50% due
10/14/1997 1,043,960 2,536,977 0.0
Total Fixed-Income Securities in
New Zealand 1,043,960 2,536,977 0.0
Philippines Utilities USD 16,000,000 CE Casecnan, 11.45% due 11/15/2005 15,895,000 17,340,000 0.2
Total Fixed-Income Securities in the
Philippines 15,895,000 17,340,000 0.2
Portugal Banking ECU 19,300,000 Banco Commercial Portuguese,
Convertible Bonds, 8.75% due 5/21/2002 26,468,747 25,202,596 0.2
Total Fixed-Income Securities
in Portugal 26,468,747 25,202,596 0.2
Russia Telecom- USD 74,500,000 PLD Telekom, Inc., 0/14% due 6/01/2004
munications (b) (n) (u)+++ 56,787,864 59,182,800 0.5
USD 18,700,000 PLD Telekom, Inc., Convertible Bonds,
9% due 6/01/2006 (u)+++ 18,756,250 20,920,625 0.2
Total Fixed-Income Securities
in Russia 75,544,114 80,103,425 0.7
</TABLE>
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<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
Currency Face Value Percent of
COUNTRY Industries Denomination Amount Fixed-Income Securities Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C> <C>
South Africa Metals USD 8,000,000 Samancor Ltd., Convertible Bonds,
7% due 6/30/2004 $ 7,683,500 $ 7,960,000 0.1%
Total Fixed-Income Securities in
South Africa 7,683,500 7,960,000 0.1
South Korea Electronics USD 5,250,000 Samsung Electronics Co., Convertible
Bonds, 0.25% due 12/31/2006+++ 5,250,000 5,656,875 0.0
Energy USD 10,540,000 Ssangyong Oil Refining, Convertible
Related Bonds, 3.75% due 12/31/2008 11,126,937 11,146,050 0.1
USD 6,795,000 Ssangyong Oil Refining, Convertible
Bonds, 3% due 12/31/2004 5,003,212 5,011,312 0.1
--------------- --------------- ------
16,130,149 16,157,362 0.2
Total Fixed-Income Securities in
South Korea 21,380,149 21,814,237 0.2
Sweden Industrial ECU 7,000,000 SKF--AB Lyons, Convertible Bonds,
0% due 7/26/2002 (b) 5,984,520 5,613,184 0.1
Total Fixed-Income Securities
in Sweden 5,984,520 5,613,184 0.1
Switzerland Chemicals USD 24,945,000 Ciba-Geigy Corp., Convertible Bonds,
6.25% due 3/15/2016 25,632,050 25,132,087 0.2
Industrial CHF 1,401,000 Ciba-Geigy AG, Convertible Bonds,
2% due 8/09/1998 1,178,587 2,803,335 0.0
Total Fixed-Income Securities in
Switzerland 26,810,637 27,935,422 0.2
United Cable/Tele- USD 43,250,000 Bell Cablemedia PLC, 0/11.875% due
Kingdom communi- 9/15/2005 (b) 27,463,384 32,329,375 0.3
cations USD 23,100,000 Diamond Cable Communications Co.,
0/11.75% due 12/15/2005 (b) 14,454,393 15,159,375 0.1
USD 48,000,000 International Cabletel Inc., Series
B, 0/11.50% due 2/01/2006 (b) 29,861,740 29,160,000 0.2
--------------- --------------- ------
71,779,517 76,648,750 0.6
Financial GBP 11,600,000 TransAtlantic Holdings PLC,
Services Convertible Bonds, 5.50% due
4/30/2009 14,179,895 16,321,304 0.1
Food & GBP 1,750,000 Allied-Lyons PLC, Convertible Bonds,
Beverage 6.75% due 7/07/2008 2,589,607 2,796,735 0.0
Government GBP 20,000,000 United Kingdom Treasury Gilt, 7.75%
Obligations due 9/08/2006 30,088,910 32,727,192 0.3
Industrial HIH Capital Ltd., Convertible Bonds:
USD 4,655,000 (Bearer), 7.50% due 9/25/2006 3,031,038 3,444,700 0.0
USD 2,000,000 Convertible Bonds, 7.50% due
9/25/2006 1,665,000 1,460,000 0.0
--------------- --------------- ------
4,696,038 4,904,700 0.0
Multi- GBP 6,625,000 English China Clays PLC, Convertible
Industry Bonds, 6.50% due 9/30/2003 10,841,824 9,752,484 0.1
Real Estate Land Securities PLC, Convertible
Bonds:
GBP 3,500,000 6.75% due 12/31/2002 5,301,121 5,835,427 0.1
GBP 3,750,000 9.375% due 7/31/2004 6,587,319 7,045,211 0.1
--------------- --------------- ------
11,888,440 12,880,638 0.2
Retail GBP 18,300,000 Sainsbury (J.) PLC, Convertible
Bonds, 8.50% due 11/19/2005 33,705,906 34,529,465 0.3
Telecom- USD 21,500,000 Comcast UK Cable Partners Ltd.,
munications 0/11.20% due 11/15/2007 (b) 12,904,529 13,867,500 0.1
USD 39,750,000 TeleWest Communications PLC, 0/11%
due 10/01/2007 (b) 24,527,513 25,489,687 0.2
--------------- --------------- ------
37,432,042 39,357,187 0.3
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Textiles GBP 2,500,000 Coats Viyella PLC, Convertible Bonds,
Series B, 6.25% due 8/09/2003 3,535,704 3,690,349 0.0
Total Fixed-Income Securities in the
United Kingdom 220,737,883 233,608,804 1.9
United States Airlines USD 4,131,821 USAir Pass-Through, 9.33% due
1/01/2006 (d) 4,028,939 3,811,605 0.0
Banking USD 14,250,000 Berkley Federal Bank, 12% due
6/15/2005 14,250,000 15,390,000 0.1
Bio- USD 7,200,000 Cetus Corporation (Euro), Convertible
technology Bonds, 5.25% due 5/21/2002 5,220,250 6,948,000 0.1
Chemicals USD 10,000,000 Laroche Industries Inc., 13% due
8/15/2004 10,325,000 10,775,000 0.1
Energy USD 12,374,000 Transamerican Refining Corp., 0% due
2/15/2002 (b) 9,517,535 9,775,460 0.1
USD 18,000,000 TransTexas Gas Corp., 11.50% due
6/15/2002 18,000,000 19,125,000 0.2
--------------- --------------- ------
27,517,535 28,900,460 0.3
Financial USD 10,000,000 Ford Capital BV, 9.375% due 1/01/1998 10,037,900 10,379,200 0.1
Services--
Captive
Healthcare USD 42,000,000 Omega Healthcare Investors Inc.,
Convertible Bonds, 8.50% due 2/01/2001 42,052,500 43,260,000 0.3
Home- Baldwin Builders & Contractors+++:
building & USD 40,000,000 10.25% due 7/18/1997 40,000,000 38,825,000 0.3
Construc- USD 7,500,000 11.25% due 7/18/1997 7,500,000 7,354,687 0.1
tion USD 31,950,000 ++++Baldwin Co., Series B, 10.375% due
8/01/2003 30,215,562 12,780,000 0.1
USD 37,500,000 Beazer Homes USA, Inc., 9% due
3/01/2004 35,597,000 34,687,500 0.3
USD 13,750,000 Presley Companies, Senior Notes,
12.50% due 7/01/2001 13,690,312 13,062,500 0.1
--------------- --------------- ------
127,002,874 106,709,687 0.9
Hospital USD 1,000,000 Novacare, Inc., Convertible Bonds,
Management 5.50% due 1/15/2000 857,500 892,500 0.0
Industrial USD 20,000,000 AM General Corp., 0/12.875% due
5/01/2002 (b) 19,844,720 19,200,000 0.1
USD 29,635,000 Brooks Fiber Properties, 0/10.875%
due 3/01/2006 (b) 16,727,028 17,336,475 0.1
USD 21,750,000 Crown Packaging Enterprises, 0/14%
due 8/01/2006 (b)+++ 8,722,869 8,613,761 0.1
USD 20,000,000 Crown Packaging Ltd., 10.75% due
11/01/2000 20,000,000 19,000,000 0.2
USD 10,000,000 Easco Corp., 10% due 3/15/2001 10,005,000 10,050,000 0.1
USD 27,000,000 Envirotest Systems Corp., 9.125% due
3/15/2001 24,683,460 24,705,000 0.2
USD 28,000,000 Genmar Holdings, Inc., 13.50% due
7/15/2001 27,803,975 27,160,000 0.2
USD 71,500,000 International Semi-Tech
Microelectronics, Inc., 0/11.50%
due 8/15/2003 (b) 46,852,840 43,436,250 0.4
--------------- --------------- ------
174,639,892 169,501,486 1.4
Leisure-- USD 20,000,000 Prime Hospitality Corp., 9.25%
Restaurant & due 1/15/2006 19,012,500 19,900,000 0.2
Lodging
Merchandis- USD 12,000,000 Price Club Co., Convertible Bonds,
ing 5.50% due 2/28/2012 11,213,250 12,210,000 0.1
Metals USD 15,000,000 Oregon Steel Mills, Inc., 11% due
6/15/2003 15,000,000 15,937,500 0.1
Oil & Related PDV America, Inc.:
USD 35,000,000 7.25% due 8/01/1998 34,856,150 34,868,750 0.3
USD 10,000,000 7.75% due 8/01/2000 10,062,500 9,937,500 0.1
USD 6,000,000 USX Marathon Oil Corp., Convertible
Bonds, 7% due 6/15/2017 5,650,000 5,760,000 0.1
--------------- --------------- ------
50,568,650 50,566,250 0.5
Oil Service USD 8,250,000 KCS Energy Inc., 11% due 1/15/2003 8,714,062 8,951,250 0.1
Real Estate USD 23,435,612 RTC Commercial Mortgage, Class C,
8.25% due 12/25/2020 (d) 23,076,754 23,084,077 0.2
</TABLE>
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<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
Currency Face Value Percent of
COUNTRY Industries Denomination Amount Fixed-Income Securities Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C> <C>
United States Real Estate USD 24,500,000 Alexander Haagen Properties Inc.,
(concluded) Investment Exchangeable Debentures, 7.25% due
Trusts 12/27/2003+++ $ 24,348,750 $ 23,979,375 0.2%
USD 7,000,000 Centerpoint Properties Corp.,
Convertible Bonds, 8.22% due
1/15/2004 7,000,000 10,325,000 0.1
USD 10,000,000 First Nationwide Escrow, 10.625% due
10/01/2003+++ 10,000,000 10,550,000 0.1
USD 30,000,000 First Union Real Estate, 8.875% due
10/01/2003 29,756,100 27,375,000 0.2
USD 25,000,000 First Washington Realty, 8.25% due
6/27/1999+++ 25,000,000 25,437,500 0.2
Health & Retirement Properties Trust,
Convertible Bonds:
USD 40,000,000 7.250% due 10/01/2001 40,000,000 40,000,000 0.3
USD 15,000,000 7.50% due 10/01/2003 15,000,000 15,000,000 0.1
LTC Properties, Inc., Convertible
Bonds:
USD 10,000,000 8.25% due 1/01/1999 10,000,000 10,900,000 0.1
USD 10,000,000 8.50% due 1/01/2001 10,000,000 10,500,000 0.1
USD 12,500,000 8% due 7/01/2001 12,500,000 13,375,000 0.1
Malan Realty Investors, Inc.,
Convertible Bonds:
USD 27,000,000 8.50% due 7/01/2003 27,000,000 27,506,250 0.2
USD 4,750,000 9.50% due 7/15/2004 3,859,375 4,298,750 0.0
Meditrust, Convertible Bonds:
USD 5,000,000 7% due 3/01/1998 5,035,000 5,750,000 0.1
USD 9,415,000 8.54% due 7/01/2000 9,602,637 10,074,050 0.1
USD 10,000,000 7.50% due 3/01/2001 10,000,000 10,300,000 0.1
USD 5,000,000 Mid-Atlantic Realty Trust,
Convertible Bonds, 7.625% due
9/15/2003 4,875,000 4,700,000 0.0
USD 22,000,000 National Health Investors,
Convertible Bonds, 7.75% due
1/01/2001 22,000,000 23,540,000 0.2
USD 23,000,000 Nationwide Health Properties Inc.,
Convertible Bonds, 6.25% due
1/01/1999 22,800,000 23,000,000 0.2
USD 5,500,000 Sizeler Property Investors, Inc.,
Convertible Bonds, 8% due 7/15/2003 5,505,000 4,771,250 0.0
--------------- --------------- ------
