<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 29, 1994
SECURITIES ACT FILE NO. 33-42681
INVESTMENT COMPANY ACT FILE NO. 811-5603
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [_]
POST-EFFECTIVE AMENDMENT NO. 3 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 4
(CHECK APPROPRIATE BOX OR BOXES) [X]
----------------
MERRILL LYNCH WORLD INCOME 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 WORLD INCOME FUND, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
----------------
Copies to:
COUNSEL FOR THE FUND: BROWN & PHILIP L. KIRSTEIN, ESQ. FUND
WOOD ONE WORLD TRADE CENTER ASSET MANAGEMENT BOX 9011
NEW YORK, NEW YORK 10048-0557 PRINCETON, NEW JERSEY 08543-
ATTENTION: THOMAS R. SMITH, 9011
JR., ESQ. BRIAN M. KAPLOWITZ,
ESQ.
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)
[_] on (date) pursuant to paragraph (a) of rule 485
----------------
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS CLASS A AND CLASS B
SHARES OF COMMON STOCK UNDER THE SECURITIES ACT OF 1933 PURSUANT TO RULE 24F-2
UNDER THE INVESTMENT COMPANY ACT OF 1940. THE NOTICE REQUIRED BY SUCH RULE FOR
THE REGISTRANT'S MOST RECENT FISCAL YEAR WAS FILED ON FEBRUARY 24, 1994.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH WORLD INCOME FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A
ITEM NO. LOCATION
-------- --------
<C> <S> <C>
PART A
Item 1. Cover Page.......................... Cover Page
Item 2. Synopsis............................ Fee Table
Item 3. Condensed Financial Information..... Financial Highlights
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
Item 5A. Management's Discussion of Fund Back Cover Page
Performance........................ Not Applicable
Item 6. Capital Stock and Other Securities.. Cover Page; Additional Information
Item 7. Purchase of Securities Being
Offered............................ Cover Page; Fee Table; Alternative Sales
Arrangements; Purchase of Shares;
Shareholder Services; Additional
Information; Inside Back Cover Page
Item 8. Redemption or Repurchase............ Fee Table; Alternative Sales Arrangements;
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..... General Information
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; Additional
Information
Item 16. Investment Advisory and Other
Services........................... Management of the Fund; Purchase of Shares;
General Information
Item 17. Brokerage Allocation and Other
Practices.......................... Portfolio Transactions
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
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
- ----------
APRIL 29, 1994
MERRILL LYNCH WORLD INCOME FUND, INC.
BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
---------------
Merrill Lynch World Income Fund, Inc. (the "Fund") is a non-diversified
mutual fund seeking to provide shareholders with high current income by
investing in a global portfolio of fixed income securities denominated in
various currencies, including multinational currency units. The Fund may
invest in United States and foreign government and corporate fixed income
securities, including high yield high risk, lower rated and unrated
securities. In pursuing its investment objective, the Fund will allocate its
investments among different types of fixed income securities denominated in
various currencies based upon management's analysis of the yield, maturity and
currency considerations affecting such securities. Under normal conditions,
the Fund's investments will be denominated in at least three currencies. The
Fund presently contemplates that it will invest primarily in obligations
denominated in the currencies of the United States, Canada, Western European
nations, New Zealand and Australia as well as in European Currency Units. The
Fund may seek to hedge against interest rate and currency risks through the
use of options, futures and foreign currency transactions. Investment on an
international basis and in high yield high risk, lower rated or unrated
securities involves certain risks and special considerations. High yield high
risk, lower rated debt securities are commonly referred to as "junk bonds".
See "Risk Factors and Special Considerations". There can be no assurance that
the investment objective of the Fund will be realized.
The Fund offers two classes of shares which may be purchased at a price
equal to the next determined net asset value per share, plus in both cases a
sales charge which, at the election of the purchaser, may be imposed (i) at
the time of purchase (the "Class A shares"), or (ii) on a deferred basis (the
"Class B shares"). The deferred charges to which the Class B shares are
subject consist of a contingent deferred sales charge which may be imposed on
redemptions made within four years of purchase and ongoing account maintenance
and distribution fees. These alternatives permit an investor to choose the
method of purchasing shares that is most beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares and other
circumstances. Investors should understand that the purpose and function of
the deferred sales charges with respect to the Class B shares are the same as
those of the initial sales charge with respect to the Class A shares.
Investors should also understand that over time the deferred charges related
to the Class B shares may exceed the initial sales charge with respect to
Class A shares. See "Alternative Sales Arrangements" on page 4.
Each share of Class A and Class B represents an identical interest in the
investment portfolio of the Fund and has the same rights, except that Class B
shares bear the expenses of the account maintenance and distribution fees and
certain other costs resulting from the deferred sales charge arrangement,
which will cause Class B shares to have a higher expense ratio and to pay
lower dividends than Class A shares and that Class B shares have exclusive
voting rights with respect to the account maintenance and distribution fees.
The two classes also have different exchange privileges.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.,
(the "Distributor"), Box 9011, Princeton, New Jersey 08543-9011 [(609) 282-
2800], or from securities dealers which have entered into selected 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 $250, and the minimum subsequent purchase is
$1. Merrill Lynch may charge its customers a processing fee (presently $4.85)
for confirming purchases and repurchases. Purchases and redemptions directly
through the Fund's Transfer Agent are not subject to the processing fee. See
"Purchase of Shares" and "Redemption of Shares".
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
---------------
This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund dated April 29, 1994 (the "Statement of Additional
Information") has been filed with the Securities and Exchange Commission and
is available, without charge, by calling or by writing the Fund at the above
telephone number or address. The Statement of Additional Information is hereby
incorporated by reference into this Prospectus.
---------------
FUND ASSET MANAGEMENT--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to Class A and Class B shares follows:
CLASS A SHARES CLASS B SHARES
INITIAL SALES DEFERRED SALES
CHARGE ALTERNATIVE CHARGE ALTERNATIVE
-------------------- --------------------------
SHAREHOLDER TRANSACTION
EXPENSES:
Maximum Sales Charge
Imposed on Purchases
(as a percentage of
offering price)....... 4.0%(a)
Sales Charge Imposed on
Dividend
Reinvestments......... None None
Deferred Sales Charge
(as a percentage of
original purchase
price or redemption
proceeds, whichever is
lower)................ None 4.0% during the first
year, decreasing 1%
annually to 0.00%
after the fourth year(b)
Exchange Fee........... None None
ANNUAL FUND OPERATING
EXPENSES (AS A
PERCENTAGE OF AVERAGE
NET ASSETS) FOR THE YEAR
ENDED DECEMBER 31, 1993:
Management Fees(c)..... 0.60% 0.60%
Rule 12b-1 Fees........ None 0.75%(d)
Other Expenses.........
Custodial Fees........ 0.05% 0.05%
Shareholder Servicing
Costs(e)............. 0.07% 0.09%
Other................. 0.06% 0.06%
---- ----
Total Other Expenses. 0.18% 0.20%
---- ----
TOTAL FUND OPERATING
EXPENSES............. 0.78% 1.55%
==== ====
- --------
(a) Reduced for purchases of $25,000 and over, decreasing to 0.50% for
purchases of $1,000,000 and over. Certain purchasers of Class A shares
investing $1,000,000 or more may, in lieu of a front-end sales load, be
assessed a deferred sales charge on redemptions within the first year of
such investment. See "Purchase of Shares--Initial Sales Charge
Alternative--Class A Shares"--page 23.
(b) See "Purchase of Shares--Deferred Sales Charge Alternative--Class B
Shares"--page 24.
(c) See "Management of the Fund--Management and Advisory Arrangements" --page
20.
(d) See "Purchase of Shares--Deferred Sales Charge Alternative--Class B
Shares--Distribution Plan"--page 26.
(e) See "Management of the Fund--Transfer Agency Services"--page 21.
2
<PAGE>
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR
THE PERIOD OF:
----------------------------
3 5 10
1 YEAR YEARS YEARS YEARS
------ ------ ------ -------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment including, for Class A shares,
the maximum $40.00 front-end sales charge and
assuming (1) an operating expense ratio of 0.78%
for Class A shares and 1.55% for Class B shares,
(2) a 5% annual return throughout the periods
and (3) redemption at the end of the periods:
Class A........................................ $47.65 $63.92 $81.60 $132.74
Class B........................................ $55.77 $68.95 $84.47 $184.55
An investor would pay the following expenses on
the same $1,000 investment assuming no
redemption at the end of the periods:
Class A........................................ $47.65 $63.92 $81.60 $132.74
Class B........................................ $15.77 $48.95 $84.47 $184.55
</TABLE>
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Securities and Exchange Commission regulations. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATE OF
RETURN, AND ACTUAL EXPENSES OR ANNUAL RATE OF RETURN MAY BE MORE OR LESS THAN
THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. Class B shareholders who hold their
shares for an extended period of time may pay more in Rule 12b-1 distribution
fees than the economic equivalent of the maximum front end sales charges
permitted under the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. Merrill Lynch may charge its customers a processing
fee (presently $4.85) for confirming purchases and repurchases. Purchases and
redemptions directly through the Fund's Transfer Agent are not subject to the
processing fee. See "Purchase of Shares" and "Redemption of Shares".
3
<PAGE>
ALTERNATIVE SALES ARRANGEMENTS
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share, plus a sales charge which, at the election of the
purchaser, may be imposed either (i) at the time of the purchase (the "initial
sales charge alternative"), or (ii) on a deferred basis (the "deferred sales
charge alternative").
Class A Shares. An investor who elects the initial sales charge alternative
acquires Class A shares. Although Class A shares incur a sales charge when they
are purchased, they enjoy the benefit of not being subject to any ongoing
account maintenance and distribution fees to which Class B shares are subject
or any sales charge when they are redeemed. Certain purchasers of Class A
shares qualify for reduced initial sales charges. See "Purchase of Shares".
Class B Shares. An investor who elects the deferred sales charge alternative
acquires Class B shares. Class B shares do not incur a sales charge when they
are purchased, but they are subject to ongoing account maintenance and
distribution fees and a sales charge if they are redeemed within four years of
purchase. Class B shares enjoy the benefit of permitting all of the investor's
dollars to work from the time the investment is made. The ongoing account
maintenance and distribution fees paid by Class B shares will cause such shares
to have a higher expense ratio and to pay lower dividends than Class A shares.
Payment of the distribution fee is subject to certain limits as set forth under
"Purchase of Shares--Deferred Sales Charge Alternative--Class B Shares".
