<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 12, 1998
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. [_]
[X]
POST-EFFECTIVE AMENDMENT NO. 12
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940 [X]
[X]
AMENDMENT NO. 14
(CHECK APPROPRIATE BOX OR BOXES)
----------------
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
800 SCUDDERS MILL ROAD 08536
PLAINSBORO, NEW JERSEY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
----------------
COPIES TO:
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
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.
----------------
TITLE OF SECURITIES BEING REGISTERED: Shares of Common Stock, par value $.10
per share.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
------------- --------
PART A
<S> <C> <C>
Item 1. Cover Page.............. Cover Page
Item 2. Synopsis................ Fee Table
Item 3. Condensed Financial
Information............ Financial Highlights; Performance Data
Item 4. General Description of
Registrant............. Investment Objective and Policies;
Additional Information
Item 5. Management of the Fund.. Fee Table; Management of the Fund;
Inside Back Cover Page
Item 5A. Management's Discussion
of Fund Performance.... Not Applicable
Item 6. Capital Stock and Other
Securities............. Cover Page; Additional Information
Item 7. Purchase of Securities
Being Offered.......... Cover Page; Fee Table; 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 Objective and Policies
Item 14. Management of the Fund.. Management of the Fund
Item 15. Control Persons and
Principal Holders of
Securities............. Management of the Fund
Item 16. Investment Advisory and
Other Services......... Management of the Fund; Purchase of Shares;
General Information
Item 17. Brokerage Allocation and
Other Services......... 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>
PROSPECTUS
FEBRUARY 12, 1998
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 objective 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 PricingSM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select PricingSM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances. See
"Merrill Lynch Select PricingSM System" on page 4.
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 dealer
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, and for participants in certain fee-based programs, the minimum initial
purchase is $500 and the minimum subsequent purchase is $50. Merrill Lynch may
charge its customers a processing fee (presently $5.35) for confirming
purchases and repurchases. Purchases and redemptions made directly through
Merrill Lynch Financial Data Services, Inc. (the "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 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 12, 1998 (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 Commission maintains a Web
site (http://www.sec.gov) that contains the Statement of Additional
Information, material incorporated by reference and other information
regarding the Fund. The Statement of Additional Information is hereby
incorporated by reference into this Prospectus.
---------------
MERRILL LYNCH ASSET MANAGEMENT--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C CLASS D
---------- ------------------------------- --------------- -------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES:
Maximum Sales Charge
Imposed on Purchases
(as a percentage of
offering price)....... 5.25%(c) None None 5.25%(c)
Sales Charge Imposed
on Dividend
Reinvestments......... None None None None
Deferred Sales Charge
(as a percentage of 4.0% during the first year,
original purchase decreasing 1.0% annually
price or redemption thereafter
proceeds, whichever to 0.0% after the fourth 1.0% for
is lower)............. None(d) year(e) one year(f) None(d)
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:
Shareholder Servicing
Costs(i).............. 0.11% 0.13% 0.14% 0.11%
Other.................. 0.05% 0.05% 0.05% 0.05%
---- ---- ---- ----
Total Other Expenses. 0.16% 0.18% 0.19% 0.16%
---- ---- ---- ----
Total Fund Operating 0.91% 1.93% 1.94% 1.16%
Expenses(j)............ ==== ==== ==== ====
</TABLE>
- --------
(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 45.
(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 36.
(footnotes continued on next page)
2
<PAGE>
(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
are not subject to an initial sales charge may instead be subject to a
CDSC of 1.0% of amounts redeemed within the first year after purchase.
Such CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"--page 45.
(e) The CDSC may be modified in connection with certain fee-based programs.
See "Shareholder Services--Fee-Based Programs"--page 45.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"--page 45.
(g) See "Management of the Fund--Management and Advisory Arrangements"--page
29.
(h) See "Purchase of Shares--Distribution Plans"--page 39.
(i) See "Management of the Fund--Transfer Agency Services"--page 30.
(j) For the fiscal year ended October 31, 1997, 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, 1997,
the Manager waived management fees totaling .08% for Class A shares, .08%
for Class B shares, .08% for Class C shares and .08% for Class D shares,
after which the Total Fund Operating Expenses were .83% for Class A
shares, 1.85% for Class B shares, 1.86% for Class C shares and 1.08% for
Class D shares.
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID
FOR THE PERIOD OF:
-------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses
on a $1,000 investment including the maximum
$52.50 initial sales charge (Class A and
Class D shares only) and assuming (1) the
Total Fund Operating Expenses for each class
set forth 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 $80 $100 $159
Class B..................................... $60 $81 $104 $206*
Class C..................................... $30 $61 $105 $226
Class D..................................... $64 $87 $113 $186
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 $80 $100 $159
Class B..................................... $20 $61 $104 $206*
Class C..................................... $20 $61 $105 $226
Class D..................................... $64 $87 $113 $186
</TABLE>
- --------
* Assumes conversion to Class D shares approximately eight years after
purchase.
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
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
$5.35) for confirming purchases and repurchases. Purchases and redemptions
made directly through the Transfer Agent are not subject to the processing
fee. See "Purchase of Shares" and "Redemption of Shares."
3
<PAGE>
MERRILL LYNCH SELECT PRICINGSM SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
PricingSM System. The shares of each class may be purchased at a price equal
to the next determined net asset value per share subject to the sales charges
and ongoing fee arrangements described below. Shares of Class A and Class D
are sold to investors choosing the initial sales charge alternatives, and
shares of Class B and Class C are sold to investors choosing the deferred
sales charge alternatives. The Merrill Lynch Select PricingSM System is used
by more than 50 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 PricingSM System are referred to herein as "MLAM-advised
mutual funds."
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 CDSCs 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 PricingSM System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select PricingSM System that the investor
believes is most beneficial under his or her particular circumstances. More
detailed information as to each class of shares is set forth under "Purchase
of Shares."
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(/1/) FEE FEE FEATURE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 to
years, D shares automatically
at a rate of 4.0% during the after approximately
first year, decreasing 1.0% eight years(/5/)
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>
4
<PAGE>
- --------
(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."
(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 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 at net asset value to Merrill Lynch & Co.,
Inc. ("ML & Co.") and its subsidiaries (the term "subsidiaries,"
when used herein with respect to ML & Co., includes MLAM, FAM and
certain other entities directly or indirectly wholly owned and
controlled by ML & Co.) and their directors and employees, and to
members of the Boards of MLAM-advised mutual funds. The maximum
initial sales charge 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 Class B shares, as well
as a CDSC if they are redeemed within four years of purchase. Such
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
5
<PAGE>
approximately ten years. If Class B shares of the Fund are
exchanged for Class B shares of another MLAM-advised mutual fund,
the conversion period applicable to the Class B shares acquired in
the exchange will apply, and the holding period for the shares
exchanged will be tacked onto the holding period for the shares
acquired. Automatic conversion of Class B shares into Class D
shares will occur at least once a month on the basis of the
relative net asset values of the shares of the two classes on the
conversion date, without the imposition of any sales load, fee or
other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for Federal income
tax purposes. Shares purchased through reinvestment of dividends
on Class B shares also will convert automatically to Class D
shares. The conversion period for dividend reinvestment shares and
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 1.0% CDSC if they are redeemed within
one year after 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 shares), 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
PricingSM System that the investor believes is most beneficial under his or
her particular circumstances.
Initial Sales Charge Alternatives. Investors that 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 that are eligible to purchase Class A shares should purchase Class
A shares rather than Class D shares
6
<PAGE>
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 CDSCs imposed in
connection with purchases of Class B or Class C shares. Investors not
qualifying for reduced initial sales charges that 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 that may qualify the investor for reduced initial sales charges
on new initial sales charge purchases. In addition, the ongoing Class B and
Class C account maintenance and distribution fees will cause Class B and Class
C shares to have higher expense ratios, pay lower dividends and have lower
total returns than the initial sales charge shares. The ongoing Class D
account maintenance fees will cause Class D shares to have a higher expense
ratio, pay lower dividends and have a lower total return than Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the
benefit of putting all of the investor's dollars to work from the time the
investment is made. The deferred sales charge alternatives may be particularly
appealing to investors that do not qualify for a reduction in initial sales
charges. Both Class B and Class C shares are subject to ongoing account
maintenance fees and distribution fees; however, the ongoing account
maintenance and distribution fees potentially may be offset to the extent any
return is realized on the additional funds initially invested in Class B or
Class C shares. In addition, Class B shares will be converted into Class D
shares of the Fund after a conversion period of approximately eight years, and
thereafter investors will be subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend
to hold their shares for an extended period of time. Investors in Class B
shares should take into account whether they intend to redeem their shares
within the CDSC period and, if not, whether they intend to remain invested
until the end of the conversion period and thereby take advantage of the
reduction in ongoing fees resulting from the conversion into Class D shares.
Other investors, however, may elect to purchase Class C shares if they
determine that it is advantageous to have all their assets invested initially
and they are uncertain as to the length of time they intend to hold their
assets in MLAM-advised mutual funds. Although Class C shareholders are subject
to a shorter CDSC period at a lower rate, they forgo the Class B conversion
feature, making their investment subject to account maintenance and
distribution fees for an indefinite period of time. In addition, while both
Class B and Class C distribution fees are subject to the limitations on asset-
based sales charges imposed by the NASD, the Class B distribution fees are
further limited under a voluntary waiver of asset-based sales charges. See
"Purchase of Shares--Limitations on the Payment of Deferred Sales Charges."
7
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in conjunction
with the annual audits of the financial statements of the Fund by Deloitte &
Touche LLP, independent auditors. Financial statements and the independent
auditors' report thereon for the fiscal year ended October 31, 1997, 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. Further information about the performance of the
Fund is contained in the Fund's most recent annual report to shareholders
which may be obtained, without charge, by calling or by writing the Fund at
the telephone number or address on the front cover of this Prospectus.
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------------------
FOR THE
PERIOD
FEB. 3,
FOR THE YEAR ENDED OCTOBER 31, 1989+ TO
------------------------------------------------------------------------------------ OCT. 31,
1997++ 1996++ 1995++ 1994 1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- -------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
PER SHARE OPERATING PER-
FORMANCE:
Net asset value, begin-
ning of period.......... $ 15.17 $ 14.21 $ 13.07 $ 13.52 $ 11.92 $ 12.16 $ 10.37 $ 10.79 $ 10.00
---------- ---------- ---------- ---------- -------- -------- ------- ------- -------
Investment income--net.. .71 .78 .79 .60 .39 .36 .55 .60 .45
Realized and unrealized
gain (loss) on invest-
ments and foreign cur-
rency transactions--net. 1.57 1.59 1.04 (.31) 2.14 .89 2.24 (.16) .48
---------- ---------- ---------- ---------- -------- -------- ------- ------- -------
Total from investment
operations.............. 2.28 2.37 1.83 .29 2.53 1.25 2.79 .44 .93
---------- ---------- ---------- ---------- -------- -------- ------- ------- -------
Less dividends and dis-
tributions:
Investment income--
net................... (.88) (.98) (.39) (.51) (.81) (.89) (.45) (.66) (.14)
Realized gain on in-
vestments--net........ (.65) (.43) (.30) (.23) (.12) (.60) (.55) (.20) --
---------- ---------- ---------- ---------- -------- -------- ------- ------- -------
Total dividends and dis-
tributions.............. (1.53) (1.41) (.69) (.74) (.93) (1.49) (1.00) (.86) (.14)
---------- ---------- ---------- ---------- -------- -------- ------- ------- -------
Net asset value, end of
period.................. $ 15.92 $ 15.17 $ 14.21 $ 13.07 $ 13.52 $ 11.92 $ 12.16 $ 10.37 $ 10.79
========== ========== ========== ========== ======== ======== ======= ======= =======
TOTAL INVESTMENT RE-
TURN:**
Based on net asset value
per share............... 16.08% 17.81% 14.81% 2.14% 22.61% 11.78% 28.89% 3.91% 9.34%#
========== ========== ========== ========== ======== ======== ======= ======= =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of reim-
bursement............... .83% .86% .90% .89% .93% 1.07% 1.29% 1.29% 1.37%*
========== ========== ========== ========== ======== ======== ======= ======= =======
Expenses................ .91% .93% .90% .89% .93% 1.07% 1.29% 1.29% 1.37%*
========== ========== ========== ========== ======== ======== ======= ======= =======
Investment income--net.. 4.64% 5.31% 5.98% 4.60% 3.90% 10.82% 8.96% 4.37% 5.31%*
========== ========== ========== ========== ======== ======== ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, end of pe-
riod (in thousands)..... $2,132,254 $1,841,974 $1,487,805 $1,357,906 $917,806 $245,839 $72,702 $49,691 $47,172
========== ========== ========== ========== ======== ======== ======= ======= =======
Portfolio turnover...... 55.42% 51.26% 36.78% 57.04% 50.35% 59.56% 81.21% 129.51% 88.59%
========== ========== ========== ========== ======== ======== ======= ======= =======
Average commission rate
paid##.................. $ .0307 $ .0048 -- -- -- -- -- -- --
========== ========== ========== ========== ======== ======== ======= ======= =======
</TABLE>
- ----
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Based on average shares outstanding during the year.
# 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 conversions may significantly affect the rate shown.
8
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
CLASS B
--------------------------------------------------------------------------------------------------
FOR THE
PERIOD
FEB. 3,
FOR THE YEAR ENDED OCTOBER 31, 1989+ TO
---------------------------------------------------------------------------------------- OCT. 31,
1997++ 1996++ 1995++ 1994 1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
PER SHARE OPERATING PER-
FORMANCE:
Net asset value,
beginning of period..... $ 14.95 $ 14.01 $ 12.91 $ 13.38 $ 11.83 $ 12.10 $ 10.33 $ 10.73 $ 10.00
---------- ---------- ---------- ---------- ---------- -------- -------- -------- --------
Investment income--net.. .55 .62 .65 .46 .28 .22 .44 .49 .38
Realized and unrealized
gain (loss) on
investments and foreign
currency transactions--
net..................... 1.52 1.59 1.01 (.31) 2.11 .91 2.22 (.16) .47
---------- ---------- ---------- ---------- ---------- -------- -------- -------- --------
Total from investment
operations.............. 2.07 2.21 1.66 .15 2.39 1.13 2.66 .33 .85
---------- ---------- ---------- ---------- ---------- -------- -------- -------- --------
Less dividends and
distributions:
Investment income--net. (.72) (.84) (.26) (.39) (.72) (.80) (.34) (.53) (.12)
Realized gain on
investments--net....... (.65) (.43) (.30) (.23) (.12) (.60) (.55) (.20) --
---------- ---------- ---------- ---------- ---------- -------- -------- -------- --------
Total dividends and
distributions........... (1.37) (1.27) (.56) (.62) (.84) (1.40) (.89) (.73) (.12)
---------- ---------- ---------- ---------- ---------- -------- -------- -------- --------
Net asset value, end of
period.................. $ 15.65 $ 14.95 $ 14.01 $ 12.91 $ 13.38 $ 11.83 $ 12.10 $ 10.33 $ 10.73
========== ========== ========== ========== ========== ======== ======== ======== ========
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share............... 14.82% 16.71% 13.54% 1.13% 21.42% 10.64% 27.48% 2.93% 8.50%#
========== ========== ========== ========== ========== ======== ======== ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement........... 1.85% 1.87% 1.93% 1.91% 1.95% 2.09% 2.31% 2.31% 2.40%*
========== ========== ========== ========== ========== ======== ======== ======== ========
Expenses................ 1.93% 1.95% 1.93% 1.91% 1.95% 2.09% 2.31% 2.31% 2.40%*
========== ========== ========== ========== ========== ======== ======== ======== ========
Investment income--net.. 3.62% 4.29% 4.96% 3.58% 2.87% 11.95% 7.98% 3.35% 4.29%*
========== ========== ========== ========== ========== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands)... $9,879,603 $8,660,279 $6,688,499 $6,457,130 $4,299,545 $958,949 $161,328 $115,682 $113,649
========== ========== ========== ========== ========== ======== ======== ======== ========
Portfolio turnover...... 55.42% 51.26% 36.78% 57.04% 50.35% 59.56% 81.21% 129.51% 88.59%
========== ========== ========== ========== ========== ======== ======== ======== ========
Average commission rate
paid##.................. $ .0307 $ .0048 -- -- -- -- -- -- --
========== ========== ========== ========== ========== ======== ======== ======== ========
</TABLE>
- ----
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Based on average shares outstanding during the year.
# 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 conversions may significantly affect the rate shown.
9
<PAGE>
FINANCIAL HIGHLIGHTS (CONCLUDED)
<TABLE>
<CAPTION>
CLASS C CLASS D
-------------------------------------- ------------------------------------------
FOR THE FOR THE
PERIOD PERIOD
FOR THE YEAR OCT. 21, FOR THE YEAR OCT. 21,
ENDED OCT. 31, 1994+ TO ENDED OCT. 31, 1994+ TO
---------------------------- OCT. 31, -------------------------------- OCT. 31,
1997++ 1996++ 1995++ 1994 1997++ 1996++ 1995++ 1994
-------- -------- -------- -------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
PER SHARE OPERATING PER-
FORMANCE:
Net asset value,
beginning of period..... $ 14.83 $ 13.94 $ 12.91 $12.91 $ 15.15 $ 14.19 $ 13.08 $13.07
-------- -------- -------- ------ ---------- ---------- -------- ------
Investment income--net.. .54 .61 .64 .01 .68 .77 .77 .01
Realized and unrealized
gain (loss) on
investments and foreign
currency transactions--
net..................... 1.52 1.58 1.02 (.01) 1.55 1.57 1.01 --
-------- -------- -------- ------ ---------- ---------- -------- ------
Total from investment
operations.............. 2.06 2.19 1.66 -- 2.23 2.34 1.78 .01
-------- -------- -------- ------ ---------- ---------- -------- ------
Less dividends and
distributions:
Investment income--net. (.74) (.87) (.33) -- (.84) (.95) (.37) --
Realized gain on
investments--net....... (.65) (.43) (.30) -- (.65) (.43) (.30) --
-------- -------- -------- ------ ---------- ---------- -------- ------
Total dividends and
distributions........... (1.39) (1.30) (.63) -- (1.49) (1.38) (.67) --
-------- -------- -------- ------ ---------- ---------- -------- ------
Net asset value, end of
period.................. $ 15.50 $ 14.83 $ 13.94 $12.91 $ 15.89 $ 15.15 $ 14.19 $13.08
======== ======== ======== ====== ========== ========== ======== ======
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share............... 14.84% 16.68% 13.58% .00%# 15.76% 17.59% 14.43% .08%#
======== ======== ======== ====== ========== ========== ======== ======
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement........... 1.86% 1.88% 1.95% 2.44%* 1.08% 1.10% 1.16% 1.69%*
======== ======== ======== ====== ========== ========== ======== ======
Expenses................ 1.94% 1.95% 1.95% 2.44%* 1.16% 1.18% 1.16% 1.69%*
======== ======== ======== ====== ========== ========== ======== ======
Investment income--net.. 3.60% 4.24% 4.80% 3.71%* 4.38% 5.04% 5.63% 4.46%*
======== ======== ======== ====== ========== ========== ======== ======
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands)... $671,467 $385,753 $102,361 $7,347 $1,479,711 $1,044,136 $256,525 $4,968
======== ======== ======== ====== ========== ========== ======== ======
Portfolio turnover...... 55.42% 51.26% 36.78% 57.04% 55.42% 51.26% 36.78% 57.04%
======== ======== ======== ====== ========== ========== ======== ======
Average commission rate
paid##.................. $ .0307 $ .0048 -- -- $ .0307 $ .0048 -- --
======== ======== ======== ====== ========== ========== ======== ======
</TABLE>
- ----
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Based on average shares outstanding during the year.
# 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 conversions may significantly affect the rate shown.
10
<PAGE>
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, 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>
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, a Division of The McGraw-Hill Companies, Inc.
("Standard & Poor's") 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 would 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
12
<PAGE>
varied from time to time both with respect to types of securities and markets
in response to changing market and economic trends. Total investment return is
the aggregate of capital value changes and income. This objective is a
fundamental policy which the Fund may not change without a vote of a majority
of the Fund's outstanding voting securities. There can be no assurance that
the Fund's investment objective will be achieved. The Fund may employ a
variety of instruments and techniques to enhance income and to hedge against
market and currency risk, as described under "Portfolio Strategies Involving
Options and Futures" below.
The Fund will invest in a portfolio of U.S. and foreign equity, debt and
money market securities. The composition of the portfolio among these
securities and markets will be varied from time to time by the Manager, in
response to changing market and economic trends. This fully managed investment
approach provides the Fund with the opportunity to benefit from anticipated
shifts in the relative performance of different types of securities and
different capital markets. For example, at times the Fund may emphasize
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>
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 that 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
that are rated, or are
14
<PAGE>
issued by issuers that have outstanding debt obligations rated, BBB or better
by Standard & Poor's or Baa or better by Moody's or commercial paper rated A-1
by Standard & Poor's or Prime-1 by Moody's or of issuers that the Manager has
determined to be of similar creditworthiness. Securities rated BBB by Standard
& Poor's 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. Although the Fund may invest in companies
that hold real estate assets, the real estate-related securities that 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 that 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
15
<PAGE>
or by private issuers. In addition, the Fund may invest in debt securities
issued or guaranteed by international organizations designed or supported by
multiple governmental entities (which are not obligations of the U.S.
Government or foreign governments) to promote economic reconstruction or
development ("supranational entities"), such as the International Bank for
Reconstruction and Development (the "World Bank").
U.S. Government securities include: (i) U.S. Treasury obligations (bills,
notes and bonds), which differ in their interest rates, maturities and times
of issuance, all of which are backed by the full faith and credit of the
United States; 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 Standard & Poor's 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 Standard & Poor's
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 corporate issuers rated
below investment grade by a nationally recognized statistical rating
organization 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 Standard & Poor's,
respectively. Investment
16
<PAGE>
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 attractive total return potential, relative to the risk of
such securities, as compared to higher quality debt securities. Securities
rated BB or lower by Standard & Poor's 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 Standard & Poor's
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, and adverse economic events hence 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.
17
<PAGE>
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 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
Standard & Poor's rating category, of the bonds held by the Fund (including
U.S. Government and government agency securities) for the fiscal year ended
October 31, 1997:
<TABLE>
<CAPTION>
PERCENT OF
RATING TOTAL ASSETS
------ ------------
<S> <C>
AAA........................................................... 18.34%
AA............................................................ 0.60
A............................................................. 0.50
BBB........................................................... 1.08
BB............................................................ 5.36
B............................................................. 3.55
CCC........................................................... 1.47
D............................................................. 0.05
Not Rated*.................................................... 10.03
-----
40.98%
=====
</TABLE>
- --------
* Bonds which are not rated by Standard & Poor's or which are sovereign bonds
in which the sovereign entity was not rated by Standard & Poor's. Such bonds
may be rated by nationally recognized statistical rating organizations other
than Standard & Poor's, 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 0.41% are of comparable quality
to bonds rated AAA, 0.69% are of comparable quality to bonds rated AA, 1.27%
are of comparable quality to bonds rated A, 1.73% are of comparable quality
to bonds rated BBB, 2.22% are of comparable quality to bonds rated BB, 2.80%
are of comparable quality to bonds rated B, 0.90% are of comparable quality
to bonds rated CCC and 0.01% are of comparable quality to bonds rated C.
This determination is based on the Manager's own internal evaluation and
does not necessarily reflect how such securities would be rated by Standard
& Poor's if it were to rate the securities.
18
<PAGE>
The percentages on page 18 reflect the average monthly dollar-weighted
market value for the fiscal year ended October 31, 1997. 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 Standard & Poor's 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 either owned by the Fund or which the Fund will receive
upon immediate conversion or exchange of securities owned by the Fund 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 either owned by the
Fund or which the Fund will receive upon immediate conversion or exchange of
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
19
<PAGE>
than would be realized on the securities alone. By writing covered call
options, the Fund gives up the opportunity, while the option is in effect, to
profit from any price increase in the underlying security above the option
exercise price. In addition, the Fund's ability to sell the underlying
security will be limited while the option is in effect unless the Fund effects
a closing purchase transaction. A closing purchase transaction cancels out the
Fund's position as the writer of an option by means of an offsetting purchase
of an identical option prior to the expiration of the option it has written.
Covered call options serve as a partial hedge against the price of the
underlying security declining.
The Fund also may write (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 options, 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 (premiums 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 Futures and Options. 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
20
<PAGE>
as described below. A futures contract is an agreement between two parties
that obligates the purchaser of the futures contract to buy and the seller of
a futures contract to sell a particular commodity for a set price on a future
date. Unlike most other futures contracts, a stock index futures contract does
not require actual delivery of a commodity, in this case securities, but
results in cash settlement based upon the difference in value of the stock
index between the time the contract was entered into and the time of its
settlement. The Fund may effect transactions in stock index futures contracts
in connection with the equity securities in which it invests and in financial
futures contracts in connection with the debt securities in which it invests.
Transactions by the Fund in stock index futures and financial futures are
subject to limitations as described below under "Restrictions on the Use of
Futures Transactions."
The Fund 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 market 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 Manager 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>
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 securities which
22
<PAGE>
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 that have capital of at least $50 million or whose obligations are
guaranteed by an entity having capital of at least $50 million or any other
bank or dealer having capital of at least $150 million or whose obligations
are guaranteed by an entity having capital of at least $150 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>
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)
that 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 that 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 be the
obligations of a single issuer. A fund that
24
<PAGE>
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, 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. The Fund may
purchase securities in offerings in which Merrill Lynch or an affiliate
participates as an underwriter so long as the securities are not purchased
from Merrill Lynch as principal and certain conditions are satisfied. 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
25
<PAGE>
the security underlying the commitment at a yield and price that 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; 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
receives either the income on the collateral or other compensation, i.e.,
negotiated loan premium or fee, for entering into the loan and thereby
26
<PAGE>
increases its yield. In the event that the borrower defaults on its obligation
to return borrowed securities, because of insolvency or otherwise, the Fund
could experience delays and costs in gaining access to the collateral and
could suffer a loss to the extent that the value of the collateral falls below
the market value of the borrowed securities.
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 at the time of each investment, in the securities of
issuers in any particular industry (excluding the U.S. Government and its
agencies and instrumentalities). In addition, the Fund has adopted non-
fundamental restrictions that 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
27
<PAGE>
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 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. 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*--Chairman of the Manager and its affiliate, FAM; Chairman
and Director of Princeton Services, Inc. ("Princeton Services"); Executive
Vice President of ML & Co.
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>
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 140 registered investment companies and also offers portfolio
management services to individuals and institutions. As of January 31, 1998,
the Manager and FAM had a total of approximately $287.0 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, 1997,
the Fund paid the Manager a fee at the effective rate of 0.66% of average
daily net assets. This fee is higher than that of many other 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,
1997, the Manager earned a fee of $99,812,816 (based on average daily net
assets of approximately $13.3 billion), of which $11,605,587 was voluntarily
waived.
The Manager has also 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
29
<PAGE>
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 year ended October 31, 1997, the fee paid
by the Manager to MLAM U.K. pursuant to such agreement aggregated $10,062,279.
MLAM U.K. has offices at Milton Gate, 1 Moor Lane, London EC2Y 9HA, England.
Bryan N. Ison, Senior Vice President of the Fund, is the Fund's Portfolio
Manager. Mr. Ison has been a First Vice President of the Manager since 1997
and Portfolio Manager of the Manager and its corporate predecessors since
1984. Mr. Ison was a Vice President of the Manager and its corporate
predecessors from 1985 to 1997. 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, 1997, the Fund
reimbursed the Manager $718,491 for such accounting services. For the fiscal
year ended October 31, 1997, the ratio of total expenses to average net assets
for Class A, Class B, Class C and Class D shares was 0.91%, 1.93%, 1.94% and
1.16%, 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 that
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
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
30
<PAGE>
issuance, transfer and redemption of shares and the opening and maintenance of
shareholder accounts. Pursuant to the Transfer Agency Agreement, the Transfer
Agent receives an annual fee of 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 certain transaction charges and out-of-pocket expenses
incurred by the Transfer Agent under the Transfer Agency Agreement.
Additionally, a $.20 monthly closed account charge will be assessed on all
accounts which close during the calendar year. Application of this fee will
commence the month following the month the account is closed. At the end of
the calendar year, no further fees will be due. For purposes of the Transfer
Agency Agreement, the term "account" includes a shareholder account maintained
directly by the Transfer Agent 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, 1997, the total fee paid by the Fund to
the Transfer Agent was $16,300,769 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 the shares of the Fund. Shares of the Fund are offered
continuously for sale by the Distributor and other eligible securities dealers
(including Merrill Lynch). Shares of the Fund may be purchased from securities
dealers or by mailing a purchase order directly to the Transfer Agent. The
minimum initial 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 and, for participants in certain fee-based
programs, the minimum initial purchase is $500 and the minimum subsequent
purchase is $50.