294,281,862 301,382,175 2.4
Resources USD 12,000,000 Freeport-McMoRan Resources,
8.75% due 2/15/2004 11,116,875 12,225,000 0.1
Retail-- USD 29,500,000 ++++Coinstar Inc., 0/13% due 10/01/2006
Miscellaneous (b) (k)+++ 20,430,013 20,502,500 0.2
Savings USD 21,400,000 First Federal Financial Corporation,
Bank 11.75% due 10/01/2004 21,401,250 23,112,000 0.2
Steel USD 15,000,000 Bar Technologies Ltd., 13.50% due
4/01/2001 13,898,344 15,075,000 0.1
Telecom- USD 20,000,000 American Communications Services,
munications Inc., 0/13% due 11/01/2005 (b) 11,699,628 11,200,000 0.1
USD 28,500,000 Busse Broadcasting, 11.625% due
10/15/2000 27,478,987 28,785,000 0.3
USD 38,000,000 CAI Wireless Systems, Inc., 12.25%
due 9/15/2002 39,322,000 36,670,000 0.3
USD 59,500,000 CS Wireless Systems, Inc., 0/11.375%
due 3/01/2006 (b) (q)+++ 34,907,847 27,518,750 0.2
USD 15,500,000 Call Net Enterprise, Inc., 0/13.25%
due 12/01/2004 (b) 10,521,689 12,128,750 0.1
USD 76,000,000 CellNet Data Systems, Inc., 0/13% due
6/15/2005 (b) (h)+++ 48,829,774 58,140,000 0.5
Geotek Communications, Inc.:
USD 99,000,000 0/15% due 7/15/2005 (b) 45,958,118 62,865,000 0.5
USD 20,000,000 Convertible Bonds, 12% due
2/15/2001+++ 20,000,000 20,725,000 0.2
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
USD 30,000,000 Millicom International Cellular S.A.,
0/13.5% due 6/01/2006 (b)+++ 16,424,034 17,100,000 0.1
USD 38,500,000 Nextel Communications, Inc., 0/9.75%
due 8/15/2004 (b) 28,603,737 24,303,125 0.2
Teleport Communications Group Inc.:
USD 3,000,000 9.875% due 7/01/2006 3,000,000 3,060,000 0.0
USD 34,000,000 0/11.125% due 7/01/2007 (b) 20,510,380 21,760,000 0.2
United International Holdings,
Inc. (b):
USD 39,250,000 0% due 11/15/1999 (f) 24,964,747 27,475,000 0.2
USD 11,000,000 Series B, 0% due 11/15/1999 7,289,584 7,700,000 0.1
United USN Inc. (b):
USD 47,000,000 0/14% due 9/30/2003 (i)+++ 29,610,393 29,269,250 0.3
USD 35,000,000 Convertible Bonds, 0/9% due
9/30/2003+++ 27,079,878 26,876,500 0.2
--------------- --------------- ------
396,200,796 415,576,375 3.5
Textiles & USD 18,250,000 Texfi Industries, Inc., 8.75% due
Apparel 8/01/1999 17,930,300 16,060,000 0.1
Transpor- USD 10,625,000 Eletson Holdings Inc., 9.25% due
tation 11/15/2003 10,558,437 10,505,469 0.1
Transpor- USD 27,000,000 Teekay Shipping Corporation, 8.32%
tation-- due 2/01/2008 26,002,500 26,190,000 0.2
Shipping
Trucking USD 32,000,000 Ameritruck Distribution, 12.25% due
11/15/2005 31,563,525 31,760,000 0.3
US Govern- Federal Home Loan Mortgage Corp.,
ment & REMIC (d) (g):
Agency USD 4,910,000 1243-HP, 5.625% due 11/25/2015 4,788,017 4,839,394 0.0
Obligations USD 10,000,000 Series, 6.30% due 5/15/2008 9,210,937 9,379,687 0.1
Federal National Mortgage
Association (d):
USD 7,815,443 8% due 10/01/2024 7,462,527 7,986,367 0.1
USD 15,685,499 8% due 12/01/2024 15,408,552 16,028,541 0.1
US Treasury Notes & Bonds:
USD 341,100,000 6% due 5/31/1998 339,137,636 342,645,183 2.9
USD 100,000,000 6.125% due 8/31/1998 99,632,812 100,672,000 0.8
USD 55,000,000 7.875% due 8/15/2001 53,943,600 59,013,350 0.5
USD 25,000,000 6.25% due 2/15/2003 25,710,937 25,089,750 0.2
US Treasury STRIPS (b) (m):
USD 22,000,000 0% due 5/15/2000 17,525,317 17,856,960 0.2
USD 5,000,000 0% due 2/15/2019 1,190,741 1,085,900 0.0
--------------- --------------- ------
574,011,076 584,597,132 4.9
Utilities-- CTC Mansfield Funding Corp.,
Electric USD 5,483,000 10.25% due 3/30/2003 5,602,320 5,585,806 0.1
USD 15,000,000 Calpine Corp., Inc., 9.25%
due 2/01/2004 13,857,500 14,643,750 0.1
USD 3,000,000 Cleveland Electric Illuminating
Company Inc., First Mortgage, 9.05%
due 8/15/2001 3,093,750 3,090,000 0.0
Toledo Edison Co.:
USD 3,000,000 9.50% due 4/01/2001 3,221,250 3,150,000 0.1
USD 1,500,000 7.85% due 3/31/2003 1,296,450 1,447,500 0.0
USD 2,000,000 7.91% due 4/01/2003 1,992,500 1,932,500 0.0
--------------- --------------- ------
29,063,770 29,849,556 0.3
Total Fixed-Income Securities in the
United States 1,989,976,354 2,014,052,222 16.9
Total Investments in Fixed-Income
Securities 4,416,512,935 4,666,792,822 39.1
</TABLE>
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<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
Currency Face Value Percent of
COUNTRY Denomination Amount Short-Term Securities Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C> <C>
Canada Foreign USD 1,500,000 Canadian Treasury Bill, 6.06% due
Government 11/14/1996 $ 1,105,823 $ 1,117,533 0.0%
Obligations*
United States Commercial A I Credit:
Paper* USD 20,000,000 5.35% due 11/12/1996 19,967,306 19,967,306 0.2
USD 14,025,000 5.37% due 11/12/1996 14,001,987 14,001,987 0.1
USD 20,000,000 Alcatel Alsthom Cie Generale
d'Electricite S.A., 5.24% due
12/20/1996 19,857,356 19,857,356 0.2
USD 25,000,000 AlliedSignal, Inc., 5.25% due
11/07/1996 24,978,125 24,978,125 0.2
American Express Credit Corp.:
USD 50,000,000 5.28% due 11/26/1996 49,816,667 49,816,667 0.4
USD 50,000,000 5.26% due 12/10/1996 49,715,083 49,715,083 0.4
USD 20,000,000 Ameritech Credit Corp., 5.22% due
11/13/1996 19,965,200 19,965,200 0.2
Associates Corp. of North America:
USD 20,000,000 5.26% due 12/10/1996 19,886,033 19,886,033 0.2
USD 80,000,000 5.25% due 12/20/1996 79,428,333 79,428,333 0.7
USD 50,000,000 BBV Finance (Delaware), Inc.,
5.22% due 11/12/1996 49,920,250 49,920,250 0.4
USD 50,000,000 Barclays U.S. Funding, 5.23% due
11/25/1996 49,825,667 49,825,667 0.4
CIT Group Holdings, Inc. (The):
USD 30,000,000 5.22% due 12/09/1996 29,834,700 29,834,700 0.3
USD 30,000,000 5.24% due 12/20/1996 29,786,033 29,786,033 0.2
Caisse des Depots et Consignations:
USD 21,555,000 5.37% due 11/07/1996 21,535,708 21,535,708 0.2
USD 20,000,000 5.25% due 12/06/1996 19,897,917 19,897,917 0.2
USD 60,000,000 5.24% due 12/12/1996 59,641,933 59,641,933 0.5
Cargill Inc.:
USD 50,000,000 5.23% due 11/18/1996 49,876,514 49,876,514 0.4
USD 30,000,000 5.35% due 11/18/1996 29,924,208 29,924,208 0.3
Ciesco, L.P.:
USD 25,000,000 5.33% due 11/15/1996 24,948,181 24,948,181 0.2
USD 20,000,000 5.28% due 12/02/1996 19,909,067 19,909,067 0.2
USD 15,000,000 5.23% due 12/13/1996 14,908,475 14,908,475 0.1
USD 30,000,000 5.25% due 12/13/1996 29,816,250 29,816,250 0.2
USD 25,000,000 Coca-Cola Company (The), 5.21% due
12/09/1996 24,862,514 24,862,514 0.2
Daimler-Benz AG:
USD 35,207,000 5.35% due 11/07/1996 35,175,607 35,175,607 0.3
USD 25,000,000 5.33% due 11/22/1996 24,922,271 24,922,271 0.2
Delaware Funding Corp.:
USD 35,000,000 5.35% due 11/08/1996 34,963,590 34,963,590 0.3
USD 45,000,000 5.26% due 11/15/1996 44,907,950 44,907,950 0.4
USD 19,934,000 5.25% due 11/22/1996 19,872,952 19,872,952 0.2
USD 50,000,000 Deutsche Bank Financial, Inc.,
5.225% due 11/20/1996 49,862,118 49,862,118 0.4
du Pont (E.I.) de Nemours & Co.:
USD 45,000,000 5.26% due 11/06/1996 44,967,125 44,967,125 0.4
USD 57,000,000 5.25% due 11/14/1996 56,891,938 56,891,938 0.5
USD 18,000,000 5.23% due 11/18/1996 17,955,545 17,955,545 0.1
USD 25,000,000 5.23% due 11/21/1996 24,927,361 24,927,361 0.2
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Eiger Capital Corp.:
USD 19,074,000 5.40% due 11/08/1996 19,053,972 19,053,972 0.2
USD 32,000,000 5.28% due 11/25/1996 31,887,360 31,887,360 0.3
USD 20,000,000 5.32% due 11/25/1996 19,929,067 19,929,067 0.2
USD 100,000,000 Ford Motor Credit Co., 5.36% due
11/15/1996 99,791,556 99,791,556 0.8
USD 19,950,000 France Telecom, 5.24% due 11/07/1996 19,932,577 19,932,577 0.2
USD 71,886,000 General Motors Acceptance Corp.,
5.56% due 11/01/1996 71,886,000 71,886,000 0.6
USD 50,000,000 Goldman Sachs Group L.P., 5.40% due
11/04/1996 49,977,500 49,977,500 0.4
IBM Credit Corp.:
USD 50,000,000 5.37% due 11/19/1996 49,865,750 49,865,750 0.4
USD 50,000,000 5.24% due 12/19/1996 49,650,667 49,650,667 0.4
IBRD Discount Notes:
USD 17,940,000 5.21% due 11/21/1996 17,888,074 17,888,074 0.1
USD 72,155,000 5.18% due 12/06/1996 71,791,619 71,791,619 0.6
USD 35,000,000 International Lease Finance Corp.,
5.32% due 11/14/1996 34,932,761 34,932,761 0.3
USD 20,000,000 KFW International Finance Inc.,
5.29% due 11/12/1996 19,967,672 19,967,672 0.2
Metlife Funding Corp.:
USD 20,171,000 5.39% due 11/05/1996 20,158,920 20,158,920 0.2
USD 20,000,000 5.38% due 11/06/1996 19,985,056 19,985,056 0.2
USD 27,905,000 5.37% due 11/18/1996 27,834,238 27,834,238 0.2
USD 20,000,000 5.42% due 11/20/1996 19,942,789 19,942,789 0.2
USD 20,000,000 Monsanto Company, 5.25% due
11/04/1996 19,991,250 19,991,250 0.2
USD 20,000,000 National Australia Funding (Delaware)
Inc., 5.23% due 12/06/1996 19,898,306 19,898,306 0.2
USD 30,000,000 Pepsico, Inc., 5.22% due 11/06/1996 29,978,250 29,978,250 0.3
Pfizer Inc.:
USD 60,000,000 5.26% due 11/04/1996 59,973,700 59,973,700 0.5
USD 21,400,000 5.24% due 11/07/1996 21,381,311 21,381,311 0.2
Preferred Receivable Funding Corp.:
USD 22,400,000 5.26% due 11/08/1996 22,377,090 22,377,090 0.2
USD 26,000,000 5.26% due 11/14/1996 25,950,614 25,950,614 0.2
USD 30,000,000 5.25% due 11/26/1996 29,890,625 29,890,625 0.2
USD 22,675,000 5.26% due 12/03/1996 22,568,982 22,568,982 0.2
USD 30,000,000 Procter & Gamble Co., 5.22% due
12/05/1996 29,852,100 29,852,100 0.2
Sandoz Corporation:
USD 20,000,000 5.40% due 11/12/1996 19,967,000 19,967,000 0.2
USD 27,000,000 5.23% due 11/26/1996 26,901,937 26,901,937 0.2
USD 13,900,000 5.30% due 11/26/1996 13,848,840 13,848,840 0.1
USD 19,100,000 5.27% due 12/02/1996 19,013,323 19,013,323 0.1