As an illustration, investors who qualify for significantly reduced sales
charges might elect the initial sales charge alternative because similar sales
charge reductions are not available for purchases under the deferred sales
charge alternative. Moreover, shares acquired under the initial sales charge
alternative are not subject to ongoing account maintenance and distribution
fees. However, because initial sales charges are deducted at the time of
purchase, such investors would not have all their funds invested initially.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time also might elect the
initial sales charge alternative because over time the accumulated continuing
account maintenance and distribution fees on Class B shares may exceed the
initial sales charge on Class A shares. Again, however, such investors must
weigh this consideration against the fact that not all their funds will be
invested initially. Furthermore, the ongoing account maintenance and
distribution fees will be offset to the extent any return is realized on the
additional funds initially invested under the deferred sales charge
alternative. However, there can be no assurance as to the return, if any, which
will be realized on such additional funds. Certain other investors might
determine it to be more advantageous to have all their funds invested
initially, although remaining subject to continued account maintenance and
distribution fees and, for a four year period of time, a contingent deferred
sales charge.
The distribution expenses incurred by the Distributor and dealers (primarily
Merrill Lynch) in connection with the sale of the shares will be paid, in the
case of the Class A shares, from the proceeds of the initial sales charge. In
the case of the Class B shares, such distribution expenses will be paid from
the proceeds of the ongoing distribution fee and, if applicable, the contingent
deferred sales charge incurred upon redemption within four years of purchase.
Sales personnel may receive different compensation for selling Class A or Class
B shares. Investors should understand that the purpose and function of the
deferred sales charges with respect to the Class B shares are the same as those
of the initial sales charge with respect to the Class A shares.
4
<PAGE>
Dividends paid by the Fund with respect to Class A and Class B shares, to the
extent any dividends are paid, will be calculated in the same manner at the
same time on the same day and will be in the same amount, except that account
maintenance and distribution fees and any incremental transfer agency costs
relating to Class B shares will be borne exclusively by that class. See
"Additional Information--Determination of Net Asset Value". Class A and Class B
shareholders of the Fund each have an exchange privilege for Class A and Class
B shares, respectively, with certain other mutual funds sponsored by Merrill
Lynch. Class A and Class B shareholders of the Fund also may exchange their
shares for shares of certain money market funds sponsored by Merrill Lynch. See
"Shareholder Services--Exchange Privilege".
The Directors of the Fund have determined that currently no conflict of
interest exists between the Class A and Class B shares. On an ongoing basis,
the Directors of the Fund, pursuant to their fiduciary duties under the
Investment Company Act of 1940, as amended (the "Investment Company Act") and
state laws, will seek to assure that no such conflict arises.
The alternative sales arrangements permit an investor to choose the method
of purchasing shares that is most beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares and
other circumstances. Investors should determine whether under their
particular circumstances it is more advantageous to incur an initial sales
charge and not be subject to ongoing charges, or to have the entire initial
purchase price invested in the Fund with the investment thereafter being
subject to ongoing account maintenance and distribution fees. To assist
investors in making this determination, the Fee Table on page 2 sets forth
the charges applicable to each class of shares, and a discussion of relevant
factors in making such determination is set forth under "Purchase of
Shares--Alternative Sales Arrangements" on page 22.
5
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in conjunction
with the annual audits of the financial statements of the Fund by Deloitte &
Touche, independent auditors. Financial statements for the year ended December
31, 1993 and the independent auditors' report thereon are included in the
Statement of Additional Information. Further information about the performance
of the Fund is contained in the Fund's most recent annual report to
shareholders which may be obtained, without charge, by calling or by writing
the Fund at the telephone number or address on the front cover of this
Prospectus.
The following per share data and ratios have been derived from information
provided in the Financial Statements.
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------
FOR THE FOR THE
PERIOD PERIOD
FOR THE YEAR SEPTEMBER 1, SEPTEMBER 29,
ENDED 1992 TO FOR THE YEAR ENDED 1988 TO
DECEMBER 31, DECEMBER 31, AUGUST 31, AUGUST 31,
------------ ------------ ---------------------------- -------------
1993 1992 1992 1991* 1990* 1989*
------------ ------------ -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE
(DECREASE) IN NET
ASSET VALUE:
Per Share
Operating
Performance...... $ 8.85 $ 9.34 $ 9.07 $ 9.48 $ 9.32 $ 9.35
Net asset value
beginning of
period:
Investment
income-net...... .75 .29 .99 1.12 1.23 1.03
Realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions-- .46 (.41) .40 (.16) .15 (.12)
net............. -------- -------- -------- -------- -------- --------
Total from
investment 1.21 (.12) 1.39 .96 1.38 .91
operations....... -------- -------- -------- -------- -------- --------
Less dividends
and
distributions:
Investment
income--net..... (.58) (.35) (1.12) (1.37) (1.17) (.94)
Realized gain on
investments--
net............. (.03) (.02) -- -- (.05) --
Return of (.17) -- -- -- -- --
capital--net.... -------- -------- -------- -------- -------- --------
Total dividends
and (.78) (.37) (1.12) (1.37) (1.22) (.94)
distributions.... -------- -------- -------- -------- -------- --------
Net asset value, $ 9.28 $ 8.85 $ 9.34 $ 9.07 $ 9.48 $ 9.32
end of period.... ======== ======== ======== ======== ======== ========
Total Investment
Return++
Based on net
asset value per 14.12% (1.26%)+++ 16.09% 11.50% 16.48% 9.86%+++
share............ -------- -------- -------- -------- -------- --------
RATIOS TO AVERAGE
NET ASSETS:
Expenses,
excluding
distribution
fees............. -- -- -- -- -- --
Expenses......... .78% .76%** .88% .85% .86% .81%**
======== ======== ======== ======== ======== ========
Investment 8.22% 8.09%** 11.16% 12.38% 16.27% 10.87%**
income-net....... ======== ======== ======== ======== ======== ========
SUPPLEMENTAL
DATA:
Net assets, end
of period (in $467,625 $455,672 $526,631 $292,709 $299,700 $296,247
thousands)....... ======== ======== ======== ======== ======== ========
Portfolio 182.88% 68.42% 76.18% 63.83% 99.86% 157.67%
turnover......... ======== ======== ======== ======== ======== ========
<CAPTION>
CLASS B
-------------------------------------------
FOR THE FOR THE
PERIOD PERIOD
FOR THE YEAR SEPTEMBER 1 NOVEMBER 18,
ENDED 1992 TO 1991+ TO
DECEMBER 31, DECEMBER 31, AUGUST 31,
------------ --------------- --------------
1993 1992 1992
------------ --------------- --------------
<S> <C> <C> <C>
INCREASE
(DECREASE) IN NET
ASSET VALUE:
Per Share
Operating
Performance...... $ 8.85 $ 9.33 $ 9.26
Net asset value
beginning of
period:
Investment
income-net...... .70 .27 .77
Realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions-- .44 (.40) --
net............. ------------ --------------- --------------
Total from
investment 1.14 (.13) .77
operations....... ------------ --------------- --------------
Less dividends
and
distributions:
Investment
income--net..... (.53) (.33) (.70)
Realized gain on
investments--
net............. (.03) (.02) --
Return of (.15) -- --
capital--net.... ------------ --------------- --------------
Total dividends
and (.71) (.35) (.70)
distributions.... ------------ --------------- --------------
Net asset value, $ 9.28 $ 8.85 $ 9.33
end of period.... ============ =============== ==============
Total Investment
Return++
Based on net
asset value per 13.27% (1.42%)+++ 8.61+++
share............ ------------ --------------- --------------
RATIOS TO AVERAGE
NET ASSETS:
Expenses,
excluding
distribution .80% .78%** .88%**
fees............. ============ =============== ==============
Expenses......... 1.55% 1.53%** 1.63%**
============ =============== ==============
Investment 7.42% 7.08%** 8.02%**
income-net....... ============ =============== ==============
SUPPLEMENTAL
DATA:
Net assets, end
of period (in $2,106,120 $1,582,270 $1,514,406
thousands)....... ============ =============== ==============
Portfolio 182.88% 68.42% 76.18%
turnover......... ============ =============== ==============
</TABLE>
- ----
* The above financial information reflects the Fund's performance as a
closed-end investment company and, therefore, may not be indicative of its
performance as an open-end investment company. Shares of the Fund existing at
November 15, 1991, the time of its conversion to an open-end investment
company, have been classified as Class A shares.
** Annualized.
+ Commencement of operations of the Class B shares.
++ Total investment returns exclude the effects of sales loads.
+++ Aggregate total investment return.
6
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investment in the Fund involves special considerations including the fact
that the Fund makes investments on an international basis and in high yield
high risk, lower rated or unrated securities.
International Investing. Investments in securities of foreign entities and
securities denominated in foreign currencies involve risks not typically
involved in domestic investment including fluctuations in foreign exchanges
rates, future foreign political and economic developments, and the possible
imposition of exchange controls or other foreign or United States governmental
laws or restrictions applicable to such investments. Since the Fund may invest
in securities denominated or quoted in currencies other than the United States
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 United States 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 that currency 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 United States economy in such respects as growth of gross
national product, rate of inflation, capital reinvestment, resources, self-
sufficiency and balance of payments position.
With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social instability
or diplomatic developments which could affect investment in those countries.
There may be less publicly available information about a foreign financial
instrument than about a United States instrument, and foreign entities may not
be subject to accounting, auditing and financial reporting standards and
requirements comparable to those of United States entities. In addition,
certain foreign investments may be subject to foreign withholding taxes. See
"Taxes".
Foreign financial markets, while growing in volume, have, for the most part,
substantially less volume than United States markets, and securities of many
foreign companies are less liquid and their prices more volatile than
securities of comparable domestic companies. Foreign markets also have
different clearance and settlement procedures, and in certain markets there
have been times when settlements have been unable to keep pace with the volume
of securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when assets of the Fund
are uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause the
Fund to miss attractive investment opportunities. Inability to dispose of
portfolio securities due to settlement problems could result either in losses
to the Fund due to subsequent declines in value of the portfolio security or,
if the Fund has entered into a contract to sell the security, could result in
possible liability to the purchaser. Since the securities in which the Fund
invests are traded primarily in the over-the-counter market, and therefore,
portfolio transactions will generally not be effected on foreign securities
exchanges, the Fund does not expect typically to incur these potential
settlement delays. Costs associated with transactions in foreign securities are
generally higher than with transactions in United States securities. There is
generally less government supervision and regulation of exchanges, financial
institutions and corporate issuers in foreign countries than there is in the
United States.
The operating expense ratio of the Fund can be expected to be higher than
that of an investment company investing exclusively in United States securities
since the expenses of the Fund, such as custodial
7
<PAGE>
costs, are higher. The portfolio turnover of the Fund may be higher than that
of many investment companies. See "Portfolio Transactions--Portfolio Turnover".