The Fund offers its shares in four classes at a public offering price equal
to the next determined net asset value per share plus sales charges imposed
either at the time of purchase or on a deferred basis, depending upon the
class of shares selected by the investor under the Merrill Lynch Select
PricingSM System, as described below. The applicable offering price for
purchase orders is based upon the net asset value of the Fund next determined
after receipt of the purchase orders by the Distributor. As to purchase orders
received by securities dealers prior to the close of business on the New York
Stock Exchange (the "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 order 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 on that day, 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 $5.35) to confirm a sale of
shares to such customers. Purchases made directly through the Transfer Agent
are not subject to the processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
PricingSM System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances.
31
<PAGE>
Shares of Class A and Class D are sold to investors choosing the initial sales
charge alternatives and shares of Class B and Class C are sold to investors
choosing the deferred sales charge alternatives. Investors should determine
whether under their particular circumstances it is more advantageous to incur
an initial sales charge or to have the entire initial purchase price invested
in the Fund with the investment thereafter being subject to a CDSC and ongoing
distribution fees. A discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
PricingSM System is set forth under "Merrill Lynch Select PricingSM System" on
page 4.
Each Class A, Class B, Class C and Class D share of the Fund represents
identical interests in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The 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 CDSCs and distribution fees with respect to 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.
Investors are advised that only Class A and Class D shares may be available
for purchase through securities dealers, other than Merrill Lynch, that are
eligible to sell shares.
32
<PAGE>
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select PricingSM System.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(/1/) FEE FEE CONVERSION FEATURE
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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% during to D shares automatically
the first year, decreasing 1.0% after approximately
annually to 0.0%(/4/) eight years(/5/)
- --------------------------------------------------------------------------------------------
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.
(5) The conversion period for dividend reinvestment shares, certain retirement
plans and certain fee-based programs 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.
33
<PAGE>
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternatives is the next determined net
asset value plus varying sales charges (i.e., sales loads), as set forth
below.
<TABLE>
<CAPTION>
SALES LOAD AS DISCOUNT TO
SALES LOAD AS PERCENTAGE* OF SELECTED DEALERS
PERCENTAGE OF THE NET AMOUNT AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE INVESTED THE OFFERING PRICE
- ------------------ -------------- -------------- ------------------
<S> <C> <C> <C>
Less than $25,000............. 5.25% 5.54% 5.00%
$25,000 but less than $50,000. 4.75 4.99 4.50
$50,000 but less than
$100,000..................... 4.00 4.17 3.75
$100,000 but less than
$250,000..................... 3.00 3.09 2.75
$250,000 but less than
$1,000,000................... 2.00 2.04 1.80
$1,000,000 and over**......... 0.00 0.00 0.00
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more and on Class A purchases by certain retirement plan
investors and participants 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 purchase 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 charge will be assessed on
an amount equal to the lesser of the proceeds of redemption or the cost of
the shares being redeemed. A sales charge of 0.75% will be charged on
purchases of $1,000,000 or more of Class A or Class D shares by certain
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.
The proceeds from the account maintenance fees are used to compensate the
Distributor and Merrill Lynch (pursuant to a sub-agreement) for providing
continuing account maintenance activities.
For the fiscal year ended October 31, 1997, the Fund sold 29,258,107 Class A
shares for aggregate net proceeds of $446,649,910. The gross sales charges for
the sale of Class A shares of the Fund for the year were $705,874, of which
$47,810 and $658,064 were received by the Distributor and Merrill Lynch,
respectively. For the fiscal year ended October 31, 1997, 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, 1997, the Fund sold 22,634,091 Class D
shares for aggregate net proceeds of $346,497,021. The gross sales charges for
the sale of Class D shares of the Fund for the year were $3,242,398, of which
$237,188 and $3,005,210 were received by the Distributor and Merrill Lynch,
respectively. For the fiscal year ended October 31, 1997, the Distributor
received CDSCs of $6,066 with respect to redemptions within one year after
purchase of Class D shares purchased subject to a front-end sales charge
waiver, all of which were paid to Merrill Lynch.
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
BlueprintSM 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
34
<PAGE>
or any of its affiliates. Class A shares are available at net asset value to
corporate warranty insurance reserve fund programs and U.S. branches of
foreign owned banking institutions provided that the program or the branch 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 TMASM 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."
Provided applicable threshold requirements are met, either Class A or Class
D shares are offered at net asset value to Employee AccessSM Accounts
available through authorized employers. 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 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
BlueprintSM Program.
Additional information concerning these reduced initial sales charges is set
forth in the Statement of Additional Information.
35
<PAGE>
DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four-year CDSC,
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." The proceeds from the ongoing account maintenance fees
are used to compensate the Distributor and Merrill Lynch (pursuant to a sub-
agreement) for providing continuing account maintenance activities.
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its Financial Consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of Class B and Class C
shares, such as the payment of compensation to financial consultants for
selling Class B and Class C shares from the dealers' 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. 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 redemption or the cost of the shares being redeemed. Accordingly, no CDSC
will be imposed on increases in net asset value
36
<PAGE>
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>
YEAR SINCE CDSC AS A PERCENTAGE
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..................................... None
</TABLE>
For the fiscal year ended October 31, 1997, the Distributor received CDSCs
of $10,035,794 with respect to redemptions of Class B shares, all of which
were paid to Merrill Lynch. Additional CDSCs payable to the Distributor may
have been waived or converted to a contingent obligation in connection with a
shareholder's participation in certain fee-based programs.
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 Code) of a shareholder. The Class B CDSC also is waived on
redemptions of shares by certain eligible 401(a) and eligible 401(k) plans and
in connection with certain group plans placing orders through the Merrill
Lynch BlueprintSM Program. The CDSC also is waived for any Class B shares that
are purchased by eligible 401(k) or eligible 401(a) plans that 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 that are purchased by a Merrill Lynch rollover IRA that was
funded by a rollover from a terminated 401(k) plan managed by the MLAM Private
Portfolio Group and held in such account at the time of redemption. The Class
B CDSC also is waived for any Class B shares purchased within qualifying
Employee AccessSM Accounts. Additional information concerning the waiver of
the Class B CDSC is set forth in
37
<PAGE>
the Statement of Additional 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. The Class C CDSC may be waived in
connection with certain fee-based programs. See "Shareholder Services--Fee-
Based Programs." For the fiscal year ended October 31, 1997, the Distributor
received CDSCs of $215,161 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
38
<PAGE>
Period, or vice versa, the Conversion Period applicable to the Class B shares
acquired in the exchange will apply, and the holding period for the shares
exchanged will be tacked onto the holding period for the shares acquired.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the
CDSC normally imposed on purchases of Class B shares ("Class B Retirement
Plans"). When the first share of any MLAM-advised mutual fund purchased by a
Class B Retirement Plan has been held for ten years (i.e., ten years from the
date the relationship between MLAM-advised mutual funds and the Class B
Retirement Plan was established), all Class B shares of all MLAM-advised
mutual funds held in that Class B Retirement Plan will be converted into Class
D shares of the appropriate funds. Subsequent to such conversion, that Class B
Retirement Plan will be sold Class D shares of the appropriate funds at net
asset value per share.
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, 1997, the Fund paid the Distributor
$94,703,295 pursuant to the Class B Distribution Plan (based on average daily
net assets subject to such Class B Distribution Plan of approximately $9.5
billion), all of which was paid to Merrill Lynch for providing account
maintenance and
39
<PAGE>
distribution-related activities and services in connection with Class B
shares. For the fiscal year ended October 31, 1997, the Fund paid the
Distributor $5,392,525 pursuant to the Class C Distribution Plan (based on
average daily net assets subject to such Class C Distribution Plan of
approximately $538.9 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, 1997,
the Fund paid the Distributor $3,232,450 pursuant to the Class D Distribution
Plan (based on average daily net assets subject to such Class D Distribution
Plan of approximately $1.3 billion), 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, 1996, the last date for which fully allocated accrual
data is available, 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 $20,706,000 (.23% of Class B net assets at that date). As of
October 31, 1997, direct cash revenues for the period since the commencement
of operations of Class B shares exceeded direct cash expenses by $327,116,472
(3.31% of Class B net assets at that date). As of December 31, 1996, the fully
allocated accrual expenses incurred by the Distributor and Merrill Lynch for
the period since the commencement of operations of Class C shares exceeded
fully allocated accrual revenues by approximately $1,569,000 (.37% of Class C
net assets at that date). As of October 31, 1997, direct cash revenues for the
period since the commencement of operations of Class C shares exceeded direct
cash expenses by $5,703,838 (.85% 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 fees, the distribution fees 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."
40
<PAGE>
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 distribution fee
and the CDSC borne by the Class B and Class C shares, but not the account
maintenance fee. The maximum sales charge rule is applied separately to each
class. As applicable to the Fund, the maximum sales charge rule limits the
aggregate of distribution fee payments and CDSCs payable by the Fund to (1)
6.25% of eligible gross sales of Class B shares and Class C shares, computed
separately (defined to exclude shares issued pursuant to dividend
reinvestments and exchanges), plus (2) interest on the unpaid balance for the
respective class, computed separately, at the prime rate plus 1% (the unpaid
balance being the maximum amount payable minus amounts received from the
payment of the distribution 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 that may be applicable, there will be no
charge for redemption if the redemption request is sent directly to the
Transfer Agent. Shareholders liquidating their holdings will receive upon
redemption all dividends reinvested through the date of redemption. The value
of shares at the time of redemption may be more or less than the shareholder's
cost, depending on the market value of the securities held by the Fund at such
time.
REDEMPTION
A shareholder wishing to redeem shares may do so, without charge, by
tendering the shares directly to the Transfer Agent, 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. Redemption requests should not be sent to the Fund. The redemption
request in either event requires the signature(s) of all persons in whose
name(s) the shares are registered, signed exactly as such name(s) appear(s) on
the Transfer Agent's register or on the certificates, 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,
41
<PAGE>
the existence and validity of which may be verified by the Transfer Agent
through the use of industry publications. Notarized signatures are not
sufficient. In certain instances, the Transfer Agent may require additional
documents, such as, but not limited to, trust instruments, death certificates,
appointments as executor or administrator, or certificates of corporate
authority. For shareholders redeeming directly with the Transfer Agent,
payment will be mailed within seven days of receipt of a proper notice of
redemption.
At various times the Fund may be requested to redeem shares for which it has
not yet received good payment. The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as it has assured itself that
good payment (e.g., cash or certified check drawn on a 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 that 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 $5.35) to confirm a
repurchase of shares to such customers. Repurchases made directly through the
Fund's Transfer Agent are not subject to the processing fee. The Fund reserves
the right to reject any order for repurchase, which right of rejection might
adversely affect shareholders seeking redemption through the repurchase
procedure. However, a shareholder whose order for repurchase is rejected by
the Fund may redeem shares as set forth above.
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.
42
<PAGE>
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below that 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 at the Transfer Agent. If the new
brokerage firm is willing to accommodate the shareholder in this manner, the
shareholder must request that he or she be issued certificates for such 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 exercise the
43
<PAGE>
exchange privilege. The exchange privilege may be modified or terminated in
accordance with the rules of the Commission.
Under the Merrill Lynch Select PricingSM System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-
advised mutual fund if the shareholder holds any Class A shares of the second
fund in the 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 that 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 of the exchanged
shares and a purchase of the acquired shares for Federal income tax purposes.
For further information, see "Shareholder Services--Exchange Privilege" in the
Statement of Additional Information.
44
<PAGE>
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All dividends and capital gains distributions are reinvested automatically
in full and fractional shares of the Fund, without sales charge, at the net
asset value per share next determined 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
both dividends and capital gains distributions, paid in cash, rather than
reinvested, in which event payment will be mailed on or about the payment
date. The Fund is not responsible for any failure of delivery to the
shareholder's address of record and no interest will accrue on amounts
represented by uncashed distribution or redemption checks. 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 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 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, subject to certain conditions. With
respect to redemptions of Class B or Class C shares pursuant to a systematic
withdrawal plan, the maximum number of Class B or Class C shares that can be
redeemed from an account annually shall not exceed 10% of the value of shares
of such class in that account at the time the election to join the systematic
withdrawal plan was made. Any CDSC that otherwise might be due on such
redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See "Purchase of Shares--
Deferred Sales Charge Alternatives--Class B and Class C Shares--Contingent
Deferred Sales Charges--Class B Shares" and "--Contingent Deferred Sales
Charges--Class C Shares." Where the systematic withdrawal plan is applied to
Class B shares, upon conversion of the last Class B shares in an account to
Class D shares, the systematic withdrawal plan will automatically be applied
thereafter to Class D shares. See "Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class B Shares to
Class D Shares."
AUTOMATIC INVESTMENT PLANS
Regular additions of Class A, Class B, Class C or Class D shares may be made
to an investor's Investment Account by prearranged charges of $50 or more to
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) or 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
45
<PAGE>
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 Program) is
available in such Program's client agreement and from the Transfer Agent 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
46
<PAGE>
Class C shares (such as investors in certain retirement plans), performance
data may take into account the reduced, and not the maximum, sales charge or
may not take into account the CDSC and therefore may reflect greater total
return since, due to the reduced sales charges or waiver of the CDSC, a lower
amount of expenses may be deducted. See "Purchase of Shares." The Fund's total
return may be expressed either as a percentage or as a dollar amount in order
to illustrate the effect of such total return on a hypothetical $1,000
investment in the Fund at the beginning of each specified period.
Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's
portfolio, the Fund's operating expenses and the amount of realized and
unrealized net capital gains or losses during the period. The value of an
investment in the Fund will fluctuate, and an investor's shares, when
redeemed, may be worth more or less than their original cost.
On occasion, the Fund may compare its performance to 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 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. However, a shareholder whose account is maintained at the
Transfer Agent or whose account is maintained through Merrill Lynch 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 year. Capital gains distributions will be automatically reinvested
in shares unless the shareholder elects to receive such distributions in cash.
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 the Fund shares
for Federal income tax purposes, resulting in a capital gain for any
shareholder who
47
<PAGE>
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.
See "Shareholder Services--Automatic Reinvestment of Dividends and Capital
Gains Distributions" for information as to how to elect cash payment.
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 for long positions, and
at the last available ask price for short positions. 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. Long positions in securities traded in the OTC market are
valued at the last available bid price in the OTC market prior to the time of
valuation. Short positions in securities traded in the OTC market are valued
at the last available ask price in the OTC market prior to the time of
valuation. Securities that 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, are stated at market value. Securities
and assets for which market quotations are not readily available are valued at
fair value as determined in good faith under the direction of the Board of
Directors of the Fund.
48
<PAGE>
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.
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. As long as 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 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). Recent legislation
creates additional categories of capital gains taxable at different rates.
Generally 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, as well as the amount
of capital gain dividends in the different categories of capital gain referred
to above.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. 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.
49
<PAGE>
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes. Shareholders may be
able to claim U.S. foreign tax credits with respect to such taxes, subject to
certain conditions and limitations contained in the Code. For example, certain
retirement accounts cannot claim foreign tax credits on investments in foreign
securities held in the Fund. In addition, recent legislation permits a foreign
tax credit to be claimed with respect to withholding tax on a dividend only if
the shareholder meets certain holding period requirements. 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. In the case of
foreign taxes passed through by a RIC, the holding period requirements
referred to above must be met by both the shareholder and the RIC. No
deductions for foreign taxes, moreover, 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 and other information needed to claim the
foreign tax credit.
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
50
<PAGE>
paid to the Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon purchase of the new shares in the absence of
the exchange privilege. Instead, such sales charge will be treated as an
amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on U.S. Government obligations. State law
varies as to whether dividend income attributable to U.S. Government
obligations is exempt from state income tax.
Shareholders are urged to consult their tax advisors 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 3,550,000,000 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 450,000,000 shares, Class B consists of 2,000,000,000 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 relating
to the account maintenance associated with such shares, and Class B and Class
C shares bear certain expenses relating to the distribution of such shares.
Each class has exclusive voting rights with respect to matters relating to
distribution and/or account maintenance 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
51
<PAGE>
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.
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 matter, please call your Merrill Lynch
Financial Consultant or Merrill Lynch Financial Data Services, Inc. at (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.
52
<PAGE>
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.--AUTHORIZATION FORM (PART 1)
- -------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINT SM PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINT SM
PROGRAM APPLICATION BY CALLING (800) 637-3766.
- -------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, BEING OF LEGAL AGE, WISH TO PURCHASE: (CHOOSE ONE)
[_] Class A shares [_] Class B shares [_] Class
C shares [_] Class D shares
of Merrill Lynch Global Allocation Fund, Inc. and establish an Investment
Account as described in the Prospectus. In the event that I am not eligible to
purchase Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $............ payable to Merrill Lynch Financial
Data Services, Inc. as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price next to
be determined after this application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of
paper if necessary.)
1. .................................. 4. ..................................
2. .................................. 5. ..................................
3. .................................. 6. ..................................
Name...........................................................................
First Name Initial Last Name
Name of Co-Owner (if any)......................................................
First Name Initial Last Name
Address.......................................... Date........................
(Zip Code)
Occupation........................... Name and Address of Employer ........
................................
..................................... ................................
.....................................
Signature of Owner Signature of Co-Owner (if any)
(In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- -------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
Long-Term Capital
Ordinary Income Dividends Gains
[_] Reinvest
Select One:
[_] Cash
Select One:
[_] Reinvest
[_] Cash
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: [_] CHECK
OR [_] DIRECT DEPOSIT TO BANK ACCOUNT
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by
direct deposit to my bank account and, if necessary, debit entries and
adjustments for any credit entries made to my account in accordance with the
terms I have selected on the Merrill Lynch Global Allocation Fund, Inc.
Authorization Form.
SPECIFY TYPE OF ACCOUNT (CHECK ONE): [_] CHECKING [_] SAVINGS
Name on your account ..........................................................
Bank Name .....................................................................
Bank Number ...................... Account Number ............................
Bank Address ..................................................................
I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE WRITTEN
NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Signature of Depositor ........................................................
Signature of Depositor ............................... Date...................
(If joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED
CHECK MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD
ACCOMPANY THIS APPLICATION.
- -------------------------------------------------------------------------------
53
<PAGE>
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 in the Prospectus
under "Additional Information--Taxes") either because I have not been notified
that I am subject thereto as a result of a failure to report all interest or
dividends, or the Internal Revenue Service ("IRS") has notified me that I am
no longer subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO 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.
..................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
- -------------------------------------------------------------------------------
4. LETTER OF INTENTION--CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
Dear Sir/Madam:
..................., 19......
Date of initial purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Global Allocation Fund, Inc. or any other investment company with an
initial sales charge or deferred sales charge for which Merrill Lynch Funds
Distributor, Inc. acts as distributor over the next 13- month period which
will equal or exceed:
[_] $25,000 [_] $50,000 [_] $100,000 [_] $250,000 [_] $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Fund's Prospectus.
I agree to the terms and conditions of this Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc. my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Global Allocation Fund, Inc. held as security.
By .................................. .....................................
Signature of Owner Signature of Co-Owner
(If registered in joint names, both must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name............................. (2) Name.............................
Account Number....................... Account Number.......................
- -------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp We hereby authorize Merrill Lynch
Funds Distributor, Inc. to act as
- - - our agent in connection with
transactions under this
- - - authorization form and agree to
This form when completed should be notify the Distributor of any
mailed to: purchases or sales made under a
Letter of Intention, Automatic
Merrill Lynch Global Allocation Investment Plan or Systematic
Fund, Inc. Withdrawal Plan. We guarantee the
c/o Merrill Lynch Financial shareholder's signature.
Data Services, Inc.
P.O. Box 45289 .....................................
Jacksonville, FL 32232-5289 Dealer Name and Address
By ..................................
Authorized Signature of Dealer
..............
[ ][ ][ ] [ ][ ][ ][ ] F/C Last Name
Branch-Code F/C No.
[ ][ ][ ] [ ][ ][ ][ ][ ]
Dealer's Customer A/C No.
54
<PAGE>
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.--AUTHORIZATION FORM (PART 2)
- -------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR
AUTOMATIC INVESTMENT PLANS ONLY.
- -------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
Name of Owner......................
Social Security No. or
Name of Co-Owner (if any).......... Taxpayer Identification
No.
Address............................ Account Number ....................
(if existing account)
...................................
- -------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN (SEE TERMS AND CONDITIONS IN THE STATEMENT OF
ADDITIONAL INFORMATION)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of [_] Class A, [_] Class B*, [_] Class C* 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 withdrawals on
. . . . . . . . . .(month), or as soon as possible thereafter.
SPECIFY THE AMOUNT OF THE WITHDRAWAL YOU WOULD LIKE PAID TO YOU: $ of
(check one) [_] Class A, [_] Class B*, [_] Class C* 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 SHOULD ACCOMPANY THIS APPLICATION.
- -------
* Annual withdrawal cannot exceed 10% of the value of shares of each class
held in the account at the time the election to join the systematic withdrawal
plan is made.
55
<PAGE>
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.
AUTHORIZATION TO HONOR ACH DEBITS
MERRILL LYNCH FINANCIAL DATA DRAWN BY MERRILL LYNCH FINANCIAL
SERVICES, INC. DATA SERVICES, INC.
You are hereby authorized to draw an To...............................Bank
ACH debit each month on my bank (Investor's Bank)
account for investment in Merrill
Lynch Global Allocation Fund, Inc. Bank Address.........................
as indicated below:
Amount of each ACH debit $........ City....... State....... Zip .......
Account Number ...................
Please date and invest ACH debits on As a convenience to me, I hereby
the 20th of each month beginning request and authorize you to pay and
charge to my account ACH debits
....... or as soon thereafter drawn on my account by and payable
(month) to Merrill Lynch Financial Data
as possible. Services, Inc. I agree that your
rights in respect to each such debit
I agree that you are drawing these shall be the same as if it were a
ACH debits voluntarily at my request check drawn on you and signed
and that you shall not be liable for personally by me. This authority is
any loss arising from any delay in to remain in effect until revoked by
preparing or failure to prepare any me in writing. Until you receive
such debit. If I change banks or such notice, you shall be fully
desire to terminate or suspend this protected in honoring any such
program, I agree to notify you debit. I further agree that if any
promptly in writing. I hereby such debit be dishonored, whether
authorize you to take any action to with or without cause and whether
correct erroneous ACH debits of my intentionally or inadvertently, you
bank account or purchases of Fund shall be under no liability.
shares including liquidating shares
of the Fund and crediting my bank
account. I further agree that if a ............ .....................
debit is not honored upon Date Signature of
presentation, Merrill Lynch Financial Depositor
Data Services, Inc. is authorized to
discontinue immediately the Automatic ............ .....................
Investment Plan and to liquidate Bank Signature of Depositor
sufficient shares held in my account Account (If joint account,
to offset the purchase made with the Number both must sign)
dishonored debit.
............ .....................
Date Signature of
Depositor
............ .....................
Bank Signature of Depositor
Account (If joint account,
Number both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" SHOULD ACCOMPANY THIS APPLICATION.
56
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
MANAGER
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
COUNSEL
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH
THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER IN-
FORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTI-
TUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table.................................................................. 2
Merrill Lynch Select PricingSM System...................................... 4
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.............................................. 36
Distribution Plans........................................................ 39
Limitations on the Payment of Deferred Sales Charges...................... 41
Redemption of Shares....................................................... 41
Redemption................................................................ 41
Repurchase................................................................ 42
Reinstatement Privilege--
Class A and Class D Shares.............................................. 42
Shareholder Services....................................................... 43
Investment Account........................................................ 43
Exchange Privilege........................................................ 43
Automatic Reinvestment of Dividends and Capital Gains Distributions....... 45
Systematic Withdrawal Plans............................................... 45
Automatic Investment Plans................................................ 45
Fee-Based Programs........................................................ 45
Performance Data........................................................... 46
Additional Information..................................................... 47
Dividends and Distributions............................................... 47
Determination of Net Asset Value.......................................... 48
Taxes..................................................................... 49
Organization of the Fund.................................................. 51
Shareholder Reports....................................................... 52
Shareholder Inquiries..................................................... 52
Authorization Form......................................................... 53
</TABLE>
Code #10810-0298
[LOGO] MERRILL LYNCH
MERRILL LYNCH
GLOBAL ALLOCATION
FUND, INC.
[ART]
PROSPECTUS
FEBRUARY 12, 1998
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be retained for future reference
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
----------------
Merrill Lynch Global Allocation Fund, Inc. (the "Fund") is a non-
diversified, 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 PricingSM System, the Fund offers four
classes of shares each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select PricingSM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances.
----------------
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
12, 1998 (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 12, 1998
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to seek a high total investment return,
consistent with prudent risk, through a fully-managed investment policy
utilizing United States and foreign equity, debt and money market securities
the combination of which will be varied from time to time both with respect to
types of securities and markets in response to changing market and economic
trends. Reference is made to "Investment Objective and Policies" in the
Prospectus for a discussion of the investment objective and policies of the
Fund.
While it is the policy of the Fund generally not to engage in trading for
short-term gains, Merrill Lynch Asset Management, L.P. (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, 1996
and 1997 were 51.26% and 55.42%, respectively.
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 Manager 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 values 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 economic
2
<PAGE>
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, a Division of The McGraw-Hill Companies, Inc. ("Standard
& Poor's") or Baa or better by Moody's Investors Service, Inc. ("Moody's") or
commercial paper rated A-1 by Standard & Poor's 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 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
Although the Fund may invest in companies that hold real estate as assets,
the real estate-related securities that 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>
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 either owned by the
Fund or which the Fund will receive upon immediate conversion or exchange of
securities owned by the Fund on or before a specified future date and at a
specified 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 realizes 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 realizes 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.
4
<PAGE>
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 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 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.
5
<PAGE>
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 "marking 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 assets committed to the
consummation of such
6
<PAGE>
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 if
7
<PAGE>
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, and the
Fund may be more susceptible to any single economic, political or regulatory
occurrence than a diversified company.
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.
8
<PAGE>
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 that
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 market
fluctuations during such period although it may be affected by currency
fluctuations. Such agreements usually cover short
9
<PAGE>
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
creditors of the issuer. The Fund's Board of
10
<PAGE>
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 Standard &
Poor's, 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, certificates of
deposit, bankers acceptances, repurchase agreements or any similar
instruments shall not be
11
<PAGE>
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. As a matter of
policy, however, the Fund will not purchase shares of any registered open-
end investment company or registered unit investment trust, in reliance on
Section 12(d)(1)(F) or (G) (the "fund of funds" provisions) of the
Investment Company Act, at any time the Fund's shares are owned by another
investment company that is part of the same group of investment companies
as the Fund.
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 that 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.
12
<PAGE>
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 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 Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") 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.
13
<PAGE>
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
Information about the Directors, executive officers and portfolio managers
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 the portfolio managers and of each executive officer and Director is P.O.
Box 9011, Princeton, New Jersey 08543-9011.
Arthur Zeikel (65)--President and Director(1)(2)--Chairman of the Manager
(which term, as used herein, includes its corporate predecessors) since 1997;
Chairman of Fund Asset Management, L.P. ("FAM," which term, as used herein,
includes its corporate predecessors) since 1997; President of the Manager and
FAM from 1977 to 1997; Chairman of Princeton Services Inc. ("Princeton
Services") since 1997 and Director thereof since 1993; President of Princeton
Services from 1993 to 1997; Executive Vice President of Merrill Lynch & Co.,
Inc. ("ML & Co.") since 1990.
Donald Cecil (71)--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 (71)--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 (66)--Director(2)--9 Hampton Harbor Road, Hampton Bays,
New York 11946. Self-employed financial consultant since 1990; President and
Chief Investment Officer of Verus Capital, Inc. from 1979 to 1990; 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 89411. 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) and Alexander's, Inc. (real estate company).
Edward D. Zinbarg (63)--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 (57)--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 Merrill Lynch Funds
Distributor, Inc. ("MLFD" or the "Distributor") since 1986 and Director
thereof since 1991; President of Princeton Administrators, L.P. since 1988.
Norman R. Harvey (64)--Senior Vice President(1)(2)--Senior Vice President of
the Manager and FAM since 1982.
14
<PAGE>
Bryan N. Ison (42)--Senior Vice President and Portfolio Manager(1)--First
Vice President of the Manager since 1997; Vice President of the Manager from
1985 to 1997; Portfolio Manager of the Manager since 1984.
Dennis W. Stattman (46)--Vice President and Portfolio Manager(1)--First Vice
President of the Manager since 1997; Vice President of the Manager from 1989
to 1997.
Donald C. Burke (37)--Vice President(1)(2)--First Vice President of the
Manager since 1997; Vice President of the Manager from 1990 to 1997; Director
of Taxation of the Manager since 1990.