USD 20,000,000 5.23% due 12/17/1996 19,866,344 19,866,344 0.2
Sheffield Receivables Corp.:
USD 46,900,000 5.25% due 11/19/1996 46,776,888 46,776,888 0.4
USD 45,700,000 5.25% due 11/25/1996 45,540,050 45,540,050 0.4
Siemens Corporation AG:
USD 25,000,000 5.23% due 12/12/1996 24,851,090 24,851,090 0.2
USD 50,000,000 5.22% due 12/17/1996 49,666,500 49,666,500 0.4
USD 42,000,000 Societe Generale N.A., 5.26% due
11/27/1996 41,840,447 41,840,447 0.3
USD 50,000,000 Toys 'R' Us, Inc., 5.26% due
11/05/1996 49,970,778 49,970,778 0.4
USD 12,800,000 Transamerica Corporation, 5.24% due
11/15/1996 12,773,916 12,773,916 0.1
USD 50,000,000 UBS Finance Delaware, Inc., 5.22% due
11/19/1996 49,869,500 49,869,500 0.4
</TABLE>
71
<PAGE> 132
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
Currency Face Value Percent of
COUNTRY Denomination Amount Short-Term Securities Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C> <C>
United States Commercial Xerox Corp.:
(concluded) Paper* USD 35,000,000 5.39% due 11/08/1996 $ 34,963,318 $ 34,963,318 0.3%
(concluded) USD 30,000,000 5.35% due 11/13/1996 29,946,500 29,946,500 0.2
USD 30,000,000 5.30% due 11/26/1996 29,889,583 29,889,583 0.2
USD 26,400,000 Xerox Credit Corp., 5.37% due
11/13/1996 26,352,744 26,352,744 0.2
--------------- --------------- ------
2,575,126,528 2,575,126,528 21.6
US Govern- Federal Home Loan Bank:
ment & USD 14,505,000 5.21% due 11/21/1996 14,463,016 14,463,016 0.1
Agency USD 36,000,000 5.17% due 12/02/1996 35,839,730 35,839,730 0.3
Obligations* Federal Home Loan Mortgage Corp.:
USD 40,000,000 5.19% due 11/19/1996 39,896,200 39,896,200 0.3
USD 25,000,000 5.18% due 12/11/1996 24,856,111 24,856,111 0.2
USD 30,000,000 5.17% due 12/20/1996 29,788,892 29,788,892 0.3
Federal National Mortgage
Association:
USD 38,000,000 5.20% due 11/08/1996 37,961,578 37,961,578 0.3
USD 56,000,000 5.17% due 11/18/1996 55,863,282 55,863,282 0.5
USD 10,200,000 5.18% due 11/27/1996 10,161,841 10,161,841 0.1
--------------- --------------- ------
248,830,650 248,830,650 2.1
Total Short-Term Securities in the
United States 2,823,957,178 2,823,957,178 23.7
Total Investments in Short-Term
Securities 2,825,063,001 2,825,074,711 23.7
Total Investments $10,841,006,739 11,804,281,027 98.9
Short Sales (Proceeds--$13,058,078)** =============== (12,562,286) (0.1)
Unrealized Depreciation on Forward Foreign Exchange Contracts*** (2,424,249) 0.0
Variation Margin on Futures Contracts**** (685,000) 0.0
Other Assets Less Liabilities 143,532,394 1.2
--------------- ------
Net Assets $11,932,141,886 100.0%
=============== ======
<FN>
(a)Warrants entitle the Fund to purchase a predetermined number of shares of
stock/face amount of bonds at a predetermined price until the expiration date.
(b)Represents a zero coupon or step bond. The interest rate shown on a step bond
represents the fixed rate of interest that will commence its accrual on a pre-
determined date until maturity.
(c)Security held as collateral in connection with open financial 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 Chemical Banking Corp.
(f)Each $1,000 face amount contains one warrant of United International Holdings, Inc.
(g)Real Estate Mortgage Investment Conduits (REMIC).
(h)Each $1,000 face amount contains four warrants of CellNet Data Systems, Inc.
(i)Each $1,000 face amount contains one warrant of United USN, Inc.
(j)Name changed from Amev N.V.
(k)Each $1,000 face amount contains one warrant of Coinstar, Inc.
(l)Name changed from Aetna Life & Casualty Co.
(m)Separate Trading of Registered Interest and Principal of Securities (STRIPS).
(n)Each $1,000 face amount contains one warrant of PLD Telekom, Inc.
</TABLE>
72
<PAGE> 133
<TABLE>
<FN>
(o)Created as a result of the merger of Kymmene Corporation and Repola Ltd.
(p)Name changed from Carr Realty Corp.
(q)Each $1,000 face amount contains 1.1 shares of common stock of CS Wireless
Systems, Inc.
(r)Name changed from Sherritt, Inc.
(s)Each $10 face amount contains 40 shares of common stock of First Place Tower.
(t)Securities held as collateral in connection with covered short sales.
(u)Name changed from Petersburg Long Distance Inc.
++American Depositary Receipts (ADR).
++++Non-income producing security.
+++Restricted securities as to resale. The value of the Fund's investment in
restricted securities was approximately $539,620,000, representing 4.5% of
net assets.
<CAPTION>
Acquisition Value
Issue Date(s) Cost (Note 1a)
<S> <C> <C> <C>
Abril S.A., 12% due 10/25/2003 10/18/1995--
10/19/1995 $15,030,000 $15,562,500
Alexander Haagen Properties Inc.,
Exchangeable Debentures, 7.25% 2/13/1995--
due 12/27/2003 12/27/1995 24,348,750 23,979,375
Baldwin Builders & Contractors, 10.25%
due 7/18/1997 2/01/1996 40,000,000 38,825,000
Baldwin Builders & Contractors, 11.25%
due 7/18/1997 2/01/1996 7,500,000 7,354,687
CS Wireless Systems, Inc., 0/11.375% due 2/16/1996--
3/01/2006 6/07/1996 34,907,847 27,518,750
Catellus Development Corp. (7.25% 10/23/1993--
Exchangeable, Series B) 8/24/1995 33,521,250 38,402,000
CellNet Data Systems Inc., 0/13% due 11/16/1995--
6/15/2005 3/15/1996 48,829,774 58,140,000
Coinstar Inc., 0/13% due 10/01/2006 10/22/1996 20,430,013 20,502,500
Companhia Vale Do Rio Doce, 10% due
4/02/2004 3/5/1996 11,485,878 11,830,625
Crown Packaging Enterprises, 0/14% due
8/01/2006 8/09/1996 8,722,869 8,613,761
Diva Systems Corp. (Convertible, Series C) 7/17/1996--
8/22/1996 8,410,000 8,892,500
First Nationwide Escrow, 10.625% due
10/01/2003 9/13/1996 10,000,000 10,550,000
First Washington Realty, 8.25% due
6/27/1999 6/27/1994 25,000,000 25,437,500
Four Seasons Hotel, Inc., 9.125% due 6/23/1993--
7/01/2000 4/21/1994 20,917,750 21,131,250
Geotek Communications, Inc., Convertible 3/01/1996--
Bonds, 12% due 2/15/2001 9/05/1996 20,000,000 20,725,000
Geotek Communications, Inc. (Warrants) 7/31/1995 14,200,634 7,875,000
Millicom International Cellular S.A., 5/24/1996--
0/1350% due 6/01/2006 7/16/1996 16,424,034 17,100,000
PLD Telekom, Inc., 0/14% due 6/01/2004 5/24/1996--
8/09/1996 56,787,864 59,182,800
PLD Telekom, Inc., Convertible Bonds,
9% due 6/01/2006 5/24/1996--
8/09/1996 18,756,250 20,920,625
Petroleos Mexicanos, 8.625% 5/24/1996--
due 12/01/2023 8/01/1996 25,007,000 35,273,437
Samsung Electronics Co., Convertible
Bonds, 0.25% due 12/31/2006 9/17/1996 5,250,000 5,656,875
United USN Inc., 0/14% due 9/30/2003 9/30/1996 29,610,393 29,269,250
United USN Inc., Convertible, 0/9% due
9/30/2003 9/30/1996 27,079,878 26,876,500
Total $522,220,184 $539,619,935
============ ============
+++++++Investments 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> <C> <C> <C> <C>
Healthcare Advocat, Inc. -- -- ++++
Services
Paper & Pulp Asia Pacific Resources
International Holdings
Ltd. (ADR) $ 609,600 $ 2,858,468 ++++
Paper & Pulp Asia Pulp & Paper
Company Ltd. (ADR) 1,715,000 19,722,500 ++++
Computers Borland International
Corp. 1,900,000 28,496,506 ++++
Retail Stores Buttrey Food & Drug
Stores Co. -- -- ++++
Retail Stores Filene's Basement Corp. -- -- ++++
Metals Lukens Inc. 1,350,000 25,689,657 532,100
Real Estate Mid-America Realty
Investment Investments -- -- 581,944
Trusts
Banking Oriental Bank and Trust 73,600 -- 173,880
Real Estate Prime Retail, Inc. 1,251,325 13,982,561 923,608
Investment Prime Retail, Inc. (10.50%) -- -- 2,193,188
Trusts
Computers Stratus Computer, Inc. 1,200,000 23,632,111 ++++
*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, 1996.
**Covered Short Sales entered into as of October 31, 1996 were as follows:
<CAPTION>
Common Value
Shares Issue (Note 1i)
<C> <S> <C>
519,000 NEC Corporation $ (5,657,670)
340,000 Yamanouchi Pharmaceuticals
Co., Ltd. (6,904,616)
Total (Proceeds--$13,058,078) $(12,562,286)
============
***Forward Foreign Exchange Contracts as of October 31, 1996 were as follows:
<CAPTION>
Unrealized
Foreign Expiration Appreciation
Currency Sold Date (Depreciation)
<S> <C> <S> <C>
CHF 23,000,000 November 1996 $ (57,062)
CHF 102,000,000 December 1996 107,678
DEM 554,000,000 November 1996 5,222,430
DEM 453,000,000 December 1996 (2,757,482)
DEM 329,000,000 January 1997 (2,503,475)
DKR 10,000,000 November 1996 13,279
ECU 73,000,000 November 1996 295,220
ECU 45,000,000 December 1996 (477,950)
ESP 5,000,000,000 November 1996 300,500
ESP 1,100,000,000 December 1996 (151,702)
ESP 3,300,000,000 January 1997 (146,866)
FRF 436,000,000 November 1996 (407,065)
FRF 195,000,000 December 1996 (402,340)
FRF 149,000,000 January 1997 (235,244)
GBP 101,000,000 November 1996 (7,941,540)
GBP 51,000,000 December 1996 (2,951,697)
JPY 20,500,000,000 November 1996 7,741,457
JPY 7,000,000,000 December 1996 1,537,566
JPY 7,000,000,000 January 1997 194,240
NLG 112,000,000 November 1996 825,195
NLG 29,000,000 December 1996 249,313
NLG 16,000,000 January 1997 25,016
NOK 25,000,000 November 1996 (74,708)
NOK 85,000,000 December 1996 (280,950)
SKR 230,000,000 December 1996 (268,482)
SKR 235,000,000 January 1997 (279,580)
Total Unrealized Depreciation on Forward Foreign Exchange
Contracts--Net (USD Commitment--$2,092,365,033) $(2,424,249)
===========
****Financial Futures Contracts sold as of October 31, 1996 were as follows:
<CAPTION>
Number of Expiration Value
Contracts Issue Date (Note 1a)
<C> <S> <S> <S>
200 Standard & Poor's 500 Index December 1996 $70,965,000
Total Financial Futures Contracts Sold
(Total Contract Price--$68,903,125) $70,965,000
===========
</TABLE>
See Notes to Financial Statements.