Lower-Rated Securities. Investment in the Fund's shares involves special risk
considerations because the Fund has no established rating criteria, and a
substantial portion of the portfolio may consist of securities rated in the
lower rating categories of established rating services (Baa or lower by Moody's
Investors Service, Inc. ("Moody's"), BBB or lower by Standard & Poor's
Corporation ("Standard & Poor's") and BBB or lower by IBCA, Ltd. or IBCA, Inc.
(both "IBCA"), or in unrated securities of comparable quality ("high yield high
risk securities")). Such lower rated securities are commonly called "junk
bonds" and entail a greater risk of default than higher rated securities.
Because investments in high yield high risk securities entail higher risk of
loss of income or principal than investment in higher rated securities, an
investment in the Fund should not constitute a complete investment program and
may not be appropriate for all investors. The Fund has no minimum credit rating
criteria. See "Investment Objective and Policies--Allocation of Investments and
Risks of High Yield High Risk Securities".
Options, Futures and Currency Transactions. The Fund may engage in a variety
of options, futures and currency transactions. Subject to its investment
restrictions, the Fund also may make loans of its portfolio securities secured
by collateral and borrow money. These investment strategies involve certain
special risks. See "Investment Objective and Policies--Hedging Techniques", "--
Other Investment Policies and Practices--Lending of Portfolio Securities" and
"--Other Investment Policies and Practices--Borrowing".
Portfolio Turnover. The Investment Adviser will effect portfolio transactions
without regard to holding period, if, in its judgment, such transactions are
advisable in light of a change in circumstance in general market, economic or
financial conditions. As a result of its investment policies, the Fund may
engage in a substantial number of portfolio transactions. Accordingly, while
the Fund anticipates that its annual turnover rate should not exceed 200% under
normal conditions, it is impossible to predict portfolio turnover rates. High
portfolio turnover involves correspondingly greater transaction costs in the
form of dealer spreads and brokerage commissions, which are borne directly by
the Fund. Such turnover also has certain tax consequences for the Fund. See
"Taxes".
Non-Diversified Status. The Fund has registered as a "non-diversified"
investment company so that it will be able to invest more than 5% of the value
of its assets in the obligations of a single issuer subject to the
diversification requirements of subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), applicable to the Fund. To the extent the Fund
invests a relatively high percentage of its assets in obligations of a limited
number of issuers, the Fund may be more susceptible than a more widely
diversified fund to any single economic, political or regulatory occurrence.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek to provide shareholders with
high current income by investing in a global portfolio of fixed income
securities denominated in various currencies, including multi-national currency
units. The Fund may invest in United States and foreign government and
corporate fixed income securities, including high yield high risk, lower rated
and unrated securities. The Fund will, under normal conditions, invest at least
90% of its total assets in such fixed income securities and may invest up to
100% of its total assets in lower rated, high yield high risk securities. In
pursuing its investment objective, the Fund will allocate its investments among
different types of fixed income securities denominated in various
8
<PAGE>
currencies based upon the Investment Adviser's analysis of the yield, maturity
and currency considerations affecting such securities. The investment objective
set forth in the first sentence of this paragraph is a fundamental policy of
the Fund which may not be changed without a vote of a majority of its
outstanding shares as defined below under "Investment Restrictions". There can
be no assurance that this investment objective will be realized.
The Fund may purchase fixed income securities issued by United States or
foreign corporations or financial institutions, including debt securities of
all types and maturities, convertible securities and preferred stocks. The Fund
also may purchase securities issued or guaranteed by United States or foreign
governments (including foreign states, provinces and municipalities) or their
agencies and instrumentalities ("governmental entities") or issued or
guaranteed by international organizations designated or supported by multiple
governmental entities to promote economic reconstruction or development
("supranational entities").
INTERNATIONAL INVESTING
The Fund may invest in fixed income securities denominated in any currency or
multinational currency unit. An illustration of a multinational currency unit
is the European Currency Unit ("ECU") which is a "basket" consisting of
specified amounts of the currencies of certain of the twelve member states of
the European Community, a Western European economic cooperative association
including France, Germany, the Netherlands and the United Kingdom. The specific
amounts of currencies comprising the ECU may be adjusted by the Council of
Ministers of the European Community to reflect changes in relative values of
the underlying currencies. The Investment Adviser does not believe that such
adjustments will adversely affect holders of ECU-denominated obligations or the
marketability of such securities. European supranational entities (described
further below), in particular, issue ECU-denominated obligations. The Fund may
invest in securities denominated in the currency of one nation although issued
by a governmental entity, corporation or financial institution of another
nation. For example, the Fund may invest in a British pound sterling-
denominated obligation issued by a United States corporation. Such investments
involve credit risks associated with the issuer and currency risks associated
with the currency in which the obligation is denominated.
It is anticipated that under current conditions the Fund will invest
primarily in marketable securities denominated in the currencies of the United
States, Canada, Western European nations, New Zealand and Australia, as well as
in ECUs. Further, it is anticipated that such securities will be issued
primarily by entities located in such countries and by supranational entities.
Under normal conditions, the Fund's investments will be denominated in at least
three currencies or multinational currency units. Under certain adverse
conditions, the Fund may restrict the financial markets or currencies in which
its assets will be invested. The Fund presently intends to invest its assets
solely in the United States financial markets or United States dollar-
denominated obligations only for temporary defensive purposes.
United States 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
or asset-backed 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).
9
<PAGE>
In the case of mortgage-related securities, prepayments occur when the holder
of an individual mortgage prepays the remaining principal before the mortgage's
scheduled maturity date. As a result of the pass-through of prepayments of
principal on the underlying securities, a mortgage-related security is often
subject to more rapid prepayment of principal than its stated maturity would
indicate. Because the prepayment characteristics of the underlying mortgages
vary, it is not possible to predict accurately the realized yield or average
life of a particular issue of the mortgage-related securities. (Asset-backed
securities, other than those backed by home equity loans, generally do not
prepay in response to changes in interest rates but may be subject to
prepayment in response to other factors.) Prepayment rates are important
because of their effect on the yield and price of the securities. Accelerated
prepayments adversely impact yields for 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 securities
purchased at a discount. The Fund may purchase mortgage-related (and asset-
backed) 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
Fund's Investment Adviser. The Investment Adviser 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.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Steel and Coal Community, the Asian
Development Bank and the Inter-American Development Bank. The government
members, or "stockholders", usually make initial capital contributions to the
supranational entity and in many cases are committed to make additional capital
contributions if the supranational entity is unable to repay its borrowings.
ALLOCATION OF INVESTMENTS AND RISKS OF HIGH YIELD HIGH RISK SECURITIES
In seeking high current income, the Fund will allocate its investments among
fixed income securities of various types, maturities and issuers in the various
global markets based upon the analysis of the Investment Adviser of yield and
price differentials, currency considerations and general market and economic
conditions. In making such allocations, the Investment Adviser will assess the
overall quality of the portfolio considering in particular the extent to which
the differences in yield justify investments in higher risk securities. In its
evaluations, the Investment Adviser will utilize its internal financial,
economic and credit analysis resources as well as information in this regard
obtained from other sources.
No Rating Criteria for Debt Securities. The Fund has established no rating
criteria for the fixed income securities in which it may invest, and a
substantial portion of the securities in the Fund's portfolio may be securities
rated in the medium to lower rating categories of nationally recognized
statistical rating organizations such as Moody's, Standard & Poor's or IBCA, or
in unrated securities of comparable quality. See the Appendix to this
Prospectus for a description of these rating categories. High yield high risk
securities are predominantly speculative with respect to the capacity to pay
interest and repay principal in accordance
10
<PAGE>
with the terms of the security and generally involve a greater volatility of
price than securities in higher rating categories. In purchasing such
securities, the Fund will rely on the Investment Adviser's judgment, analysis
and experience in evaluating the creditworthiness of an issuer of such
securities. The Investment Adviser will take into consideration, among other
things, the issuer's financial resources, its sensitivity to economic
conditions and trends, its operating history, the quality of the issuer's
management and regulatory matters. The Fund does not intend to purchase
securities that are in default.
The market values of high yield high risk securities tend to reflect
individual issuer developments to a greater extent than do higher rated
securities, which react primarily to fluctuations in the general level of
interest rates. 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 risk associated with acquiring the securities of such
issuers generally is greater than is the case with higher rated securities. For
example, during an economic downturn or a sustained period of rising interest
rates, issuers of high yield high risk securities may be more likely to
experience financial stress, especially if such issuers are highly leveraged.
During periods of economic recession, 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 holders of high yield
high risk securities because such securities may be unsecured and may be
subordinated to other creditors of the issuer.
High yield high risk securities may have call or redemption features which
would permit an issuer to repurchase the securities from the Fund. If a call
were exercised by the issuer during a period of declining interest rates, the
Fund likely would have to replace such called securities with lower yielding
securities, 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. To
the extent that a secondary trading market for high yield high risk securities
does exist, it 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.
Reduced secondary market liquidity for certain high yield high risk securities
also may make it more difficult for the Fund to obtain accurate market
quotations for purposes of valuing the Fund's portfolio. Market quotations are
generally available on many high yield high risk securities only from a limited
number of dealers and may not necessarily represent firm bids of such dealers
or prices for actual sales. The Fund's Directors, or the Investment Adviser
pursuant to guidelines which may be adopted by the Directors, will carefully
consider the factors affecting the market for high yield high risk, lower rated
securities in determining whether any particular security is liquid or illiquid
and whether market quotations are readily available for purposes of valuing
portfolio securities.
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 high risk securities 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 participate in the restructuring of the
obligation.
11
<PAGE>
The weighted average ratings of all bonds held by the Fund during its most
recent fiscal year, as percentages of total investments, were as follows:
<TABLE>
<CAPTION>
RATED BONDS* UNRATED BONDS*
------------ --------------
<S> <C>
MOODY'S
Aaa, 6.06%; Aa, 2.46%; A, 13.54%
0.23%; Baa, 2.58%;
Ba, 28.91%; B, 44.46%; Caa,
1.71%; Ca, 0.05%;
and C, 0.00%.
STANDARD & POOR'S:
AAA, 6.83%; AA, 0.43%; A, UNRATED BONDS DETERMINED BY THE FUND'S INVEST-
0.28%; BBB, MENT ADVISER TO BE OF COMPARABLE QUALITY TO
2.31%; BB, 29.80%; B, 43.29%; BONDS WITH THE INDICATED RATINGS*
CCC, 1.68%;
CC, 0.00%; C, 0.07%; and D,
0.05%.