Gerald M. Richard (48)--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 thereof since 1984.
James W. Harshaw, III (39)--Secretary(1)(2)--Vice President of the Manager
since 1998; attorney associated with the Manager since 1994; associate at
Sullivan & Cromwell from 1990 to 1994.
- --------
(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, 1998, the officers and Directors of the Fund as a group (13
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 an aggregate of 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, 1997, fees and
expenses paid to the non-affiliated Directors aggregated $36,137.
The following table sets forth for the fiscal year ended October 31, 1997,
compensation paid by the Fund to the non-affiliated Directors and for the
calendar year ended December 31, 1997, 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 $269,350
Edward H. Meyer................. $6,000 None $214,600
Charles C. Reilly............... $7,500 None $282,000
Richard R. West................. $7,500 None $273,000
Edward D. Zinbarg............... $7,500 None $133,500
</TABLE>
(footnote on the following page)
15
<PAGE>
- --------
(1) The Directors serve on the boards of MLAM/FAM Advised funds as follows:
Mr. Cecil (33 registered investment companies consisting of 33
portfolios); Mr. Meyer (33 registered investment companies consisting of
33 portfolios); Mr. Reilly (44 registered investment companies consisting
of 57 portfolios); Mr. West (45 registered investment companies consisting
of 67 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, 1997, the Fund paid the Manager a fee at the effective rate of
0.66% of average daily net assets. For the fiscal year ended October 31, 1995,
the total management fee paid by the Fund to the Manager aggregated
$55,558,045 (with no voluntary fee waiver by the Manager). For the fiscal
years ended October 31, 1996 and 1997, the total management fees paid by the
Fund to the Manager aggregated $70,943,078 and $88,207,229 (after giving
effect to the Manager's voluntary waiver of fees), respectively.
As described in the Prospectus, the Manager has also entered into a sub-
advisory agreement with Merrill Lynch Asset Management U.K. Limited ("MLAM
U.K.") pursuant to which MLAM U.K. provides investment advisory services to
the Manager with respect to the Fund.
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 to the extent
paid by the Distributor); charges of the custodian, any sub-custodian and
transfer agent; expenses of
16
<PAGE>
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, 1995, 1996 and
1997, the amount of such reimbursement was $611,736, $600,636 and $718,491,
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 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. Similarly, the following entities
may be considered "controlling persons" of MLAM U.K.: Merrill Lynch Europe
Limited (MLAM U.K.'s parent), a subsidiary of ML International Holdings, a
subsidiary of Merrill Lynch International, Inc., a subsidiary of ML & Co.
Duration and Termination. Unless earlier terminated as described herein, the
Management Agreement and the sub-advisory agreement will remain in effect from
year to year if approved annually (a) by the Board of Directors or by a
majority of the outstanding shares of the Fund and (b) by a majority of the
Directors who are not parties to such contracts or interested persons (as
defined in the Investment Company Act) of any such party. Such contracts are
not assignable and may be terminated without penalty on 60 days' written
notice at the option of either party thereto or by the vote of the
shareholders of the Fund.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
The Fund issues four classes of shares under the Merrill Lynch Select
PricingSM System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B and Class C are
sold to investors choosing the deferred sales charge alternatives. Each Class
A, Class B, Class C and Class D share of the Fund represents identical
interests in the investment portfolio of the Fund and has the same rights,
except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
Class B, Class C and Class D shares each have exclusive voting rights with
respect to the Rule 12b-1 distribution plan adopted with respect to such class
pursuant to which account maintenance and/or distribution fees are paid
(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."
17
<PAGE>
The Merrill Lynch Select PricingSM 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 PricingSM
System are referred to herein as "MLAM-advised mutual funds."
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offering of each class of shares
of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the
offering of each class of shares of the Fund. After the prospectuses,
statements of additional information and periodic reports have been prepared,
set in type and mailed to shareholders, the Distributor pays for the printing
and distribution of copies thereof used in connection with the offering to
dealers and investors. The Distributor also pays for other supplementary sales
literature and advertising costs. The Distribution Agreements are subject to
the same renewal requirements and termination provisions as the Management
Agreement described above.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
The Fund sells its Class A and Class D shares through the Distributor and
Merrill Lynch, as dealers. 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 A shares for the fiscal year ended October 31, 1997 were $705,874, of
which the Distributor received $47,810 and Merrill Lynch received $658,064.
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. The gross sales charges for the sale of Class D shares
for the fiscal year ended October 31, 1997 were $3,242,398, of which the
Distributor received $237,188 and Merrill Lynch received $3,005,210.
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
fiscal year ended October 31, 1997, 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 $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 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, 1997, the Distributor received CDSCs of $6,066, 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.
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
18
<PAGE>
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by 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 that has not been in existence for at least six
months or that 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
employer 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 PricingSM System commenced
operations) and wish to reinvest the net proceeds from a sale of their closed-
end fund shares of common stock in Eligible Class A Shares, if the conditions
set forth below are satisfied. Alternatively, closed-end fund shareholders who
purchased such shares on or after October 21, 1994, and wish to reinvest the
net proceeds from a sale of their closed-end fund shares are offered Class A
shares (if eligible to buy Class A shares) or Class D shares of the Fund and
other MLAM-advised mutual funds ("Eligible Class D Shares"), if the following
conditions are met. First, the sale of the closed-end fund shares must be made
through Merrill Lynch, and the net proceeds therefrom must be immediately
reinvested in Eligible Class A or Class D shares. Second, the closed-end fund
shares must either have been acquired in the initial public offering or be
shares representing dividends from shares of common stock acquired in such
offering. Third, the closed-end fund shares must have been continuously
maintained in a Merrill Lynch securities account. Fourth, there must be a
minimum purchase of $250 to be eligible for the investment option.
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 to the eligible fund in
19
<PAGE>
connection with a tender offer conducted by the eligible fund and reinvest the
proceeds immediately in the designated class of shares of the Fund. This
investment option is available only with respect to eligible shares as to
which no Early Withdrawal Charge or CDSC (each as defined in the eligible
fund's prospectus) is applicable. Purchase orders from eligible fund
shareholders wishing to exercise this investment option will be accepted only
on the day that the related tender offer terminates and will be effected at
the net asset value of the designated class of the Fund on such day.
REDUCED INITIAL SALES CHARGES
Right of Accumulation. Reduced sales charges are applicable through a right
of accumulation under which eligible investors are permitted to purchase
shares of the Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the shares then
being purchased plus (b) an amount equal to the then current net asset value
or cost, whichever is higher, of the purchaser's combined holdings of all
classes of shares of the Fund and of other MLAM-advised mutual funds. For any
such right of accumulation to be made available, the Distributor must be
provided at the time of purchase, by the purchaser or the purchaser's
securities dealer, with sufficient information to permit confirmation of
qualification. Acceptance of the purchase order is subject to such
confirmation. The right of accumulation may be amended or terminated at any
time. Shares held in the name of a nominee or custodian under pension, profit-
sharing or other employee benefit plans may not be combined with other shares
to qualify for the right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of Class A or Class D shares of the Fund or any
other MLAM-advised mutual funds made within a 13-month period starting with
the first purchase pursuant to a Letter of Intention in the form provided in
the Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at Merrill Lynch Financial Data Services, Inc., the
Fund's transfer agent (the "Transfer Agent"). The Letter of Intention is not
available to employee benefit plans for which Merrill Lynch provides plan
participant recordkeeping services. The Letter of Intention is not a binding
obligation to purchase any amount of Class A or Class D shares, but its
execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant
to a Letter of Intention may be included under a subsequent Letter 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 at least 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 that further reduced percentage
sales charge that would be applicable to a single purchase equal to the total
dollar value of the Class A or Class D shares then being purchased under such
Letter, but there will be no retroactive reduction of the sales charges on any
previous purchase.
20
<PAGE>
The value of any shares redeemed or otherwise disposed of by the purchaser
prior to termination or completion of the Letter of Intention will be deducted
from the total purchases made under such Letter. An exchange from a MLAM-
advised money market fund into the Fund that creates a sales charge will count
toward completing a new or existing Letter of Intention from the Fund.
Merrill Lynch 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(SM) Accounts. Provided applicable threshold requirements are
met, either Class A or Class D shares are offered at net asset value to
Employee Access(SM) Accounts available through authorized employers. 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 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.
21
<PAGE>
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 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 sponsored by
a non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice"), if the following conditions are
satisfied: first, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and 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.
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
such 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 that might
result from an acquisition of assets having net unrealized appreciation that
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 that (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, that are not restricted as to transfer either by law or
liquidity of market (except that the Fund may acquire through such
transactions restricted or illiquid securities to the extent the Fund does not
exceed the applicable limits on acquisition of such securities set forth under
"Investment Objective and Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.
EMPLOYER-SPONSORED RETIREMENT OR SAVINGS PLANS AND CERTAIN OTHER ARRANGEMENTS
Certain employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class A or Class D shares at net asset value, based
on the number of employees or number of employees eligible to
22
<PAGE>
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-based sales charges such as the distribution fee and the CDSC
borne by the Class B and Class C shares but not the account maintenance fee.
The maximum sales charge rule is applied separately to each class. As
applicable to the Fund, the maximum sales charge rule limits the aggregate of
distribution fee payments and CDSCs payable by the Fund to (1) 6.25% of
eligible gross sales of Class B shares and Class C shares, computed separately
(defined to exclude shares issued pursuant to dividend reinvestments and
exchanges), plus (2) interest on the unpaid balance for the respective class,
computed separately, at the prime rate plus 1% (the unpaid balance being the
maximum amount payable minus amounts
23
<PAGE>
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,
1997, with respect to Class B and Class C shares of the Fund, indicating the
maximum allowable payments that can be made under the NASD maximum sales
charge rule and, with respect to Class B shares, the Distributor's voluntary
maximum:
<TABLE>
<CAPTION>
DATA CALCULATED AS OF OCTOBER 31, 1997(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, 1997:
Under NASD Rule As
Adopted................ $13,072,749 $817,047 $347,374 $1,164,421 $438,021 $726,400 $74,103
Under Distributor's
Voluntary Waiver....... $13,072,749 $817,047 $ 65,364 $ 882,411 $438,021 $444,390 $74,103
CLASS C SHARES, FOR THE
PERIOD
OCTOBER 21, 1994
(COMMENCEMENT OF
OPERATIONS) TO OCTOBER
31, 1997:
Under NASD Rule As
Adopted................ $ 675,377 $ 42,211 $ 4,607 $ 46,818 $ 6,678 $ 40,140 $ 5,036
</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. This
figure may include CDSCs that were deferred when a shareholder redeemed
shares prior to the expiration of the applicable CDSC period and invested
the proceeds, without the imposition of a sales charge, in Class A shares
in conjunction with the shareholder's participation in the Merrill Lynch
Mutual Fund Advisor (Merrill Lynch MFASM) Program (the "MFA Program"). The
CDSC is booked as a contingent obligation that may be payable if the
shareholder terminates participation in the MFA Program.
(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 (with respect to Class
B and Class C shares) or the voluntary maximum (with respect to Class B
shares).
24
<PAGE>
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 for more than seven days only for any period
during which trading on the NYSE is restricted as determined by the Commission
or the NYSE is closed (other than customary weekend and holiday closings), for
any period during which an emergency exists, as defined by the Commission, as
a result of which disposal of portfolio securities or determination of the net
asset value of the Fund is not reasonably practicable, and for such other
periods as the Commission may by order permit for the protection of
shareholders of the Fund.
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending in part on the market value of the securities
held by the Fund at such time.
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 on redemptions of Class B shares in
certain instances including in connection with certain post-retirement
withdrawals from an Individual Retirement Account ("IRA") or other retirement
plan or on redemptions of Class B shares following the death or disability of
a Class B shareholder. Redemptions for which the waiver applies in the case of
such withdrawals 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, 1995 and
1996, the Distributor received CDSCs of $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 fiscal year ended October 31, 1997, the
Distributor received CDSCs of $12,451,911, of which $10,035,794 was paid to
Merrill Lynch. Additional CDSCs payable to the Distributor during the fiscal
year ended October 31, 1997 may have been waived or converted to a contingent
obligation in connection with a shareholder's participation in certain fee-
based programs. For the fiscal years ended October 31, 1995, 1996 and 1997,
the Distributor received CDSCs of $32,676, $117,278 and $215,161,
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
25
<PAGE>
such orders two business days following the day such orders are placed. The
minimum initial purchase price is $100, with a $50 minimum for subsequent
purchases through Blueprint. There is no minimum initial or subsequent
purchase requirement for investors who are part of the Blueprint automatic
investment plan. Additional information concerning these Blueprint programs,
including any annual fees or transaction charges, is available from Merrill
Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint(SM) Program, P.O. Box
30441, New Brunswick, New Jersey 08989-0441.
Employee Access(SM) Accounts. The CDSC is also waived for any Class B shares
that were acquired and held at the time of redemption by Employee Access(SM)
Accounts 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. 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. 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.
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. For the fiscal year ended October 31, 1997, the Fund paid total
brokerage commissions of $8,287,221, of which $238,952 or 2.88% was paid to
Merrill Lynch for effecting 1.80% of the aggregate dollar amount of
transactions in which the Fund paid brokerage commissions.
26
<PAGE>
The Fund anticipates that its brokerage transactions involving securities of
companies domiciled in countries other than the United States will be
conducted primarily on the principal stock exchanges of such countries.
Brokerage commissions and other transaction costs on foreign stock exchange
transactions are generally higher than in the United States, although the Fund
will endeavor to achieve the best net results in effecting its portfolio
transactions. There is generally less governmental supervision and regulation
of foreign stock exchanges and brokers than in the United States.
The Fund 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. The Fund may purchase securities
in offerings in which Merrill Lynch or an affiliate participates as an
underwriter so long as the securities are not purchased from Merrill Lynch as
principal and certain conditions are satisfied. 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 that
they manage unless the member (i) has obtained prior express authorization
from the account to effect such transactions, (ii) at least annually furnishes
the account with a statement disclosing the aggregate compensation received by
the member in effecting such transactions, and (iii) complies with any rules
the Commission has prescribed with respect to the requirements of clauses (i)
and (ii). To the extent Section 11(a) would apply to Merrill Lynch acting as a
broker for the Fund in any of its portfolio transactions executed on any such
securities exchange of which it is a member, appropriate consents have been
obtained from the Fund and annual statements as to aggregate compensation will
be provided to the Fund.
The 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>
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, Martin Luther King, Jr. 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 per share is computed by dividing the value of the
securities held by the Fund plus any cash or other assets (including interest
and dividends accrued but not yet received) minus all liabilities (including
accrued expenses) by the total number of shares outstanding at such time.
Expenses, including the fees payable to the Manager and the 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. In addition, the per share net asset value of the Fund's
Class B and Class C shares generally will be lower than the per share net
asset value of its Class D shares, reflecting the daily expense accruals of
the distribution fees and higher transfer agency fees applicable with respect
to 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 for long positions, and
at the last available ask price for short positions. 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. Long positions in securities traded in the OTC market are
valued at the last available bid price in the OTC market prior to the time of
valuation. Short positions in securities traded in the OTC market are valued
at the last available ask price in the OTC market prior to the time of
valuation. Securities that 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.
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
28
<PAGE>
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.
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 also will receive separate transaction confirmations for each
purchase or sale transaction other than automatic investment purchases and the
reinvestment of ordinary income dividends and long-term capital gain
distributions. A shareholder may make additions to his Investment Account at
any time by mailing a check directly to the Transfer Agent.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by a
shareholder directly from the Transfer Agent.
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
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
29
<PAGE>
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.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor as
described in the Prospectus) or Class B, Class C or Class D shares at the
applicable public offering price either through the shareholder's securities
dealer or by mail directly to the Fund's transfer agent, acting as agent for
such securities dealer. Voluntary accumulation also can be made through a
service known as the Automatic Investment Plan whereby the Fund is authorized
through pre-authorized checks or automated clearing house debits of $50 or
more to charge the regular bank account of the shareholder on a regular basis
to provide systematic additions to the Investment Account of such shareholder.
For investors who buy shares of the Fund through BlueprintSM no minimum charge
to the investors' bank account is required. 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) account or in certain related accounts 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 automatically reinvested 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. The
Fund is not responsible for any failure of delivery to the shareholder's
address of record and no interest will accrue on amounts represented by
uncashed distribution or redemption checks.
Shareholders may, at any time, notify Merrill Lynch in writing if the
shareholder's account is maintained with Merrill Lynch or notify the Transfer
Agent in writing or by telephone (1-800-MER-FUND) if the shareholder's account
is maintained with the Transfer Agent 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
A shareholder may elect to make systematic withdrawals from an Investment
Account of Class A, Class B, Class C or Class D shares in the form of payments
by check or through automatic payment by direct deposit to such shareholder's
bank account on either a monthly or quarterly basis as provided below.
Quarterly withdrawals are available for shareholders who have acquired 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
shares having a value of $10,000 or more.
30
<PAGE>
At the time of each withdrawal payment, sufficient 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 the dollar
amount and class of shares to be redeemed. Redemptions will be made at net
asset value as determined 15 minutes after the close of business on 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 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 shares in
the Investment Account are reinvested automatically in shares of the Fund. A
shareholder's Systematic Withdrawal Plan may be terminated at any time,
without a charge or penalty, by the shareholder, the Fund, the Transfer Agent
or the Distributor.
With respect to redemptions of Class B and Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares
that can be redeemed from an account annually shall not exceed 10% of the
value of shares of such class in that account at the time the election to join
the systematic withdrawal plan was made. Any CDSC that otherwise might be due
on such redemptions of Class B or Class C shares will be waived. Shares
redeemed pursuant to a systematic withdrawal plan will be redeemed in the same
order as Class B or Class C shares are otherwise redeemed. See "Purchase of
Shares--Deferred Sales Charge Alternatives--Class B and Class C Shares--
Contingent Deferred Sales Charges--Class B Shares" and "--Contingent Deferred
Sales Charges--Class C Shares" in the Prospectus. Where the systematic
withdrawal plan is applied to Class B shares, upon conversion of the last
Class B shares in an account to Class D shares, the systematic withdrawal plan
will automatically be applied thereafter to Class D shares. See "Purchase of
Shares--Deferred Sales Charge Alternatives--Class B and Class C Shares--
Conversion of Class B Shares to Class D Shares" in the Prospectus; if an
investor wishes to change the amount being withdrawn in a systematic
withdrawal plan the investor should contact his or her Financial Consultant.
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 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 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 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
$50. The proceeds of systematic redemptions will be posted to the
shareholder's account three business days after the date the shares are
redeemed. All redemptions are made at net asset value. A shareholder may elect
to have his or her shares redeemed on the first, second, third or fourth
Monday of each month, in the case of monthly redemption, or every other month,
in the case of bimonthly redemptions. For quarterly, semiannual or annual
redemptions, the shareholder may select the month in which the shares are to
be redeemed and may designate whether the redemption is to be made on the
first, second, third or fourth Monday of the month. If the Monday selected is
not a business day, the redemption will be processed at net asset value on the
next business day. The CMA(R) or
31
<PAGE>
CBA(R) Systematic Redemption Program is not available if Fund shares are being
purchased within the account pursuant to the Automatic Investment Program. For
more information on the CMA(R) 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 PricingSM System, Class A shareholders may exchange Class A
shares of the Fund for Class A shares of a second MLAM-advised mutual fund if
the shareholder holds any Class A shares of the second fund in his 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 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.
32
<PAGE>
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's 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's 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.
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 that were
acquired as a result of an exchange for Class B or Class C shares of the Fund
may, in turn, be exchanged back into Class B or Class C shares, respectively,
of any fund offering such shares, in which event the holding period for Class
B or Class C shares of the newly-acquired 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's
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 that 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, a shareholder should contact his or her
Merrill Lynch Financial Consultant, who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other MLAM-advised funds
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
33
<PAGE>
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 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 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 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. As long as 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 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). Recent legislation
creates additional categories of capital gains
34
<PAGE>
taxable at different rates. Generally 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.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. A portion of the Fund's ordinary income
dividends may be eligible for the dividends received deduction allowed to
corporations under the Code, if certain requirements are met. For this
purpose, the Fund will allocate dividends eligible for the dividends received
deduction among the Class A, Class B, Class C and Class D shareholders
according to a method (which it believes is consistent with the Commission
rule permitting the issuance and sale of multiple classes of stock) that is
based on the gross income allocable to Class A, Class B, Class C and Class D
shareholders during the taxable year, or such other method as the Internal
Revenue Service may prescribe. If the Fund pays a dividend in January which
was declared in the previous October, November or December to shareholders of
record on a specified date in one of such months, then such dividend will be
treated for tax purposes as being paid by the Fund and received by its
shareholders on December 31 of the year in which such dividend was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% U.S. withholding tax under existing
provisions of the Code applicable to foreign individuals and entities unless a
reduced rate of withholding or a withholding exemption is provided under
applicable treaty law. Nonresident shareholders are urged to consult their own
tax advisers concerning the applicability of the U.S. withholding tax.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have
furnished an incorrect number. When establishing an account, an investor must
certify under penalty of perjury that such number is correct and that such
investor is not otherwise subject to backup withholding.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes. Shareholders may be
able to claim U.S. foreign tax credits with respect to such taxes, subject to
certain conditions and limitations contained in the Code. For example, certain
retirement accounts cannot claim foreign tax credits on investments in foreign
securities held in the Fund. In addition, recent legislation permits a foreign
tax credit to be claimed with respect to withholding tax on a dividend only if
the shareholder meets certain holding period requirements. 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. In the case of
foreign taxes passed through by a RIC, the holding period requirements
referred to above must be met by both the shareholder and the RIC. No
deductions for foreign taxes, moreover, may be claimed by noncorporate
35
<PAGE>
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 and other information needed to claim the
foreign tax credit. For this purpose, the Fund will allocate foreign taxes and
foreign source income among the Class A, Class B, Class C and Class D
shareholders according to a method similar to that described above for the
allocation of dividends eligible for the dividends received deduction.
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the
Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D
shares will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of acquiring
the shares, then the loss the shareholder can recognize on the exchange will
be reduced (or the gain increased) to the extent any sales charge paid to the
Fund on the exchanged shares reduces any sales charge the shareholder would
have owed upon purchase of the new shares in the absence of the exchange
privilege. Instead, such sales charge will be treated as an amount paid for
the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income
and capital gains in the manner necessary to minimize imposition of the 4%
excise tax, there can be no assurance that sufficient amounts of the Fund's
taxable income and capital gains will be distributed to avoid entirely the
imposition of the tax. In such event, the Fund will be liable for the tax only
on the amount by which it does not meet the foregoing distribution
requirements.
The Fund may invest in securities rated in the medium to lower rating
categories of nationally recognized rating organizations, and in unrated
securities ("high yield/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.
36
<PAGE>
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.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether the Fund qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options, foreign currency
futures and forward foreign exchange contracts will be valued for purposes of
the RIC diversification requirements applicable to the Fund.
Under Code Section 988, special rules are provided for certain transactions
in a currency other than the taxpayer's functional currency (i.e., unless
certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains or losses from certain debt instruments, from
certain forward contracts, from futures contracts that are not "regulated
futures contracts" and from unlisted options will be treated as ordinary
income or loss under Code Section 988. In certain circumstances, the Fund may
elect capital gain or loss treatment for such transactions. Regulated futures
contracts, as described above, will be taxed under Code Section 1256 unless
application of Section 988 is elected by the Fund. In general, however, Code
Section 988 gains or losses will increase or decrease the amount of the Fund's
investment company taxable income available to be distributed to shareholders
as ordinary income. Additionally, if Code Section 988 losses exceed other
investment company taxable income during a taxable year, the Fund would not be
able to make any ordinary income dividend distributions, and all or a portion
of distributions made before the losses were realized but in the same taxable
year would be recharacterized as a return of capital to shareholders, thereby
reducing the basis of each shareholder's Fund shares and resulting in a
capital gain for any shareholder who received a distribution
37
<PAGE>
greater than the shareholder's tax basis in Fund shares (assuming the shares
were held as a capital asset). These rules and the mark-to-market rules
described above, however, will not apply to certain transactions entered into
by the Fund solely to reduce the risk of currency fluctuations with respect to
its investments.
----------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on U.S. Government obligations. State law
varies as to whether dividend income attributable to U.S. Government
obligations is exempt from state income tax.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present
or prospective shareholders. Total return figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return is determined separately for Class A, Class B,
Class C and Class D shares in accordance with a formula specified by the
Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on
net investment income and any realized and unrealized capital gains or losses
on portfolio investments over such periods) that would equate the initial
amount invested to the redeemable value of such investment at the end of each
period. Average annual total return is computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including the maximum sales charge in the case of
Class A and Class D shares and the CDSC that would be applicable to a complete
redemption of the investment at the end of the specified period in the case of
Class B and Class C shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (i) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted,
and (ii) the maximum applicable sales charges will not be included. Actual
annual or annualized total return data generally will be lower than average
annual total return data since the average rates of return reflect compounding
of return; aggregate total return data generally will be higher than average
annual total return data since the aggregate rates of return reflect
compounding over longer periods of time.
38
<PAGE>
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 HYPOTHETICAL AT THE HYPOTHETICAL AT THE HYPOTHETICAL AT THE
$1,000 END OF $1,000 END OF $1,000 END OF $1,000 END OF
PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD
------ -------------- ------------ -------------- ------------ -------------- ------------ -------------- ------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One Year Ended
October 31,
1997........... 9.99% $1,099.90 10.82% $1,108.20 13.84% $1,138.40 9.68% $1,096.80
Five Years Ended
October 31,
1997........... 13.25% $1,863.20 13.31% $1,868.20
Inception (Feb-
ruary 3, 1989)
to October 31,
1997........... 13.61% $3,049.80 13.14% $2,942.70
Inception (Octo-
ber 21, 1994)
to October 31,
1997........... 14.88% $1,522.00 13.75% $1,477.00
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended Octo-
ber 31, 1997... 16.08% $1,160.80 14.82% $1,148.20 14.84% $1,148.40 15.76% $1,157.60
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 -- -- -- --
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Inception
(February 3,
1989) to
October 31,
1997........... 204.98% $3,049.80 194.27% $2,942.70 -- -- -- --
Inception
(October 21,
1994) to
October 31,
1997........... -- -- -- -- 52.20% $1,522.00 47.70% $1,477.00
</TABLE>
39
<PAGE>
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 3,550,000,000 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 450,000,000 shares, Class B consists of
2,000,000,000 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 relating 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, 1997 and its shares outstanding on that date is as
follows:
40
<PAGE>
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
-------------- -------------- ------------ --------------
<S> <C> <C> <C> <C>
Net Assets.............. $2,132,253,943 $9,879,603,597 $671,466,862 $1,479,710,710
============== ============== ============ ==============
Number of Shares
Outstanding............ 133,956,220 631,094,470 43,327,119 93,115,446
============== ============== ============ ==============
Net Asset Value Per
Share
(net assets divided by
number of shares
outstanding)........... $ 15.92 $ 15.65 $ 15.50 $ 15.89
Sales Charge (for Class
A and Class D shares:
5.25% of offering
price;
5.54% of net asset
value)*................ .88 ** ** .88
-------------- -------------- ------------ --------------
Offering Price.......... $ 16.80 $ 15.65 $ 15.50 $ 16.77
============== ============== ============ ==============
</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 Charges--Class B and
Class C Shares" herein.
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, 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.
41
<PAGE>
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on October 31 of each year. The Fund sends
to its shareholders at least semi-annually reports showing the Fund's
portfolio and other information. An annual report, containing financial
statements audited by independent auditors, is sent to shareholders each year.
After the end of each year, shareholders will receive Federal income tax
information regarding dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Commission, Washington,
D.C., under the Securities Act and the Investment Company Act, to which
reference is hereby made.
Under a separate agreement, Merrill Lynch has granted the Fund the right to
use the "Merrill Lynch" name and has reserved the right to withdraw its
consent to the use of such name by the Fund at any time or to grant the use of
such name to any other company, and the Fund has granted Merrill Lynch, under
certain conditions, the use of any other name it might assume in the future,
with respect to any corporation organized by Merrill Lynch.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's shares on January 31, 1998.
42
<PAGE>
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 edged." 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". The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a
ranking in the lower end of that generic rating category.
43
<PAGE>
DESCRIPTION OF MOODY'S SHORT-TERM DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted. Moody's makes no
representation that rated bank or insurance company obligations are exempt
from registration under the Securities Act of 1933 or issued in conformity
with any other applicable law or regulation. Nor does Moody's represent that
any specific bank or insurance company obligation is legally enforceable or a
valid senior obligation of a rated issuer. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment ability of rated issuers:
PRIME-1. Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
--Leading market positions in well-established industries.
--High rates of return on funds employed.
--Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
--Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
--Well-established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-2. Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
PRIME-3. Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect
of industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level
of debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
NOT PRIME. Issuers rated Not Prime do not fall within any of the Prime
rating categories.
If an issuer represents to Moody's that its short-term debt obligations are
supported by the credit of another entity or entities, then the name or names
of such supporting entity or entities are listed within the parentheses
beneath the name of the issuer, or there is a footnote referring the reader to
another page for the name or names of the supporting entity or entities. In
assigning ratings to such issuers, Moody's evaluates the financial strength of
the affiliated corporations, commercial banks, insurance companies, foreign
governments or other entities, but only as one factor in the total rating
assessment. Moody's makes no representation and gives no opinion on the legal
validity or enforceability of any support arrangement.
44
<PAGE>
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS
Because of the fundamental differences between preferred stocks and bonds, a
variation of the bond rating symbols is 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 "a" to "b": 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>
DESCRIPTION OF STANDARD & POOR'S, A DIVISION OF THE MCGRAW-HILL COMPANIES,
INC. ("STANDARD & POOR'S") CORPORATE DEBT RATINGS
A Standard & Poor's corporate or municipal debt rating is a current opinion
of the creditworthiness of an obligor with respect to a specific financial
obligation, a specific class of financial obligations, or a specific financial
program. It takes into consideration the creditworthiness of guarantors,
insurers, or other forms of credit enhancement on the obligation.
The debt rating is not a recommendation to purchase, sell or hold a
financial obligation, 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 obligors 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 based on other circumstances.
The ratings are based, in varying degrees, on the following considerations:
<TABLE>
<C> <S>
I. Likelihood of payment--capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms
of the obligation;
II. Nature of and provisions of the obligation; and
III. 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.
AAA Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to meet its financial commitment on the obligation is
extremely strong.
AA Debt rated "AA" differs from the highest rated obligations only in
small degree. The obligor's capacity to meet its financial commitment
on the obligation is very strong.
A Debt rated "A" is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher
rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB Debt rated "BBB" exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Debt rated "BB", "B", "CCC", "CC" and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least
degree of speculation and "C" the highest. While such debt will likely
have some quality and protective characteristics, these may be
outweighed by large uncertainties or major exposures to adverse
conditions.
BB Debt rated "BB" is less vulnerable to non-payment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
</TABLE>
46
<PAGE>
B Debt rated "B" is more vulnerable to non-payment than obligations rated
"BB", but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to
meet its financial commitment on the obligation.
CCC Debt rated "CCC" is currently vulnerable to non-payment, and is
dependent upon favorable business, financial, and economic conditions
for the obligor to meet its financial commitment on the obligation. In
the event of adverse business, financial, or economic conditions, it is
not likely to have the capacity to meet its financial commitment on the
obligation.
CC The rating "CC" is currently highly vulnerable to non-payment.
C The "C" rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments
on this obligation are being continued.
D Debt rated "D" is in payment default. The "D" rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired on an obligation, 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 or the taking of similar action if payments on an
obligation 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
rating 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 are regarded as eligible for bank investment. Also, the
laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks,
trust companies, insurance companies and fiduciaries in general.
47
<PAGE>
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into several categories, ranging from "A"
for the highest-quality obligations to "D" for the lowest. These categories
are as follows:
A-1 This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong
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 an adequate capacity for timely
payment. They are, however, 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 speculative 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 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 debt 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:
1. 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>
2. Nature of, and provisions of, the issue.
3. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
AAA This is the highest rating that may be assigned by Standard & Poor's to
a preferred stock issue and indicates an extremely strong capacity to
pay the preferred stock obligations.
AA A preferred stock issue rated "AA" also qualifies as a high-quality,
fixed income security. The capacity to pay preferred stock obligations
is very strong, although not as overwhelming as for issues rated "AAA".
A An issue rated "A" is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.
BBB An issue rated "BBB" is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to make
payments for a preferred stock in this category than for issues in the
"A" category.
BB, Preferred stock rated "BB", "B", and "CCC" are regarded, on balance, as
B predominately speculative with respect to the issuer's capacity to pay
CCC preferred stock obligations. "BB" indicates the lowest degree of
speculation and "CCC" the highest. 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>
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, 1997, 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, 1997 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, 1997, the results of its
operations, the changes in its net assets, and the financial highlights for
the respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Princeton, New Jersey
December 17, 1997
50
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
51
<PAGE>
Merrill Lynch Global Allocation Fund, Inc., October 31, 1997
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
Shares Value Percent of
COUNTRY Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Argentina Banking 1,013,200 ++Banco Rio de La Plata
S.A.(ADR)++++ (USD) $ 10,830,050 $ 10,638,600 0.1%
Oil--Related 480,000 Yacimientos Petroliferos
Fiscales S.A. (ADR)++++ (USD) 10,296,490 15,360,000 0.1
Total Common Stocks
in Argentina 21,126,540 25,998,600 0.2
Australia Banking 2,645,800 Westpac Banking Corp. 5,614,396 15,446,784 0.1
Beverages 1,999,379 Foster's Brewing Group
Limited 3,509,519 3,806,358 0.0
Building & 1,636,577 Lend Lease Corporation
Construction Limited 27,280,912 33,603,037 0.3
Building Materials 690,547 Pioneer International
Limited 1,744,554 1,830,762 0.0
Diversified 8,614,452 Broken Hill Proprietary
Co., Ltd. 95,060,491 85,644,106 0.6
Foods 7,916,000 Goodman Fielder Wattie Ltd. 8,324,587 12,167,826 0.1
Insurance 1,803,135 GIO Australia Holdings, Ltd. 3,207,015 4,627,861 0.0
Metals & Mining 3,102,904 M.I.M. Holdings Ltd. 2,639,750 2,734,822 0.0
2,795,439 Pasminco Limited 3,044,304 3,469,073 0.0
6,000,000 WMC Limited 20,064,490 21,364,530 0.2
--------------- --------------- ------
25,748,544 27,568,425 0.2
Multi-Industry 1,500,000 Pacific Dunlop, Ltd. 4,092,789 3,212,083 0.0
Tobacco 1,689,800 Rothmans Holdings, Ltd. 6,042,681 8,364,175 0.1
1,242,300 WD & HO Wills Holdings, Ltd. 1,389,502 1,532,905 0.0
--------------- --------------- ------
7,432,183 9,897,080 0.1
Total Common Stocks
in Australia 182,014,990 197,804,322 1.4
Canada Beverages 1,900,000 Cott Corp.(USD) 15,484,918 19,475,000 0.1
Metals--Non-Ferrous 1,000,000 Inco Ltd. (USD) 22,852,818 20,625,000 0.2
Multi-Industry 280,000 ++Semi-Tech Corporation
(Class A) 4,108,297 337,900 0.0
Paper 3,250,000 ++Repap Enterprises Inc.(USD) 12,879,320 507,813 0.0
Telecommunications 200,000 BCE Telecommunications,
Inc. (USD) 3,375,484 5,587,500 0.0
1,165,200 ++Rogers Cantel Mobile
Communications Inc.
(Class B)+++ 22,391,633 19,437,922 0.1
1,160,900 ++Rogers Cantel Mobile
Communications Inc.
(Class B) (USD)+++ 19,836,379 19,590,187 0.2
4,543,700 ++Rogers Communications Inc.
(Class B) 39,359,870 30,964,379 0.2
--------------- --------------- ------
84,963,366 75,579,988 0.5
Total Common Stocks
in Canada 140,288,719 116,525,701 0.8
Finland Metals 576,930 Outokumpu OY 8,651,262 8,600,893 0.1
Paper & Forest 770,930 Enso OY 6,578,864 7,328,686 0.0
Products 2,909,250 Metsa Serla OY 'B' 23,657,400 25,628,437 0.2
442,079 UPM-Kymmene OY 8,170,266 9,774,525 0.1
--------------- --------------- ------
38,406,530 42,731,648 0.3
Telecommunication 75,000 Nokia Corp. (ADR)++++ (USD) 2,482,938 6,618,750 0.0
Equipment 186,360 Nokia OY 8,998,615 16,453,080 0.1
--------------- --------------- ------
</TABLE>
52
<PAGE>
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
11,481,553 23,071,830 0.1
Total Common Stocks
in Finland 58,539,345 74,404,371 0.5
France Automobiles 79,132 Peugeot S.A. 9,062,870 8,963,260 0.1
Banking 216,620 Banque Nationale de
Paris S.A. 9,576,811 9,581,631 0.1
173,900 Compagnie Financiere de
Paribas S.A. 9,343,179 12,636,029 0.1
540,386 Societe Generale de
France S.A. 56,680,843 74,051,160 0.5
--------------- --------------- ------
75,600,833 96,268,820 0.7
Consumer Products 17,097 Christian Dior S.A. 1,744,296 1,898,019 0.0
Electronics 75,299 ++SGS-Thomson Microelectronics
N.V. 3,487,840 5,361,707 0.0
Energy & Petroleum 75,828 Elf Aquitaine (Elf) S.A. 7,353,249 9,391,360 0.1
Engineering & 212,968 Bouygues S.A. 20,353,497 19,948,434 0.1
Construction
Foods/Food Processing 61,600 Groupe Danone S.A. 9,786,153 9,424,319 0.1
Hotel/Leisure 47,466 Accor S.A. 6,649,847 8,842,755 0.1
Industrial 195,846 Alcatel Alsthom Cie Generale
d'Electricite S.A. 18,263,077 23,644,201 0.1
Insurance 503,171 Assurances Generales de
France S.A. (AGF) 16,032,715 26,489,575 0.2
314,456 Axa S.A.--UAP 19,659,982 21,545,554 0.1
--------------- --------------- ------
35,692,697 48,035,129 0.3
Metals/Steel 1,275,580 Usinor-Sacilor S.A. 19,472,262 21,130,597 0.2
Multi-Industry 36,933 EuraFrance S.A. 10,437,805 15,048,676 0.1
Retail--Home Improvement 54,440 Castorama Dubois
Investissements S.C.A. 7,307,525 5,675,358 0.0
Telecommunications 216,056 ++France Telecom S.A. 6,817,602 8,181,271 0.1
Utilities--Water 7,663 Compagnie Generale
des Eaux S.A. 835,034 891,912 0.0
Total Common Stocks
in France 232,864,587 282,705,818 2.0
Germany Automotive 199,256 Daimler-Benz AG 13,553,254 13,599,590 0.1
37,883 Volkswagen AG 16,398,475 22,442,170 0.1
--------------- --------------- ------
29,951,729 36,041,760 0.2
Banking 55,680 Bayerische Vereinsbank AG 1,339,965 3,237,021 0.0
Capital Goods 369,636 ++Kloeckner-Werke AG 17,229,762 28,365,765 0.2
Chemicals 224,385 BASF AG 7,802,958 7,631,255 0.1
419,934 Bayer AG 15,484,588 14,770,076 0.1
101,451 Henkel KGaA 4,390,556 4,954,296 0.0
--------------- --------------- ------
27,678,102 27,355,627 0.2
Engineering & 32,565 ++Philipp Holzmann AG 12,268,030 9,182,039 0.1
Construction
</TABLE>
Portfolio
Abbreviations
Merrill Lynch Global Allocation Fund, Inc., October 31, 1997
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
IDR Indonesian Rupiah
JPY Japanese Yen
NLG Netherlands Guilder
NOK Norwegian Krone
NZD New Zealand Dollar
PHP Philippine Peso
SEK Swedish Kroner
USD United States Dollar
ZAL South African Rand
53
<PAGE>
Merrill Lynch Global Allocation Fund, Inc., October 31, 1997
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Shares Value Percent of
COUNTRY Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Germany Insurance 11,790 Muenchener
(concluded) Rueckversicherungs
-Gesellschaft AG $ 3,429,320 $ 3,440,835 0.0%
Metals/Steel 169,415 Thyssen AG 36,439,456 37,475,965 0.3
Retail 29,472 Karstadt AG 10,289,552 10,280,333 0.1
Telecommunications 197,100 Deutsche Telekom AG 3,748,649 3,701,139 0.0
Utilities 189,775 Veba AG 9,611,569 10,602,510 0.1
Total Common Stocks
in Germany 151,986,134 169,682,994 1.2
Hong Kong Agriculture 31,924,000 C.P. Pokphand Co. Ltd.
(Ordinary) 11,031,647 7,640,285 0.1
Banking 901,676 HSBC Holdings PLC 14,386,653 20,413,105 0.1
Conglomerates 5,304,500 Hutchison Whampoa Ltd. 34,916,054 36,712,904 0.2
Total Common Stocks
in Hong Kong 60,334,354 64,766,294 0.4
Indonesia Paper & Pulp 4,671,800 ++Asia Pacific Resources
International Holdings Ltd.
(NY Registered Shares)
(USD)+++ 25,834,218 18,395,213 0.2
1,420,000 Asia Pulp & Paper Company
Ltd. (ADR)++++ (USD) 16,330,000 16,152,500 0.1
--------------- --------------- ------
42,164,218 34,547,713 0.3
Tobacco 7,500,000 Sampoerna International
Finance Company B.V. 11,856,769 13,109,331 0.1
Total Common Stocks
in Indonesia 54,020,987 47,657,044 0.4
Ireland Building & 631,423 CRH PLC (GBP) 6,857,511 7,616,189 0.1
Construction
Total Common Stocks
in Ireland 6,857,511 7,616,189 0.1
Italy Banking 3,130,440 Istituto Bancario San
Paolo di Torino S.p.A. 19,845,879 23,796,012 0.2
1,813,400 Istituto Mobiliare Italiano
S.p.A. (Ordinary) 13,339,979 16,247,412 0.1
--------------- --------------- ------
33,185,858 40,043,424 0.3
Insurance 906,772 Assicurazioni Generali
S.p.A. 16,525,125 20,310,877 0.1
10,694,743 Istituto Nazionale delle
Assicurazioni (INA) S.p.A. 16,063,214 17,246,523 0.1
--------------- --------------- ------
32,588,339 37,557,400 0.2
Multi-Industry 9,117,595 ++Compagnie Industriali
Riunite S.p.A. (CIR) 7,816,550 7,284,148 0.1
67,959,595 MontEdison S.p.A. 52,812,846 55,258,897 0.4
--------------- --------------- ------
60,629,396 62,543,045 0.5
Publishing 3,000,000 ++Seat S.p.A. 1,088,139 1,207,243 0.0
8,666,863 ++Seat S.p.A.--RISP 2,411,987 2,272,115 0.0
--------------- --------------- ------
3,500,126 3,479,358 0.0
Telecommunications 3,958,000 TIM S.p.A. 1,395,818 14,709,575 0.1
3,751,300 TIM S.p.A.--RISP 3,831,835 7,703,285 0.1
5,198,888 Telecom Italia S.p.A. 12,145,121 32,643,036 0.2
8,322,588 Telecom Italia S.p.A.--RISP 15,895,748 33,688,307 0.2
--------------- --------------- ------
33,268,522 88,744,203 0.6
Total Common Stocks
in Italy 163,172,241 232,367,430 1.6
Japan Automobiles & 3,282,000 Suzuki Motor Corp. 30,510,247 34,946,843 0.3
Equipment
</TABLE>
54
<PAGE>
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
Automotive 2,508,000 Fuji Heavy Industries,
Ltd. 10,432,063 9,993,611 0.1
Beverages 1,415,000 Chukyo Coca-Cola Bottling
Co., Ltd. 15,370,052 11,182,514 0.1
663,000 Hokkaido Coca-Cola Bottling
Co., Ltd. 8,836,164 6,894,185 0.0
790,000 Kinki Coca-Cola Bottling
Co., Ltd. 11,999,955 9,463,439 0.1
1,243,000 Mikuni Coca-Cola Bottling
Co., Ltd. 17,391,669 17,371,600 0.1
1,197,700 Sanyo Coca-Cola Bottling
Co., Ltd. 16,669,629 14,546,560 0.1
--------------- --------------- ------
70,267,469 59,458,298 0.4
Capital Goods 10,900,000 Kawasaki Heavy Industries,
Ltd. 30,706,775 25,388,903 0.2
6,375,000 Mitsubishi Heavy Industries,
Inc. 38,324,849 31,342,026 0.2
--------------- --------------- ------
69,031,624 56,730,929 0.4
Chemicals 34,000 Shin-Etsu Chemical Co., Ltd. 657,132 831,545 0.0
Consumer Products 50,000 Amway Japan Limited
(Premium Exchangeable
Participating Shares) (USD) 721,750 731,250 0.0
Electrical 1,124,000 Chudenko Corp. 30,032,358 27,396,390 0.2
Construction 1,386,000 Kinden Corporation 21,348,708 17,294,734 0.1
34,000 Taihei Dengyo Kaisha, Ltd. 637,020 156,975 0.0
--------------- --------------- ------
52,018,086 44,848,099 0.3
Electrical Equipment 593,000 Murata Manufacturing
Co., Ltd. 19,275,913 24,073,205 0.2
Financial Services 4,989,000 Daiwa Securities Co., Ltd. 30,211,613 30,213,726 0.2
211,000 Kokusai Securities Co., Ltd. 1,472,698 1,527,078 0.0
879,000 Nomura Securities Co., Ltd. 11,893,928 10,237,085 0.1
1,720,000 ++Wako Securities Co., Ltd. 4,377,152 4,507,113 0.0
--------------- --------------- ------
47,955,391 46,485,002 0.3
Industrial 28,000 Miura Kogyo Co., Ltd. 466,635 302,803 0.0
14,500 Nitto Kohki Co., Ltd. 488,740 254,513 0.0
--------------- --------------- ------
955,375 557,316 0.0
Insurance 743,000 Chiyoda Fire & Marine
Insurance Co., Ltd. 2,796,009 2,701,032 0.0
2,897,000 Dai-Tokyo Fire & Marine
Insurance Co., Ltd. 17,990,037 12,435,338 0.1
125,000 Dowa Fire & Marine
Insurance Co., Ltd. 441,340 500,166 0.0
3,743,000 Fuji Fire & Marine
Insurance Co., Ltd. 13,980,452 11,956,676 0.1
4,865,000 Koa Fire & Marine
Insurance Co., Ltd. 24,748,402 25,294,277 0.2
765,000 Mitsui Marine & Fire
Insurance Co., Ltd. 5,730,161 4,505,615 0.0
3,508,000 Nichido Fire & Marine
Insurance Co., Ltd. 20,622,267 22,674,619 0.2
4,816,000 Nippon Fire & Marine
Insurance Co., Ltd. 20,479,413 18,589,335 0.1
999,000 Nisshin Fire & Marine
Insurance Co., Ltd. 2,688,731 2,808,934 0.0
7,315,000 Sumitomo Marine & Fire
Insurance Co., Ltd. 46,067,731 48,803,178 0.3
2,368,000 Tokio Marine & Fire
Insurance Co., Ltd. 25,707,953 23,638,632 0.2
5,000,000 Yasuda Fire & Marine
Insurance Co., Ltd. 25,976,040 27,743,116 0.2
--------------- --------------- ------
207,228,536 201,650,918 1.4
Office Equipment 1,612,000 Canon, Inc. 23,455,745 39,156,809 0.3
Packaging & 1,103,000 Toyo Seikan Kaisha, Ltd. 25,118,395 17,341,902 0.1
Containers
Pharmaceuticals 1,061,000 Sankyo Pharmaceuticals
Co., Ltd. 23,391,365 35,040,097 0.2
384,000 Taisho Pharmaceuticals Co. 7,984,458 9,838,782 0.1
--------------- --------------- ------
31,375,823 44,878,879 0.3
Restaurants 600,000 Mos Food Services, Inc. 11,492,811 8,035,937 0.1
548,000 Ohsho Food Service Corp. 9,428,814 5,971,883 0.0
--------------- --------------- ------
20,921,625 14,007,820 0.1
</TABLE>
55
<PAGE>
Merrill Lynch Global Allocation Fund, Inc., October 31, 1997
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Shares Value Percent of
COUNTRY Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Japan Retail Stores 460,000 Ito Yokado Co., Ltd. $ 21,319,319 $ 22,883,288 0.2%
(concluded) 100,000 Sangetsu Co., Ltd. 3,160,832 1,622,161 0.0
--------------- --------------- ------
24,480,151 24,505,449 0.2
Total Common Stocks
in Japan 634,405,325 620,197,875 4.4
Mexico Conglomerates 433,800 Grupo Carso, S.A. de
C.V. (ADR)++++ (USD) 3,832,850 5,422,500 0.0
Finance 6,054 Grupo Financiero Inbursa,
S.A. de C.V. (ADR)++++ (USD) 121,464 102,918 0.0
Foods 700,000 Grupo Industrial Maseca
(ADR)++++ (USD) 7,969,925 10,193,750 0.1
Telecommunications 433,800 Global Telecommunications
Solutions, Inc.
(ADR)++++ (USD) 2,060,550 2,765,475 0.0
Total Common Stocks
in Mexico 13,984,789 18,484,643 0.1
Netherlands Banking 360,279 ABN AMRO Holding N.V. 6,828,977 7,260,545 0.1
Chemicals 143,576 Akzo N.V. 17,876,528 25,315,612 0.2
288,070 European Vinyls Corp.
International N.V. 11,384,340 7,156,465 0.0
--------------- --------------- ------
29,260,868 32,472,077 0.2
Electronics 299,483 Philips Electronics N.V. 10,810,709 23,462,229 0.2
Distribution
Forest Products 869,088 Koninklijke KNP N.V 19,707,929 19,798,824 0.1
Insurance 958,493 Internationale Nederlanden
Groep N.V. 15,908,091 40,262,437 0.3
Miscellaneous-- 10,000 Koninklijke Ten Cate 501,699 480,363 0.0
Manufacturing
Steel 161,800 ++Ispat International N.V.
(NY Registered Shares) (USD) 4,382,262 4,127,977 0.0
Telecommunications 750,916 Royal PTT Nederland N.V. 26,855,248 28,717,641 0.2
Transportation 111,846 Koninklijke Pakhoed N.V. 4,339,539 3,666,326 0.0
Total Common Stocks in
the Netherlands 118,595,322 160,248,419 1.1
New Zealand Natural Gas Suppliers 1,477,104 Natural Gas Corporation
Holdings Limited 1,043,960 2,330,065 0.0
Total Common Stocks in
New Zealand 1,043,960 2,330,065 0.0
Norway Banking 4,785,400 Christiania Bank Og
Kreditkasse 10,697,335 19,122,478 0.1
2,434,000 Den Norske Bank ASA 7,189,721 11,011,531 0.1
Total Common Stocks
in Norway 17,887,056 30,134,009 0.2
Philippines Multi-Industry 3,028,000 Ayala Corporation 1,117,717 1,121,481 0.0
Total Common Stocks in
the Philippines 1,117,717 1,121,481 0.0
Portugal Telecommunications 41,000 ++Telecel-Comunicacaoes
Pessoais, S.A. 2,073,605 3,710,302 0.0
Total Common Stocks
in Portugal 2,073,605 3,710,302 0.0
South Korea Steel 150,900 Pohang Iron & Steel Co.,
Ltd. (ADR)++++ (USD) 2,414,023 2,452,125 0.0
Telecommunications 700,800 ++SK Telecom Co., Ltd.
(ADR)++++ (USD) 3,662,367 3,854,400 0.0
Utilities--Electric 495,300 Korea Electric Power
Corporation (ADR)++++ (USD) 3,801,972 4,055,269 0.1
</TABLE>
56
<PAGE>
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
Total Common Stocks in
South Korea 9,878,362 10,361,794 0.1
Spain Banking 86,000 Corporacion Bancaria de
Espana S.A. (Argentaria) 3,351,129 4,784,028 0.0
Energy & Petroleum 147,623 Repsol S.A. 5,580,104 6,199,658 0.0
212,500 Repsol S.A. (ADR)++++ (USD) 6,126,375 9,031,250 0.1
--------------- --------------- ------
11,706,479 15,230,908 0.1
Insurance 33,389 Mapfre S.A. 1,272,758 1,528,653 0.0
Manufacturing 173,000 ++Grupo Fosforera Espanola S.A. 1,501,871 267,986 0.0
Utilities--Electric 1,235,325 Endesa S.A. 20,999,424 23,303,205 0.2
141,800 Iberdrola I S.A. 793,768 1,698,671 0.0
--------------- --------------- ------
21,793,192 25,001,876 0.2
Total Common Stocks
in Spain 39,625,429 46,813,451 0.3
Sweden Appliances 222,953 Electrolux AB 'B' Free 9,775,237 18,475,862 0.1
Automotive & Equipment 43,916 Scania AB (Warrants) (a) 60,444 43,436 0.0
Industrial 119,420 SKF AB 'A' 2,217,257 2,665,589 0.0
Insurance 329,563 Skandia Forsakring AB Free 9,003,098 15,417,224 0.1
Metals/Steel 887,529 Avesta Sheffield AB 8,590,616 6,643,092 0.1
Multi-Industry 192,784 Svedala Industri AB Free 2,531,671 3,787,809 0.0
Paper & Forest 297,445 Mo och Domsjo AB (Class B) 7,181,896 8,070,537 0.1
Products 642,035 Stora Kopparbergs
Bergslags AB 7,084,794 8,881,754 0.1
--------------- --------------- ------
14,266,690 16,952,291 0.2
Total Common Stocks
in Sweden 46,445,013 63,985,303 0.5
Switzerland Electronic Components 69,850 Societe Suisse pour la
Microelectronique
et l'Horlogerie AG
(Registered) 9,809,595 9,184,862 0.1
Financial Services 34,954 CS Holdings AG (Registered) 3,513,437 4,940,650 0.0
Machinery 12,180 Saurer AG (Registered) 5,954,865 8,082,178 0.1
Multi-Industry 301,993 Oerlikon-Buehrle Holding Ltd. 32,057,825 38,736,472 0.3
Pharmaceuticals 29,068 Novartis AG (Registered) 39,100,010 45,679,774 0.3
Photographic Services 9,869 Fotolabo S.A. 4,104,691 2,404,486 0.0
Total Common Stocks
in Switzerland 94,540,423 109,028,422 0.8
Thailand Holding Company 1,373,300 BEC World Public Co.,
Ltd. (Foreign) 8,876,272 6,916,866 0.1
Total Common Stocks
in Thailand 8,876,272 6,916,866 0.1
United Banking 899,577 HSBC Holdings PLC (GBP) 27,212,308 22,410,586 0.2
Kingdom 884,956 National Westminster
Bank PLC 9,683,612 12,723,041 0.1
--------------- --------------- ------
36,895,920 35,133,627 0.3
Beverages 1,451,980 Cadbury Schweppes PLC 11,384,259 14,615,050 0.1
Chemicals 759,778 Imperial Chemical
Industries PLC 11,810,389 11,216,511 0.1
1,470,000 Inspec Group PLC 4,431,923 5,906,242 0.0
--------------- --------------- ------
16,242,312 17,122,753 0.1
Computers 436,453 Misys PLC 5,613,530 11,001,208 0.1
Conglomerates 6,250 Hanson PLC (ADR)++++ (USD) 353,583 159,375 0.0
Energy & Related 724,323 Energy Group PLC 7,684,595 7,381,880 0.0
6,250 Energy Group PLC
(ADR)++++ (USD) 226,417 252,344 0.0
--------------- --------------- ------
7,911,012 7,634,224 0.0
</TABLE>
57
<PAGE>
Merrill Lynch Global Allocation Fund, Inc., October 31, 1997
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Shares Value Percent of
COUNTRY Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
United Environmental 1,194,500 ++Waste Management
Kingdom International PLC
(concluded) (ADR)++++ (USD) $ 11,101,063 $ 8,212,188 0.1%
Food & Beverage 1,498,814 Allied Domecq PLC 10,394,260 12,232,606 0.1
650,505 Bass PLC 8,302,679 9,035,858 0.1
631,110 Matthew Clark PLC 6,157,510 2,593,938 0.0
--------------- --------------- ------
24,854,449 23,862,402 0.2
Glass 3,451,777 Pilkington PLC 6,954,694 8,743,959 0.1
Holding Company 7,602,145 BTR PLC 28,078,103 25,666,134 0.2
Manufacturing-- 4,731,768 LucasVarity PLC 15,226,664 16,233,239 0.1
Automotive Supplies
Merchandising 1,023,673 W.H. Smith Group PLC
(Class A) 6,255,529 6,491,446 0.0
Metals & Mining 858,223 Rio Tinto PLC 12,434,329 11,057,318 0.1
Retail Stores 691,675 Signet Group PLC
(ADR)++++ (USD) 2,194,907 10,029,288 0.1
Retail/Food 8,235,525 Asda Group PLC 15,096,762 21,414,671 0.1
2,209,750 Sainsbury (J.) PLC 13,705,005 18,442,706 0.1
2,761,101 Tesco PLC 14,814,819 22,106,330 0.2
--------------- --------------- ------
43,616,586 61,963,707 0.4
Steel 1,500,000 British Steel PLC 4,081,599 3,975,912 0.0
Telecommunications 2,245,417 British Telecommunications
PLC (Ordinary) 14,760,954 17,064,091 0.1
1,598,955 Cable & Wireless PLC 10,985,936 12,768,257 0.1
917,333 ++Ionica PLC 4,556,654 4,770,645 0.0
2,290,000 ++Ionica PLC (r) 10,286,966 11,832,448 0.1
1,565,667 Ionica PLC (Warrants) (a)(r) -- 1,472,654 0.0
4,702,580 Unilever PLC 22,970,885 35,027,374 0.3
--------------- --------------- ------
63,561,395 82,935,469 0.6
Tobacco 2,787,884 B.A.T. Industries PLC 23,744,589 24,390,316 0.2
411,705 Gallaher Group PLC 1,712,347 1,978,788 0.0
12,500 Imperial Tobacco Group
PLC (ADR)++++ (USD) 238,391 149,219 0.0
--------------- --------------- ------
25,695,327 26,518,323 0.2
Utilities--Water 1,548,165 Southwest Water PLC 11,855,933 22,154,130 0.1
Total Common Stocks in
the United Kingdom 334,311,194 393,509,752 2.8
United States Apparel 700,000 ++Fruit of the Loom, Inc.