73
<PAGE> 134
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
As of October 31, 1996
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$10,841,006,739) (Note 1a) $11,804,281,027
Foreign cash (Note 1c) 2,041
Receivables:
Interest $ 110,542,497
Securities sold 60,946,101
Capital shares sold 24,212,607
Short sales (Note 1i) 13,058,078
Dividends 8,215,874
Forward foreign exchange contracts (Note 1d) 1,656,223
Principal paydowns 50,731 218,682,111
--------------
Prepaid registration fees and other assets (Note 1g) 335,952
---------------
Total assets 12,023,301,131
---------------
Liabilities: Common stocks sold short, at market value (proceeds--$13,058,078) (Note 1i) 12,562,286
Unrealized depreciation on foward foreign exchange contracts (Note 1d) 2,424,249
Payables:
Securities purchased 32,779,667
Capital shares redeemed 21,222,229
Distributor (Note 2) 7,840,597
Investment adviser (Note 2) 6,720,415
Variation margin (Note 1d) 685,000
Forward foreign exchange contracts (Note 1d) 432,600 69,680,508
--------------
Accrued expenses and other liabilities 6,492,202
---------------
Total liabilities 91,159,245
---------------
Net Assets: Net assets $11,932,141,886
---------------
Net Assets Class A Shares of Common Stock, $0.10 par value, 300,000,000
Consist of: shares authorized $ 12,139,267
Class B Shares of Common Stock, $0.10 par value, 1,500,000,000
shares authorized 57,933,600
Class C Shares of Common Stock, $0.10 par value, 200,000,000
shares authorized 2,601,840
Class D Shares of Common Stock, $0.10 par value, 900,000,000
shares authorized 6,890,966
Paid-in capital in excess of par 10,184,636,288
Undistributed investment income--net 188,632,757
Undistributed realized capital gains on investments and foreign
currency transactions--net 520,067,231
Unrealized appreciation on investments and foreign currency
transactions--net 959,239,937
---------------
Net assets $11,932,141,886
===============
Net Asset Class A--Based on net assets of $1,841,974,296 and 121,392,667
Value: shares outstanding $ 15.17
===============
Class B--Based on net assets of $8,660,279,417 and 579,336,002
shares outstanding $ 14.95
===============
Class C--Based on net assets of $385,752,514 and 26,018,395
shares outstanding $ 14.83
===============
Class D--Based on net assets of $1,044,135,659 and 68,909,658
shares outstanding $ 15.15
===============
</TABLE>
See Notes to Financial Statements.
74
<PAGE> 135
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
For the Year Ended October 31, 1996
<S> <S> <C> <C>
Investment Interest and discount earned (net of $41,161 foreign withholding tax) $ 535,209,007
Income Dividends (net of $5,677,814 foreign withholding tax) 109,844,707
(Notes 1e & 1f): Other 2,326,343
---------------
Total income 647,380,057
---------------
Expenses: Investment advisory fees (Note 2) $ 78,610,213
Account maintenance and distribution fees--Class B (Note 2) 78,009,323
Transfer agent fees--Class B (Note 2) 11,338,388
Account maintenance and distribution fees--Class C (Note 2) 2,485,555
Custodian fees 2,419,837
Transfer agent fees--Class A (Note 2) 2,111,250
Account maintenance fees--Class D (Note 2) 1,852,841
Registration fees (Note 1g) 1,207,658
Printing and shareholder reports 996,732
Transfer agent fees--Class D (Note 2) 933,561
Accounting services (Note 2) 600,636
Professional fees 469,748
Transfer agent fees--Class C (Note 2) 388,189
Directors' fees and expenses 38,593
Pricing fees 10,957
Other 113,995
---------------
Total expenses/before reimbursement 181,587,476
Reimbursement of expenses (Note 2) (7,667,135)
Total expenses/after reimbursement ---------------
173,920,341
---------------
Investment income--net 473,459,716
---------------
Realized & Realized gain from:
Unrealized Investments--net 523,862,389
Gain on Foreign currency transactions--net 130,084,847 653,947,236
Investments & ---------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net 523,697,433
(Notes 1c, 1d, Foreign currency transactions--net 24,128,607 547,826,040
1f & 3): --------------- ---------------
Net realized and unrealized gain on investments and foreign currency
transactions 1,201,773,276
---------------
Net Increase in Net Assets Resulting from Operations $ 1,675,232,992
===============
</TABLE>
See Notes to Financial Statements.
75
<PAGE> 136
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended October 31,
1996 1995
Increase (Decrease) in Net Assets:
<S> <C> <C> <C>
Operations: Investment income--net $ 473,459,716 $ 411,287,932
Realized gain on investments and foreign currency transactions--net 653,947,236 251,310,846
Change in unrealized appreciation/depreciation on investments
and foreign currency transactions--net 547,826,040 375,406,183
--------------- ---------------
Net increase in net assets resulting from operations 1,675,232,992 1,038,004,961
--------------- ---------------
Dividends & Investment income--net:
Distributions Class A (108,106,998) (40,572,591)
to Shareholders Class B (425,282,978) (127,353,416)
(Note 1h): Class C (11,381,642) (874,590)
Class D (34,542,355) (3,765,243)
Realized gain on investments--net:
Class A (45,054,853) (31,500,182)
Class B (206,613,317) (150,016,954)
Class C (3,762,020) (426,507)
Class D (8,531,078) (2,156,668)
--------------- ---------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (843,275,241) (356,666,151)
--------------- ---------------
Capital Share Net proceeds from issuance of capital shares 2,041,810,853 26,500,607
Transactions Net proceeds from issuance of capital shares resulting from reorganization 523,182,823 --
(Note 4): --------------- ---------------
Net increase in net assets derived from capital share transactions 2,564,993,676 26,500,607
--------------- ---------------
Net Assets: Total increase in net assets 3,396,951,427 707,839,417
Beginning of year 8,535,190,459 7,827,351,042
--------------- ---------------
End of year* $11,932,141,886 $ 8,535,190,459
=============== ===============
<FN>
*Undistributed investment income--net (Note 1j) $ 188,632,757 $ 159,653,484
=============== ===============
</TABLE>
See Notes to Financial Statements.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
The following per share data and ratios have been derived Class A
from information provided in the financial statements. For the Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1996++++ 1995 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 14.21 $ 13.07 $ 13.52 $ 11.92 $ 12.16
Operating ---------- ---------- ---------- ---------- --------
Performance: Investment income--net .78 .79 .60 .39 .36
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net 1.59 1.04 (.31) 2.14 .89
---------- ---------- ---------- ---------- --------
Total from investment operations 2.37 1.83 .29 2.53 1.25
---------- ---------- ---------- ---------- --------
</TABLE>
76
<PAGE> 137
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Less dividends and distributions:
Investment income--net (.98) (.39) (.51) (.81) (.89)
Realized gain on investments--net (.43) (.30) (.23) (.12) (.60)
---------- ---------- ---------- ---------- --------
Total dividends and distributions (1.41) (.69) (.74) (.93) (1.49)
---------- ---------- ---------- ---------- --------
Net asset value, end of year $ 15.17 $ 14.21 $ 13.07 $ 13.52 $ 11.92
========== ========== ========== ========== ========
Total Investment Based on net asset value per share 17.81% 14.81% 2.14% 22.61% 11.78%
Return:* ========== ========== ========== ========== ========
Ratios to Average Expenses, net of reimbursement .86% .90% .89% .93% 1.07%
Net Assets: ========== ========== ========== ========== ========
Expenses .93% .90% .89% .93% 1.07%
========== ========== ========== ========== ========
Investment income--net 5.31% 5.98% 4.60% 3.90% 10.82%
========== ========== ========== ========== ========
Supplemental Net assets, end of year (in thousands) $1,841,974 $1,487,805 $1,357,906 $ 917,806 $245,839
Data: ========== ========== ========== ========== ========
Portfolio turnover 51.26% 36.78% 57.04% 50.35% 59.56%
========== ========== ========== ========== ========
Average commission rate paid++++ $ .0048 -- -- -- --
========== ========== ========== ========== ========
<CAPTION>
The following per share data and ratios have been derived Class B
from information provided in the financial statements. For the Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1996++++ 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 14.01 $ 12.91 $ 13.38 $ 11.83 $ 12.10
Operating ---------- ---------- ---------- ---------- --------
Performance: Investment income--net .62 .65 .46 .28 .22
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net 1.59 1.01 (.31) 2.11 .91
---------- ---------- ---------- ---------- --------
Total from investment operations 2.21 1.66 .15 2.39 1.13
---------- ---------- ---------- ---------- --------
Less dividends and distributions:
Investment income--net (.84) (.26) (.39) (.72) (.80)
Realized gain on investments--net (.43) (.30) (.23) (.12) (.60)
---------- ---------- ---------- ---------- --------
Total dividends and distributions (1.27) (.56) (.62) (.84) (1.40)
---------- ---------- ---------- ---------- --------
Net asset value, end of year $ 14.95 $ 14.01 $ 12.91 $ 13.38 $ 11.83
========== ========== ========== ========== ========
Total Investment Based on net asset value per share 16.71% 13.54% 1.13% 21.42% 10.64%
Return:* ========== ========== ========== ========== ========
Ratios to Average Expenses, net of reimbursement 1.87% 1.93% 1.91% 1.95% 2.09%
Net Assets: ========== ========== ========== ========== ========
Expenses 1.95% 1.93% 1.91% 1.95% 2.09%
========== ========== ========== ========== ========
Investment income--net 4.29% 4.96% 3.58% 2.87% 11.95%
========== ========== ========== ========== ========
Supplemental Net assets, end of year (in thousands) $8,660,279 $6,688,499 $6,457,130 $4,299,545 $958,949
Data: ========== ========== ========== ========== ========
Portfolio turnover 51.26% 36.78% 57.04% 50.35% 59.56%
========== ========== ========== ========== ========
Average commission rate paid+++ $ .0048 -- -- -- --
========== ========== ========== ========== ========
<FN>
*Total investment returns exclude the effects of sales loads.
++Based on average shares outstanding during the year.
++++For fiscal years beginning on or after September 1, 1995, the
Fund is required to disclose its average commission rate per
share for purchases and sales of equity securities. The
"Average Commission Rate Paid" includes commissions paid in
foreign currencies, which have been converted into US
dollars using the prevailing exchange rate on the date of
the transaction. Such conversions may affect the rate shown.
</TABLE>
See Notes to Financial Statements.
77
<PAGE> 138
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (concluded)
Class C Class D
For the For the
Period Period
The following per share data and ratios have been derived Oct. 21, Oct. 21,
from information provided in the financial statements. For the Year Ended 1994++ to For the Year Ended 1994++ to
October 31, Oct. 31, October 31, Oct. 31,
Increase (Decrease) in Net Asset Value: 1996++++ 1995++++ 1994++++ 1996++++ 1995++++ 1994++++
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 13.94 $ 12.91 $ 12.91 $ 14.19 $ 13.08 $ 13.07
Operating -------- -------- ------- ---------- -------- -------
Performance: Investment income--net .61 .64 .01 .77 .77 .01
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net 1.58 1.02 (.01) 1.57 1.01 --
-------- -------- ------- ---------- -------- -------
Total from investment operations 2.19 1.66 -- 2.34 1.78 .01
-------- -------- ------- ---------- -------- -------
Less dividends and distributions:
Investment income--net (.87) (.33) -- (.95) (.37) --
Realized gain on investments--net (.43) (.30) -- (.43) (.30) --
-------- -------- ------- ---------- -------- -------
Total dividends and distributions (1.30) (.63) -- (1.38) (.67) --
-------- -------- ------- ---------- -------- -------
Net asset value, end of period $ 14.83 $ 13.94 $ 12.91 $ 15.15 $ 14.19 $ 13.08
======== ======== ======= ========== ======== =======
Total Investment Based on net asset value per share 16.68% 13.58% .00%+++ 17.59% 14.43% .08%+++
Return:** ======== ======== ======= ========== ======== =======
Ratios to Average Expenses, net of reimbursement 1.88% 1.95% 2.44%* 1.10% 1.16% 1.69%*
Net Assets: ======== ======== ======= ========== ======== =======
Expenses 1.95% 1.95% 2.44%* 1.18% 1.16% 1.69%*
======== ======== ======= ========== ======== =======
Investment income--net 4.24% 4.80% 3.71%* 5.04% 5.63% 4.46%*
======== ======== ======= ========== ======== =======
Supplemental Net assets, end of period (in thousands) $385,753 $102,361 $ 7,347 $1,044,136 $256,525 $ 4,968
Data: ======== ======== ======= ========== ======== =======
Portfolio turnover 51.26% 36.78% 57.04% 51.26% 36.78% 57.04%
======== ======== ======= ========== ======== =======
Average commission rate paid++++++ $ .0048 -- -- $ .0048 -- --
======== ======== ======= ========== ======== =======
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
+++Aggregate total investment return.