MOODY'S;
Aaa, 0.00%; Aa, 0.00%; A, 0.00%; Baa, 0.00%;
Ba, 0.00%; B, 0.00%; Caa, 0.00%; Ca, 0.00%;
and C, 0.00%.
STANDARD & POOR'S:
AAA, 0.00%; AA, 0.00%; A, 0.00%; BBB,
0.00%, BB, 0.00%; B, 0.00%; CCC, 0.00%; CC,
0.00%; C, 0.00%; CI, 0.00%; and D, 0.00%.
</TABLE>
- --------
*These data were calculated on a dollar weighted basis, computed no less
frequently than monthly.
For a description of the above referenced ratings, see the appendix to this
Prospectus. Again, the Fund has established no rating criteria for the fixed
income securities in which it may invest.
Average Maturity. The average maturity of the Fund's portfolio securities
will vary based upon the Investment Adviser's assessment of economic and market
conditions. As with all fixed income securities, changes in market yields will
affect the Fund's asset value as the prices of portfolio securities 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. The Fund does not expect
the average maturity of its portfolio to exceed ten years.
HEDGING TECHNIQUES
The Fund may engage in various portfolio strategies to hedge its portfolio
against interest rate and currency risks. These strategies include use of
options on portfolio positions or currencies, financial and currency futures,
options on such futures and forward foreign currency transactions. The Fund may
enter into such transactions only in connection with its hedging strategies.
While the Fund's use of hedging strategies is intended to reduce the volatility
of the net asset value of Fund shares, the Fund's net asset value will
fluctuate. There can be no assurance that the Fund's hedging transactions will
be effective. Furthermore, the Fund may only engage in hedging activities from
time to time and may not necessarily be engaging in hedging activities when
movements in interest rates or currency exchange rates occur. Reference is made
to the Statement of Additional Information for further information concerning
these strategies.
Although certain risks are involved in options and futures transactions (as
discussed below in "Risk Factors in Options, Futures and Currency
Transactions"), the Investment Adviser believes that, because the Fund will
only engage in these transactions for hedging purposes, the options and futures
portfolio strategies
12
<PAGE>
of the Fund will not subject the Fund to the risks frequently associated with
the speculative use of options and futures transactions. Tax requirements may
limit the Fund's ability to engage in the hedging transactions and strategies
described below. See "Taxes".
The following is a description of the hedging instruments the Fund may
utilize with respect to interest rate and currency risks.
Hedging Interest Rate Risks. The Fund may purchase and write (i.e., sell)
call options and put options on securities and engage in transactions in
financial futures and related options, as described below.
The Fund may write covered call options with respect to securities it owns
and enter into closing purchase transactions with respect to such options. A
covered call option provides the holder of the option with the right to buy the
underlying security covered by the option at the stated exercise price until
the option expires. A covered call option is an option where the Fund, in
return for a premium, gives another party a right to buy particular securities
held by the Fund at a specified price for a certain period of time. In return
for the premium income realized from the sale of the option, the Fund gives up
the opportunity to profit from a price increase in the underlying security
above the option exercise price while the option is in effect. In addition, the
Fund's ability to sell the underlying security will be limited until the option
is closed or expires. 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. The Fund
also 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. There
is no percentage limitation with respect to portfolio securities on which the
Fund may write call options.
The Fund may purchase put options on portfolio securities. In return for
payment of a premium, the purchase of a put option gives the holder thereof the
right to sell the security underlying the option to another party at a
specified price until the put option is closed out, expires or is exercised.
The Fund will purchase put options to seek to reduce the risk of a decline in
value of the underlying security owned by the Fund. The Fund does not intend to
purchase uncovered puts in excess of 10% of its total assets. The total return
on the security may be reduced by the amount of the premium paid for the
option. The Fund 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 have
deposited and maintained with its custodian cash or liquid securities 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 or purchased. The Fund intends to limit its writing of covered puts so
that the aggregate value of the obligations underlying the puts will not exceed
50% of its net assets.
The Fund may also purchase and sell financial futures contracts ("futures
contracts") as a hedge against adverse changes in interest rates, as described
below. A futures contract is an agreement between two parties which obligates
the purchaser of the futures contract to buy and the seller of a futures
contract to sell a security for a set price on a future date. The Fund may
effect transactions in futures contracts in United States and foreign agency
and government securities and corporate debt securities. Transactions by the
Fund in financial futures are subject to limitation as described below under
"Restrictions on the Use of Futures Transactions".
13
<PAGE>
The Fund may sell futures contracts in anticipation of an increase in the
general level of interest rates. Generally, as interest rates rise, the market
value of securities held by the Fund will fall, thus reducing the net asset
value of the Fund. As interest rates rise, however, the value of the Fund's
short position in the futures contract also will 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 would have been incurred had
the Fund sold portfolio securities in order to reduce its exposure to increases
in interest rates.
The Fund may purchase 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.
The Fund does not consider purchases of futures contracts to be a speculative
practice under these circumstances. In a substantial majority of these
transactions, the Fund will purchase securities upon termination of the futures
contract.
The Fund also may purchase and write call and put options on futures
contracts in connection with its hedging activities. Generally, these
strategies are utilized under the same market and market sector conditions
(i.e., conditions relating to specific types of investments) in which the Fund
enters into futures transactions. The Fund may purchase put options or write
call options on futures contracts rather than selling the underlying futures
contract in anticipation of an increase in interest rates. Similarly, the Fund
may purchase call options, or write put options on futures contracts, as a
substitute for the purchase of such futures to hedge against the increased cost
resulting from a decline in interest rates of securities which the Fund intends
to purchase. Limitations on transactions in options on futures contracts are
described below.
The Fund may engage in options and futures transactions on exchanges and in
the over-the-counter ("OTC") markets. 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 transactions are two-party contracts with
price and terms negotiated by the buyer and seller. The Fund will engage in OTC
options only with member banks of the Federal Reserve System and primary
dealers in U.S. Government securities or with affiliates of such banks or
dealers which have capital of at least $50 million or whose obligations are
guaranteed by an entity having capital of at least $50 million.
The staff of the Securities and Exchange Commission (the "Commission") has
taken the position that purchased OTC options and the assets used as cover for
written OTC options are illiquid securities. Therefore, the Fund has adopted an
investment policy pursuant to which it will not purchase or sell OTC options
(including OTC options on futures contracts) if, as a result of such
transaction, the sum of the market value of OTC options currently outstanding
which are held by the Fund, the market value of the underlying securities
covered by OTC call options currently outstanding which were sold by the Fund
and margin deposits on the Fund's existing OTC options on futures contracts
exceed 10% of the net 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 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
14
<PAGE>
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.
Hedging Foreign Currency Risks. The Fund is authorized to deal in forward
foreign exchange between currencies of the different countries in which it will
invest and multinational currency units as a hedge against possible variations
in the foreign exchange rate between these currencies. This is accomplished
through contractual agreements to purchase or sell one specified currency for
another currency at a specified future date (up to one year) and price 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 one forward foreign
currency for another 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 purchase or
sale of one forward foreign currency for another currency with respect to
portfolio security positions denominated or quoted in such foreign currency to
offset the effect of an anticipated substantial appreciation or depreciation,
respectively, in the value of such currency relative to the U.S. dollar. In
this situation, the Fund also may, for example, enter into a forward contract
to sell or purchase a different foreign currency for a fixed U.S. dollar amount
where it is believed that the U.S. dollar value of the currency to be sold or
bought pursuant to the forward contract will fall or rise, as the case may be,
whenever there is a decline or increase, respectively, in the U.S. dollar value
of the currency in which portfolio securities of the Fund are denominated (this
practice being referred to as a "cross-hedge").
The Fund will not speculate in forward foreign exchange. Hedging against a
decline in the value of a currency does not eliminate fluctuations in the
prices of portfolio securities or prevent losses if the prices of such
securities decline. Such transactions also preclude the opportunity for gain if
the value of the hedged currency should rise. Moreover, it may not be possible
for the Fund to hedge against a devaluation that is so generally anticipated
that the Fund is not able to contract to sell the currency at a price above the
devaluation level it anticipates.
The Fund also is authorized to purchase or sell listed or 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 (including securities
denominated in the ECU) owned by the Fund, sold by the Fund but not yet
delivered, or committed or anticipated to be purchased by the Fund. As an
illustration, the Fund may use such techniques to hedge the stated value in
United States dollars of an investment in a Japanese 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 dollar relative to the yen 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 also may 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 on the
opportunity to profit without limit from increases in the relative value of the
yen to the dollar.
Certain differences exist between these foreign currency hedging instruments.
Foreign currency options provide the holder thereof the right to buy or to sell
a currency at a fixed price on a future date. Listed options are third-party
contracts (i.e., performance of the parties' obligations is guaranteed by an
exchange or clearing corporation) which are issued by a clearing corporation,
traded on an exchange and have standardized strike prices and expiration dates.
OTC options are two-party contracts and have negotiated strike prices and
15
<PAGE>
expiration dates. The Fund will engage in OTC options only with member banks of
the Federal Reserve System or primary dealers in U.S. Government securities or
with affiliates of such banks or dealers which have capital of at least $50
million or whose obligations are guaranteed by an entity having capital of at
least $50 million. The Fund will acquire only those 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).
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 the securities
denominated in such currency which it owns, the expected acquisition price of
securities which it has committed or anticipates to purchase which are
denominated in such currency, and, in the case of securities which have been
sold by the Fund but not yet delivered, the proceeds thereof in its denominated
currency. Further, the Fund will segregate at its custodian U.S. Government or
other high quality securities having a market value substantially representing
any subsequent net decrease in the market value of such hedged positions,
including net positions with respect to cross-currency hedges. The Fund may not
incur potential net liabilities with respect to currencies and securities
positions, including net liabilities with respect to cross-currency hedges, of
more than 33 1/3% of its total assets from foreign currency options, futures,
related options and forward currency transactions.
Restrictions on the Use of Futures Transactions. Regulations of the Commodity
Futures Trading Commission ("CFTC") applicable to the Fund permit the Fund's
futures and options on futures transactions to include (i) bona fide hedging
transactions without regard to the percentage of the Fund's assets committed to
margin and option premiums, and (ii) non-hedging transactions, provided that
the Fund not enter into such non-hedging transactions if, immediately
thereafter, the sum of the amount of initial margin and option premiums
required to establish non-hedging transactions would exceed 5% of the market
value of the Fund's liquidating value, after taking into account unrealized
profits and unrealized losses on any such transactions. However, as stated
above, the Fund intends to engage in options and futures transactions only for
hedging purposes.