(Class A) 18,572,062 18,243,750 0.2
100,000 Liz Claiborne, Inc. 2,016,276 5,068,750 0.0
--------------- --------------- ------
20,588,338 23,312,500 0.2
Automobiles 165,308 Ford Motor Company 4,906,268 7,221,893 0.0
150,000 General Motors Corp. 5,691,925 9,628,125 0.1
--------------- --------------- ------
10,598,193 16,850,018 0.1
Automotive 400,000 ++Collins & Aikman Group Inc. 2,792,538 3,875,000 0.0
Banking 400,000 BB&T Corporation 7,717,728 21,775,000 0.2
129,500 Banknorth Group, Inc. 1,865,422 7,737,625 0.1
</TABLE>
58
<PAGE>
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
407,100 CoreStates Financial Corp. 14,288,085 29,616,525 0.2
350,000 First Chicago NBD
Corporation 10,902,245 25,462,500 0.2
900,000 First Commerce Corp. 22,726,556 57,825,000 0.4
950,000 ++Golden State Bancorp Inc. 13,232,157 31,587,500 0.2
770,194 Golden State Bancorp Inc.
(Warrants) (a) -- 16,847,994 0.1
900,000 KeyCorp 26,457,055 55,068,750 0.4
1,125,800 Mellon Bank Corp. 21,852,555 58,049,063 0.4
397,125 Oriental Financial Group 6,989,400 10,548,633 0.0
760,000 Republic New York Corp. 33,998,213 80,417,500 0.6
--------------- --------------- ------
160,029,416 94,936,090 2.8
Broadcasting/Cable 49,450 People's Choice TV Corp.
(Warrants) (a) 226,458 495 0.0
Building Products 81,700 ++CBI Industries, Inc. 1,381,235 1,445,069 0.0
567,892 Flowserve Corporation 14,089,137 16,894,787 0.1
--------------- --------------- ------
15,470,372 18,339,856 0.1
Business Data Systems 1,400,000 ++Information Resources,
Inc.+++ 16,553,312 22,750,000 0.2
Chemicals 300,000 The Geon Company 5,955,557 6,506,250 0.1
Computer Services 240,000 Electronic Data Systems Corp. 9,927,011 9,285,000 0.1
Computer Software 225,000 Boole & Babbage, Inc. 1,329,492 6,468,750 0.0
2,400,000 ++Borland International
Corp.+++ 33,535,053 22,500,000 0.2
--------------- --------------- ------
34,864,545 28,968,750 0.2
Computers & 614,300 ++FileNet Corporation 8,153,432 13,821,750 0.1
Technology 998,000 ++Komag, Inc. 17,615,478 17,153,125 0.1
500,000 ++Stratus Computer, Inc. 9,130,512 17,687,500 0.2
200,000 ++Unisys Corp. 1,970,986 2,662,500 0.0
--------------- --------------- ------
36,870,408 51,324,875 0.4
Construction & 300,000 ++K. Hovnanian Enterprises,
Housing Inc. (Class A) 2,795,933 2,231,250 0.0
Construction 700,000 TJ International, Inc. 12,547,379 15,837,500 0.1
Products
Consumer-- 90,770 ++Ascent Entertainment
Miscellaneous Group, Inc. 631,090 896,354 0.0
400,000 ++Department 56, Inc. 8,951,325 12,075,000 0.1
--------------- --------------- ------
9,582,415 12,971,354 0.1
Containers 1,008,000 Stone Container Corporation 12,596,036 12,159,000 0.1
Electronics 1,600,000 Checkpoint Systems, Inc. 17,710,635 25,600,000 0.2
1,050,000 ++MEMC Electronic
Materials, Inc. 21,050,365 21,065,625 0.1
750,300 ++Silicon Graphics, Inc. 12,303,605 11,020,031 0.1
1,000,000 ++Silicon Valley Group, Inc. 18,066,194 28,500,000 0.2
--------------- --------------- ------
69,130,799 86,185,656 0.6
Energy & Petroleum 610,900 Arch Coal, Inc. 16,543,746 16,341,575 0.1
46,400 Mitchell Energy Development
Corp. (Class A) 675,717 1,165,800 0.0
174,350 Mitchell Energy Development
Corp. (Class B) 2,755,451 4,358,750 0.0
50,000 Murphy Oil Corp. 1,688,446 2,896,875 0.0
1,500,000 Occidental Petroleum Corp. 28,058,743 41,812,500 0.3
235,828 ++Plains Resources, Inc. 1,381,815 4,716,560 0.1
1,440,078 Santa Fe Energy Resources,
Inc. 7,768,521 18,811,019 0.1
1,034,500 ++TransTexas Gas Corp. 14,373,642 19,655,500 0.2
500,000 USX-Marathon Group 8,761,976 17,875,000 0.1
--------------- --------------- ------
82,008,057 127,633,579 0.9
Financial Services 163,600 ++American Capital
Strategies, Ltd. 2,454,000 2,863,000 0.0
</TABLE>
59
<PAGE>
Merrill Lynch Global Allocation Fund, Inc., October 31, 1997
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Shares Value Percent of
COUNTRY Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
United States Forest Products 14,300 Deltic Timber Corporation $ 392,321 $ 403,081 0.0%
(continued)
Gaming 1,235,000 ++Scientific Games
Holdings Corp. (c)+++ 27,568,304 26,629,688 0.2
Health Care 600,000 ++Oxford Health Plans, Inc. 16,429,590 15,487,500 0.1
Cost Containment
Healthcare Services 360,000 ++Advocat, Inc.+++ 3,422,500 3,555,000 0.0
90,000 Allegiance Corporation 760,858 2,497,500 0.0
450,000 Baxter International, Inc. 9,088,023 20,812,500 0.1
1,600,000 ++Beverly Enterprises, Inc. 18,056,405 23,900,000 0.2
600,000 Columbia/HCA Healthcare
Corp. 17,051,556 16,950,000 0.1
700,000 ++Humana, Inc. 13,206,455 14,700,000 0.1
1,225,740 US Surgical Corp. 27,641,430 33,018,371 0.3
185,600 United Healthcare
Corporation 6,009,630 8,595,600 0.1
--------------- --------------- ------
95,236,857 124,028,971 0.9
Industrial 100,000 ++American Standard, Inc. 2,986,000 3,575,000 0.0
15,000 Bar Technologies Ltd.
(Warrants) (a) 838,256 750,000 0.0
179,802 Cooper Industries, Inc. 6,534,892 9,372,179 0.1
2,830,246 ++Crown Packaging Holdings
Ltd. (q) 1,433,657 28,302 0.0
--------------- --------------- ------
11,792,805 13,725,481 0.1
Insurance 200,000 ACE, Ltd. 7,051,748 18,587,500 0.1
350,000 Aetna Inc. 28,167,500 24,871,875 0.2
510,000 American General Corp. 13,187,448 26,010,000 0.2
114,000 The Hartford Financial
Services Group Inc. 4,188,594 9,234,000 0.0
387,500 Horace Mann Educators, Inc. 9,196,189 21,796,875 0.2
400,200 Lincoln National Corp. 14,468,475 27,513,750 0.2
350,000 PartnerRe Holdings, Ltd. 6,790,237 14,350,000 0.1
1,927,500 ++Risk Capital Holdings
Inc.+++ 33,900,906 41,923,125 0.3
--------------- --------------- ------
116,951,097 184,287,125 1.3
Manufacturing 200,000 ITT Industries Inc. 4,175,065 6,312,500 0.0
Metals & Mining 305,000 Aluminum Co. of America 13,814,815 22,265,000 0.2
1,100,000 Battle Mountain Gold Company 7,231,967 6,737,500 0.1
624,500 Commonwealth Industries Inc. 11,725,173 10,772,625 0.1
1,350,000 Lukens Inc.+++ 25,689,657 24,300,000 0.2
600,000 ++National Steel Corp. 5,445,549 9,900,000 0.1
600,000 Newmont Mining Corporation 23,399,952 21,000,000 0.1
400,000 Nucor Corporation 18,363,133 20,900,000 0.1
132,800 Reynolds Metals Co. 5,801,771 8,092,500 0.0
--------------- --------------- ------
111,472,017 123,967,625 0.9
Multi-Industry 90,000 Loews Corp. 3,984,675 10,051,875 0.1
Multimedia & 512,800 ++U S West Media Group 7,933,766 12,948,200 0.1
Telecommunications 20,000 Unifi Communications Inc.
(Warrants) (a)(q) 1,166,800 400,000 0.0
--------------- --------------- ------
9,100,566 13,348,200 0.1
Natural Resources 349,765 ++Alumax, Inc. 7,240,312 11,367,362 0.1
</TABLE>
60
<PAGE>
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
210,519 Freeport-McMoRan Copper
& Gold Inc. (Class B) 3,665,657 5,026,141 0.0
--------------- --------------- ------
10,905,969 16,393,503 0.1
Oil Services 200,000 Diamond Offshore
Drilling Inc. 5,150,000 12,450,000 0.1
2,500,000 ++Noble Drilling Corp. 16,505,558 88,906,250 0.6
150,000 Tidewater Inc. 5,807,066 9,853,125 0.1
150,000 ++Western Atlas, Inc. 9,013,408 12,928,125 0.1
--------------- --------------- ------
36,476,032 124,137,500 0.9
Paper 160,200 Boise Cascade Corporation 4,225,000 5,546,925 0.0
265,316 Fort James Corporation 4,971,450 10,529,729 0.1
240,000 Louisiana-Pacific Corp. 5,273,733 5,040,000 0.0
--------------- --------------- ------
14,470,183 21,116,654 0.1
Petroleum 707,031 Monterey Resources, Inc. 6,627,069 14,096,431 0.1
Pharmaceuticals/ 250,000 ++Alteon, Inc. 1,968,199 1,578,125 0.0
Biotechnology
Photography 160,000 Eastman Kodak Company 8,746,145 9,580,000 0.1
Pollution Control 1,246,900 ++Waste Management Inc. 31,997,538 29,146,287 0.2
Publishing 250,000 Gannett Co., Inc. 5,935,736 13,140,625 0.1
201,500 New York Times Co. (Class A) 4,801,503 11,032,125 0.1
350,000 Reader's Digest Association,
Inc. (Class A) 8,229,300 7,962,500 0.0
--------------- --------------- ------
18,966,539 32,135,250 0.2
Real Estate 2,574,465 ++Catellus Development Corp. 22,351,219 44,248,617 0.3
Real Estate 730,000 Ambassador Apartments Inc. 11,272,615 15,649,375 0.1
Investment 446,800 Imperial Credit Commercial
Trusts Mortgage Investment Corp. 6,702,000 7,316,350 0.1
661,300 Mid-America Realty
Investments+++ 6,444,676 6,902,319 0.1
1,839,825 Prime Retail, Inc.+++ 21,062,587 27,482,386 0.2
400,000 Taubman Centers, Inc. 3,641,641 5,000,000 0.0
50,000 Walden Residential
Properties, Inc. 1,418,750 1,400,000 0.0
920,000 Walden Residential
Properties, Inc.
(Warrants) (a) 1,125,068 1,150,000 0.0
--------------- --------------- ------
51,667,337 64,900,430 0.5
Restaurants 1,500,000 ++Brinker International, Inc. 16,515,025 21,000,000 0.1
500,000 ++Buffets, Inc. 5,071,633 5,187,500 0.0
2,100,000 Darden Restaurants Inc. 15,622,713 23,887,500 0.2
--------------- --------------- ------
37,209,371 50,075,000 0.3
Retail 206,500 ++Coinstar Inc. (q) 311,636 2,039,187 0.0
1,295,000 ++Ugly Duckling Corporation 18,183,750 15,378,125 0.1
--------------- --------------- ------
18,495,386 17,417,312 0.1
Retail Stores 608,500 Baker (J.), Inc. 10,187,765 4,335,562 0.0
416,900 ++Buttrey Food & Drug
Stores Co. 3,241,636 4,585,900 0.0
1,110,000 ++Filene's Basement Corp.+++ 10,092,619 8,116,875 0.1
700,000 The Limited, Inc. 12,951,591 16,493,750 0.1
361,800 ++Payless Cashways, Inc. 3,975,907 65,124 0.0
400,000 Sotheby's Holdings, Inc.
(Class A) 4,879,559 7,500,000 0.1
700,000 ++Toys 'R' Us, Inc. 16,081,734 23,843,750 0.2
--------------- --------------- ------
61,410,811 64,940,961 0.5
Savings Banks 274,796 Downey Savings & Loan
Association 2,516,927 7,213,395 0.0
477,405 Sovereign Bancorp, Inc. 1,552,137 8,473,939 0.1
--------------- --------------- ------
4,069,064 15,687,334 0.1
</TABLE>
61
<PAGE>
Merrill Lynch Global Allocation Fund, Inc., October 31, 1997
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Shares Value Percent of
COUNTRY Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
United States Telecommunications 642,800 ++360 Communications
(concluded) Company $ 9,933,360 $ 13,579,150 0.1%
200,000 AT&T Corp. 6,268,550 9,787,500 0.1
300,000 ++AirTouch Communications,
Inc. 6,812,219 11,587,500 0.1
27,750 American Telecasting Inc.
(Warrants) (a) -- 277 0.0
32,037 ++CS Wireless Systems, Inc. 123,681 320 0.0
1,375,800 ++CellNet Data Systems, Inc. 12,252,498 13,328,062 0.1
185,700 Comsat Corp. 3,677,677 4,247,887 0.0
800,000 ++DSC Communications Corp. 12,249,518 19,500,000 0.1
500,000 Frontier Corporation 8,023,581 10,812,500 0.1
1,104,500 GTE Corp. 45,189,166 46,872,219 0.3
1,287,800 ++General Communication, Inc.
(Class A)+++ 9,336,550 9,658,500 0.1
1,094,100 ++Geotek Communications, Inc. 5,883,636 3,897,731 0.0
3,000,000 Geotek Communications, Inc.
(Warrants) (a)(q) 14,200,634 1,500,000 0.0
1,600,000 ++Glenayre Technologies, Inc. 21,915,406 20,600,000 0.1
75,140 ++Nextel Communications Inc. 1,212,489 1,972,425 0.0
1,611,800 ++PLD Telekom Inc. 10,028,238 12,491,450 0.1
810,000 ++QUALCOMM, Inc. 41,047,522 45,663,750 0.3
225,000 ++Telegroup Inc. 2,250,000 2,418,750 0.0
47,000 United USN Inc. (Warrants)
(a)(q) 5,840,131 5,734,000 0.1
1,255,000 ++Western Wireless Corporation 15,610,218 22,276,250 0.2
18,315 Wireless One, Inc.
(Warrants) (a) 18,315 4,579 0.0
--------------- --------------- ------
231,873,389 255,932,850 1.8
Textiles 2,825,200 ++Burlington Industries,
Inc.+++ 37,451,653 42,201,425 0.3
Transportation 900,000 J.B. Hunt Transport
Services, Inc. 12,600,052 13,837,500 0.1
Utilities 4,004,680 Citizens Utilities Company
(Class B) 35,740,884 39,796,507 0.3
1,404,400 Potomac Electric Power
Company 31,388,446 31,511,225 0.2
--------------- --------------- ------
67,129,330 71,307,732 0.5
Utilities-- 1,250,000 Allegheny Power System, Inc. 27,315,551 35,312,500 0.3
Electric 115,650 Atmos Energy Corp. 1,445,257 2,920,162 0.0
& Gas 47,570 BayCorp Holdings, Ltd. 2,549,753 356,775 0.0
125,000 CMS Energy Corp. 2,290,025 4,562,500 0.0
1,101,000 Centerior Energy Corp. 12,953,094 14,313,000 0.1
603,100 Central and South West
Corporation 11,630,764 13,004,344 0.1
100,000 Consolidated Edison
Company, Inc. 2,923,495 3,425,000 0.0
4,512,285 ++El Paso Electric Company+++ 23,689,496 28,483,799 0.2
1,780,000 Entergy Corp. 47,516,856 43,498,750 0.3
475,000 FPL Group, Inc. 14,363,265 24,551,562 0.2
2,177,900 Houston Industries, Inc. 43,848,083 47,369,325 0.3
1,500,000 ++Niagara Mohawk Power Corp. 23,789,306 14,531,250 0.1
1,144,600 Texas Utilities Co. 36,647,663 41,062,525 0.3
1,148,800 Unicom Corporation 27,549,620 32,166,400 0.2
--------------- --------------- ------
278,512,228 305,557,892 2.1
Total Common Stocks in
the United States 1,855,021,578 2,548,563,022 18.0
</TABLE>
62
<PAGE>
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
Total Investments in
Common Stocks 4,249,011,453 5,234,934,167 37.0
Equity Closed-End Funds
Austria Financial Services 320,000 Austria Fund (USD) 2,642,432 3,040,000 0.0
Total Equity Closed-End
Funds in Austria 2,642,432 3,040,000 0.0
Indonesia Financial Services 25,600 Jakarta Growth Fund (USD) 158,080 144,000 0.0
Total Equity Closed-End
Funds in Indonesia 158,080 144,000 0.0
Ireland Financial Services 150,000 Irish Investment Fund,
Inc. (USD) 1,086,041 2,362,500 0.0
Total Equity Closed-End
Funds in Ireland 1,086,041 2,362,500 0.0
Italy Financial Services 150,000 Italy Fund (USD) 1,198,520 1,425,000 0.0
Total Equity Closed-End
Funds in Italy 1,198,520 1,425,000 0.0
South Korea Financial Services 125,000 ++The Fidelity Advisor
Korea Fund (USD) 1,088,750 601,562 0.0
200,000 ++Korea Equity Fund (USD) 1,369,598 737,500 0.0
1,400,528 ++Korea Fund, Inc. (USD) 19,847,163 11,466,823 0.1
200,000 ++Korean Invesment Fund,
Inc. (USD) 1,561,000 887,500 0.0
Total Equity Closed-End
Funds in South Korea 23,866,511 13,693,385 0.1
Spain Financial Services 300,100 Growth Fund of Spain,
Inc. (USD) 2,630,827 4,651,550 0.1
Total Equity Closed-End
Funds in Spain 2,630,827 4,651,550 0.1
Total Investments in
Equity Closed-End Funds 31,582,411 25,316,435 0.2
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
Austria Banking 203,400 ++Bank Austria Finance Inc. 6,298,337 9,305,004 0.1
Total Preferred Stocks
in Austria 6,298,337 9,305,004 0.1
Germany Chemicals 494,411 Henkel KGaA 20,929,927 25,725,123 0.2
Multi-Industry 450,000 RWE AG 8,725,424 16,272,310 0.1
Total Preferred Stocks
in Germany 29,655,351 41,997,433 0.3
New Zealand Financial Services 3,085,700 Brierly Investments,
Ltd. (9% Convertible) 1,988,414 2,116,327 0.0
Total Preferred Stocks
in New Zealand 1,988,414 2,116,327 0.0
Norway Financial Services 175,000 A/S Eksportfinans (8.70%
Convertible) (USD) 4,377,500 4,725,000 0.0
Total Preferred Stocks
in Norway 4,377,500 4,725,000 0.0
Portugal Banking 966,528 BCP International Bank
(8% Convertible) (USD) 58,597,712 70,435,728 0.5
Total Preferred Stocks
in Portugal 58,597,712 70,435,728 0.5
Spain Banking 225,000 Santander Overseas Bank
(8% Convertible, Series D)
(USD) 5,463,250 5,864,062 0.0
Total Preferred Stocks
in Spain 5,463,250 5,864,062 0.0
</TABLE>
63
<PAGE>
Merrill Lynch Global Allocation Fund, Inc., October 31, 1997
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Shares Value Percent of
COUNTRY Industries Held Preferred Stocks Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
United States Banking 870,000 California Federal Bank
(9.125%, Series A) $ 21,735,500 $ 23,109,375 0.2%
55,000 California Federal Bank
(10.625%, Series B) 5,500,000 5,940,000 0.0
--------------- --------------- ------
27,235,500 29,049,375 0.2
Cable Television 1,000,000 ++Diva Systems Corp.
(Convertible, Series C) (r) 8,410,000 11,000,000 0.1
1,000,000 ++Diva Systems Corp.
(Convertible, Series D) (q) 11,440,000 11,000,000 0.1
--------------- --------------- ------
19,850,000 22,000,000 0.2
Financial Services 619,900 Golden State Bancorp Inc.
(8.75% Convertible,
Series E) 15,070,337 51,451,700 0.4
Natural Resources 150,000 Cyprus Amax Minerals Co.
(Convertible, Series A) 9,188,313 7,075,500 0.0
348,700 Freeport-McMoRan Copper &
Gold, Inc. (Convertible) 7,918,834 8,804,675 0.1
219,000 Freeport-McMoRan Inc.
(Convertible--Gold) 7,703,330 6,159,375 0.0
--------------- --------------- ------
24,810,477 22,039,550 0.1
Real Estate 400,000 Crown American Realty
Investment Trust (11%, Series A) 20,000,000 21,700,000 0.1
Trusts 139,200 First Union Real Estate
Investments (8.40%
Convertible, Series A) 3,480,000 7,308,000 0.1
350,000 National Health Investors,
Inc. (8.50% Convertible) 8,750,000 12,075,000 0.1
717,500 Prime Retail, Inc.
10.50%)+++ 16,366,161 19,193,125 0.1
1,078,000 Walden Residential
Properties, Inc. (9.20%,
Series S) 26,269,636 27,623,750 0.2
--------------- --------------- ------
74,865,797 87,899,875 0.6
Steel 2,442,500 Rouge/Worthington
Industries, Inc.
(Convertible, Series DECS) 38,015,300 38,469,375 0.3
Utilities 77,600 Citizens Utilities Company
(5% Convertible) 3,398,931 3,686,000 0.0
Total Preferred Stocks
in the United States 203,246,342 254,595,875 1.8
Total Investments in
Preferred Stocks 320,077,962 399,689,429 2.8
Currency Face
Denomination Amount Fixed-Income Securities
Argentina Banking Banco Rio de la Plata S.A.:
USD 45,000,000 8.75% due 12/15/2003 36,900,950 44,550,000 0.3
USD 30,000,000 (Class 3), 8.50% due
7/15/1998 30,225,000 29,400,000 0.2
--------------- --------------- ------
67,125,950 73,950,000 0.5
Government USD 38,000,000 City of Buenos Aires,
Obligations 11.25% due 4/11/2007 (q) 37,715,000 37,240,000 0.3
Republic of Argentina (p):
USD 191,500,000 9.75% due 9/19/2027 156,380,000 155,115,000 1.1
USD 98,400,000 Floating Rate Bonds,
Series L, 6.678% due
3/31/2005 (d) 72,934,800 84,132,000 0.6
USD 80,000,000 Floating Rate Discount
Notes, 6.875%
due 3/31/2023 54,779,110 63,296,000 0.5
USD 85,000,000 Global Bonds, 11.375%
due 1/30/2017 82,988,125 82,875,000 0.6
USD 30,000,000 Par 'L' Bonds, 5.50%
due 3/31/2023 18,700,565 20,400,000 0.1
--------------- --------------- ------
423,497,600 443,058,000 3.2
</TABLE>
64
<PAGE>
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
Total Fixed-Income
Securities in Argentina 490,623,550 517,008,000 3.7
Australia Mining USD 11,500,000 Murrin Murrin Holdings
Property, 9.375%
due 8/31/2007 (q) 11,500,000 11,787,500 0.1
Total Fixed-Income
Securities in Australia 11,500,000 11,787,500 0.1
Brazil Government USD 35,000,000 Brazil Exit Bonds, 6% due
Obligations 9/15/2013 (p) 19,912,221 25,550,000 0.2
Republic of Brazil:
USD 3,469,700 Floating Rate Bonds,
6.687% due 1/01/2001 (d) 2,367,996 3,190,389 0.0
USD 71,500,000 Global Bonds, 10.125%
due 5/15/2027 (p) 50,235,000 53,982,500 0.4
USD 10,000,000 Par `L' Bonds, 5% due
4/15/2024 (p) 6,100,000 6,500,000 0.0
--------------- --------------- ------
78,615,217 89,222,889 0.6
Metals USD 31,500,000 CSN Panama Iron S.A.,
9.125% due 6/01/2007 30,135,000 25,830,000 0.2
Natural USD 5,000,000 Companhia Vale Do Rio Doce,
Resources 10% due 4/02/2004 (q) 4,993,860 4,875,000 0.0
Utilities USD 28,500,000 Espirito Santo--Escelsa,
10% due 7/15/2007 (q) 28,464,375 25,650,000 0.2
Total Fixed-Income
Securities in Brazil 142,208,452 145,577,889 1.0
Canada Cable/ CAD 7,545,000 Rogers Cablesystem Inc.,
Telecom- 9.65% due 1/15/2014 4,397,424 5,610,412 0.0
munications CAD 5,000,000 Rogers Communications Inc.,
Convertible Bonds,
7.50% due 9/01/1999 3,394,000 3,522,751 0.0
--------------- --------------- ------
7,791,424 9,133,163 0.0
Industrial-- USD 28,000,000 Ainsworth Lumber Company,
Services 12.50% due 7/15/2007 (q) (s) 27,226,640 28,280,000 0.2
Natural USD 10,500,000 Sifto Canada, Inc., 8.50%
Resources due 7/15/2000 10,352,688 10,605,000 0.1
Paper & CAD 2,000,000 MacMillan Bloedel Limited,
Forest Products Convertible Bonds, 5% due
5/01/2007 1,024,416 1,263,576 0.0
Real Estate CAD 16,501,370 First Place Tower, Inc.,
Convertible Bonds, 10.28%
due 12/15/2015 (e) 26,352,962 42,170,038 0.3
Total Fixed-Income
Securities in Canada 72,748,130 91,451,777 0.6
Cayman Islands Financial USD 37,000,000 APP Global Finance (V)
Services Ltd., 2% due 7/25/2000 (q) 37,406,500 34,780,000 0.3
USD 17,250,000 Guangdong Investment
Finance Inc., 1% due
7/07/2002 15,569,375 15,697,500 0.1
Total Fixed-Income
Securities in the
Cayman Islands 52,975,875 50,477,500 0.4
China Financial USD 12,750,000 Shangai Investment Holding
Services Co., 1% due 6/12/2002 11,681,250 12,144,375 0.1
Industrial USD 1,750,000 Huaneng Power International
PLC, 1.75% due 5/21/2004 1,607,500 1,662,500 0.0
Total Fixed-Income
Securities in China 13,288,750 13,806,875 0.1
France Automobiles FRF 5,500 Peugeot S.A., Convertible
Bonds, 2% due 1/01/2001 992,341 1,101,813 0.0
Banking ECU 2,000,000 Credit Local de France,
0% due 10/16/2001 (b) 1,994,211 1,857,265 0.0
FRF 58,000 Societe Generale de France
S.A., Convertible Bonds,
3.50% due 1/01/2000 (g) 7,499,838 8,269,905 0.1
--------------- --------------- ------
9,494,049 10,127,170 0.1
Financial USD 230,000 Societe Fonciere Lyonnaise
Services S.A., Convertible Bonds,
4% due 10/31/2004 31,087,057 31,637,467 0.2
Industrial FRF 30,000 Alcatel Alsthom, Convertible
Bonds, 2.50% due 1/01/2004 3,926,887 4,964,441 0.0
Insurance FRF 35,500 Finaxa, Convertible Bonds,
3% due 1/01/2001 9,060,172 10,622,290 0.1
Total Fixed-Income
Securities in France 54,560,506 58,453,181 0.4
</TABLE>
65
<PAGE>
Merrill Lynch Global Allocation Fund, Inc., October 31, 1997
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Currency Face Value Percent of
COUNTRY Industries Denominations Amount Fixed-Income Securities Cost (Note 1a) Net Assets
<S> <S> <S> <C> <S> <C> <C> <C>
Germany Banking DEM 2,310,000 Commerzbank AG, Floating
Rate Convertible
Bonds, 0% due
6/15/2001 (b) $ 1,556,456 $ 3,679,670 0.0%
USD 5,000,000 Landes Kredit Bank, 7.875%
due 4/15/2004 4,972,067 5,465,750 0.1
USD 13,750,000 Nordeutsche Landesbank
Girozentrale,
3% due 2/11/2003 12,600,000 12,581,250 0.1
--------------- --------------- ------
19,128,523 21,726,670 0.2
Building USD 41,100,000 Tarkett AG, 9% due
Materials 3/01/2002 39,413,750 41,511,000 0.3
Financial USD 5,875,000 Veba International
Services Finance (with Warrants),
6% due 4/06/2000 (a) 2,965,841 5,833,875 0.0
Government Bundesrepublik Deutscheland:
Obligations DEM 31,000,000 5.75% due 8/20/1998 22,444,131 18,278,123 0.1
DEM 215,500,000 7.375% due 1/03/2005 140,126,980 139,791,233 1.0
--------------- --------------- ------
162,571,111 158,069,356 1.1
Government DEM 55,000,000 Freie Hansestadt Hamburg,
Obligations-- 6.08% due 11/29/2018 31,730,765 32,870,182 0.2
Regional DEM 64,000,000 Land Baden-Wuerttemberg,
6.20% due 11/22/2013 37,148,769 38,769,839 0.3
DEM 170,500,000 Land Hessen, 6% due
11/29/2013 (c) 98,586,862 101,709,232 0.7
DEM 110,000,000 Mecklenberg-Vorpommern,
6.15% due 6/16/2023 (c) 61,012,437 65,036,916 0.5
DEM 134,950,000 Nordrhein-Westfalen, 6.125%
due 12/21/2018 (c) 77,420,913 80,886,838 0.6
Rheinland-Pfalz:
DEM 33,000,000 5.75% due 2/24/2014 18,324,663 19,607,000 0.1
DEM 64,000,000 6.08% due 11/29/2018 36,935,547 38,174,525 0.3
DEM 47,000,000 Sachsen-Anhalt, 6% due
1/10/2014 26,915,615 27,733,853 0.2
--------------- --------------- ------
388,075,571 404,788,385 2.9
Industrial USD 1,000,000 Siemens Capital Corp.