++Commencement of Operations.
++++Based on average shares outstanding during the period.
++++++For fiscal years beginning on or after September 1, 1995, the Fund is required
to disclose its average commission rate per share for purchases and sales of
equity securities. The "Average Commission Rate Paid" includes commissions
paid in foreign currencies, which have been converted into US dollars using
the prevailing exchange rate on the date of the transaction. Such conversions
may affect the rate shown.
</TABLE>
See Notes to Financial Statements.
78
<PAGE> 139
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Global Allocation Fund, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 as a non-diversified,
open-end management investment company. The Fund offers four
classes of shares under the Merrill Lynch Select Pricing SM System.
Shares of Class A and Class D are sold with a front-end sales charge.
Shares of Class B and Class C may be subject to a contingent deferred
sales charge. All classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions,
except that Class B, Class C and Class D Shares bear certain expenses
related to the account maintenance of such shares, and Class B and
Class C Shares also bear certain expenses related to the distribution
of such shares. Each class has exclusive voting rights with respect
to matters relating to its account maintenance and distribution
expenditures. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments--Portfolio securities which are traded on
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) assets or liabilities expressed in foreign
currencies into US dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates
on investments.
(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.
79
<PAGE> 140
NOTES TO FINANCIAL STATEMENTS (continued)
* Financial futures contracts--The Fund may purchase or sell
interest rate futures contracts and options on such futures contracts
for the purpose of hedging the market risk on existing securities or
the intended purchase of securities. Futures contracts are contracts
for delayed delivery of securities at a specific future date and at a
specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required
by the exchange on which the transaction is effected. 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) Short sales--When the Fund engages in a short sale, an amount
equal to the proceeds received by the Fund is reflected as an asset
and an equivalent liability. The amount of the liability is subsequently
marked to market to reflect the market value of the short sale. The
Fund maintains a segregated account of securities as collateral for
the short sales. The Fund is exposed to market risk based on the
amount, if any, that the market value of the stock exceeds the
market value of the securities in the segregated account.
(j) Reclassification--Generally accepted accounting principles
require that certain components of net assets be reclassified to
reflect permanent differences between financial and tax reporting.
Accordingly, current year's permanent book/tax differences of
$134,833,530 have been reclassified between undistributed net realized
capital gains and undistributed net investment income. These
reclassifications have no effect on net assets or net 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
reduced from 0.70% to 0.65% for average daily net assets in excess of
$5 billion, further reduced from 0.65% to 0.625% for average daily net
assets in excess of $7.5 billion, and further reduced from 0.625% to
0.60% for average daily net assets in excess of $10 billion. For the
year ended October 31, 1996, MLAM earned fees of $78,610,213, of
which $7,667,135 was voluntarily waived. 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, 1996, MLAM
paid MLAM U.K. a fee of $9,422,273 pursuant to such agreement.
Pursuant to the distribution plans (the "Distribution Plans")
adopted by the Fund in accordance with Rule 12b-1 under the
80
<PAGE> 141
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% --
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, 1996, 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 $76,760 $1,016,346
Class D $241,734 $3,413,112
For the year ended October 31, 1996, MLPF&S received contingent
deferred sales charges of $8,488,220 and $117,278 relating to trans-
actions in Class B and Class C Shares, respectively. Furthermore,
MLPF&S received contingent deferred sales charges of $19,080
relating to transactions subject to front-end sales charge waivers in
Class A Shares.
In addition, MLPF&S received $197,361 in commissions on the
execution of portfolio security transactions for the Fund for the
year ended October 31, 1996.
For the year ended October 31, 1996, the Fund paid Merrill Lynch
Security Pricing Service, an affiliate of MLPF&S, $438 for security
price quotations to compute the net asset value of the Fund.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, PSI, 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, 1996 were $4,369,726,802 and
$4,527,702,804, respectively.
Net realized and unrealized gains (losses) as of October 31, 1996 were
as follows:
Realized Unrealized
Gains (Losses) Gains (Losses)
Long-term investments $537,557,780 $ 963,274,288
Short-term investments (8,976,885) --
Short sales investments -- 495,792
Financial futures contracts (4,718,506) (2,061,875)
Forward foreign exchange contracts 131,153,510 (2,424,249)
Foreign currency transactions (1,068,663) (44,019)
------------ -------------
Total $653,947,236 $ 959,239,937
============ =============
As of October 31, 1996, net unrealized appreciation for Federal income
tax purposes aggregated $944,503,495, of which $1,223,821,344
related to appreciated securities and $279,317,849 related to depre-
ciated securities. At October 31, 1996, the aggregate cost of invest-
ments for Federal income tax purposes was $10,859,777,532.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions
was $2,564,993,676 and $26,500,607 for the years ended October 31,
1996 and October 31, 1995, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Year Dollar
Ended October 31, 1996 Shares Amount
Shares sold 26,663,921 $ 385,379,581
Shares issued to shareholders in
reinvestment of dividends and
distributions 9,842,522 136,704,200
Shares issued resulting from
reorganization 732,464 12,726,168
----------- --------------
Total issued 37,238,907 534,809,949
Shares redeemed (20,574,819) (298,410,953)
----------- --------------
Net increase 16,664,088 $ 236,398,996
=========== ==============
81
<PAGE> 142
NOTES TO FINANCIAL STATEMENTS (concluded)
Class A Shares for the Year Dollar
Ended 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 B Shares for the Year Dollar
Ended October 31, 1996 Shares Amount
Shares sold 132,348,586 $1,887,208,023
Shares issued to shareholders in
reinvestment of dividends and
distributions 40,325,041 553,386,648
Shares issued resulting from
reorganization 9,028,794 47,981,055
----------- --------------
Total issued 181,702,421 2,488,575,726
Shares redeemed (75,996,626) (1,087,870,352)
Automatic conversion of shares (3,687,016) (52,616,493)
----------- --------------
Net increase 102,018,779 $1,348,088,881
=========== ==============
Class B Shares for the Year Dollar
Ended 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)
============ ==============
Class C Shares for the Year Dollar
Ended October 31, 1996 Shares Amount
Shares sold 20,590,847 $ 291,762,498
Shares issued to shareholders in
reinvestment of dividends and
distributions 987,843 13,590,987
Shares issued resulting from
reorganization 91,170 1,203,359
----------- --------------
Total issued 21,669,860 306,556,844
Shares redeemed (2,995,301) (42,705,296)
----------- --------------
Net increase 18,674,559 $ 263,851,548
=========== ==============
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
========== ==============
82
<PAGE> 143
Class D Shares for the Year Dollar
Ended October 31, 1996 Shares Amount
Shares sold 20,921,971 $ 291,938,712
Automatic conversion of shares 2,961,136 52,616,493
Shares issued to shareholders in
reinvestment of dividends and
distributions 2,670,340 37,606,934
Shares issued resulting from
reorganization 32,998,082 461,272,241
----------- --------------
Total issued 59,551,529 843,434,380
Shares redeemed (8,715,593) (126,780,129)
----------- --------------
Net increase 50,835,936 $ 716,654,251
=========== ==============
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
=========== ==============
5. Commitments:
At October 31, 1996, 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 approximate values of $1,620,000 and
$19,280,000, respectively.
6. Acquisition of Merrill Lynch Balanced Fund for
Investment and Retirement, Inc.:
On March 4, 1996, Merrill Lynch Global Allocation Fund, Inc.
acquired all the net assets of Merrill Lynch Balanced Fund for
Investment and Retirement, Inc. pursuant to a plan of reorganiza-
tion. The acquisition was accomplished by a tax-free exchange of
42,850,510 Common Stock shares of Merrill Lynch Global Allocation
Fund, Inc. Class A, 732,464; Class B, 9,028,794; Class C, 91,170; and
Class D, 32,998,082; respectively, for 53,060,748 Common Stock
shares outstanding of Merrill Lynch Balanced Fund for Investment
and Retirement, Inc. Merrill Lynch Balanced Fund for Investment
and Retirement, Inc.'s net assets on that date of $609,137,506,
including $85,653,336 of unrealized appreciation, were combined
with those of Merrill Lynch Global Allocation Fund, Inc. The
aggregate net assets of Merrill Lynch Global Allocation Fund, Inc.
immediately after the acquisition amounted to $10,403,863,333.
83
<PAGE> 144
- ------
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..................................... 3
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.............................. 17
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..................................... 23
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.............. 33
Dividends and Distributions................... 33
Taxes......................................... 34
Tax Treatment of Options, Futures and Forward
Foreign Exchange Transactions............... 36
Special Rules for Certain Foreign Currency
Transactions................................ 36
Performance Data................................ 37
General Information............................. 39
Description of Shares......................... 39
Computation of Offering Price Per Share....... 40
Independent Auditors.......................... 41
Custodian..................................... 41
Transfer Agent................................ 41
Legal Counsel................................. 41
Reports to Shareholders....................... 41
Additional Information........................ 41
Security Ownership of Certain Beneficial
Owners...................................... 42
Appendix........................................ 43
Independent Auditors' Report.................... 50
Financial Statements............................ 51
Code # 10811-0297
</TABLE>
[MERRILL LYNCH LOGO]
MERRILL LYNCH
GLOBAL ALLOCATION
FUND, INC.
[MLYNCH COMPASS]
STATEMENT OF
ADDITIONAL
INFORMATION
February 25, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE> 145
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission File due to ASCII-incompatibility and
cross-references this material to the location of each occurrence in the text.
<TABLE>
<CAPTION>
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
<S> <C>
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull.
</TABLE>
<PAGE> 146
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) Financial Statements
Contained in Part A:
Financial Highlights for each of the years in the seven-year period
ended October 31, 1996 and for the period February 3, 1989 (commencement of
operations) to October 31, 1989.
Contained in Part B:
Schedule of Investments as of October 31, 1996.
Statement of Assets and Liabilities as of October 31, 1996.
Statement of Operations for the year ended October 31, 1996.
Statements of Changes in Net Assets for each of the years in the
two-year period ended October 31, 1996.
Financial Highlights for each of the years in the five-year period
ended October 31, 1996.
(B) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------------- ----------------------------------------------------------------------------------
<S> <C> <C>
1 (a) -- Articles of Incorporation of the Registrant, dated June 7, 1988.(a)
(b) -- Articles of Amendment to the Articles of Incorporation of the Registrant, dated
November 28, 1988.(a)
(c) -- Articles Supplementary to the Articles of Incorporation of the Registrant, dated
December 7, 1992.(a)
(d) -- Articles Supplementary to the Articles of Incorporation of the Registrant, dated
July 13, 1993.
(e) -- Articles Supplementary to the Articles of Incorporation of the Registrant, dated
December 16, 1993.
(f) -- Articles of Amendment to the Articles of Incorporation of the Registrant, dated
October 17, 1994.(b)
(g) -- Articles Supplementary to the Articles of Incorporation of the Registrant, dated
October 17, 1994.(b)
(h) -- Articles Supplementary to the Articles of Incorporation of the Registrant, dated
September 9, 1996.
(i) -- Articles Supplementary to the Articles of Incorporation of the Registrant, filed
on November 6, 1996 (including Certificate of Correction dated February 19, 1997
filed with respect thereto).