When the Fund purchases a futures contract or writes a put option or
purchases a call option thereon, an amount of cash and cash equivalents will be
deposited in a segregated account with the Fund's custodian so that the amount
so segregated, plus the amount of initial and variation margin held in the
account of its broker, equals the market value of the futures contract, thereby
ensuring that the use of such futures is unleveraged.
An order has been obtained from the Commission which exempts the Fund from
certain provisions of the Investment Company Act in connection with
transactions involving futures contracts and options thereon.
Risk Factors in Options, Futures and Currency Transactions. Utilization of
futures transactions involves the risk of imperfect correlation in movements in
the price of futures contracts and movements in the price of the securities and
currencies which are the subject of the hedge. If the price of the futures
contract moves more or less than the price of the security or currency, the
Fund will experience a gain or loss which will not be completely offset by
movements in the price of the debt securities which are the subject of the
hedge. There is also a risk of imperfect correlations where the securities
underlying futures contracts have different
16
<PAGE>
maturities than the portfolio securities being hedged. Transactions in options
on futures contracts involve similar risks.
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,
management believes the Fund can receive on each business day a bid or offer.
There can be no assurance, however, that a liquid secondary market will exist
at any specific time. Thus, it may not be possible to close an options or
futures transaction. The inability to close options and futures positions also
could have an adverse impact on the Fund's ability to effectively hedge its
portfolio. There is also the risk of loss by the Fund of margin deposits or
collateral in the event of bankruptcy of a broker with whom the Fund has an
open position in an option, a futures contract or related option.
The exchanges on which options on portfolio securities and currency are
traded have generally established limitations governing the maximum number of
call or put options on the same underlying security and currency (whether or
not covered) which may be written by a single investor, whether acting alone or
in concert with others (regardless of whether such options are written on the
same or different exchanges or are held or written on one or more accounts or
through one or more brokers). "Trading limits" are imposed on the maximum
number of contracts which any person may trade on a particular trading day. The
Investment Adviser does not believe that these trading and position limits will
have any adverse impact on the portfolio strategies for hedging the Fund's
portfolio.
OTHER INVESTMENT POLICIES AND PRACTICES
Convertible Securities. The convertible securities to be held by the Fund
include any corporate debt security or preferred stock which may be converted
into underlying shares of common stock. Convertible securities entitle the
holder to receive interest payments paid on corporate debt securities or the
dividend preference on a preferred stock until such time as the convertible
security matures or is redeemed or until the holder elects to exercise the
conversion privilege. Although the Fund generally expects that it will sell
convertible securities rather than convert such securities into common stock,
the Fund may, at various times, exercise conversion rights on convertible
securities called for redemption to establish holding periods for tax purposes
or for other reasons. The Fund may not invest more than 10% of its total assets
in such common stock.
Borrowing. The Fund is authorized to borrow money from banks in amounts of up
to 33 1/3% of the value of its total assets at the time of such borrowings,
provided that such borrowings will be made only to meet redemption requests,
settle investment transactions or for temporary or emergency purposes.
Repurchase Agreements and Purchase and Sale Contracts. The Fund may invest in
securities pursuant to repurchase agreements or purchase and sale contracts.
Foreign currency-denominated agreements will be limited to purchase and sale
contracts entered into with financial institutions that have at least $50
million in capital or whose obligations are guaranteed by an entity having at
least $50 million in capital. U.S. Dollar-denominated repurchase agreements and
purchase and sale contracts may be entered into only with a member bank of the
Federal Reserve System or primary dealer in U.S. Government securities. Under
such agreements, the bank or primary dealer 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. In the case of repurchase agreements, the prices at which the
trades are conducted do not reflect accrued interest on the underlying
obligations, whereas, in the case of
17
<PAGE>
purchase and sale contracts, the prices take into account accrued interest.
Such agreements usually cover short periods, such as under one week. Repurchase
agreements may be construed to be collateralized loans by the purchaser to the
seller secured by the securities transferred to the purchaser. In the case of a
repurchase agreement, as a purchaser, the Fund will require the seller to
provide additional collateral if the market value of the securities falls below
the repurchase price at any time during the term of the repurchase agreement;
the Fund does not have the right to seek additional collateral in the case of
purchase and sale contracts. In the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but only constitute collateral for the
seller's obligation to pay the repurchase price. Therefore, the Fund may suffer
time delays and incur costs or possible losses in connection with disposition
of the collateral. A purchase and sale contract differs from a repurchase
agreement in that the contract arrangements stipulate that the securities are
owned by the Fund. In the event of a default under such a repurchase agreement
or under a purchase and sale contract, instead of the contractual fixed rate,
the rate of return to the Fund shall be dependent upon intervening fluctuations
of the market value of such security and the accrued interest on the security.
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.
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 United States
Government which 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
this loan, the Fund receives the income on the loaned securities and either
receives the income on the collateral or other compensation (i.e., negotiated
loan premium or fee) for entering into the loan and thereby increases its
yield. In the event that the borrower defaults on its obligation to return
borrowed securities, because of insolvency or otherwise, the Fund could
experience delays and costs in gaining access to the collateral and could
suffer a loss to the extent that the value of the collateral falls below the
market value of the borrowed securities.
Non-Diversified Status. The Fund is classified as non-diversified within the
meaning of the Investment Company Act, which means that the Fund is not limited
by such Act in the proportion of its assets that it may invest in securities of
a single issuer. However, the Fund's investments will be limited so as to
qualify as a "regulated investment company" for purposes of the Code. See
"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 (other than U.S. Government securities),
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 (other than U.S. Government securities), and the
Fund will not own more than 10% of the outstanding voting securities of a
single issuer. A fund which elects to be classified as "diversified" under the
Investment Company Act must satisfy the foregoing 5% and 10% requirements with
respect to 75% of its total assets. To the extent that the Fund assumes large
positions in the securities of a small number of issuers, the Fund's yield may
fluctuate to a greater extent than that of a diversified company as a result of
changes in the financial condition or in the market's assessment of the
issuers.
INVESTMENT RESTRICTIONS
The Fund has adopted a number of restrictions and policies relating to the
investment of its assets and its activities, some of which are fundamental
policies and may not be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities, as defined in the
Investment Company Act.
18
<PAGE>
See "Investment Objective and Policies--Investment Restrictions" in the
Statement of Additional Information. Among the more significant restrictions,
the Fund may not:
--Issue senior securities, borrow money or pledge its assets in excess of
33 1/3% of its total assets taken at market value (including the amount
borrowed) and then only from banks for the purpose of meeting redemption
requests or settlement of investment transactions, or for temporary or
emergency purposes. [Usually only "leveraged" investment companies may
borrow in excess of 5% of their assets; however, the Fund will not borrow
to increase income but intends only to meet redemption requests or to
settle investment transactions or for temporary or emergency purposes which
may otherwise require untimely dispositions of Fund securities. Interest
paid on such borrowings will reduce net income.] The Fund will not purchase
additional portfolio securities while outstanding borrowings exceed 5% of
the Fund's total assets;
--invest more than 25% of its total assets (taken at market value at the
time of each investment) in the securities of issuers in any particular
industry (including securities issued or guaranteed by the government of
any one foreign country, but excluding the U.S. Government, its agencies
and instrumentalities).
The above restrictions are fundamental policies of the Fund. The Fund has
certain non-fundamental policies which may be changed by the Fund's Board of
Directors, including policies which limit investments in securities which
cannot be readily resold because of legal or contractual restrictions or which
are not otherwise readily marketable, if, regarding all such securities, more
than 10% of the Fund's net assets, taken at market value, would be invested in
such securities. While the Fund does not intend to purchase illiquid securities
in an amount exceeding 10% of its net assets, the Fund may purchase, without
regard to that 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 has adopted guidelines regarding
certain foreign debt securities which may be held by the Fund and delegated to
the Investment Adviser the daily function of determining and monitoring
liquidity of such securities. The Board of Directors, however, has retained
oversight and is ultimately responsible for the determinations.
Since it is not possible to predict with assurance exactly how this market
for restricted securities sold and offered under Rule 144A will develop, the
Board of Directors will carefully monitor the Fund's investments in these
securities, focusing on such factors, among others, as valuation, liquidity and
availability of information. This investment practice could have the effect of
increasing the level of illiquidity in the Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing these
securities.
MANAGEMENT OF THE FUND
DIRECTORS
The 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
Directors are responsible for the overall supervision of the operations of the
Fund and perform the various duties imposed on the directors of investment
companies by the Investment Company Act.
THE DIRECTORS ARE:
Arthur Zeikel*--President and Chief Investment Officer of Fund Asset
Management, L.P. and Merrill Lynch Asset Management, L.P. ("MLAM"); President
and Director of Princeton Services, Inc.;
19
<PAGE>
Executive Vice President of Merrill Lynch & Co., Inc.; Executive Vice President
of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch");
Director of the Distributor.
Kenneth S. Axelson--Former Executive Vice President and Director, J.C. Penney
Company, Inc.
Herbert I. London--Former Dean, Gallatin Division of New York University;
John M. Olin Professor of Humanities, New York University; Trustee, Hudson
Institute.
Robert R. Martin--Former Chairman, Kinnard Investments, Inc.; Chairman of the
Board, WTC Industries, Inc.
Joseph L. May--Attorney in private practice.
Andre F. Perold--Professor, Harvard Business School.
- --------
*Interested person, as defined by the Investment Company Act, of the Fund.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Fund's investment adviser is Fund Asset Management, L.P. (the "Investment
Adviser" or "FAM"), which is an affiliate of MLAM and is owned and controlled
by Merrill Lynch & Co., Inc., a financial services holding company and the
parent of Merrill Lynch. The Investment Adviser or MLAM act as the investment
adviser for more than 90 other registered investment companies. MLAM also
offers portfolio management and portfolio analysis services to individuals and
institutions. As of February 28, 1994, the Investment Adviser and MLAM had a
total of approximately $164.4 billion in investment company and other portfolio
assets under management, including accounts of certain affiliates of MLAM.
Subject to the direction of the Directors, the Investment Adviser is
responsible for the actual management of the Fund's portfolio and constantly
reviews the Fund's holdings in light of its own research analysis and that from
other relevant sources. The responsibilities for making decisions to buy, sell
or hold a particular security rest with the Investment Adviser. The Investment
Adviser performs certain of the other administrative services and provides all
the office space, facilities, equipment and necessary personnel for management
of the Fund.
Vincent T. Lathbury, III and Robert Parish are the Portfolio Managers for the
Fund. Vincent T. Lathbury, III has been Portfolio Manager and Vice President of
the Investment Adviser and MLAM since 1982. Robert Parish has been Portfolio
Manager and Vice President of the Investment Adviser since 1991.