(with Warrants),
8% due 6/24/2002 (a) 1,318,750 1,854,100 0.0
Total Fixed-Income
Securities in Germany 613,473,546 633,783,386 4.5
Hong Kong Banking USD 17,500,000 Bank of East Asia, Convertible
Bonds, 2% due 7/19/2003 (n) 20,833,400 17,806,250 0.1
USD 11,500,000 First Pacific Company Ltd.,
2% due 3/27/2002 10,759,600 10,810,000 0.1
--------------- --------------- ------
31,593,000 28,616,250 0.2
Real Estate USD 24,980,000 Hysan Development
Company Limited,
Convertible Bonds, 6.75%
due 6/01/2000 (n) 29,762,300 24,730,200 0.2
USD 19,000,000 Sino Land Company Ltd.,
Convertible Bonds,
5% due 2/26/2001 (n) 18,316,875 16,435,000 0.1
--------------- --------------- ------
48,079,175 41,165,200 0.3
Total Fixed-Income
Securities in Hong Kong 79,672,175 69,781,450 0.5
India Chemicals USD 22,500,000 Indian Petrochemicals Ltd.,
2.50% due 3/11/2002 (q) 23,009,062 22,050,000 0.2
USD 30,250,000 Indian Petrochemicals Ltd.,
2.50% due 3/11/2002
(Regulation S) 30,516,342 29,645,000 0.2
Total Fixed-Income
Securities in India 53,525,404 51,695,000 0.4
Indonesia Paper & USD 19,500,000 APP International Finance,
Forest 11.75% due 10/01/2005 19,500,000 19,792,500 0.1
Products
</TABLE>
66
<PAGE>
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
Total Fixed-Income Securities
in Indonesia 19,500,000 19,792,500 0.1
Italy Government USD 5,000,000 Republic of Italy, 8.75%
Obligations due 2/08/2001 5,373,050 5,437,500 0.0
USD 32,985,000 Republic of Italy/INA,
Convertible Bonds,
5% due 6/28/2001 32,779,000 35,293,950 0.3
Total Fixed-Income
Securities in Italy 38,152,050 40,731,450 0.3
Japan Banking USD 13,250,000 Bank of Tokyo-Mitsubishi
Convertible Bonds,
3% due 11/30/2002 13,300,625 13,541,500 0.1
Beverages JPY 1,268,000,000 Kinki Coca-Cola Bottling
Co., Ltd., #1 Convertible
Bonds, 0.85% due 12/30/2003 11,282,608 10,495,466 0.1
JPY 1,408,000,000 Sanyo Coca-Cola Bottling
Inc., #1 Convertible Bonds,
0.90% due 6/30/2003 12,966,065 11,150,620 0.1
JPY 479,000,000 Shikoku Coca-Cola Bottling
Co., Ltd., #1 Convertible
Bonds, 2.40% due 3/29/2002 4,558,416 4,207,836 0.0
--------------- --------------- ------
28,807,089 25,853,922 0.2
Capital JPY 500,000,000 Kawasaki Heavy Industries,
Goods Convertible Bonds,
0.50% due 9/30/1998 4,566,161 4,117,794 0.0
Chemicals USD 4,700,000 Shin-Etsu Chemical Co.,
Ltd., Convertible Bonds
(with Warrants), 3.375%
due 8/08/2000 (a) 3,274,060 4,361,130 0.1
Shin-Etsu Chemical Co.,
Ltd., Convertible Bonds:
JPY 148,000,000 #5, 1.30% due 3/31/1999 1,577,446 2,052,375 0.0
JPY 301,000,000 #6, 0.40% due 9/30/2005 2,987,802 3,851,077 0.0
--------------- --------------- ------
7,839,308 10,264,582 0.1
Electrical JPY 1,204,000,000 Matsushita Electric
Equipment Works, Ltd., #9 Convertible
Bonds, 1% due 11/30/2005 12,091,160 10,516,596 0.1
Electronics JPY 650,000,000 Matsushita Electric
Industrial Co., Ltd.,
#5 Convertible Bonds, 1.30%
due 3/29/2002 6,133,347 6,921,221 0.0
Financial JPY 5,313,000,000 Fuji International
Services Finance Trust, 0.25%
due 2/01/2002 37,032,237 35,579,112 0.2
JPY 3,528,000,000 Sumitomo Bank International
Finance NV,
Convertible Bonds, 0.75%
due 5/31/2001 30,168,480 29,240,050 0.2
--------------- --------------- ------
67,200,717 64,819,162 0.4
Government JPY 17,395,000,000 Japanese Government Bond
Obligations #112 (10-Year Issue),
5% due 9/21/1998 149,822,891 150,420,951 1.1
Insurance JPY 456,000,000 Mitsui Marine & Fire
Insurance Co., Ltd.,
#3 Convertible Bonds,
0.70% due 3/31/2003 3,786,983 3,728,874 0.0
JPY 117,000,000 Nichido Fire & Marine
Insurance Co., Ltd.,
#5 Convertible Bonds,
1% due 3/31/2003 1,109,381 1,002,496 0.0
Nisshin Fire & Marine
Insurance Co., Ltd.,
Convertible Bonds:
JPY 800,000,000 #1, 0.65% due 3/31/2004 6,412,341 6,056,069 0.1
JPY 1,572,000,000 #2, 0.75% due 3/31/2006 12,292,248 11,481,707 0.1
Sumitomo Marine & Fire
Insurance Co., Ltd.,
Convertible Bonds:
JPY 300,000,000 #3, 1.10% due 3/29/2002 2,522,005 3,007,237 0.0
JPY 1,527,000,000 #4, 1.20% due 3/31/2004 13,104,977 14,862,241 0.1
JPY 588,000,000 Yasuda Fire & Marine
Insurance Co., Ltd.,
#3 Convertible Bonds,
0.60% due 3/30/2001 4,903,719 4,915,897 0.0
--------------- --------------- ------
44,131,654 45,054,521 0.3
Pharma- JPY 4,000,000,000 Yamanouchi Pharmaceutical
ceuticals Co., Ltd., Convertible
Bonds, 1.625% due
3/31/2000 (n) 41,915,632 39,763,747 0.3
Total Fixed-Income
Securities in Japan 375,808,584 371,273,996 2.6
</TABLE>
67
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Currency Face Value Percent of
COUNTRY Industries Denominations Amount Fixed-Income Securities Cost (Note 1a) Net Assets
<S> <S> <S> <C> <S> <C> <C> <C>
Malaysia Telecommuni- Telekom Malaysia BHD,
cations Convertible Bonds:
USD 3,000,000 4% due 10/03/2004 (q) $ 2,523,750 $ 2,415,000 0.0%
USD 49,500,000 4% due 10/03/2004
(Regulation S) 43,761,775 39,847,500 0.3
Total Fixed-Income
Securities in Malaysia 46,285,525 42,262,500 0.3
Mexico Government USD 54,000,000 United Mexican States,
Obligations 11.50% due 5/15/2026 (p) 55,695,000 57,445,200 0.4
Oil & Petroleos Mexicanos:
Related USD 45,150,000 8.625% due 12/01/2023 (r) 25,007,000 36,684,375 0.2
USD 9,000,000 9.50% due 9/15/2027 (q) 8,989,470 8,100,000 0.1
--------------- --------------- ------
33,996,470 44,784,375 0.3
Total Fixed-Income
Securities in Mexico 89,691,470 102,229,575 0.7
New Zealand Government NZD 44,000,000 New Zealand Index Linked
Obligations Notes, 4.50% due 2/15/2016 27,358,590 26,981,339 0.2
Total Fixed-Income
Securities in New Zealand 27,358,590 26,981,339 0.2
Philippines Financial PHP 13,000,000 AC International Finance,
Services 0% due 12/08/2000 (b) 9,911,909 9,750,000 0.1
Total Fixed-Income
Securities in the Philippines 9,911,909 9,750,000 0.1
Russia Telecommuni- PLD Telekom, Inc.,
cations Convertible Bonds:
USD 74,500,000 0/14% due 6/01/2004
(b)(j)(q) 64,663,486 71,520,000 0.5
USD 18,700,000 9% due 6/01/2006 (j)(q) 18,756,250 22,635,415 0.2
Total Fixed-Income
Securities in Russia 83,419,736 94,155,415 0.7
Singapore Industrial Keppel Corporation Limited,
Convertible Bonds:
USD 2,500,000 1.50% due 5/02/2001 2,060,000 2,050,000 0.0
USD 50,000,000 2% due 8/12/2002 (q) 49,872,500 45,750,000 0.3
USD 2,250,000 2% due 8/12/2002
(Regulation S) 2,123,125 2,058,750 0.0
--------------- --------------- ------
54,055,625 49,858,750 0.3
Retail USD 12,000,000 Dairy Farm International
Holdings Ltd. (Convertible
Preferred), 6.50% due
5/10/2049 9,525,875 9,000,000 0.1
Total Fixed-Income
Securities in Singapore 63,581,500 58,858,750 0.4
South Africa Metals ZAL 21,520,000 Samancor Ltd., Convertible
Bonds, 7% due 6/30/2004 20,753,175 20,659,200 0.1
Total Fixed-Income
Securities in South Africa 20,753,175 20,659,200 0.1
South Korea Banking Koram Bank Ltd.:
USD 1,500,000 0.25% due 8/26/2007 (q) 1,447,500 1,380,000 0.0
USD 3,600,000 0.25% due 8/26/2007
(Regulation S) 3,393,875 3,312,000 0.0
--------------- --------------- ------
4,841,375 4,692,000 0.0
Electronics Samsung Electronics Co.,
Convertible Bonds (b):
USD 8,500,000 0% due 12/31/2007 (q) 8,211,250 7,097,500 0.1
USD 46,500,000 0% due 12/31/2007
(Regulation S) 43,484,532 38,130,000 0.3
--------------- --------------- ------
51,695,782 45,227,500 0.4
</TABLE>
68
<PAGE>
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
Energy Ssangyong Oil Refining,
Related Convertible Bonds:
USD 10,685,000 3% due 12/31/2004 7,887,437 5,876,750 0.0
USD 16,535,000 3.75% due 12/31/2008 17,448,950 13,393,350 0.1
--------------- --------------- ------
25,336,387 19,270,100 0.1
Utilities-- USD 33,315,000 Korea Electric &
Electric Power Company, 5% due
8/01/2001 32,149,731 29,816,925 0.2
Total Fixed-Income
Securities in South Korea 114,023,275 99,006,525 0.7
Switzerland Chemicals USD 24,945,000 Ciba-Geigy Corp.,
Convertible Bonds, 6.25%
due 3/15/2016 25,632,050 25,443,900 0.2
Trading CHF 3,750,000 Daewoo Corporation,
Convertible Bonds,
0.125% due 12/31/2001 2,483,186 2,499,104 0.0
Total Fixed-Income
Securities in Switzerland 28,115,236 27,943,004 0.2
Taiwan Industrial USD 13,800,000 GVC Corporation, 0% due
5/21/2002 (b) (q) 13,794,000 14,352,000 0.1
Total Fixed-Income
Securities in Taiwan 13,794,000 14,352,000 0.1
United Cable/ USD 14,000,000 Comcast UK Cable Partners
Kingdom Telecom- Ltd., 0/11.20% due 11/15/2007
munications (b) 9,414,951 10,535,000 0.1
Diamond Cable Communications
PLC (b):
USD 7,600,000 0/11.75% due 12/15/2005 5,601,452 5,662,000 0.0
USD 2,250,000 0/10.75% due
2/15/2007 (q) 1,345,995 1,451,250 0.0
--------------- --------------- ------
16,362,398 17,648,250 0.1
Financial GBP 11,600,000 Liberty International
Services Holdings PLC, Convertible
Bonds, 5.50% due 4/30/2009 14,179,895 19,265,558 0.1
Food & GBP 13,500,000 Allied-Lyons PLC,
Beverage Convertible Bonds, 6.75%
due 7/07/2008 21,002,665 22,760,838 0.2
Government United Kingdom Treasury
Obligations Gilt:
GBP 60,000,000 10% due 9/08/2003 115,077,375 116,635,140 0.8
GBP 20,000,000 9.50% due 10/25/2004 37,627,645 38,878,380 0.3
--------------- --------------- ------
152,705,020 155,513,520 1.1
Industrial USD 4,655,000 HIH Capital Ltd., Convertible
Bonds (Bearer),
7.50% due 9/25/2006 3,031,037 3,770,550 0.0
Multi- GBP 10,375,000 English China Clays PLC,
Industry Convertible Bonds,
6.50% due 9/30/2003 16,476,672 16,882,947 0.1
Telecommuni- USD 39,000,000 Ionica PLC, 0/15% due
cations 5/01/2007 (b)(m) 20,333,014 21,060,000 0.2
USD 20,250,000 Millicom International
Cellular S.A., 0/13.50%
due 6/01/2006 (b) 12,619,316 15,187,500 0.1
USD 17,750,000 TeleWest Communications
PLC, 0/11% due 10/01/2007 (b) 12,829,621 13,046,250 0.1
--------------- --------------- ------
45,781,951 49,293,750 0.4
Textiles GBP 2,500,000 Coats Viyella PLC,
Convertible Bonds, Series B,
6.25% due 8/09/2003 3,535,704 3,868,965 0.0
Total Fixed-Income
Securities in the
United Kingdom 273,075,342 289,004,378 2.0
United Agricultural USD 14,000,000 Sun World International,
States Inc., 11.25% due
4/15/2004 (q) 14,000,000 14,770,000 0.1
Banking USD 14,250,000 Ocwen Federal Bank, 12%
due 6/15/2005 14,250,000 15,817,500 0.1
Biotech- USD 7,200,000 Cetus Corporation (Euro),
nology Convertible Bonds,
5.25% due 5/21/2002 5,220,250 6,984,000 0.1
Cable Adelphia Communications
Corporation (q):
USD 5,000,000 9.25% due 10/01/2002 5,000,000 4,987,500 0.0
USD 1,500,000 10.50% due 7/15/2004 1,500,000 1,563,750 0.0
--------------- --------------- ------
6,500,000 6,551,250 0.0
Financial USD 9,000,000 Emergent Group Inc.,
Services 10.75% due 9/15/2004 (q) 8,934,375 8,820,000 0.1
Financial USD 10,000,000 Ford Capital BV, 9.375%
Services-- due 1/01/1998 10,037,900 10,054,000 0.1
Captive
</TABLE>
69
<PAGE>
Merrill Lynch Global Allocation Fund, Inc., October 31, 1997
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Currency Face Value Percent of
COUNTRY Industries Denominations Amount Fixed-Income Securities Cost (Note 1a) Net Assets
<S> <S> <S> <C> <S> <C> <C> <C>
United Food & USD 15,000,000 Tom's Food Inc., 10.50%
States Beverage due 11/01/2004 (q) $ 15,000,000 $ 15,150,000 0.1%
(continued)
Healthcare USD 17,500,000 American Retirement
Corp., 5.75% due 10/01/2002 17,500,000 17,456,250 0.1
USD 1,000,000 Novacare, Inc.,
Convertible Bonds, 5.50%
due 1/15/2000 857,500 947,500 0.0
--------------- --------------- ------
18,357,500 18,403,750 0.1
Home- USD 32,500,000 Beazer Homes USA, Inc.,
building & 9% due 3/01/2004 30,597,000 32,500,000 0.2
Construction
Industrial USD 21,750,000 Crown Packaging Enterprises,
0/14% due 8/01/2006 (b) 8,561,524 1,087,500 0.0
USD 68,500,000 International Semi-Tech
Microelectronics, Inc.,
0/11.50% due 8/15/2003 (b) 48,990,100 32,880,000 0.2
USD 4,500,000 Port Royal Holdings Inc.,
10.25% due 10/01/2007 (q) 4,500,000 4,522,500 0.1
USD 4,000,000 WMX Technologies, Inc., 2%
due 1/24/2005 3,483,128 3,335,200 0.0
--------------- --------------- ------
65,534,752 41,825,200 0.3
Oil & PDV America, Inc.:
Related USD 35,000,000 7.25% due 8/01/1998 34,856,150 34,518,750 0.2
USD 10,000,000 7.75% due 8/01/2000 10,062,500 10,037,500 0.1
--------------- --------------- ------
44,918,650 44,556,250 0.3
Real Estate USD 23,128,168 RTC Commercial Mortgage,
Class C, 8.25%
due 12/25/2020 (d) 22,773,900 23,128,169 0.2
Real Estate USD 25,500,000 Alexander Haagen Properties,
Investment Inc., Exchangeable
Trusts Debentures, 7.25% due
12/27/2003 (q) 25,291,250 24,671,250 0.2
USD 4,500,000 Capstone Capital Corp.,
6.55% due 3/14/2002 4,108,502 4,218,750 0.0
USD 7,000,000 Centerpoint Properties Corp.,
Convertible Bonds,
8.22% due 1/15/2004 7,000,000 12,608,750 0.1
USD 30,000,000 First Union Real Estate,
8.875% due 10/01/2003 29,756,100 29,325,000 0.2
USD 25,000,000 First Washington Realty,
Exchangable Debentures,
8.25% due 6/27/1999 (r) 25,000,000 27,500,000 0.2
Health & Retirement Properties
Trust, Convertible Bonds:
USD 40,000,000 7.25% due 10/01/2001 40,000,000 41,100,000 0.3
USD 15,000,000 7.50% due 10/01/2003 15,000,000 15,525,000 0.1
LTC Properties, Inc.,
Convertible Bonds:
USD 10,000,000 8.25% due 1/01/1999 10,000,000 11,362,500 0.1
USD 9,000,000 8.50% due 1/01/2001 9,000,000 11,396,250 0.1
USD 12,500,000 8% due 7/01/2001 12,500,000 16,375,000 0.1
USD 25,000,000 Lepercq Corporate Income
Fund, Exchangeable
Secured Notes, 8% due
3/17/2004 (r) 25,000,000 29,187,500 0.2
Malan Realty Investors,
Inc., Convertible Bonds:
USD 27,000,000 8.50% due 7/01/2003 (q) 27,000,000 27,810,000 0.2
USD 4,750,000 9.50% due 7/15/2004 3,859,375 4,797,500 0.0
USD 9,415,000 Meditrust, Convertible
Bonds, 8.54% due 7/01/2000 9,602,637 12,015,894 0.1
USD 5,000,000 Mid-Atlantic Realty Trust,
Convertible Bonds,
7.625% due 9/15/2003 4,875,000 6,000,000 0.0
USD 22,000,000 National Health Investors,
Convertible Bonds,
7.75% due 1/01/2001 22,000,000 26,372,500 0.2
USD 23,000,000 Nationwide Health Properties
Inc., Convertible Bonds,
6.25% due 1/01/1999 22,800,000 23,057,500 0.2
</TABLE>
70
<PAGE>
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
USD 34,000,000 Omega Healthcare Investors
Inc., Convertible Bonds,
8.50% due 2/01/2001 34,052,500 42,287,500 0.3
USD 5,500,000 Sizeler Property Investors,
Inc., Convertible Bonds,
8% due 7/15/2003 5,505,000 5,417,500 0.0
--------------- --------------- ------
332,350,364 371,028,394 2.6
Resources USD 12,000,000 Freeport-McMoRan Resources,
8.75% due 2/15/2004 11,116,875 12,480,000 0.1
Retail-- USD 25,000,000 Coinstar Inc., 0/13% due
Miscellaneous 10/01/2006 (b)(k)(q) 19,388,383 19,750,000 0.1
Savings Bank USD 21,400,000 First Federal Financial
Corporation, 11.75% due
10/01/2004 21,401,250 23,754,000 0.2
Steel USD 8,000,000 Bar Technologies Ltd.,
3.50% due 4/01/2001 7,412,450 8,680,000 0.1
Telecommuni- USD 15,500,000 Call Net Enterprises, Inc.,
cations 0/13.25% due 12/01/2004 (b) 11,925,333 13,988,750 0.1
USD 120,363,000 CellNet Data Systems, Inc.,
0/14% due 10/01/2007
(b)(h)(q) 56,295,601 60,181,500 0.4
Geotek Communications, Inc.:
USD 99,000,000 0/15% due 7/15/2005 (b) 54,876,852 58,905,000 0.4
USD 22,650,000 Convertible Bonds, 12%
due 2/15/2001 (r) 22,463,875 18,912,750 0.1
USD 41,750,000 International Cabletel,
Series B, 0/11.50% due
2/01/2006 (b) 29,313,581 30,686,250 0.2
USD 35,750,000 Nextel Communications,
Inc., 0/9.75% due
8/15/2004 (b) 27,941,919 30,119,375 0.2
USD 13,000,000 Salem Communications
Corp., 9.50% due
10/01/2007 (q) 13,183,750 13,000,000 0.1
Telegroup Inc. (q):
USD 5,000,000 0/10.50% due 11/01/2004 (b) 3,871,095 3,712,500 0.0
USD 22,000,000 8% due 4/15/2005 22,000,000 24,200,000 0.2
USD 20,000,000 Unifi Communications, Inc.,
14% due 3/01/2004 (g)(q) 18,901,570 18,600,000 0.1
USD 41,650,000 United International
Holdings, Inc., 0% due
11/15/1999 (b)(f) 30,592,576 34,153,000 0.3
United USN, Inc. (b)(q):
USD 47,000,000 0/14% due 9/15/2003 (i) 28,060,805 32,430,000 0.3
USD 35,000,000 Convertible Bonds, 0/9%
due 9/30/2004 29,571,849 28,525,000 0.2
Winstar Communications Inc.:
USD 25,500,000 0/14% due 10/15/2005 (b) 16,292,308 17,850,000 0.1
USD 9,750,000 14.50% due 10/15/2005 (q) 11,177,363 11,261,250 0.1
USD 10,000,000 Winstar Equipment, 12.50%
due 3/15/2004 (q) 10,000,000 10,400,000 0.1
--------------- --------------- ------
386,468,477 406,925,375 2.9
Trans- USD 10,625,000 Eletson Holdings Inc.,
portation-- 9.25% due 11/15/2003 10,558,437 10,731,250 0.1
Shipping USD 19,250,000 Teekay Shipping Corporation,
8.32% due 2/01/2008 18,252,500 19,538,750 0.1
--------------- --------------- ------
28,810,937 30,270,000 0.2
Trucking USD 21,000,000 Ameritruck Distribution,
12.25% due 11/15/2005 20,718,075 21,945,000 0.2
US Federal National Mortgage
Government & Association (d):
Agency USD 6,913,881 8% due 10/01/2024 6,601,676 7,181,794 0.0
Obligations USD 13,782,986 8% due 12/01/2024 13,539,630 14,286,892 0.1
US Treasury Inflation
Indexed Notes:
USD 120,000,000 3.625% due 7/15/2002 119,354,400 120,702,293 0.9
USD 125,000,000 3.375% due 1/15/2007 123,217,917 125,232,138 0.9
US Treasury Notes & Bonds:
USD 341,100,000 6% due 5/31/1998(c) 339,137,636 342,031,203 2.4
USD 150,000,000 6.125% due 8/31/1998(c) 149,890,625 150,679,687 1.1
USD 200,000,000 5.75% due 12/31/1998 198,992,025 200,328,000 1.4
USD 750,000,000 5.875% due 2/28/1999 747,746,094 752,220,000 5.3
USD 300,000,000 5.875% due 2/15/2000 (c) 294,964,844 301,277,343 2.1
USD 100,000,000 6% due 8/15/2000 100,078,125 100,797,000 0.7
USD 55,000,000 7.875% due 8/15/2001 53,943,600 58,892,900 0.4
--------------- --------------- ------
2,147,466,572 2,173,629,250 15.3
</TABLE>
71
<PAGE>
Merrill Lynch Global Allocation Fund, Inc., October 31, 1997
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Currency Face Value Percent of
COUNTRY Industries Denominations Amount Fixed-Income Securities Cost (Note 1a) Net Assets
<S> <S> <S> <C> <S> <C> <C> <C>
United Video USD 94,025,000 CAI Wireless Systems,
States Services/ Inc., 12.25% due
(concluded) Telecommuni- 9/15/2002 $ 63,879,250 $ 26,797,125 0.2%
cations USD 122,500,000 CS Wireless Systems,
Inc., 0/11.375% due
3/01/2006 (b)(l) 61,250,805 33,075,000 0.2
USD 17,000,000 Heartland Wireless
Communications Inc.,
14% due 10/15/2004 12,885,000 7,990,000 0.1
USD 53,430,000 People's Choice T.V.
Corp., 0/13.125% due
6/01/2004 (b)(o) 25,921,874 19,501,950 0.1
Wireless One Inc.:
USD 27,750,000 13% due 10/15/2003 18,688,125 12,487,500 0.1
USD 16,250,000 0/13.50% due 8/01/2006 (b) 3,457,928 4,306,250 0.0
--------------- --------------- ------
186,082,982 104,157,825 0.7
Total Fixed-Income
Securities in the
United States 3,417,340,692 3,411,179,963 24.1
Total Investments in
Fixed-Income Securities 6,205,387,472 6,272,003,153 44.3
Short-Term Securities
Switzerland Certificates UBS Singapore:
of IDR 30,000,000,000 13.30% due 11/24/1997 8,287,293 8,356,546 0.1
Deposit IDR 28,050,000,000 13.50% due 11/26/1997 7,727,273 7,813,370 0.1
IDR 37,450,000,000 15% due 11/26/1997 10,460,894 10,431,755 0.1
IDR 73,700,000,000 13.25% due 12/03/1997 20,644,258 20,529,248 0.1
IDR 168,000,000,000 16.20% due 12/29/1997 46,280,992 46,796,657 0.3
--------------- --------------- ------
93,400,710 93,927,576 0.7
Time USD 113,000,000 United Bank of Switzerland,
Deposits-- 5.75% due 11/03/1997 113,000,000 113,000,000 0.8
Foreign
Total Short-Term Securities
in Switzerland 206,400,710 206,927,576 1.5
United Commercial USD 20,000,000 A.I. Credit Corp.,
States Paper* 5.47% due 11/13/1997 19,963,533 19,963,533 0.1
USD 32,340,000 AlliedSignal Inc.,
5.50% due 11/13/1997 32,280,710 32,280,710 0.2
Associates Corp. of
North America:
USD 30,000,000 5.51% due 12/03/1997 29,853,067 29,853,067 0.2
USD 70,000,000 5.48% due 12/16/1997 69,520,500 69,520,500 0.5
USD 50,000,000 BBV Finance (Delaware),
Inc., 5.50% due 11/21/1997 49,847,222 49,847,222 0.3
Bayerische Vereinsbank AG:
USD 40,000,000 5.49% due 11/14/1997 39,920,700 39,920,700 0.3
USD 60,000,000 5.475% due 12/08/1997 59,662,375 59,662,375 0.4
CIT Group Holdings, Inc.