2 -- By-Laws of the Registrant.(c)
3 -- None.
4 -- Portions of the Articles of Incorporation, as amended, and By-Laws of
Registrant.(d)
5 (a) -- Management Agreement between the Registrant and Merrill Lynch Asset Management,
L.P.(c)
(b) -- Sub-Advisory Agreement between Merrill Lynch Asset Management, Inc. L.P. and
Merrill Lynch Asset Management U.K. Limited.(c)
(c) -- Supplement to Management Agreement between the Registrant and Merrill Lynch Asset
Management, L.P., dated January 3, 1994.(e)
6 (a) -- Class A Shares Distribution Agreement between the Registrant and Merrill Lynch
Funds Distributor, Inc.(e)
(b) -- Class B Shares Distribution Agreement between the Registrant and Merrill Lynch
Funds Distributor, Inc.(c)
(c) -- Letter Agreement between the Registrant and Merrill Lynch Funds Distributor, Inc.
with respect to the Merrill Lynch Mutual Fund Adviser Program.(a)
(d) -- Class C Shares Distribution Agreement between the Registrant and Merrill Lynch
Funds Distributor, Inc.(e)
(e) -- Class D Shares Distribution Agreement between the Registrant and Merrill Lynch
Funds Distributor, Inc.(e)
</TABLE>
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<PAGE> 147
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------------- ----------------------------------------------------------------------------------
<S> <C> <C>
7 -- None.
8 -- Custodian Agreement between the Registrant and Brown Brothers Harriman & Co.(c)
9 (a) -- Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement between the Registrant and Merrill Lynch Financial Data Services,
Inc.(c)
(b) -- Form of License Agreement relating to the use of name between the Registrant and
Merrill Lynch, Pierce, Fenner & Smith Incorporated.(c)
10 -- None.
11 -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
12 -- None.
13 -- Certificate of Merrill Lynch Asset Management, L.P.(c)
14 -- None.
15 (a) -- Amended and Restated Class B Shares Distribution Plan and Class B Shares
Distribution Plan Sub-Agreement of the Registrant.(a)
(b) -- Class C Shares Distribution Plan and Class C Shares Distribution Plan
Sub-Agreement of the Registrant.(e)
(c) -- Class D Shares Distribution Plan and Class D Shares Distribution Plan
Sub-Agreement of the Registrant.(e)
16 (a) -- Schedule of computation of each performance quotation provided in the Registration
Statement in response to Item 22 relating to Class A Shares.(c)
(b) -- Schedule of computation of each performance quotation provided in the Registration
Statement in response to Item 22 relating to Class B Shares.(c)
(c) -- Schedule of computation of each performance quotation provided in the Registration
Statement in response to Item 22 relating to Class C Shares.(b)
(d) -- Schedule of computation of each performance quotation provided in the Registration
Statement in response to Item 22 relating to Class D Shares.(b)
17 (a) -- Financial Data Schedule for Class A shares.
(b) -- Financial Data Schedule for Class B shares.
(c) -- Financial Data Schedule for Class C shares.
(d) -- Financial Data Schedule for Class D shares.
18 -- Merrill Lynch Select PricingSM System Plan Pursuant to Rule 18f-3.(f)
</TABLE>
- ---------------
(a) Filed on February 24, 1994, as an Exhibit to Post-Effective Amendment No. 7
to Registrant's Registration Statement on Form N-1A under the Securities Act
of 1933, as amended (File No. 33-22462) the ("Registration Statement").
(b) Filed on February 27, 1995, as an Exhibit to Post-Effective Amendment No. 9
to the Registration Statement.
(c) Filed on February 27, 1996 as an Exhibit to Post-Effective Amendment No. 10
the Registration Statement.
(d) Reference is made to Article III (Sections 3 and 4), Article V, Article VI
(Sections 2, 3, 5 and 6), Article VII, Article VIII and Article X of the
Registrant's Articles of Incorporation as amended and supplemented, filed as
Exhibits 1(a), 1(b), 1(c), 1(d), 1(e), 1(f), 1(g), 1(h) and 1(i) to this
Registration Statement, and Article II, Article III (Sections 1, 3, 5, 6 and
17), Article IV (Section 1), Article V (Section 7), Article VI, Article VII,
Article XII, Article XIII, and Article XIV of the Registrant's By-Laws filed
as Exhibit 2 to the Registration Statement.
(e) Filed on October 18, 1994, as an Exhibit to Post-Effective Amendment No. 8
to the Registration Statement.
(f) Incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A under the Securities Act of 1933,
as amended, filed on January 25, 1996,
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<PAGE> 148
relating to shares of Merrill Lynch New York Municipal Bond Fund series of
Merrill Lynch Multi-State Municipal Series Trust (File No. 2-99473).
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The Registrant is not controlled by or under common control with any other
person.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
JANUARY 31,
TITLE OF CLASS 1997*
- ------------------------------------------------------------------------------ ----------------
<S> <C>
Class A Common Stock, par value $0.10 per share............................... 129,446
Class B Common Stock, par value $0.10 per share............................... 575,411
Class C Common Stock, par value $0.10 per share............................... 44,887
Class D Common Stock, par value $0.10 per share............................... 102,131
</TABLE>
- ---------------
*Note: The number of holders shown above includes holders of record plus
beneficial owners, whose shares are held of record by Merrill Lynch,
Pierce, Fenner & Smith Incorporated.
ITEM 27. INDEMNIFICATION.
Reference is made to Article VI of the Registrant's Articles of
Incorporation, Article VI of the Registrant's By-Laws, Section 2-418 of the
Maryland General Corporation Law and Section 9 of the Distribution Agreements.
Article VI of the By-Laws provides that each officer and director of the
Registrant shall be indemnified by the Registrant to the full extent permitted
under the General Laws of the State of Maryland, except that such indemnity
shall not protect any such person against any liability to the Registrant or any
stockholder thereof to which such person would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office. Absent a court determination that
an officer or director seeking indemnification was not liable on the merits or
guilty of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office, the decision by the
Registrant to indemnify such person must be based upon the reasonable
determination of independent counsel or non-party independent directors, after
review of the facts, that such officer or director is not guilty of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
The Registrant may purchase insurance on behalf of an officer or director
protecting such person to the full extent permitted under the General Laws of
the State of Maryland from liability arising from his activities as officer or
director of the Registrant. The Registrant, however, may not purchase insurance
on behalf of any officer or director of the Registrant that protects or purports
to protect such person from liability to the Registrant or to its stockholders
to which such officer or director would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of his office.
Insofar as the conditional advancing of indemnification moneys for actions
based upon the Investment Company Act of 1940, as amended, may be concerned,
such payments will be made only on the following conditions: (i) the advances
must be limited to amounts used, or to be used, for the preparation or
presentation of a defense to the action, including costs connected with the
preparation of a settlement; (ii) advances may be made only on receipt of a
written promise by, or on behalf of, the recipient to repay that amount of the
advance which exceeds the amount which it is ultimately determined he or she is
entitled to receive from the Registrant by reason of indemnification; and (iii)
(a) such promise must be secured by a surety bond, other suitable insurance or
an equivalent form of security which assures that any repayments may be obtained
by the Registrant without delay or litigation, which bond, insurance or other
form of security must
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<PAGE> 149
be provided by the recipient of the advance, or (b) a majority of a quorum of
the Registrant's disinterested, non-party Directors, or an independent legal
counsel in a written opinion, shall determine, based upon a review of readily
available facts, that the recipient of the advance ultimately will be found
entitled to indemnification.
In Section 9 of the Class A, Class B, Class C and Class D Distribution
Agreements relating to the securities being offered hereby, the Registrant
agrees to indemnify the Distributor and each person, if any, who controls the
Distributor within the meaning of the Securities Act of 1933, as amended (the
"1933 Act"), against certain types of civil liabilities arising in connection
with the Registration Statement or the Prospectus and Statement of Additional
Information.
Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to Directors, officers and controlling persons of the Registrant
and the principal underwriter pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the 1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Director, officer, or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Director, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER.
(a) Merrill Lynch Asset Management, L.P. ("MLAM" or the "Manager"), acts as
investment adviser for the following open-end investment companies: Merrill
Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income Fund,
Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch Asset Growth
Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Capital Fund,
Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch Dragon
Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc.,
Merrill Lynch Fund For Tomorrow, Inc., Merrill Lynch Global Allocation Fund,
Inc., Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill
Lynch Global Convertible Fund, Inc., Merrill Lynch Global Holdings, Inc.,
Merrill Lynch Global Resources Trust, Merrill Lynch Global SmallCap Fund, Inc.,
Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc.,
Merrill Lynch Growth Fund, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch
Intermediate Government Bond Fund, Merrill Lynch International Equity Fund,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund,
Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund, Inc.,
Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Series Trust, Merrill
Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc.,
Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc.,
Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch U.S.A. Government
Reserves, Merrill Lynch Utility Income Fund, Inc. and Merrill Lynch Variable
Series Funds, Inc., and for the following closed-end investment companies:
Convertible Holdings, Inc., Merrill Lynch High Income Municipal Bond Fund, Inc.,
Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch Senior Floating
Rate Fund, Inc.
Fund Asset Management, L.P. ("FAM"), an affiliate of the Manager, acts as
the investment adviser for the following open-end investment companies: CBA
Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State
Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate
Fund Accumulation Program, Inc., Financial Institutions Series Trust, Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Emerging Tigers Fund,
Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for
Institutions Series, Merrill Lynch Multi-State Limited Maturity Municipal Series
Trust, Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch Municipal
Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value
Fund, Inc., Merrill Lynch World Income Fund, Inc., and The Municipal
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<PAGE> 150
Fund Accumulation Program, Inc.; and for the following closed-end investment
companies: Apex Municipal Fund, Inc., Corporate High Yield Fund, Inc., Corporate
High Yield Fund II, Inc., Income Opportunities Fund 1999, Inc., Income
Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund, Inc.,
MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest
Fund, Inc., MuniVest Fund II, Inc., MuniVest Florida Fund, MuniVest Michigan
Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest Pennsylvania
Insured Fund, MuniYield Arizona Fund, Inc., MuniYield California Fund, Inc.,
MuniYield California Insured Fund, Inc., MuniYield California Insured Fund II,
Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund,
Inc., MuniYield Insured Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield
Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New
Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New
York Insured Fund II, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund,
Inc., MuniYield Quality Fund II, Inc., Senior High Income Portfolio, Inc.,
Taurus MuniCalifornia Holdings, Inc., Taurus MuniNewYork Holdings, Inc. and
Worldwide DollarVest Fund, Inc.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch Funds
for Institutions Series and Merrill Lynch Institutional Intermediate Fund is One
Financial Center, 15th Floor, Boston, Massachusetts 02111-2646. The address of
the MLAM, FAM, Princeton Services, Inc. ("Princeton Services") and Princeton
Administrators L.P. is also P.O. Box 9011, Princeton, New Jersey 08543-9011. The
address of Merrill Lynch Funds Distributor, Inc. ("MLFD") is P.O. Box 9081,
Princeton, New Jersey 08543-9081. The address of Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") and Merrill Lynch & Co., Inc. ("ML & Co.")
World Financial Center, North Tower, 250 Vesey Street, New York, New York 10281.
The address of Merrill Lynch Financial Data Services, Inc. ("MLFDS") is 4800
Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
November 1, 1994 for his, her or its own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Zeikel is President, Mr. Richard
is Treasurer and Mr. Glenn is Executive Vice President of substantially all of
the investment companies described in the first two paragraphs of this Item 28
and Messrs. Giordano, Harvey, Kirstein and Monagle are directors, trustees or
officers of one or more of such companies.
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- --------------------------- ------------------------- -------------------------------------------
<S> <C> <C>
ML & Co.................... Limited Partner Financial Services Holding Company; Limited
Partner of FAM
Princeton Services......... General Partner General Partner of FAM
Arthur Zeikel.............. President President of FAM; President and Director of
Princeton Services; Director of MLFD;
Executive Vice President of ML & Co.
Terry K. Glenn............. Executive Vice President Executive Vice President of FAM; Executive
Vice President and Director of Princeton
Services; President and Director of MLFD;
Director of MLFDS; President of Princeton
Administrators, L.P.