Pursuant to the management agreement between the Investment Adviser and the
Fund (the "Investment Advisory Agreement"), the Investment Adviser is entitled
to receive from the Fund a monthly fee based upon the average daily net assets
of the Fund at an annual rate of 0.60%. For the fiscal year ended December 31,
1993, the total fee paid by the Fund to the Investment Adviser was $13,902,958
(based on average net assets of approximately $464.9 million).
The Investment Advisory Agreement obligates the Fund to pay certain expenses
incurred in the Fund's operations, including, among other things, the
management fee, legal and audit fees, unaffiliated Directors' fees and
expenses, registration fees, custodian and transfer agency fees, accounting and
pricing costs, 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 Investment Adviser, and the Fund
reimburses the Investment Adviser for its costs in connection with such
services. For the fiscal year ended December 31, 1993, the Fund reimbursed the
Investment Adviser $169,845 for accounting services. For the
20
<PAGE>
fiscal year ended December 31, 1993, the annualized ratio of total expenses,
net of distribution fees, to average net assets was 0.78% for the Class A
shares and 0.80% for the Class B shares.
TRANSFER AGENCY SERVICES
Financial Data Services, Inc. (the "Transfer Agent"), which is a wholly-owned
subsidiary of Merrill Lynch & Co., Inc., acts as the Fund's transfer agent
pursuant to a transfer agency, dividend disbursing agency and shareholder
servicing agency agreement (the "Transfer Agency Agreement"). Pursuant to the
Transfer Agency Agreement, the Transfer Agent is responsible for the issuance,
transfer and redemption of shares and the opening and maintenance of
shareholder accounts. Pursuant to the Transfer Agency Agreement, the Fund pays
the Transfer Agent an annual fee of $10.00 per Class A shareholder account and
$12.00 per Class B shareholder account, and the Transfer Agent is entitled to
reimbursement for out-of-pocket expenses incurred by it under the Transfer
Agency Agreement. For the year ended December 31, 1993, the Fund paid the
Transfer Agent a total fee of $2,005,966 pursuant to the Transfer Agency
Agreement for providing Transfer Agency services.
PURCHASE OF SHARES
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), an affiliate of
MLAM, the Investment Adviser and Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"), acts as the distributor of shares of the Fund.
Class A and Class B 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, except that the minimum initial purchase for retirement plans is $250.
The minimum subsequent purchase is $50 ($1 for retirement plans).
The Fund offers its shares at a public offering price equal to the next
determined net asset value per share plus sales charges which, at the option of
the purchaser, may be imposed either at the time of purchase (the "initial
sales charge alternative") or on a deferred basis (the "deferred sales charge
alternative"), as described below. 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 normal trading on the New
York Stock Exchange on each day during which the New York Stock Exchange is
open for trading, which includes orders received after the determination of net
asset value on the previous day, the applicable offering price will be based on
the net asset value determined on the day the order is placed with the
Distributor, provided the order is received by the Distributor prior to 4:30
P.M., New York time, on that day. If the purchase orders are not received by
the Distributor prior to 4:30 P.M., New York time, such orders shall be deemed
received on the next business day. Any order may be rejected by the Distributor
or the Fund. The Fund or the Distributor may suspend the offering of the Fund's
shares to the general public at any time in response to conditions in the
securities markets or otherwise and may thereafter resume such offering from
time to time. Neither the Distributor nor the dealers are permitted to withhold
placing orders to benefit themselves by a price change. Merrill Lynch may
charge its customers a processing fee (presently $4.85) to confirm a sale of
shares to such customers. Purchases directly through the Fund's Transfer Agent
are not subject to the processing fee.
The Fund issues two classes of shares: Class A shares are sold to investors
choosing the initial sales charge alternative, and Class B shares are sold to
investors choosing the deferred sales charge alternative. Each class of shares
represents an interest in the same portfolio of investments of the Fund, has
the same rights and is identical to the other class in all respects, except
that Class B shares bear the expenses of the
21
<PAGE>
deferred sales arrangements, any expenses (including incremental transfer
agency costs) resulting from such sales arrangements and the expenses paid by
the account maintenance fee and have exclusive voting rights with respect to
the Rule 12b-1 distribution plan pursuant to which the account maintenance fee
and distribution fees are paid. The two classes also have different exchange
privileges. See "Shareholder Services--Exchange Privilege". The net income
attributable to Class B shares and the dividends payable on Class B shares will
be reduced by the amount of the account maintenance and distribution fees and
incremental transfer agency costs relating to the Class B shares; accordingly,
the net asset value of the Class B shares will be reduced by such amount to the
extent the Fund has undistributed net income. Sales personnel may receive
different compensation for selling Class A or Class B shares. Also, Directors
of Merrill Lynch & Co., Inc. may purchase Class A shares of the Fund at net
asset value. Investors are advised that only Class A shares may be available
for purchase through securities dealers, other than Merrill Lynch, which are
eligible to sell shares.
ALTERNATIVE SALES ARRANGEMENTS
The alternative sales arrangements of the Fund permit investors to choose the
method of purchasing shares that is most beneficial given the amount of their
purchase, the length of time the investor expects to
hold his shares and other relevant circumstances. Investors should determine
whether under their particular circumstances it is more advantageous to incur
an initial sales charge and not be subject to ongoing charges, as discussed
below, or to have the entire initial purchase price invested in the Fund with
the investment thereafter being subject to ongoing distribution charges.
As an illustration, investors who qualify for significantly reduced sales
charges, as described below, might elect the initial sales charge alternative
because similar sales charge reductions are not available for purchases under
the deferred sales charge alternative. Moreover, shares acquired under the
initial sales charge alternative would not be subject to ongoing account
maintenance and distribution fees as described below. However, because initial
sales charges are deducted at the time of purchase, such investors would not
have all their funds invested initially.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time also might elect the
initial sales charge alternative because over time the accumulated continuing
account maintenance and distribution fees may exceed the initial sales charge.
Again, however, such investors must weigh this consideration against the fact
that not all their funds will be invested initially. Furthermore, the ongoing
account maintenance and distribution fees will be offset to the extent any
return is realized on the additional funds initially invested under the
deferred alternative. Another factor that may be applicable under certain
circumstances is that the payment of the Class B distribution fee and
contingent deferred sales charge ("CDSC") is subject to certain limits as set
forth below under "Deferred Sales Charge Alternative--Class B Shares".
Certain other investors might determine it to be more advantageous to have
all their funds invested initially, although remaining subject to continued
account maintenance and distribution fees and, for a four-year period of time,
a CDSC as described below. For example, an investor subject to the 4.0% initial
sales charge will have to hold its investment at least 4 years for the 0.25%
account maintenance fee and 0.50% distribution fee to exceed the initial sales
charge on Class A shares. This example does not take into account the time
value of money which further reduces the impact of the ongoing account
maintenance and distribution fees on the investment, fluctuations in net asset
value, the effect of the return on the investment over this period of time or
the effect of any limits that may be imposed upon the payment of the
distribution fee and CDSC.
22
<PAGE>
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The public offering price of Class A shares for purchasers choosing the
initial sales charge alternative is the next determined net asset value plus
varying sales charges (i.e., sales loads), as set forth below.
<TABLE>
<CAPTION>
DISCOUNT TO
SALES SALES SELECTED
CHARGE AS CHARGE AS DEALERS AS
PERCENTAGE OF PERCENTAGE* OF PERCENTAGE OF
OFFERING THE NET AMOUNT THE OFFERING
AMOUNT OF PURCHASE PRICE INVESTED PRICE
- ------------------ ------------- -------------- -------------
<S> <C> <C> <C>
Less than $25,000 4.00% 4.17% 3.75%
$25,000 but less than $50,000........ 3.75 3.90 3.50
$50,000 but less than $100,000....... 3.25 3.36 3.00
$100,000 but less than $250,000 ..... 2.50 2.56 2.25
$250,000 but less than $1,000,000.... 1.50 1.52 1.25
$1,000,000 and over**................ .50 .50 .40
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent.
** A purchase of $1 million or more in a single transaction by an investor
(other than a tax qualified retirement plan under Section 401 of the Internal
Revenue Code of 1986, as amended (the "Code"), or a deferred compensation
plan under Section 403(b) and Section 457 of the Code), or any purchase by a
TMASM Managed Trust, of Class A shares of the Fund may not be subject to an
initial sales charge. Purchases for which the initial sales charge is waived
will be subject instead to a contingent deferred sales charge of up to 1% of
the dollar amount of the purchase if the shares are redeemed within one year
after purchase.
Initial sales charges will be waived for shareholders purchasing $1 million
or more in a single transaction (other than an employer sponsored retirement or
savings plan, such as a tax qualified retirement plan under Section 401 of the
Internal Revenue Code of 1986, as amended (the "Code"), a deferred compensation
plan under Section 403(b) and Section 457 of the Code, other deferred
compensation arrangements, VEBA plans and non-qualified After Tax Savings and
Investment programs maintained on the Merrill Lynch Group Employee Services
system herein referred to as "Employer Sponsored Retirement or Savings Plans"),
or a purchase by a TMASM Managed Trust, of Class A shares of the Fund. In
addition, purchases of Class A shares of the Fund made in connection with a
single investment of $1 million or more under the Merrill Lynch Mutual Fund
Adviser Program will not be subject to an initial sales charge. Purchases
described in this paragraph will be subject to a CDSC if the shares are
redeemed within one year after purchase at the following rates:
<TABLE>
<CAPTION>
CDSC AS A PERCENTAGE OF
AMOUNT OF PURCHASE DOLLAR AMOUNT OF PURCHASE
- ------------------ -------------------------
<S> <C>
$1 million up to $2.5 million......................... 0.75%
Over $2.5 million up to $3.5 million.................. 0.40%
Over $3.5 million up to $5 million.................... 0.25%
Over $5 million....................................... 0.20%
</TABLE>
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A shares
of the Fund will receive a concession equal to most of the sales charge, they
may be deemed to be underwriters under the Securities Act.