(The):
USD 50,000,000 5.50% due 11/17/1997 49,877,778 49,877,778 0.3
USD 50,000,000 5.50% due 12/23/1997 49,602,778 49,602,778 0.3
USD 100,000,000 Caisse des Depots et
Consignations, 5.50% due
11/14/1997 99,801,389 99,801,389 0.7
Ciesco, L.P.:
USD 15,000,000 5.52% due 12/05/1997 14,921,800 14,921,800 0.1
USD 25,000,000 5.50% due 12/09/1997 24,854,861 24,854,861 0.2
Commerzbank US Finance Inc.:
USD 39,000,000 5.50% due 11/24/1997 38,862,958 38,862,958 0.3
USD 61,125,000 5.51% due 11/24/1997 60,909,823 60,909,823 0.4
USD 100,000,000 Delaware Funding Corp.,
5.52% due 11/19/1997 99,724,000 99,724,000 0.7
</TABLE>
72
<PAGE>
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
USD 50,000,000 Deutsche Bank Financial,
Inc., 5.48% due 11/07/1997 49,954,333 49,954,333 0.3
USD 50,000,000 Dresdner US Finance Inc.,
5.52% due 11/04/1997 49,977,000 49,977,000 0.3
USD 50,000,000 du Pont (E.I.) de Nemours,
Co., 5.48% due 11/06/1997 49,961,944 49,961,944 0.3
USD 10,000,000 Eastman Kodak Company, 5.48%
due 11/07/1997 9,990,867 9,990,867 0.1
USD 100,000,000 Eiger Capital Corp., 5.52%
due 11/10/1997 99,862,000 99,862,000 0.7
USD 50,000,000 Ford Motor Credit Co., 5.48%
due 12/09/1997 49,710,778 49,710,778 0.3
France Telecom S.A.:
USD 20,000,000 5.50% due 12/03/1997 19,902,222 19,902,222 0.1
USD 20,550,000 5.50% due 12/18/1997 20,402,440 20,402,440 0.1
USD 100,000,000 General Electric Capital PLC,
5.49% due 12/02/1997 99,527,250 99,527,250 0.7
General Electric Company PLC:
USD 50,000,000 5.53% due 11/05/1997 49,969,278 49,969,278 0.4
USD 50,000,000 5.48% due 12/01/1997 49,771,667 49,771,667 0.4
USD 50,000,000 Goldman Sachs Group L.P.,
5.53% due 11/12/1997 49,915,514 49,915,514 0.4
IBM Credit Corp.:
USD 50,000,000 5.47% due 11/19/1997 49,863,250 49,863,250 0.4
USD 50,000,000 5.50% due 12/11/1997 49,694,444 49,694,444 0.4
USD 75,000,000 International Lease Finance
Corporation,
5.48% due 11/14/1997 74,851,583 74,851,583 0.5
KFW International
Finance Inc.:
USD 18,000,000 5.47% due 11/03/1997 17,994,530 17,994,530 0.1
USD 25,000,000 5.48% due 11/05/1997 24,984,778 24,984,778 0.2
USD 29,977,000 Matterhorn Capital Corp.,
5.51% due 11/04/1997 29,963,236 29,963,236 0.2
MetLife Funding Corp.:
USD 65,566,000 5.49% due 11/04/1997 65,536,004 65,536,004 0.5
USD 25,000,000 5.51% due 11/25/1997 24,908,167 24,908,167 0.2
USD 45,000,000 Monsanto Company, 5.50% due
11/10/1997 44,938,125 44,938,125 0.3
USD 50,000,000 Morgan Stanley Group Inc.,
5.49% due 11/18/1997 49,870,375 49,870,375 0.4
USD 100,000,000 National Australia Funding
(Delaware) Inc.,
5.48% due 12/08/1997 99,436,778 99,436,778 0.7
USD 100,000,000 Societe Generale N.A., 5.53%
due 12/19/1997 99,262,667 99,262,667 0.7
Transamerica Finance Corp.:
USD 50,000,000 5.49% due 11/17/1997 49,878,000 49,878,000 0.4
USD 26,000,000 5.52% due 12/03/1997 25,872,427 25,872,427 0.2
USD 50,000,000 UBS Finance (Delaware) Inc.,
5.50% due 11/06/1997 49,961,806 49,961,806 0.4
USD 100,000,000 Vereinsbanken Finance
(Deleware) Inc.,
5.50% due 11/03/1997 99,969,444 99,969,444 0.7
USD 43,000,000 The Walt Disney Company,
5.49% due 11/05/1997 42,973,770 42,973,770 0.3
Xerox Credit Corp.:
USD 8,070,000 5.50% due 11/06/1997 8,063,835 8,063,835 0.1
USD 23,225,000 5.49% due 11/13/1997 23,182,498 23,182,498 0.2
USD 56,000,000 5.49% due 12/12/1997 55,649,860 55,649,860 0.4
--------------- --------------- ------
2,325,404,364 2,325,404,364 16.4
US Federal Home Loan
Government Mortgage Corp.:
Agency USD 9,471,000 5.41% due 11/12/1997 9,455,344 9,455,344 0.1
Obligations* USD 20,324,000 5.395% due 12/04/1997 20,223,489 20,223,489 0.1
USD 35,000,000 Federal National Mortgage
Association, 5.41% due
11/06/1997 34,973,701 34,973,701 0.2
--------------- --------------- ------
64,652,534 64,652,534 0.4
Total Short-Term Securities
in the United States 2,390,056,898 2,390,056,898 16.8
Total Investments in
Short-Term Securities 2,596,457,608 2,596,984,474 18.3
Total Investments 13,402,516,906 14,528,927,658 102.6
</TABLE>
73
<PAGE>
Merrill Lynch Global Allocation Fund, Inc., October 31, 1997
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<CAPTION>
OPTIONS Nominal Value Premiums Value Percent of
WRITTEN Covered by Uptions Issue Received (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Call Options 100,000 Aetna Inc., expiring
Written January 1998 at USD 85 $ (465,734) $ (87,500) 0.0%
100,000 Aetna Inc., expiring
January 1998 at USD 90 (734,475) (43,750) 0.0
150,000 Aetna Inc., expiring
April 1998 at USD 75 (914,219) (806,250) 0.0
1,000,000 GTE Corp., expiring
December 1997 at USD 42.50 (2,844,904) (1,750,000) 0.0
350,000 QUALCOMM Inc., expiring
January 1998 at USD 55 (2,308,173) (2,450,000) 0.0
50,000 QUALCOMM Inc., expiring
January 1998 at USD 70 (217,243) (106,250) 0.0
50,000 QUALCOMM Inc., expiring
November 1997 at USD 60 (129,746) (106,250) 0.0
250,000 Waste Management Inc.,
expiring January
1998 at USD 30 (476,859) (78,125) 0.0
Total Options Written (8,091,353) (5,428,125) 0.0
Total Investments, Net of Options Written $13,394,425,553 14,523,499,533 102.6
===============
Short Sales (Proceeds--$28,700,782)** (34,793,111) (0.3)
Unrealized Depreciation on Forward Foreign Exchange Contracts*** (26,323,675) (0.2)
Variation Margin on Financial Futures Contracts**** 3,823,820 0.0
Liabilities in Excess of Other Assets (303,171,455) (2.1)
--------------- ------
Net Assets $14,163,035,112 100.0%
=============== ======
<FN>
++Non-income producing security.
++++American Depositary Receipts.
*Commercial Paper and certain US Government Agency Obligations are
traded on a discount basis. The interest rates shown are the rates
in effect at October 31, 1997.
**Covered Short Sales entered into as of October 31, 1997 were as
follows:
Common Value
Shares Issue (Note 1i)
1,413,000 Yamanouchi Pharmaceutical Co., Ltd. $(34,793,111)
Total (Proceeds--$28,700,782) $(34,793,111)
============
***Forward Foreign Exchange Contracts sold as of October 31, 1997
were as follows:
Unrealized
Appreciation
Foreign Expiration (Depreciation)
Currency Sold Date (Notes 1a & 1c)
CHF 51,000,000 November 1997 $ (1,070,938)
CHF 47,000,000 January 1998 (811,800)
ESP 1,000,000,000 November 1997 (165,466)
ESP 2,000,000,000 February 1998 27,868
FRF 579,000,000 November 1997 (3,527,936)
FRF 195,000,000 December 1997 (1,106,535)
FRF 380,000,000 January 1998 (697,652)
GBP 26,000,000 November 1997 (1,703,754)
GBP 206,000,000 December 1997 (14,331,148)
NLG 72,000,000 November 1997 (1,308,363)
NLG 26,000,000 December 1997 (176,554)
NLG 78,000,000 January 1998 (688,977)
NOK 105,000,000 November 1997 (377,191)
SEK 380,000,000 January 1998 (385,229)
Total Unrealized Depreciation on Forward
Foreign Exchange Contracts--Net
(USD Commitment--$810,925,698) $(26,323,675)
============
****Financial Futures Contracts purchased as of October 31, 1997
were as follows:
Number of Expiration Value
Contracts Issue Exchange Date (Note 1a)
375 Hang Seng Index Hang Seng November 1997 $ 25,687,257
3,256 Nikkei 225 OSAKA December 1997 445,834,456
50 Standard & Poor's
500 Index NYSE December 1997 23,100,000
Total Financial Futures Contracts Purchased
(Total Contract Price--$542,627,412) $494,621,713
============
Financial Futures Contracts sold as of October 31, 1997 were as
follows:
Number of Expiration Value
Contracts Issue Exchange Date (Note 1a)
280 Japanese
Government Bond Tokyo December 1997 $304,200,982
60 Standard & Poor's
500 Index NYSE December 1997 27,720,000
200 US Treasury Bond NYSE December 1997 22,350,000
Total Financial Futures Contracts Sold
(Total Contract Price--$346,002,346) $354,270,982
============
</TABLE>
74
<PAGE>
(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 on a
step bond represents the fixed rate of interest that will
commence its accrual on a predetermined date until maturity.
(c)All or a portion of security held as collateral in connection
with open financial future contracts.
(d)Subject to principal paydowns as a result of prepayments or
refinancings of underlying mortgage instruments. As a result,
the average life may be less than the original maturity.
(e)Each $10 face amount contains 40 shares of First Place Tower,
Inc.
(f)Each $1,000 face amount contains one warrant of United
International Holdings, Inc.
(g)Each $1,000 face amount contains one warrant of Unifi
Communications, Inc.
(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)Each $1,000 face amount contains one warrant of PLD Telekom,
Inc.
(k)Each $1,000 face amount contains one warrant of Coinstar, Inc.
(l)Each $1,000 face amount contains 1.1 shares of common stock of
CS Wireless Systems, Inc.
(m)Each $1,000 face amount contains one warrant of Ionica PLC.
(n)Securities held as collateral in connection with covered short
sales.
(o)Each $1,000 face amount contains one warrant of People's Choice
T.V. Corp.
(p)Represents a Brady Bond. Brady Bonds are securities which have
been issued to refinance commercial bank loans and other debt.
The risk associated with these instruments is the amount of any
uncollateralized principal or interest payments since there is
a high default rate of commercial bank loans by countries
issuing these securities.
(q)The security may be offered and sold to "qualified institution-
al buyers" under Rule 144A of the Securities Act of 1933.
(r)Restricted securities as to resale. The value of the Fund's
investments in restricted securities was approximately
$136,590,000, representing 1.0% of net assets.
<TABLE>
<CAPTION>
Acquisition Value
Issue Date(s) Cost (Note 1a)
<S> <C> <C> <C>
Diva Systems Corp. 7/17/1996--
(Converitble, Series C) 8/22/1996 $ 8,410,000 $ 11,000,000
First Washington Realty,
Exchangable Debentures,
8.25% due 6/27/1999 6/27/1994 25,000,000 27,500,000
Geotek Communications,
Inc., Convertible Bonds, 3/01/1996--
12% due 2/15/200 3/31/1996 22,463,875 18,912,750
Ionica PLC 2/25/1997 10,286,966 11,832,448
Ionica PLC (Warrants) 2/25/1997 -- 1,472,654
Leperq Corporate Income
Fund, Exchangeable Secured
Notes, 8% due 3/17/2004 3/18/1997 25,000,000 29,187,500
Petroleos Mexicanos, 5/24/1996--
8.625% due 12/01/2023 8/01/1996 25,007,000 36,684,375
Total $116,167,841 $136,589,727
============ ============
</TABLE>
(s)Represents a pay-in-kind security which may pay interest in
additional shares/face.
+++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:
<TABLE>
<CAPTION>
Net Share Net Dividend
Industry Affiliate Activity Cost Income
<S> <S> <C> <C> <C>
Healthcare Advocat, Inc. -- -- ++
Services
Paper & Pulp Asia Pacific Resources
International
Holdings Ltd. (NY
Registered Shares) 2,002,200 $ 7,508,250 ++
Computer Borland International
Software Corp. -- -- ++
Textiles Burlington
Industries, Inc. -- -- ++
Utilities-- El Paso Electric
Electric & Company -- -- ++
Gas
Retail Stores Filene's Basement Corp. -- -- ++
Metals & Lukens Inc. -- -- $1,350,000
Mining
Real Estate Mid-America Realty
Investment Investments -- (171,964) 581,944
Trusts
Real Estate Prime Retail, Inc. 588,500 7,080,026 1,899,328
Investment
Trusts
Real Estate Prime Retail, Inc.
Investment (10.50%) (118,000) 2,950,000 2,069,813
Trusts
Insurance Risk Capital
Holdings Inc. 638,000 10,505,000 ++
Telecommu- Rogers Cantel Mobile
nications Communications Inc.
(Class B) 1,165,200 22,391,633 ++
Telecommu- Rogers Cantel Mobile
nications Communications Inc.
(Class B) (USD) 1,160,900 19,836,379 ++
Gaming Scientific Games
Holdings Corp. -- -- ++
++Non-income producing security.
See Notes to Financial Statements.
</TABLE>
75
<PAGE>
Merrill Lynch Global Allocation Fund, Inc., October 31, 1997
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of October 31, 1997
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$13,402,516,906)
(Note 1a) $14,528,927,658
Foreign cash (Note 1c) 184,731,673
Deposits on short sales (Note 1i) 52,215,639
Receivables:
Interest $ 105,789,488
Securities sold 42,282,878
Capital shares sold 15,285,433
Dividends 10,428,962
Variation margin (Note 1d) 3,823,820
Options written 914,219
Principal paydowns 174,777 178,699,577
---------------
Prepaid registration fees and other assets (Note 1g) 2,858,415
---------------
Total assets 14,947,432,962
---------------
Liabilities: Common stocks sold short, at market value
(proceeds--$28,700,782) (Note 1i) 34,793,111
Options written, at value (premiums paid--$8,091,353)
(Notes 1a & 1d) 5,428,125
Unrealized depreciation on forward foreign exchange
contracts (Note 1d) 26,323,675
Payables:
Securities purchased 639,889,506
Custodian bank (Note 1k) 29,082,387
Capital shares redeemed 25,056,168
Distributor (Note 2) 9,508,198
Investment adviser (Note 2) 8,081,652
Forward foreign exchange contracts (Note 1d) 805,020 712,422,931
---------------
Accrued expenses and other liabilities 5,430,008
---------------
Total liabilities 784,397,850
---------------
Net Assets: Net assets $14,163,035,112
===============
Net Assets Class A Shares of Common Stock, $0.10 par value,
Consist of: 450,000,000 shares authorized $ 13,395,622
Class B Shares of Common Stock, $0.10 par value,
2,000,000,000 shares authorized 63,109,447
Class C Shares of Common Stock, $0.10 par value,
200,000,000 shares authorized 4,332,712
Class D Shares of Common Stock, $0.10 par value,
900,000,000 shares authorized 9,311,545
Paid-in capital in excess of par 11,714,319,740
Undistributed investment income--net 260,070,062
Undistributed realized capital gains on investments and
foreign currency transactions--net 1,059,345,958
Unrealized appreciation on investments and foreign
currency transactions--net 1,039,150,026
---------------
Net assets $14,163,035,112
===============
Net Asset Class A--Based on net assets of $2,132,253,943
Value: and 133,956,220 shares outstanding $ 15.92
===============
Class B--Based on net assets of $9,879,603,597
and 631,094,470 shares outstanding $ 15.65
===============
Class C--Based on net assets of $671,466,862 and
43,327,119 shares outstanding $ 15.50
===============
</TABLE>
76
<PAGE>
<TABLE>
<S> <C>
Class D--Based on net assets of $1,479,710,710 and
93,115,446 shares outstanding $ 15.89
===============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
For the Year Ended October 31, 1997
<S> <S> <C> <C>
Investment Interest and discount earned (net of $136,135
Income foreign withholding tax) $ 604,947,856
(Notes 1e & 1f): Dividends (net of $5,718,574 foreign withholding tax) 106,585,253
Other 15,978,217
---------------
Total income 727,511,326
---------------
Expenses: Investment advisory fees (Note 2) $ 99,812,816
Account maintenance and distribution fees--Class B (Note 2) 94,703,295
Transfer agent fees--Class B (Note 2) 11,959,689
Account maintenance and distribution fees--Class C (Note 2) 5,392,525
Account maintenance fees--Class D (Note 2) 3,232,450
Custodian fees 2,440,432
Transfer agent fees--Class A (Note 2) 2,209,961
Transfer agent fees--Class D (Note 2) 1,398,918
Interest on short sales (Note 1i) 1,056,723
Printing and shareholder reports 1,032,534
Registration fees (Note 1g) 941,142
Dividends on short sales (Note 1i) 808,558
Transfer agent fees--Class C (Note 2) 732,201
Accounting services (Note 2) 718,491
Professional fees 186,802
Directors' fees and expenses 36,137
Pricing fees 23,168
Other 100,152
---------------
Total expenses before reimbursement 226,785,994
Reimbursement of expenses (Note 2) (11,605,587)
---------------
Total expenses after reimbursement 215,180,407
---------------
Investment income--net 512,330,919
---------------
Realized & Realized gain from:
Unrealized Gain Investments--net $ 1,067,656,865
(Loss) on Foreign currency transactions--net 187,279,376 1,254,936,241
Investments & ---------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net 104,999,111
(Notes 1c, 1d, Foreign currency transactions--net (25,089,022) 79,910,089
1f & 3): --------------- ---------------
Net realized and unrealized gain on
investments and foreign currency transactions 1,334,846,330
---------------
Net Increase in Net Assets Resulting from Operations $ 1,847,177,249
===============
See Notes to Financial Statements.
</TABLE>
77
<PAGE>
Merrill Lynch Global Allocation Fund, Inc., October 31, 1997
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended
October 31,
Increase (Decrease) in Net Assets: 1997 1996
<S> <S> <C> <C>
Operations: Investment income--net $ 512,330,919 $ 473,459,716
Realized gain on investments and foreign currency
transactions--net 1,254,936,241 653,947,236
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net 79,910,089 547,826,040
--------------- ---------------
Net increase in net assets resulting from operations 1,847,177,249 1,675,232,992
--------------- ---------------
Dividends & Investment income--net:
Distributions to Class A (111,208,977) (108,106,998)
Shareholders Class B (435,557,200) (425,282,978)
(Note 1h): Class C (23,496,200) (11,381,642)
Class D (64,960,694) (34,542,355)
Realized gain on investments--net:
Class A (79,203,184) (45,054,853)
Class B (378,949,932) (206,613,317)
Class C (17,801,965) (3,762,020)
Class D (45,374,563) (8,531,078)
--------------- ---------------
Net decrease in net assets resulting from dividends
and distributions to shareholders (1,156,552,715) (843,275,241)
--------------- ---------------
Capital Share Net proceeds from issuance of capital shares 1,540,268,692 2,041,810,853
Transactions Net proceeds from issuance of capital shares resulting
(Note 4): from reorganization -- 523,182,823
--------------- ---------------
Net increase in net assets derived from capital
share transactions 1,540,268,692 2,564,993,676
--------------- ---------------
Net Assets: Total increase in net assets 2,230,893,226 3,396,951,427
Beginning of year 11,932,141,886 8,535,190,459
--------------- ---------------
End of year* $14,163,035,112 $11,932,141,886
=============== ===============
<FN>
*Undistributed investment income--net (Note 1j) $ 260,070,062 $ 188,632,757
=============== ===============
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios
have been derived from information
provided in the financial statements. Class A
For the Year Ended October 31,
Increase (Decrease) in
Net Asset Value: 1997++ 1996++ 1995++ 1994 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of year $ 15.17 $ 14.21 $ 13.07 $ 13.52 $ 11.92
Performance: ----------- ----------- ----------- ----------- -----------
Investment income--net .71 .78 .79 .60 .39
Realized and unrealized
gain (loss) on investments
and foreign currency
transactions--net 1.57 1.59 1.04 (.31) 2.14
----------- ----------- ----------- ----------- -----------
Total from investment
operations 2.28 2.37 1.83 .29 2.53
----------- ----------- ----------- ----------- -----------
</TABLE>
78
<PAGE>
<TABLE>
<S> <S> <C> <C> <C> <C> <C>
Less dividends and
distributions:
Investment income--net (.88) (.98) (.39) (.51) (.81)
Realized gain on
investments--net (.65) (.43) (.30) (.23) (.12)
----------- ----------- ----------- ----------- -----------
Total dividends and
distributions (1.53) (1.41) (.69) (.74) (.93)
----------- ----------- ----------- ----------- -----------
Net asset value,
end of year $ 15.92 $ 15.17 $ 14.21 $ 13.07 $ 13.52
=========== =========== =========== =========== ===========
Total Investment Based on net asset
Return:* value per share 16.08% 17.81% 14.81% 2.14% 22.61%
=========== =========== =========== =========== ===========
Ratios to Average Expenses, net of
Net Assets: reimbursement .83% .86% .90% .89% .93%
=========== =========== =========== =========== ===========
Expenses .91% .93% .90% .89% .93%
=========== =========== =========== =========== ===========
Investment income--net 4.64% 5.31% 5.98% 4.60% 3.90%
=========== =========== =========== =========== ===========
Supplemental Net assets, end of year
Data: (in thousands) $ 2,132,254 $ 1,841,974 $ 1,487,805 $ 1,357,906 $ 917,806
=========== =========== =========== =========== ===========
Portfolio turnover 55.42% 51.26% 36.78% 57.04% 50.35%
=========== =========== =========== =========== ===========
Average commission rate
paid++++ $ .0307 $ .0048 -- -- --
=========== =========== =========== =========== ===========
<CAPTION>
The following per share data and ratios
have been derived from information
provided in the financial statements. Class B
For the Year Ended October 31,
Increase (Decrease) in
Net Asset Value: 1997++ 1996++ 1995++ 1994 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of year $ 14.95 $ 14.01 $ 12.91 $ 13.38 $ 11.83
Performance: ----------- ----------- ----------- ----------- -----------
Investment income--net .55 .62 .65 .46 .28
Realized and unrealized
gain (loss) on investments
and foreign currency
transactions--net 1.52 1.59 1.01 (.31) 2.11
----------- ----------- ----------- ----------- -----------
Total from investment
operations 2.07 2.21 1.66 .15 2.39
----------- ----------- ----------- ----------- -----------
Less dividends and
distributions:
Investment income--net (.72) (.84) (.26) (.39) (.72)
Realized gain on
investments--net (.65) (.43) (.30) (.23) (.12)
----------- ----------- ----------- ----------- -----------
Total dividends and
distributions (1.37) (1.27) (.56) (.62) (.84)
----------- ----------- ----------- ----------- -----------
Net asset value,
end of year $ 15.65 $ 14.95 $ 14.01 $ 12.91 $ 13.38
=========== =========== =========== =========== ===========
Total Investment Based on net asset
Return:* value per share 14.82% 16.71% 13.54% 1.13% 21.42%
=========== =========== =========== =========== ===========
Ratios to Average Expenses, net of
Net Assets: reimbursement 1.85% 1.87% 1.93% 1.91% 1.95%
=========== =========== =========== =========== ===========
Expenses 1.93% 1.95% 1.93% 1.91% 1.95%
=========== =========== =========== =========== ===========
Investment income--net 3.62% 4.29% 4.96% 3.58% 2.87%
=========== =========== =========== =========== ===========
Supplemental Net assets, end of year
Data: (in thousands) $ 9,879,603 $ 8,660,279 $ 6,668,499 $ 6,457,130 $ 4,299,545
=========== =========== =========== =========== ===========
Portfolio turnover 55.42% 51.26% 36.78% 57.04% 50.35%
=========== =========== =========== =========== ===========
Average commission rate
paid++++ $ .0307 $ .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 rate on the date of the transaction. Such
conversions may significantly affect the rate shown.
See Notes to Financial Statements.
</TABLE>
79
<PAGE>
Merrill Lynch Global Allocation Fund, Inc., October 31, 1997
<TABLE>
FINANCIAL HIGHLIGHTS (concluded)
<CAPTION>
Class C
The following per share data and ratios For the
have been derived from information provided Period
in the financial statements. For the Year Oct. 21, 1994++
Ended October 31, to Oct. 31,
Increase (Decrease) in Net Asset Value: 1997++++ 1996++++ 1995++++ 1994
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 14.83 $ 13.94 $ 12.91 $ 12.91
Operating ---------- ---------- ---------- ----------
Performance: Investment income--net .54 .61 .64 .01
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net 1.52 1.58 1.02 (.01)
---------- ---------- ---------- ----------
Total from investment operations 2.06 2.19 1.66 --
---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.74) (.87) (.33) --
Realized gain on investments--net (.65) (.43) (.30) --
---------- ---------- ---------- ----------
Total dividends and distributions (1.39) (1.30) (.63) --
---------- ---------- ---------- ----------
Net asset value, end of period $ 15.50 $ 14.83 $ 13.94 $ 12.91
========== ========== ========== ==========
Total Investment Based on net asset value per share 14.84% 16.68% 13.58% .00%+++
Return:** ========== ========== ========== ==========
Ratios to Average Expenses, net of reimbursement 1.86% 1.88% 1.95% 2.44%*
Net Assets: ========== ========== ========== ==========
Expenses 1.94% 1.95% 1.95% 2.44%*
========== ========== ========== ==========
Investment income--net 3.60% 4.24% 4.80% 3.71%*
========== ========== ========== ==========
Supplemental Net assets, end of period (in thousands) $ 671,467 $ 385,753 $ 102,361 $ 7,347
Data: ========== ========== ========== ==========
Portfolio turnover 55.42% 51.26% 36.78% 57.04%
========== ========== ========== ==========
Average commission rate paid++++++ $ .0307 $ .0048 -- --
========== ========== ========== ==========
<CAPTION>
Class D
The following per share data and ratios For the
have been derived from information provided Period
in the financial statements. For the Year Oct. 21, 1994++
Ended October 31, to Oct. 31,
Increase (Decrease) in Net Asset Value: 1997++++ 1996++++ 1995++++ 1994
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 15.15 $ 14.19 $ 13.08 $ 13.07
Operating ---------- ---------- ---------- ----------
Performance: Investment income--net .68 .77 .77 .01
Realized and unrealized gain on
investments and foreign
currency transactions--net 1.55 1.57 1.01 --
---------- ---------- ---------- ----------
Total from investment operations 2.23 2.34 1.78 .01
---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.84) (.95) (.37) --
Realized gain on investments--net (.65) (.43) (.30) --
---------- ---------- ---------- ----------
</TABLE>
80
<PAGE>
<TABLE>
<S> <S> <C> <C> <C> <C>
Total dividends and distributions (1.49) (1.38) (.67) --
---------- ---------- ---------- ----------
Net asset value, end of period $ 15.89 $ 15.15 $ 14.19 $ 13.08
========== ========== ========== ==========
Total Investment Based on net asset value per share 15.76% 17.59% 14.43% .08%+++
Return:** ========== ========== ========== ==========
Ratios to Average Expenses, net of reimbursement 1.08% 1.10% 1.16% 1.69%*
Net Assets: ========== ========== ========== ==========
Expenses 1.16% 1.18% 1.16% 1.69%*
========== ========== ========== ==========
Investment income--net 4.38% 5.04% 5.63% 4.46%*
========== ========== ========== ==========
Supplemental Net assets, end of period (in thousands) $1,479,711 $1,044,136 $ 256,525 $ 4,968
Data: ========== ========== ========== ==========
Portfolio turnover 55.42% 51.26% 36.78% 57.04%
========== ========== ========== ==========
Average commission rate paid++++++ $ .0307 $ .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 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 significantly affect the rate shown.