Vincent R. Giordano........ Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Elizabeth Griffin.......... Senior Vice President Senior Vice President of FAM
Norman R. Harvey........... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Michael J. Hennewinkel..... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
</TABLE>
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<PAGE> 151
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- --------------------------- ------------------------- -------------------------------------------
<S> <C> <C>
Philip L. Kirstein......... Senior Vice President, Senior Vice President, General Counsel and
General Counsel and Secretary of FAM; Senior Vice President,
Secretary General Counsel, Director and Secretary
of Princeton Services; Director of MLFD
Ronald M. Kloss............ Senior Vice President and Senior Vice President and Controller of
Controller FAM; Senior Vice President and Controller
of Princeton Services
Stephen M.M. Miller........ Senior Vice President Executive Vice President of Princeton
Administrators, L.P.; Senior Vice
President of Princeton Services
Joseph T. Monagle, Jr...... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Michael L. Quinn........... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services; Managing
Director and First Vice President of
Merrill Lynch, Pierce, Fenner & Smith
Incorporated from 1989 to 1995
Richard L. Reller.......... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Gerald M. Richard.......... Senior Vice President and Senior Vice President and Treasurer of FAM;
Treasurer Senior Vice President and Treasurer of
Princeton Services; Vice President and
Treasurer of MLFD
Ronald L. Welburn.......... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Anthony Wiseman............ Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
</TABLE>
(b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as
sub-adviser for the following registered investment companies: Corporate High
Yield Fund, Inc., Corporate High Yield Fund II, Inc., Income Opportunities Fund
1999, Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Americas Income
Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch Asset
Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Basic
Value Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Consults
International Portfolio, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch
Developing Capital Markets, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch
Emerging Tigers Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental
Growth Fund Inc., Merrill Lynch Fund for Tomorrow, Inc., Merrill Lynch Global
Allocation Fund, Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill Lynch Global
Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch Global
SmallCap Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill Lynch
Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch Healthcare
Fund, Inc., Merrill Lynch International Equity Fund, Merrill Lynch Latin America
Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch Pacific
Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Series Fund, Inc.,
Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Special Value
Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology
Fund, Inc., Merrill Lynch Utility Income Fund, Inc., Merrill Lynch Variable
Series Funds, Inc., Merrill Lynch World Income Fund, Inc. and Worldwide
DollarVest Fund, Inc. The address of each of these investment companies is P.O.
Box 9011, Princeton, New Jersey 08543-9011. The address of MLAM U.K. is Milton
Gate, 1 Moor Lane, London EC2Y 9HA, England.
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<PAGE> 152
Set forth below is a list of each executive officer and director of MLAM
U.K. indicating each business, profession, vocation or employment of a
substantial nature in which each such person has been engaged since November 1,
1994, for his own account or in the capacity of director, officer, partner or
trustee. In addition, Messrs. Zeikel, Albert, Bascand, Glenn, Harvey, Richard
and Yardley are officers of one or more of the registered investment companies
listed in the first two paragraphs of this Item 28:
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
- --------------------------- ------------------------- -------------------------------------------
<S> <C> <C>
Arthur Zeikel.............. Director and Chairman President of the Manager and FAM; President
and Director of Princeton Services;
Director of MLFD; Executive Vice
President of ML & Co.
Alan J. Albert............. Senior Managing Director Vice President of the Manager
Terry K. Glenn............. Director Executive Vice President of the Manager and
FAM; Executive Vice President and
Director of Princeton Services; President
and Director of MLFD; Director of MLFDS;
President of Princeton Administrators,
L.P.
Adrian Holmes.............. Managing Director Director of Merrill Lynch Global Asset
Management
Andrew John Bascand........ Director Director of Merrill Lynch Global Asset
Management
Edward Gobora.............. Director Director of Merrill Lynch Global Asset
Management
Richard Kilbride........... Director Managing Director of Merrill Lynch Global
Asset Management
Robert M. Ryan............. Director Vice President, Institutional Marketing,
Debt and Equity Group, Merrill Lynch
Capital Markets from 1989 to 1994
Gerald M. Richard.......... Senior Vice President Senior Vice President and Treasurer of the
Manager and FAM; Senior Vice President
and Treasurer of Princeton Services; Vice
President and Treasurer of MLFD
Stephen J. Yardley......... Director Director of Merrill Lynch Global Asset
Management
Carol Ann Langham.......... Company Secretary None
Debra Anne Searle.......... Assistant Company None
Secretary
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and for each
of the open-end investment companies referred to in the first two paragraphs of
Item 28 except CBA Money Fund, CMA Government Securities Fund, CMA Money Fund,
CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund,
The Corporate Fund Accumulation Program, Inc., and The Municipal Fund
Accumulation Program, Inc., and MLFD also acts as the principal underwriter for
the following closed-end investment companies: Merrill Lynch High Income
Municipal Bond Program, Inc., Merrill Lynch Municipal Strategy Fund, Inc. and
Merrill Lynch Senior Floating Rate Fund, Inc.
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<PAGE> 153
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Aldrich,
Brady, Breen, Crook, Fatseas and Wasel is One Financial Center, 15th Floor,
Boston, Massachusetts 02111-2665.
<TABLE>
<CAPTION>
POSITION(S) AND
OFFICE(S) POSITION(S) AND OFFICE(S)
NAME WITH MLFD WITH REGISTRANT
- -------------------------------------------- ------------------------ --------------------------
<S> <C> <C>
Terry K. Glenn.............................. President and Director Executive Vice President
Arthur Zeikel............................... Director President and Director
Philip L. Kirstein.......................... Director None
William E. Aldrich.......................... Senior Vice President None
Robert W. Crook............................. Senior Vice President None
Kevin P. Boman.............................. Vice President None
Michael J. Brady............................ Vice President None
William M. Breen............................ Vice President None
Michael G. Clark............................ Vice President None
Mark A. DeSario............................. Vice President None
James T. Fatseas............................ Vice President None
Michelle T. Lau............................. Vice President None
Debra W. Landsman-Yaros..................... Vice President None
Gerald M. Richard........................... Vice President and Treasurer
Treasurer
Salvatore Venezia........................... Vice President None
William Wasel............................... Vice President None
Robert Harris............................... Secretary None
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act, and the rules thereunder are maintained at the
offices of the Registrant, (800 Scudders Mill Road, Plainsboro, New Jersey
08536), and its transfer agent, Merrill Lynch Financial Data Services, Inc.,
(4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484).
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the
Fund -- Management and Advisory Arrangements" in the Prospectus constituting
Part A of the Registration Statement and under "Management of the
Fund -- Management and Advisory Arrangements" in the Statement of Additional
Information constituting Part B of the Registration Statement, the Registrant is
not a party to any management-related service contract.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders,
upon request and without charge.
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<PAGE> 154
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to its Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
Township of Plainsboro, and State of New Jersey, on the 24th day of February,
1997.
MERRILL LYNCH GLOBAL ALLOCATION
FUND, INC. (Registrant)
By: /s/ GERALD M. RICHARD
------------------------------------
(Gerald M. Richard, Treasurer)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed by the
following persons in the capacities and on the date(s) indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ----------------------------------- ---------------------------------- ------------------
<S> <C> <C>
ARTHUR ZEIKEL* President and Director (Principal
- ----------------------------------- Executive Officer)
(Arthur Zeikel)
GERALD M. RICHARD* Treasurer (Principal Financial and
- ----------------------------------- Accounting Officer)
(Gerald M. Richard)
DONALD CECIL* Director
- -----------------------------------
(Donald Cecil)
EDWARD H. MEYER* Director
- -----------------------------------
(Edward H. Meyer)
CHARLES C. REILLY* Director
- -----------------------------------
(Charles C. Reilly)
RICHARD R. WEST* Director
- -----------------------------------
(Richard R. West)
EDWARD D. ZINBARG* Director
- -----------------------------------
(Edward D. Zinbarg)
*By: /s/ GERALD M. RICHARD February 24, 1997
- -----------------------------------
(Gerald M. Richard,
Attorney-in-Fact)
</TABLE>
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<PAGE> 155
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ---
<S> <C> <C>
1 (d) -- Articles Supplementary to the Articles of Incorporation of the Registrant, dated
July 13, 1993.
(e) -- Articles Supplementary to the Articles of Incorporation of the Registrant, dated
December 16, 1993.
(h) -- Articles Supplementary to the Articles of Incorporation of the Registrant, dated
September 9, 1996.
(i) -- Articles Supplementary to the Articles of Incorporation of the Registrant, filed
on November 6, 1996 (including Certificate of Correction dated February 19, 1997
filed with respect thereto).
11 -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
17 (a) -- Financial Data Schedule for Class A Shares.
(b) -- Financial Data Schedule for Class B Shares.
(c) -- Financial Data Schedule for Class C Shares.
(d) -- Financial Data Schedule for Class D Shares.
</TABLE>
<PAGE> 1
EXHIBIT 1(d)
ARTICLES SUPPLEMENTARY TO THE
ARTICLES OF INCORPORATION OF
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. (hereinafter called the
"Corporation"), a Maryland corporation, registered as an open-end investment
company under the Investment Company Act of 1940 and having its principal office
in the City of Baltimore, Maryland, hereby certifies to the State Department of
Assessments and Taxation of Maryland that:
FIRST: The Board of Directors of the Corporation at a meeting duly
convened and held on July 12, 1993, adopted a resolution in accordance with
Section 2-105(c) of the General Corporation Law of Maryland, to increase the
total number of shares of capital stock of the Corporation. The capital stock
shall be classified into two classes, consisting of TWO HUNDRED MILLION
(200,000,000) shares of Class A Common Stock with the par value of Ten Cents
($0.10) per share and of the aggregate par value of Twenty Million Dollars
($20,000,000) and FOUR HUNDRED MILLION (400,000,000) shares of Class B Common
Stock with the par value of Ten Cents ($0.10) per share and of the aggregate par
value of Forty Million Dollars ($40,000,000).
SECOND: The total number of shares of all classes of capital stock of
the Corporation heretofore authorized, and the number and par value of the
shares of each class, are as follows:
Three Hundred Million (300,000,000) shares of capital stock of the par
value of Ten Cents ($0.10) per share and of the aggregate par value of
Thirty Million Dollars ($30,000,000), classified into two classes
consisting of ONE HUNDRED MILLION (100,000,000) shares of Class A
Common Stock with the par value of Ten Cents ($0.10) per share and of
the aggregate par value of Ten Million Dollars ($10,000,000) and TWO
HUNDRED MILLION (200,000,000) shares of Class B Common Stock with the
par value of Ten Cents ($0.10) per share and of the aggregate par value
of Twenty Million Dollars ($20,000,000).
THIRD: The total number of shares of all classes of capital stock of
the Corporation as increased, and the number and par value of the shares of each
class, are as follows:
The total number of shares of capital stock which the Corporation shall
have the authority to issue shall
<PAGE> 2
consist of SIX HUNDRED MILLION (600,000,000) shares of the par value of
Ten Cents ($0.10) per share and of the aggregate par value of Sixty
Million Dollars ($60,000,000) divided into TWO HUNDRED MILLION
(200,000,000) shares of Class A Common Stock with the par value of Ten
Cents ($0.10) per share and of the aggregate par value of Twenty
Million Dollars ($20,000,000) and FOUR HUNDRED MILLION (400,000,000)
shares of Class B Common Stock with the par value of Ten Cents ($0.10)
per share and of the aggregate par value of Forty Million Dollars
($40,000,000).
FOURTH: The aforesaid action by the Board of Directors was taken
pursuant to authority and power contained in the Amended and Restated Articles
of Incorporation of the Corporation.
IN WITNESS WHEREOF, MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. has
caused these presents to be signed in its name and on its behalf by its
President and attested by its Secretary on July 13, 1993.
MERRILL LYNCH GLOBAL
ALLOCATION FUND, INC.