23
<PAGE>
Reduced Initial Sales Charges. Sales charges are reduced under a Right of
Accumulation and a Letter of Intention. Class A shares of the Fund are offered
at net asset value to Directors of the Fund, to directors or trustees of
certain other Merrill Lynch-sponsored investment companies, to an investor who
has a business relationship with a financial consultant who joined Merrill
Lynch from another investment firm within six months prior to the date of
purchase if certain conditions set forth in the Statement of Additional
Information are met, to directors of Merrill Lynch & Co., Inc. and to employees
of Merrill Lynch & Co., Inc. and its subsidiaries. Class A shares may be
offered at net asset value in connection with the acquisition of assets of
other investment companies. No initial sales charges are imposed on Class A
shares as a result of the automatic reinvestment of dividends or capital gains
distributions. [Class A shares are offered to TMASM Managed Trusts to which
Merrill Lynch Trust Company provides discretionary trustee services at net
asset value plus a reduced sales charge.] Class A shares are offered at net
asset value to certain Employer Sponsored Retirement or Savings Plans, provided
such plans meet the required number of eligible employees or required amount of
assets advised by the Investment Adviser or any of its affiliates. Class A
shares of the Fund are also offered at net asset value to shareholders of
certain closed-end funds advised by MLAM or the Investment Adviser who wish to
reinvest the net proceeds from a sale of their closed-end fund shares of common
stock in shares of the Fund, provided certain conditions are met. Thus, for
example, Class A shares of the Fund are offered at net asset value to
shareholders of Merrill Lynch Senior Floating Rate Fund (formerly known as
Merrill Lynch Prime Fund, Inc.) ("Senior Floating Rate Fund") who wish to
reinvest the net proceeds from a sale of certain of their shares of common
stock of Senior Floating Rate Fund in shares of the Fund. In order to exercise
this investment option, Senior Floating Rate Fund shareholders must sell their
Senior Floating Rate Fund shares to the Senior Floating Rate Fund in connection
with a tender offer conducted by the Senior Floating Rate Fund and reinvest the
proceeds immediately in the Fund. This investment option is available only with
respect to the proceeds of Senior Floating Rate Fund Shares as to which no
Early Withdrawal Charge (as defined in the Senior Floating Rate Fund
prospectus) is applicable. Purchase orders from Senior Floating Rate Fund
shareholders wishing to exercise this investment option will be accepted only
on the day that the related Senior Floating Rate Fund tender offer terminates
and will be effected at the net asset value of the Fund at such day. Additional
information concerning these reduced initial sales charges is set forth in the
Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
Investors choosing the deferred sales charge alternative purchase Class B
shares at net asset value per share without the imposition of a sales charge at
the time of purchase. The Class B shares are being sold without an initial
sales charge so that the Fund will receive the full amount of the investor's
purchase payment. Merrill Lynch compensates its financial consultants for
selling Class B shares at the time of purchase from its own funds. The proceeds
of the CDSC and the ongoing distribution fee discussed below are used to defray
Merrill Lynch's distribution expenses, including compensating its financial
consultants. The proceeds from the ongoing account maintenance fee are used to
compensate Merrill Lynch for providing continuing account maintenance
activities.
Proceeds from the CDSC are paid to the Distributor and are used in whole or
in part by the Distributor to defray the expenses of dealers (including Merrill
Lynch) related to providing distribution-related services to the Fund in
connection with the sale of the Class B shares, such as the payment of
compensation to financial consultants for selling Class B shares, from its own
funds. Payments by the Fund to the Distributor of the distribution fee under
the distribution plan described below also may be used in whole or in part by
the Distributor for this purpose. The combination of the CDSC and the ongoing
distribution fee facilitates
24
<PAGE>
the ability of the Fund to sell the Class B shares without a sales charge being
deducted at the time of purchase. Class B shareholders of the Fund exercising
the exchange privilege described under "Shareholder Services--Exchange
Privilege" will continue to be subject to the Fund's CDSC schedule if such
schedule is higher than the deferred sales charge schedule relating to the
Class B shares acquired as a result of the exchange.
CDSC. Class B shares which are redeemed within four years of purchase may be
subject to a CDSC at the rates set forth below charged as a percentage of the
dollar amount subject thereto. The charge will be assessed on an amount equal
to the lesser of the current market value or the costs of the shares being
redeemed. Accordingly, no sales charge will be imposed on increases in net
asset value above the initial purchase price. In addition, no charge will be
assessed on shares derived from reinvestment of dividends or capital gains
distributions. For the year ended December 31, 1993 the Distributor received
CDSC's of $4,162,049 with respect to redemptions of Class B shares, all of
which was paid to Merrill Lynch.
The following table sets forth the rates of the CDSC:
<TABLE>
<CAPTION>
CDSC AS A
PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT
PAYMENT MADE (SUBJECT TO CHANGE)
------------------- -------------------
<S> <C>
0-1................................................... 4.0%
1-2................................................... 3.0%
2-3................................................... 2.0%
3-4................................................... 1.0%
4 and thereafter...................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be determined in the manner that results in the lowest applicable rate
being charged. Therefore, it will be assumed that the redemption is first of
shares held until such time as the CDSC is no longer applicable or shares
acquired pursuant to reinvestment of dividends or distributions and then of
shares held longest during the four-year period. The charge will not be applied
to dollar amounts representing an increase in the net asset value since the
time of purchase. A transfer of shares from a shareholder's account to another
account will be assumed to be made in the same order as a redemption.
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares through dividend reinvestment. If at such time the investor
makes his first redemption of 50 shares (proceeds of $600), 10 shares will not
be subject to the charge because of dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the third year after purchase). The CDSC is waived on
redemption of shares following the death or disability (as defined in the Code)
of a shareholder.
The CDSC is waived on redemptions of shares in connection with certain post-
retirement withdrawals from Individual Retirement Accounts or other retirement
plans or following the death or disability (as defined in the Code) of a
shareholder.
25
<PAGE>
The CDSC is waived on redemption of shares by certain eligible 401(a) and
eligible 401(k) plans. The CDSC is also waived for any Class B shares which are
purchased by an eligible 401(k) or eligible 401(a) plan and are rolled over
into a Merrill Lynch or Merrill Lynch Trust Company custodied Individual
Retirement Account and held in such account at the time of redemption.
Additional information concerning the waiver of the CDSC is set forth in the
Statement of Additional Information.
Distribution Plan. Pursuant to a distribution plan adopted by the Fund under
Rule 12b-1 under the Investment Company Act (the "Distribution Plan"), the Fund
pays the Distributor ongoing account maintenance and distribution fees, which
are accrued daily and paid monthly, at the annual rates of 0.25% and 0.50%,
respectively, of the average daily net assets of the Class B shares of the
Fund. Pursuant to a sub-agreement with the Distributor, Merrill Lynch also
provides account maintenance and distribution services to the Fund. The ongoing
account maintenance fee compensates the Distributor and Merrill Lynch for
providing account maintenance services to Class B shareholders. The ongoing
distribution fee compensates the Distributor and Merrill Lynch for providing
shareholder and distribution services and bearing certain distribution-related
expenses of the Fund, including payments to financial consultants for selling
Class B shares of the Fund. For the fiscal year ended December 31, 1993, the
Fund paid the Distributor $13,901,525 pursuant to the Distribution Plan, all of
which was paid to Merrill Lynch.
The Distribution Plan is designed to permit an investor to purchase Class B
shares through dealers without the assessment of a front-end sales charge and
at the same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B shares. In this regard, the purpose and
function of the distribution fee and the contingent deferred sales charge are
the same as those of the initial sales charge with respect to the Class A
shares of the Fund in that the deferred sales charges provide for the financing
of the distribution of the Fund's Class B shares.
Prior to July 6, 1993, the Fund paid the Distributor an ongoing distribution
fee, accrued daily and paid monthly, at the annual rate of 0.75% of average
daily net assets of the Class B shares of the Fund under a distribution plan
previously adopted by the Fund (the "Prior Plan") to compensate the Distributor
and Merrill Lynch for providing account maintenance and distribution-related
activities and services to Class B shareholders. The fee rate payable and the
services provided under the Prior Plan are identical to the aggregate fee rate
payable and the services provided under the Distribution Plan, the difference
being that the account maintenance and distribution services have been
unbundled. For the fiscal year ended December 31, 1993, the Fund paid the
Distributor an aggregate of $13,901,525 pursuant to the Prior Plan and the
Distribution Plan. Both the Distribution Plan and the Prior Plan were designed
to permit an investor to purchase Class B shares through dealers without the
assessment of a front-end sales load and at the same time permit the dealer to
compensate its financial consultants in connection with the sale of the Class B
shares. In this regard, the purpose and function of the ongoing account
maintenance and distribution fees under either the Distribution Plan or the
Prior Plan and the CDSC are the same as those of the initial sales charge with
respect to the Class A shares of the Fund in that the deferred sales charges
provide for the financing of the distribution of the Fund's Class B shares.
The payments under the Distribution Plan are based on a percentage of average
daily net assets of Class B shares regardless of the amount of expenses
incurred and, accordingly, distribution-related revenues may be more or less
than distribution-related expenses. Information with respect to the
distribution-related revenues and expenses is presented to the Directors for
their consideration in connection with their deliberations as to the
continuance of the Distribution Plan. This information is presented annually as
of
26
<PAGE>
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, the
CDSCs and certain other related revenues, and expenses consist of financial
consultant compensation, branch office and regional operation center selling
and transaction processing expenses, advertising, sales promotion and marketing
expenses, corporate overhead and interest expense. On the direct expense and
revenue/cash basis, revenues consist of the account maintenance fees,
distribution fees and CDSCs and the expenses consist of financial consultant
compensation. The Fund operated as a closed-end investment company from
September 29, 1988 to November 15, 1991 and commenced operations as an open-end
investment company on November 18, 1991. As of December 31, 1993, 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 as an open-end investment company exceeded
fully allocated accrual revenues for such period by approximately $40,089,000
(1.90% of Class B net assets at that date). At December 31, 1992, direct cash
expenses for the period since the commencement of operations as an open-end
investment company exceeded direct cash revenue by $12,846,275 (0.81% of
Class B net assets at that date). As of December 31, 1993, direct cash expenses
for the period since the commencement of operations as an open-end investment
company exceeded direct cash revenues by $3,162,750 (0.15% of Class B net
assets at that date).
The Fund has no obligation with respect to distribution-related expenses
incurred by the Distributor and Merrill Lynch in connection with the Class B
shares, and there is no assurance that the Directors of the Fund will approve
the continuance of the Distribution Plan from year to year. However, the
Distributor intends to seek annual continuation of the Distribution Plan. In
their review of the Distribution Plan, the Directors will not be asked to take
into consideration expenses incurred in connection with the distribution of
Class A shares or of shares of other funds for which the Distributor acts as
distributor. The account maintenance fee, distribution fee and the CDSCs in the
case of Class B shares will not be used to subsidize the sale of Class A
shares.