See Notes to Financial Statements.
</TABLE>
81
<PAGE>
Merrill Lynch Global Allocation Fund, Inc., October 31, 1997
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 valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Directors as
the primary market. Securities which are traded both in the over-the-
counter market and on a stock exchange are valued according to the
broadest and most representative market. Options written are valued
at the last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last
asked price. Options purchased are valued at the last sale price in
the case of exchange-traded options or, in the case of options
traded in the over-the-counter market, the last bid price. Short-
term securities are valued at amortized cost, which approximates
market value. Other investments, including futures contracts and
related options, are stated at market value. Securities and assets
for which market value quotations are not readily available are
valued at their fair value as determined in good faith by or under
the direction of the Fund's Board of Directors.
(b) Repurchase agreements--The Fund invests in US Government
securities pursuant to repurchase agreements with financial
institutions that have, in the opinion of Merrill Lynch Asset
Management, L.P. ("MLAM"), substantial capital relative to the
Fund's exposure, or have provided the Fund with a third-party
guaranty or other credit enhancement. Under such agreements, the
financial institution 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
operations 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 purchase
or sell listed or over-the-counter foreign currency options, foreign
currency futures and related options on foreign currency futures as
a short or long hedge against possible variations in foreign
exchange rates. Such transactions may be effected with respect to
hedges on non-US dollar denominated securities owned by the Fund,
sold by the Fund but not yet delivered, or committed or anticipated
to be purchased by the Fund.
* Options--The Fund is authorized to purchase and write covered call
and put options. When the Fund writes an option, an amount equal to
the premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current value of the option written.
When a security is 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).
82
<PAGE>
Written and purchased options are non-income producing investments.
* Financial futures contracts--The Fund may purchase or sell
interest rate futures contracts and options on such futures
contracts for the purpose of hedging the market risk on existing
securities or the intended purchase of securities. Futures contracts
are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a
contract, the Fund deposits and maintains as collateral such initial
margin as required by the exchange on which the transaction is
effected. Pursuant to the contract, the Fund agrees to receive from
or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are
known as variation margin and are recorded by the Fund as unrealized
gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of
the contract at the time it was opened and the value at the time it
was closed.
(e) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required. Under the applicable foreign tax law, a
withholding tax may be imposed on interest, dividends, and capital
gains at various rates.
(f) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Dividend income is recorded on the ex-
dividend dates. Dividends from foreign securities where the ex-
dividend date may have passed are subsequently recorded when the
Fund has determined 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 adjusted to reflect
permanent differences between financial and tax reporting.
Accordingly, current year's permanent book/tax differences of
$194,329,457 have been reclassified between undistributed net
realized capital gains and undistributed net investment income.
These reclassifications have no effect on net assets or net asset
values per share.
(k) Custodian bank--The Fund recorded an amount payable to the
Custodian Bank resulting from a timing difference of security
transaction settlements.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
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%, from 0.70% to
0.65% for average daily net assets in excess of $5 billion, from
0.65% to 0.625% for average daily net assets in excess of $7.5
billion, and from 0.625% to 0.60% for average daily net assets in
excess of $10 billion. For the year ended October 31, 1997, MLAM
earned fees of $99,812,816, of which $11,605,587 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, 1997, MLAM paid MLAM U.K. a fee
of $10,062,279 pursuant to such agreement.
Pursuant to the Distribution Plans adopted by the Fund in accordance
with Rule 12b-1 under the Investment Company Act of 1940, the Fund
pays the Distributor ongoing account maintenance and distribution
fees. The fees are accrued daily and paid monthly at
83
<PAGE>
annual rates based upon the average daily net assets of the shares
as follows:
Merrill Lynch Global Allocation Fund, Inc., October 31, 1997
NOTES TO FINANCIAL STATEMENTS (continued)
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 distribution
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, 1997, MLFD earned underwriting
discounts and direct commissions and MLPF&S earned dealer
concessions on sales of the Fund's Class A and Class D Shares as
follows:
MLFD MLPF&S
Class A $ 47,810 $ 658,064
Class D $237,188 $3,005,210
For the year ended October 31, 1997, MLPF&S received contingent
deferred sales charges of $12,451,911 and $215,161 relating to
transactions in Class B and Class C Shares, respectively.
Furthermore, MLPF&S received contingent deferred sales charges of
$6,066 relating to transactions subject to front end sales charge
waivers in Class D Shares.
In addition, MLPF&S received $238,952 in commissions on the
execution of portfolio security transactions for the Fund for the
year ended October 31, 1997.
For the year ended October 31, 1997, the Fund paid Merrill Lynch
Security Pricing Service, an affiliate of MLPF&S, $683 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, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended October 31, 1997 were $7,283,894,845 and
$5,636,369,251, respectively.
Net realized and unrealized gains (losses) as of October 31, 1997
were as follows:
Realized Unrealized
Gains (Losses) Gains (Losses)
Long-term investments $1,077,375,774 $1,125,883,886
Short-term investments (6,026) 526,866
Short sales investments 10,882,530 (6,092,329)
Options written 542,106 2,663,228
Financial futures contracts (21,137,519) (56,274,335)
Forward foreign exchange contracts 233,507,856 (26,323,675)
Foreign currency transactions (46,228,480) (1,233,615)
-------------- --------------
Total $1,254,936,241 $1,039,150,026
============== ==============
As of October 31, 1997, net unrealized appreciation for Federal
income tax purposes aggregated $1,107,182,968, of which
$1,531,855,563 related to appreciated securities and $424,672,595
related to depreciated securities. At October 31, 1997, the
aggregate cost of investments for Federal income tax purposes was
$13,416,316,565.
Transactions in call options written for the year ended October 31,
1997 were as follows:
Nominal Value Premiums
Covered Received
Outstanding call options written,
beginning of year -- --
Options written 4,400,000 $ 13,146,846
Options closed (2,350,000) (5,055,493)
----------- -------------
Outstanding call options written,
end of year 2,050,000 $ 8,091,353
=========== =============
Transactions in put options written for the year ended October 31,
1997 were as follows:
Nominal Value Premiums
Covered Paid
Outstanding put options written,
beginning of year -- --
Options written 100,000 $ 374,830
Options closed (100,000) (374,830)
----------- -------------
Outstanding put options written,
end of year -- $ --
=========== =============
84
<PAGE>
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions
was $1,540,268,692 and $2,564,993,676 for the years ended October
31, 1997 and October 31, 1996, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Year Dollar
Ended October 31, 1997 Shares Amount
Shares sold 29,258,107 $ 446,649,910
Shares issued to shareholders in reinvest-
ment of dividends and distributions 11,603,933 170,013,343
------------ --------------
Total issued 40,862,040 616,663,253
Shares redeemed (28,298,487) (435,986,811)
------------ --------------
Net increase 12,563,553 $ 180,676,442
============ ==============
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
============ ==============
Class B Shares for the Year Dollar
Ended October 31, 1997 Shares Amount
Shares sold 121,098,572 $1,825,730,372
Shares issued to shareholders in
reinvestment of dividends and
distributions 49,478,020 713,661,687
------------ --------------
Total issued 170,576,592 2,539,392,059
Shares redeemed (108,673,162) (1,647,892,648)
Automatic conversion of shares (10,144,962) (152,808,738)
------------ --------------
Net increase 51,758,468 $ 738,690,673
============ ==============
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 C Shares for the Year Dollar
Ended October 31, 1997 Shares Amount
Shares sold 21,707,656 $ 324,717,339
Shares issued to shareholders in
reinvestment of dividends and
distributions 2,575,436 36,957,125
------------ --------------
Total issued 24,283,092 361,674,464
Shares redeemed (6,974,368) (104,951,727)
------------ --------------
Net increase 17,308,724 $ 256,722,737
============ ==============
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 D Shares for the Year Dollar
Ended October 31, 1997 Shares Amount
Shares sold 22,634,091 $ 346,497,021
Automatic conversion of shares 10,015,861 152,808,738
Shares issued to shareholders in
reinvestment of dividends and
distributions 6,415,926 94,133,358
------------ --------------
Total issued 39,065,878 593,439,117
Shares redeemed (14,860,090) (229,260,277)
------------ --------------
Net increase 24,205,788 $ 364,178,840
============ ==============
85
<PAGE>
Merrill Lynch Global Allocation Fund, Inc., October 31, 1997
NOTES TO FINANCIAL STATEMENTS (concluded)
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
============ ==============
5. Commitments:
At October 31, 1997, 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 currencies with approximate values of $146,479,000 and
$46,422,000, respectively.
86
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies......................................... 2
Precious Metal-Related Securities........................................ 2
Real Estate-Related Securities........................................... 3
Portfolio Strategies Involving Options and Futures....................... 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........................................................... 22
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.............................................. 30
Exchange Privilege....................................................... 32
Dividends, Distributions and Taxes........................................ 34
Dividends and Distributions.............................................. 34
Taxes.................................................................... 34
Tax Treatment of Options, Futures and Forward Foreign Exchange
Transactions........................................................... 37
Special Rules for Certain Foreign Currency Transactions.................. 37
Performance Data.......................................................... 38
General Information....................................................... 40
Description of Shares.................................................... 40
Computation of Offering Price Per Share.................................. 40
Independent Auditors..................................................... 41
Custodian................................................................ 41
Transfer Agent........................................................... 41
Legal Counsel............................................................ 41
Reports to Shareholders.................................................. 42
Additional Information................................................... 42
Security Ownership of Certain Beneficial Owners.......................... 42
Appendix.................................................................. 43
Independent Auditors' Report.............................................. 50
Financial Statements...................................................... 52
</TABLE>
Code # 10811-0298
[LOGO] MERRILL LYNCH
Merrill Lynch
Global Allocation
Fund, Inc.
[ART]
STATEMENT OF ADDITIONAL INFORMATION
February 12, 1998
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS
Contained in Part A:
Financial Highlights for each of the years in the eight-year period
ended October 31, 1997 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, 1997.
Statement of Assets and Liabilities as of October 31, 1997.
Statement of Operations for the year ended October 31, 1997.
Statements of Changes in Net Assets for each of the years in the two-
year period ended October 31, 1997.
Financial Highlights for each of the years in the five-year period
ended October 31, 1997.
(B) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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.(d)
(e) --Articles Supplementary to the Articles of Incorporation of the
Registrant, dated December 16, 1993.(d)
(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.(d)
(i) --Articles Supplementary to the Articles of Incorporation of the
Registrant, dated November 6, 1996 (including Certificate of
Correction dated February 19, 1997 filed with respect thereto).(d)
(j) --Articles Supplementary to the Articles of Incorporation of the
Registrant, dated November 12, 1997.
2 --By-Laws of the Registrant.(c)
3 --None.
4 --Portions of the Articles of Incorporation, as amended, and the By-
Laws of the Registrant defining rights of Shareholders.(e)
5(a) --Management Agreement between the Registrant and Merrill Lynch Asset
Management, Inc., dated December 13, 1988.(c)
(b) --Sub-Advisory Agreement between Merrill Lynch Asset Management, Inc.
and Merrill Lynch Asset Management U.K. Limited, dated January 18,
1989.(c)
(c) --Supplement to Management Agreement between the Registrant and
Merrill Lynch Asset Management, L.P., dated January 3, 1994.(f)
6(a) --Class A Shares Distribution Agreement between the Registrant and
Merrill Lynch Funds Distributor, Inc.(f)
(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.(f)
(e) --Class D Shares Distribution Agreement between the Registrant and
Merrill Lynch Funds Distributor, Inc.(f)
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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, Inc.(c)
14 --None.
15(a) --Amended and Restated Class B Distribution Plan and Class B
Distribution Plan Sub-Agreement of the Registrant.(a)
(b) --Class C Distribution Plan and Class C Distribution Plan Sub-
Agreement of the Registrant.(f)
(c) --Class D Distribution Plan and Class D Distribution Plan Sub-
Agreement of the Registrant.(f)
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 Pricing(SM) System Plan Pursuant to Rule 18f-
3.(g)
</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 to the Registration Statement.
(d) Filed on February 25, 1997, as an Exhibit to Post-Effective Amendment No.
11 to the Registration Statement.
(e) 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), 1(i) and 1(j)
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.
(f) Filed on October 18, 1994, as an Exhibit to Post-Effective Amendment No. 8
to the Registration Statement.
(g) 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, 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.
C-2
<PAGE>
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
DECEMBER 31,
TITLE OF CLASS 1997*
-------------- ------------
<S> <C>
Class A Common Stock, par value $0.10 per share.................... 50,124
Class B Common Stock, par value $0.10 per share.................... 573,032
Class C Common Stock, par value $0.10 per share.................... 61,306
Class D Common Stock, par value $0.10 per share.................... 100,860
</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 ("Merrill Lynch").
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, (the "1940 Act")
may be concerned, such payments will be made only on the following conditions:
(i) the advances must be limited to amounts used, or to be used, for the
preparation or presentation of a defense to the action, including costs
connected with the preparation of a settlement; (ii) advances may be made only
upon receipt of a written promise by, or on behalf of, the recipient to repay
that amount of the advance which exceeds the amount 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 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 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, the
Prospectus or the Statement of Additional Information.
C-3
<PAGE>
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
the investment adviser for the following open-end registered 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 Convertible 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 Growth 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 Real Estate Fund, Inc., 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 Hotchkis and Wiley Funds (advised by Hotchkis
and Wiley, a division of MLAM); and for the following closed-end registered
investment companies: Merrill Lynch High Income Municipal Bond Fund, Inc., and
Merrill Lynch Senior Floating Rate Fund, Inc. MLAM also acts as sub-adviser to
Merrill Lynch World Strategy Portfolio and Merrill Lynch Basic Value Equity
Portfolio, two investment portfolios of EQ Advisors Trust.
Fund Asset Management, L.P. ("FAM"), an affiliate of the Manager, acts as
the investment adviser for the following open-end registered 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 Fund Accumulation Program, Inc.; and for the following
closed-end registered investment companies: Apex Municipal Fund, Inc.,
Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc., Corporate
High Yield Fund III, Inc., Debt Strategies Fund, Inc., Income Opportunities
Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Municipal
Strategy Fund, Inc., MuniAssets Fund, Inc., MuniEnhanced Fund, Inc.,
MuniHoldings California Insured Fund, Inc., MuniHoldings Florida Insured Fund,
MuniHoldings Fund, Inc., MuniHoldings New York Insured 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.,
C-4
<PAGE>
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. 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 Intermediate Government Bond
Fund is One Financial Center, 23rd Floor, Boston, Massachusetts 02111-2665.
The address of the Manager, 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 and Merrill Lynch & Co., Inc. ("ML & Co.") is
World Financial Center, North Tower, 250 Vesey Street, New York, New York
10281-1201. The address of the Fund's transfer agent, 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, 1995 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........... Chairman Chairman of FAM since 1997; President of
the Manager and FAM from 1977 to 1997;
Chairman of Princeton Services since
1997, Director thereof since 1993 and
President thereof from 1993 to 1997;
Executive Vice President of ML & Co.
Jeffrey M. Peek......... President President of FAM since 1997; President
and Director of Princeton Services
since 1997; Executive Vice President of
ML & Co.
Terry K. Glenn.......... Executive Vice Executive Vice President of FAM;
President Executive Vice President and Director
of Princeton Services; President and
Director of MLFD; Director of MLFDS;
President of Princeton Administrators,
L.P.
Linda L. Federici....... Senior Vice Senior Vice President of FAM; Senior
President Vice President of Princeton Services
Vincent R. Giordano..... Senior Vice Senior Vice President of FAM; Senior
President Vice President of Princeton Services
Elizabeth A. Griffin.... Senior Vice Senior Vice President of FAM; Senior
President Vice President of Princeton Services
Norman R. Harvey........ Senior Vice Senior Vice President of FAM; Senior
President Vice President of Princeton Services
Michael J. Hennewinkel.. Senior Vice Senior Vice President of FAM; Senior
President Vice President of Princeton Services
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
---- ------------- ----------------------------------
<S> <C> <C>
Philip L. Kirstein...... Senior Vice Senior Vice President, General Counsel
President, General and Secretary of FAM; Senior Vice
Counsel and President, General Counsel, Director
Secretary and Secretary of Princeton Services
Ronald M. Kloss......... Senior Vice Senior Vice President of FAM; Senior
President Vice President of Princeton Services
Debra W. Landsman-Yaros. Senior Vice Senior Vice President of MLAM; Vice
President President of MLFD; Senior Vice
President of Princeton Services
Stephen M.M. Miller..... Senior Vice Executive Vice President of Princeton
President Administrators, L.P.; Senior Vice
President of Princeton Services
Joseph T. Monagle, Jr... Senior Vice Senior Vice President of FAM; Senior
President Vice President of Princeton Services
Michael L. Quinn........ Senior Vice Senior Vice President of FAM; Senior
President Vice President of Princeton Services;
Managing Director and First Vice
President of Merrill Lynch from 1989 to
1995
Richard L. Reller....... Senior Vice Senior Vice President of FAM; Senior
President Vice President of Princeton Services;
Director of MLFD
Gerald M. Richard....... Senior Vice Senior Vice President and Treasurer of
President and FAM; Senior Vice President and
Treasurer Treasurer of Princeton Services; Vice
President and Treasurer of MLFD
Gregory D. Upah......... Senior Vice Senior Vice President of MLAM; Senior
President Vice President of Princeton Services
Ronald L. Welburn....... Senior Vice Senior Vice President of FAM; Senior
President 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., Corporate High Yield
Fund III, 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 Convertible Fund, Inc., 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 Growth 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 Real Estate 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.
C-6
<PAGE>
Set forth below is a list of each executive officer and director of MLAM
U.K. indicating each business, profession, vocation or employment of a
substantial nature in which each such person has been engaged since November
1, 1995, for his own account or in the capacity of director, officer, partner
or trustee. In addition, Messrs. Zeikel, Albert and Richard 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 of the Manager and FAM since
Chairman 1997; Chairman of Princeton Services
since 1997, Director thereof since 1993
and President thereof from 1993 to
1997; President of the Manager and FAM
from 1977 to 1997; Executive Vice
President of ML & Co.
Alan J. Albert.......... Senior Managing Vice President of the Manager
Director
Nicholas C.D. Hall...... Director Director of Merrill Lynch Europe PLC;
General Counsel of Merrill Lynch
International Private Banking Group
Gerald M. Richard....... Senior Vice Senior Vice President and Treasurer of
President the Manager and FAM; Senior Vice
President and Treasurer of Princeton
Services; Vice President and Treasurer
of MLFD
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 registered 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 registered investment companies:
Merrill Lynch High Income Municipal Bond Program, Inc., Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch Senior Floating Rate Fund,
Inc.
(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, 23rd 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
Richard L. Reller....... Director None
Thomas J. Verage........ Director None
William E. Aldrich...... Senior Vice President None
Robert W. Crook......... Senior Vice President None
Michael J. Brady........ Vice President None
William M. Breen........ Vice President None
Michael G. Clark........ 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-7
<PAGE>
(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, MLFDS (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 the caption "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.
C-8
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT CERTIFIES THAT IT MEETS ALL OF
THE REQUIREMENTS FOR EFFECTIVENESS OF THIS 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
12TH DAY OF FEBRUARY, 1998.
MERRILL LYNCH GLOBAL ALLOCATION
FUND, INC. (Registrant)
/s/ Gerald M. Richard
By: _________________________________
(GERALD M. RICHARD, TREASURER)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS POST-
EFFECTIVE AMENDMENT TO ITS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE
FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE(S) INDICATED.
SIGNATURES TITLE DATE
Arthur Zeikel* President and
- ------------------------------------- Director (Principal
(ARTHUR ZEIKEL) Executive Officer)
Gerald M. Richard* Treasurer (Principal
- ------------------------------------- Financial and
(GERALD M. RICHARD) Accounting Officer)
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)
/s/ Gerald M. Richard
*By: ________________________________ February 12,
(GERALD M. RICHARD, ATTORNEY-IN- 1998
FACT)
C-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
1(j) --Articles Supplementary to the Articles of Incorporation of the
Registrant, dated November 12, 1997.
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>
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.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 13365724771
<INVESTMENTS-AT-VALUE> 14488706422
<RECEIVABLES> 178699577
<ASSETS-OTHER> 239805727
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 14907211726
<PAYABLE-FOR-SECURITIES> 639889506
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 104287108
<TOTAL-LIABILITIES> 744176614
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11804469066
<SHARES-COMMON-STOCK> 133956220
<SHARES-COMMON-PRIOR> 121392667
<ACCUMULATED-NII-CURRENT> 260070062
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1059345958
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1039150026
<NET-ASSETS> 2132253943
<DIVIDEND-INCOME> 106585253
<INTEREST-INCOME> 604947856
<OTHER-INCOME> 15978217
<EXPENSES-NET> (215180407)
<NET-INVESTMENT-INCOME> 512330919
<REALIZED-GAINS-CURRENT> 1254936241
<APPREC-INCREASE-CURRENT> 79910089
<NET-CHANGE-FROM-OPS> 1847177249
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (111208977)
<DISTRIBUTIONS-OF-GAINS> (79203184)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 29258107
<NUMBER-OF-SHARES-REDEEMED> (28298487)
<SHARES-REINVESTED> 11603933
<NET-CHANGE-IN-ASSETS> 2230893226
<ACCUMULATED-NII-PRIOR> 188632757
<ACCUMULATED-GAINS-PRIOR> 520067231
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 99812816
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 226785994
<AVERAGE-NET-ASSETS> 2044255827
<PER-SHARE-NAV-BEGIN> 15.17
<PER-SHARE-NII> .71
<PER-SHARE-GAIN-APPREC> 1.57
<PER-SHARE-DIVIDEND> (.88)
<PER-SHARE-DISTRIBUTIONS> (.65)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.92
<EXPENSE-RATIO> .91
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 13365724771
<INVESTMENTS-AT-VALUE> 14488706422
<RECEIVABLES> 178699577
<ASSETS-OTHER> 239805727
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 14907211726
<PAYABLE-FOR-SECURITIES> 639889506
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 104287108
<TOTAL-LIABILITIES> 744176614
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11804469066
<SHARES-COMMON-STOCK> 631094470
<SHARES-COMMON-PRIOR> 579336002
<ACCUMULATED-NII-CURRENT> 260070062
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1059345958
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1039150026
<NET-ASSETS> 9879603597
<DIVIDEND-INCOME> 106585253
<INTEREST-INCOME> 604947856
<OTHER-INCOME> 15978217
<EXPENSES-NET> (215180407)
<NET-INVESTMENT-INCOME> 512330919
<REALIZED-GAINS-CURRENT> 1254936241
<APPREC-INCREASE-CURRENT> 79910089
<NET-CHANGE-FROM-OPS> 1847177249
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (435557200)
<DISTRIBUTIONS-OF-GAINS> (378949932)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 121098572
<NUMBER-OF-SHARES-REDEEMED> (118818124)
<SHARES-REINVESTED> 49478020
<NET-CHANGE-IN-ASSETS> 2230893226
<ACCUMULATED-NII-PRIOR> 188632757
<ACCUMULATED-GAINS-PRIOR> 520067231
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 99812816
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 226785994
<AVERAGE-NET-ASSETS> 9469303115
<PER-SHARE-NAV-BEGIN> 14.95
<PER-SHARE-NII> .55
<PER-SHARE-GAIN-APPREC> 1.52
<PER-SHARE-DIVIDEND> (.72)
<PER-SHARE-DISTRIBUTIONS> (.65)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.65
<EXPENSE-RATIO> 1.93
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. CLASS C
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 13365724771
<INVESTMENTS-AT-VALUE> 14488706422
<RECEIVABLES> 178699577
<ASSETS-OTHER> 239805727
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 14907211726
<PAYABLE-FOR-SECURITIES> 639889506
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 104287108
<TOTAL-LIABILITIES> 744176614
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11804469066
<SHARES-COMMON-STOCK> 43327119
<SHARES-COMMON-PRIOR> 26018395
<ACCUMULATED-NII-CURRENT> 260070062
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1059345958
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1039150026
<NET-ASSETS> 671466862
<DIVIDEND-INCOME> 106585253
<INTEREST-INCOME> 604947856
<OTHER-INCOME> 15978217
<EXPENSES-NET> (215180407)
<NET-INVESTMENT-INCOME> 512330919
<REALIZED-GAINS-CURRENT> 1254936241
<APPREC-INCREASE-CURRENT> 79910089
<NET-CHANGE-FROM-OPS> 1847177249
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (23496200)
<DISTRIBUTIONS-OF-GAINS> (17801965)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 21707656
<NUMBER-OF-SHARES-REDEEMED> (6974368)
<SHARES-REINVESTED> 2575436
<NET-CHANGE-IN-ASSETS> 2230893226
<ACCUMULATED-NII-PRIOR> 188632757
<ACCUMULATED-GAINS-PRIOR> 520067231
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 99812816
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 226785994
<AVERAGE-NET-ASSETS> 538896905
<PER-SHARE-NAV-BEGIN> 14.83
<PER-SHARE-NII> .54
<PER-SHARE-GAIN-APPREC> 1.52
<PER-SHARE-DIVIDEND> (.74)
<PER-SHARE-DISTRIBUTIONS> (.65)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.50
<EXPENSE-RATIO> 1.94
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 004
<NAME> MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. CLASS D
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 13365724771
<INVESTMENTS-AT-VALUE> 14488706422
<RECEIVABLES> 178699577
<ASSETS-OTHER> 239805727
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 14907211726
<PAYABLE-FOR-SECURITIES> 639889506
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 104287108
<TOTAL-LIABILITIES> 744176614
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11804469066
<SHARES-COMMON-STOCK> 93115446
<SHARES-COMMON-PRIOR> 68909658
<ACCUMULATED-NII-CURRENT> 260070062
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1059345958
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1039150026
<NET-ASSETS> 1479710710
<DIVIDEND-INCOME> 106585253
<INTEREST-INCOME> 604947856
<OTHER-INCOME> 15978217
<EXPENSES-NET> (215180407)
<NET-INVESTMENT-INCOME> 512330919
<REALIZED-GAINS-CURRENT> 1254936241
<APPREC-INCREASE-CURRENT> 79910089
<NET-CHANGE-FROM-OPS> 1847177249
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (64960694)
<DISTRIBUTIONS-OF-GAINS> (45374563)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 32649952
<NUMBER-OF-SHARES-REDEEMED> (14860090)
<SHARES-REINVESTED> 6415926
<NET-CHANGE-IN-ASSETS> 2230893226
<ACCUMULATED-NII-PRIOR> 188632757
<ACCUMULATED-GAINS-PRIOR> 520067231
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 99812816
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 226785994
<AVERAGE-NET-ASSETS> 1292481102
<PER-SHARE-NAV-BEGIN> 15.15
<PER-SHARE-NII> .68
<PER-SHARE-GAIN-APPREC> 1.55
<PER-SHARE-DIVIDEND> (.84)
<PER-SHARE-DISTRIBUTIONS> (.65)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.89
<EXPENSE-RATIO> 1.16
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
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
NINE HUNDRED MILLION (2,900,000,000) 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, 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. 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 NINETY MILLION Dollars
($290,000,000).
SECOND: The Board of Directors of the Corporation, acting in accordance
with Section 2-105(c) of the Maryland Corporations and Associations Code, hereby
increases (a) the total number of authorized shares of Class A Common Stock of
the Corporation by ONE HUNDRED FIFTY MILLION (150,000,000) shares and (b) the
total number of authorized shares of Class B Common Stock of the Corporation by
FIVE HUNDRED MILLION (500,000,000) shares.
THIRD: After this increase in the number of authorized shares of capital
stock of the Corporation, the Corporation will have authority to issue THREE
BILLION FIVE HUNDRED FIFTY MILLION (3,550,000,000) shares of capital stock and
the capital stock will consist of FOUR HUNDRED FIFTY MILLION (450,000,000)
shares of Class A Common Stock, TWO BILLION (2,000,000,000) shares of Class B
Common Stock, TWO HUNDRED MILLION (200,000,000) shares of Class C Common Stock
and NINE HUNDRED MILLION (900,000,000) shares of Class D Common Stock.
FOURTH: After this increase in the number of authorized shares of capital
stock of the Corporation, all shares of all classes and series of the
Corporation's capital stock will have a par value of Ten Cents ($.10) per share
and an aggregate par value of THREE HUNDRED FIFTY-FIVE MILLION Dollars
($355,000,000).
<PAGE>
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 November 12, 1997.
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>
EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Global Allocation Fund, Inc.:
We consent to the use in Post-Effective Amendment No. 12 to Registration
Statement No. 33-22462 of our report dated December 17, 1997 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.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
February 9, 1998