By: /s/ Arthur Zeikel
-------------------------
Arthur Zeikel
President
Attest:
/s/ Michael J. Hennewinkel
- -----------------------------
Michael J. Hennewinkel
Secretary
2
<PAGE> 1
EXHIBIT 1(e)
ARTICLES SUPPLEMENTARY TO THE
ARTICLES OF INCORPORATION OF
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. (hereinafter called the
"Corporation"), a Maryland corporation, registered as an open-end investment
company under the Investment Company Act of 1940 and having its principal office
in the City of Baltimore, Maryland, hereby certifies to the State Department of
Assessments and Taxation of Maryland that:
FIRST: The Board of Directors of the Corporation by means of a duly
executed Unanimous Consent of Directors dated as of November 18, 1993, adopted a
resolution in accordance with Section 2-105(c) of the General Corporation Law of
Maryland, to increase the total number of shares of capital stock of the
Corporation. The capital stock shall be classified into two classes, consisting
of TWO HUNDRED MILLION (200,000,000) shares of Class A Common Stock with the par
value of Ten Cents ($0.10) per share and of the aggregate par value of Twenty
Million Dollars ($20,000,000) and NINE HUNDRED MILLION (900,000,000) shares of
Class B Common Stock with the par value of Ten Cents ($0.10) per share and of
the aggregate par value of Ninety Million Dollars ($90,000,000).
SECOND: The total number of shares of all classes of capital stock of
the corporation heretofore authorized, and the number and par value of the
shares of each class, are as follows:
Six Hundred Million (600,000,000) shares of capital stock of the par
value of Ten Cents ($0.10) per share and of the aggregate par value of
Sixty Million Dollars ($60,000,000), classified into two classes
consisting of TWO HUNDRED MILLION (200,000,000) shares of Class A
Common Stock with the par value of Ten Cents ($0.10) per share and of
the aggregate par value of Twenty Million Dollars ($20,000,000) and
FOUR HUNDRED MILLION (400,000,000) shares of Class B Common Stock with
the par value of Ten Cents ($0.10) per share and of the aggregate par
value of Forty Million Dollars ($40,000,000).
THIRD: The total number of shares of all classes of capital stock of
the Corporation as increased, and the number and par value of the shares of each
class, are as follows:
The total number of shares of capital stock which the Corporation shall
have the authority to issue shall consist of ONE BILLION ONE HUNDRED
MILLION (1,100,000,000) shares of the par value of Ten Cents ($0.10)
per share and of the aggregate par value of One Hundred Ten Million
Dollars divided into TWO HUNDRED MILLION (200,000,000) shares of
<PAGE> 2
Class A Common Stock with the par value of Ten Cents ($0.10) per share
and of the aggregate par value of Twenty Million Dollars ($20,000,000)
and NINE HUNDRED MILLION (900,000,000) shares of Class B Common Stock
with the par value of Ten Cents ($0.10) per share and of the aggregate
par value of Ninety Million Dollars ($90,000,000).
FOURTH: The aforesaid action by the Board of Directors was taken
pursuant to authority and power contained in the Amended and Restated Articles
of Incorporation of the Corporation.
IN WITNESS WHEREOF, MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. has
caused these presents to be signed in its name and on its behalf by its
President and attested by its Secretary on December 16, 1993.
MERRILL LYNCH GLOBAL
ALLOCATION FUND, INC.
By: /s/ Arthur Zeikel
------------------------
Arthur Zeikel
President
Attest:
/s/ Michael J. Hennewinkel
- --------------------------------
Michael J. Hennewinkel
Secretary
The undersigned, President of MERRILL LYNCH GLOBAL ALLOCATION FUND,
INC., who executed on behalf of said Corporation the foregoing Articles
Supplementary, of which this certificate is made a part, hereby acknowledges, in
the name and on behalf of said Corporation, the foregoing Articles Supplementary
to be the corporate act of said corporation and further certifies that, to the
best of his knowledge, information and belief, the matters and facts set forth
therein with respect to the approval thereof are true in all material respects,
under the penalties of perjury.
/s/ Arthur Zeikel
----------------------
Arthur Zeikel
President
2
<PAGE> 1
EXHIBIT 1(h)
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
ARTICLES SUPPLEMENTARY TO ARTICLES OF INCORPORATION
INCREASING THE AUTHORIZED CAPITAL STOCK OF THE
CORPORATION
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC., a Maryland corporation
having its principal Maryland office c/o The Corporation Trust Incorporated, 32
South Street, Baltimore, Maryland 21202 (hereinafter called the "Corporation"),
hereby certifies to the State Department of Assessments and Taxation, that:
FIRST: The Corporation is registered as an open-end company under the
Investment Company Act of 1940, as amended, with authority to issue TWO BILLION
TWO HUNDRED MILLION (2,200,000,000) shares of capital stock. The Corporation has
four classes of capital stock consisting of TWO HUNDRED MILLION (200,000,000)
shares of Class A Common Stock, NINE HUNDRED MILLION (900,000,000) shares of
Class B Common Stock, TWO HUNDRED MILLION (200,000,000) shares of Class C Common
Stock and NINE HUNDRED MILLION (900,000,000) shares of Class D Common Stock. All
shares of all classes and series of the Corporation's capital stock have a par
value of Ten Cents ($.10) per share and an aggregate par value of TWO HUNDRED
TWENTY MILLION Dollars ($220,000,000).
SECOND: The Board of Directors of the Corporation, acting in accordance
with Section 2-105(c) of the Maryland Corporations and Associations Code, hereby
increases the total number of authorized shares of Class A Common Stock of the
Corporation by ONE HUNDRED MILLION (100,000,000) shares.
THIRD: After this increase in the number of authorized shares of
capital stock of the Corporation, the Corporation will have authority to issue
TWO BILLION THREE HUNDRED MILLION (2,300,000,000) shares of capital stock and
the capital stock will consist of THREE HUNDRED MILLION (300,000,000) shares of
Class A Common Stock, NINE HUNDRED MILLION (900,000,000) shares of Class B
Common Stock, TWO HUNDRED MILLION (200,000,000) shares of Class C Common Stock
and NINE HUNDRED MILLION (900,000,000) shares of Class D Common Stock.
FOURTH: After this increase in the number of authorized shares of
capital stock of the Corporation, all shares of all classes and series of the
Corporation's capital stock will have a par value of Ten Cents ($.10) per share
and an aggregate par value of TWO HUNDRED THIRTY MILLION Dollars ($230,000,000).
<PAGE> 2
IN WITNESS WHEREOF, MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. has
caused these Articles Supplementary to be signed in its name and on its behalf
by a duly authorized officer and attested by its Secretary on September 9, 1996.
MERRILL LYNCH GLOBAL ALLOCATION
FUND, INC.
By /s/ Terry K. Glenn
--------------------------------------
Name: Terry K. Glenn
Title: Executive Vice President
Attest:
/s/ James W. Harshaw
- ---------------------------------
James W. Harshaw, Secretary
THE UNDERSIGNED officer of MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.,
who executed on behalf of said Corporation the foregoing Articles Supplementary,
of which this certificate is made a part, hereby acknowledges, in the name and
on behalf of said Corporation, the foregoing Articles Supplementary to be the
corporate act of said Corporation and further certifies that, to the best of his
knowledge, information and belief, the matters and facts set forth therein with
respect to the authorization and approval thereof are true in all material
respects, and that this statement is made under the penalties for perjury.
/s/ Terry K. Glenn
----------------------------------------
Name: Terry K. Glenn
Title: Executive Vice President
2
<PAGE> 1
EXHIBIT 1(i)
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
ARTICLES SUPPLEMENTARY TO ARTICLES OF INCORPORATION
INCREASING THE AUTHORIZED CAPITAL STOCK OF THE
CORPORATION
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC., a Maryland corporation
having its principal Maryland office c/o The Corporation Trust Incorporated, 32
South Street, Baltimore, Maryland 21202 (hereinafter called the "Corporation"),
hereby certifies to the State Department of Assessments and Taxation, that:
FIRST: The Corporation is registered as an open-end company under the
Investment Company Act of 1940, as amended, with authority to issue TWO BILLION
THREE HUNDRED MILLION (2,300,000,000) shares of capital stock. The Corporation
has four classes of capital stock consisting of THREE HUNDRED MILLION
(300,000,000) shares of Class A Common Stock, NINE HUNDRED MILLION (900,000,000)
shares of Class B Common Stock, TWO HUNDRED MILLION (200,000,000) shares of
Class C Common Stock and NINE HUNDRED MILLION (900,000,000) shares of Class D
Common Stock. All shares of all classes and series of the Corporation's capital
stock have a par value of Ten Cents ($.10) per share and an aggregate par value
of TWO HUNDRED THIRTY MILLION Dollars ($230,000,000).
SECOND: The Board of Directors of the Corporation, acting in accordance
with Section 2-105(c) of the Maryland Corporations and Associations Code, hereby
increases the total number of authorized shares of Class A Common Stock of the
Corporation by SIX HUNDRED MILLION (600,000,000) shares.
THIRD: After this increase in the number of authorized shares of
capital stock of the Corporation, the Corporation will have authority to issue
TWO BILLION NINE HUNDRED MILLION (2,900,000,000) shares of capital stock and
the capital stock will consist of THREE HUNDRED MILLION (300,000,000) shares of
Class A Common Stock, ONE BILLION FIVE HUNDRED MILLION (1,500,000,000) shares
of Class B Common Stock, TWO HUNDRED MILLION (200,000,000) shares of Class C
Common Stock and NINE HUNDRED MILLION (900,000,000) shares of Class D Common
Stock.
FOURTH: After this increase in the number of authorized shares of
capital stock of the Corporation, all shares of all classes and series of the
Corporation's capital stock will have a par value of Ten Cents ($.10) per share
and an aggregate par value of TWO HUNDRED NINETY MILLION Dollars ($290,000,000).
<PAGE> 2
IN WITNESS WHEREOF, MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. has
caused these Articles Supplementary to be signed in its name and on its behalf
by a duly authorized officer and attested by its Secretary on , 1996.
MERRILL LYNCH GLOBAL ALLOCATION
FUND, INC.
By /s/ Terry K. Glenn
--------------------------------
Name: Terry K. Glenn
Title: Executive Vice President
Attest:
/s/ James W. Harshaw
- ----------------------------------
James W. Harshaw, Secretary
THE UNDERSIGNED officer of MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.,
who executed on behalf of said Corporation the foregoing Articles Supplementary,
of which this certificate is made a part, hereby acknowledges, in the name and
on behalf of said Corporation, the foregoing Articles Supplementary to be the
corporate act of said Corporation and further certifies that, to the best of his
knowledge, information and belief, the matters and facts set forth therein with
respect to the authorization and approval thereof are true in all material
respects, and that this statement is made under the penalties for perjury.
/s/ Terry K. Glenn
----------------------------------
Name: Terry K. Glenn
Title: Executive Vice President
2
<PAGE> 3
CERTIFICATE
OF
CORRECTION
OF
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
1. The title of the document being corrected is: Articles Supplementary.
2. The name of the corporation for which the Articles Supplementary were
filed is: Merrill Lynch Global Allocation Fund, Inc.
3. The date the Articles Supplementary were filed is: November 6, 1996.
4. Article Second of the Articles Supplementary as previously filed reads
as follows:
"The Board of Directors of the Corporation, acting in
accordance with Section 2-105(c) of the Maryland
Corporations and Associations Code, hereby increases
the total number of authorized shares of Class A
Common Stock of the Corporation by SIX HUNDRED
MILLION (600,000,000) shares."
Article Second of the Articles Supplementary as corrected reads as
follows:
"The Board of Directors of the Corporation, acting in
accordance with Section 2-105(c) of the Maryland
Corporations and Associations Code, hereby increases
the total number of authorized shares of Class B
Common Stock of the Corporation by SIX HUNDRED
MILLION (600,000,000) shares."
-1-
<PAGE> 4
I, Terry K. Glenn, hereby acknowledge on behalf of Merrill Lynch Global
Allocation Fund, Inc. that the foregoing Articles of Amendment are the corporate
act of said corporation under the penalties of perjury.
/s/ Terry K. Glenn
----------------------------
Terry K. Glenn
Executive Vice President
IN WITNESS WHEREOF, Merrill Lynch Global Allocation Fund, Inc. has
caused these presents to be signed in its name and on its behalf by its
Executive Vice President and witnessed by its Secretary on the 19th day of
February, 1997.
WITNESS:
/s/ James W. Harshaw By: /s/ Terry K. Glenn
- ----------------------------- ----------------------------
James W. Harshaw Terry K. Glenn
Secretary Executive Vice President
-2-
<PAGE> 1
EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Global Allocation Fund, Inc.:
We consent to the use in Post-Effective Amendment No. 11 to Registration
Statement No. 33-22462 of our report dated December 10, 1996 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
Deloitte & Touche LLP
Princeton, New Jersey
February 21, 1997
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<EXPENSE-RATIO> 1.18
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