Limitations on the Payment of Deferred Sales Charges. The maximum sales
charge rule in the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. imposes a limitation on certain asset-based sales
charges such as the Fund's distribution fee and the CDSC but not the account
maintenance fee. 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 (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges) plus (2)
interest on the unpaid balance at the prime rate plus 1% (the unpaid balance
being the maximum amount payable minus amounts received from the payment of the
distribution fee and the CDSC). The Distributor has voluntarily agreed to waive
interest charges on the unpaid balance in excess of 0.50% of eligible gross
sales. Consequently, the maximum amount payable to the Distributor (referred to
as the "voluntary maximum") 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 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 payments in excess of the amount
payable under the NASD formula will not be made.
27
<PAGE>
The following table sets forth comparative information as of February 28,
1994, with respect to the Class B shares of the Fund indicating the maximum
allowable payments that can be made under the NASD maximum sales charge rule
and the Distributor's voluntary maximum for the fiscal period ended February
28, 1994.
DATA CALCULATED AS OF FEBRUARY 28, 1994
(IN THOUSANDS)
-------------------------------------------------------------
<TABLE>
<CAPTION>
ANNUAL
ALLOWABLE ALLOWABLE AMOUNTS DISTRIBUTION
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE FEE AT CURRENT
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
---------- --------- ---------- -------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule As
Adopted................ $1,989,180 $124,324 $11,097 $135,421 $21,255 $114,166 $10,427
Under Distributor's Vol-
untary Waiver.......... $1,989,180 $124,324 $ 9,946 $134,270 $21,255 $113,015 $10,427
</TABLE>
- --------
(1) Purchase price of all eligible Class B shares sold since November 18, 1991
(commencement of operations) other than shares acquired through dividend
reinvestment and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0%, as permitted under the
NASD Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. Of the
distribution fee payments made prior to July 6, 1993 under the Prior Plan
at the 0.75% rate, 0.50% of average daily net assets has been treated as a
distribution fee and .25% of average daily net assets has been deemed to
have been a service fee and not subject to the NASD maximum sales charge
rule.
(4) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any CDSC payments) is amortizing
the unpaid balance. No assurance can be given that payments of the
distribution fee will reach either the voluntary maximum or the NASD
maximum.
REDEMPTION OF SHARES
The Fund is required to redeem for cash all full and fractional shares of
the Fund upon receipt of a written request in proper form. The redemption
price is the net asset value per share next determined after the initial
receipt of proper notice of redemption. Except for any CDSC which may be
applicable to Class B shares, there will be no charge for redemption if the
redemption request is sent directly to the Transfer Agent. Shareholders
liquidating their holdings will receive on redemption all dividends reinvested
through the date of redemption. The value of shares at the time of redemption
may be more or less than the shareholder's cost, depending on the market value
of the securities held by the Fund at such time.
REDEMPTION
A shareholder wishing to redeem shares may do so by tendering the shares
directly to the Fund's Transfer Agent, Financial Data Services, Inc., Transfer
Agency Mutual Fund Operations, P.O. Box 45289, Jacksonville, Florida 32232-
5289. 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 delivered
other than by mail should be delivered to Financial Data Services, Inc.,
Transfer Agency Mutual Fund Operations, 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484. Redemption requests should not be sent to
the
28
<PAGE>
Fund. A redemption request 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 certificate, as the case may be. The
signature(s) on the redemption request must be guaranteed by an "eligible
guarantor institution" as such is defined in Rule 17Ad-15 under the Securities
Exchange Act of 1934, as amended, the existence and validity of which may be
verified by the Transfer Agent through the use of industry publications.
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, payments 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 (e.g., cash, Federal funds or certified check
drawn on a United States bank). 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 has been collected for the purchase of such Fund shares, which may
take up to 10 days.
REPURCHASE
The Fund also will repurchase shares through a shareholder's listed
securities dealer. The Fund will normally 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 normal close of business
on the New York Stock Exchange on the day received and is received by the Fund
from such dealer not later than 4:30 P.M., New York City time, on the same day.
Dealers have the responsibility of submitting such repurchase requests to the
Fund not later than 4:30 P.M., New York City time, in order to obtain that
day's closing price.
The repurchase arrangements are for the convenience of shareholders and do
not involve a charge by the Fund (other than any applicable CDSC in the case of
Class B shares); securities firms which do not have selected dealer agreements
with the Distributor, however, may impose a transaction charge on the
shareholder for transmitting the notice of repurchase to the Fund. Merrill
Lynch may charge its customers a processing fee (presently $4.85) to confirm a
repurchase of shares. Redemptions directly through the Fund's Transfer Agent
are not subject to the processing fee. The Fund reserves the right to reject
any order for repurchase, which right of rejection might adversely affect
shareholders seeking redemption through the repurchase procedure. However, a
shareholder whose order for repurchase is rejected by the Fund may redeem
shares as set forth above.
REINSTATEMENT PRIVILEGE--CLASS A SHARES
Shareholders who have redeemed their Class A shares have a one-time privilege
to reinstate their accounts by purchasing Class A shares of the Fund at net
asset value without a sales charge up to the dollar amount redeemed. The
reinstatement privilege may be exercised by sending a notice of exercise along
with a check for the amount to be reinstated to the Transfer Agent within 30
days after the date the request for redemption was accepted by the Transfer
Agent or the Distributor. The reinstatement will be made at the net asset value
per share next determined after the notice of reinstatement is received and
cannot exceed the amount of the redemption proceeds. The reinstatement
privilege is a one-time privilege and may be exercised by the Class A
shareholder only the first time such shareholder makes a redemption.
29
<PAGE>
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below which are designed to facilitate investment in shares of the
Fund. Full details as to each of such services, copies of the various plans
described below and instructions as to how to participate in the various
services or plans, or 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. Included in such services are the following:
Investment Account. Each shareholder whose account (an "Investment Account")
is maintained at the Transfer Agent will receive quarterly statements from the
Transfer Agent. These quarterly statements will serve as transaction
confirmations for automatic investment purchases and the reinvestment of
taxable ordinary income dividends, tax-exempt income and long-term capital gain
distributions. The quarterly 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 the automatic investment purchase and the reinvestment of taxable ordinary
income dividends, tax-exempt income and long-term capital gain distributions.
Shareholders may make additions to their Investment Accounts at any time by
mailing a check directly to the Transfer Agent. Shareholders may also maintain
their accounts through Merrill Lynch. Upon the transfer of shares out of a
Merrill Lynch brokerage account, an Investment Account in the transferring
shareholder's name will be opened automatically, without charge, at the
Transfer Agent. Shareholders considering transferring their Class A shares from
Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the Class A shares are to be transferred will
not take delivery of shares of the Fund, a shareholder either must redeem the
Class A shares so that the cash proceeds can be transferred to the account at
the new firm or such shareholder must continue to maintain an Investment
Account at the Transfer Agent for those Class A shares. Shareholders interested
in transferring their Class B shares from Merrill Lynch and who do not wish to
have an Investment Account maintained for such shares at the Transfer Agent may
request their new brokerage firm to maintain such shares in an account
registered in the name of the brokerage firm for the benefit of the
shareholder. If the new brokerage firm is willing to accommodate the
shareholder in this manner, the shareholder must request that he be issued
certificates for his shares and then must turn the certificates over to the new
firm for re-registration as described in the preceding sentence. Shareholders
considering transferring a tax deferred retirement account such as an
Individual Retirement Account from Merrill Lynch to another brokerage firm or
financial institution should be aware that, if the firm to which the retirement
account is to be transferred will not take delivery of shares of the Fund, a
shareholder must either redeem the shares (paying any applicable contingent
deferred sales charge) so that the cash proceeds can be transferred to the
account at the new firm, or such shareholder must continue to maintain a
retirement account at Merrill Lynch for those shares.
Exchange Privilege. Shareholders of the Fund each have an exchange privilege
with certain other mutual funds sponsored by Merrill Lynch. There is currently
no limitation on the number of times a shareholder may exercise the exchange
privilege. The exchange privilege may be modified or terminated in accordance
with the rules of the Commission. Class A shareholders of the Fund may exchange
their shares ("outstanding Class A shares") for Class A shares of another fund
("new Class A shares") on the basis of relative net asset value per Class A
share, plus an amount equal to the difference, if any, between the sales charge
previously paid on the outstanding Class A shares and the sales charge payable
at the time of the exchange on the new Class A shares. The Fund's exchange
privilege is modified with respect to purchases of Class A shares under the
Merrill Lynch Mutual Fund Adviser program. First, the initial allocation of
assets is made under the program. Then, any subsequent exchange under the
program of Class A shares of a fund
30
<PAGE>
for Class A shares of the Fund will be made solely on the basis of the relative
net asset values of the shares being exchanged. Therefore, there will not be a
charge for any difference between the sales charge previously paid on the
shares of the other fund and the sales charge payable on the shares of the Fund
being acquired in the exchange under this program.
Class B shareholders of the Fund may exchange their shares ("outstanding
Class B shares") for Class B shares of another fund ("new Class B shares") on
the basis of relative net asset value per share, without the payment of any
CDSC that might otherwise be due upon redemption of the outstanding Class B
shares. Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the deferred sales charge schedule relating to the new Class B shares. In
addition, Class B shares of the Fund acquired through use of the exchange
privilege will be subject to the Fund's CDSC schedule if such schedule is
higher than the deferred sales charge schedule relating to the Class B shares
of the Fund from which the exchange has been made. For purposes of computing
the CDSC that may be payable upon a disposition of the new Class B shares, the
holding period for outstanding Class B shares is "tacked" to the holding period
of the new Class B shares. Class A and Class B shareholders of the Fund may
also exchange their shares for shares of certain money market funds, but in the
case of an exchange from Class B shares, the period of time that shares are
held in a money market fund will not count toward satisfaction of the holding
period requirement for purposes of reducing the CDSC. Exercise of the exchange
privilege is treated as a sale for Federal income tax purposes. The exchange
privilege is available only in states where the exchange legally may be made.
For further information, see "Shareholder Services--Exchange Privilege" in the
Statement of Additional Information.
Automatic Reinvestment of Dividends and Capital Gains Distributions. All
dividends and capital gains distributions are reinvested automatically in full
and fractional shares of the Fund, without a sales charge, at the net asset
value per share at the close of business on the payable date for such dividends
or distributions. A shareholder may at any time, by written notification or by
telephone (1-800-MER-FUND) to the Transfer Agent, elect to have subsequent
dividends or capital gains distributions, or both, paid in cash, rather than
reinvested, in which event payment will be mailed monthly. No CDSC will be
imposed on redemption of shares issued as a result of the automatic
reinvestment of dividends or capital gains distributions. The Automated
Investment Program is not available to shareholders whose shares are held in a
brokerage account with Merrill Lynch (other than a CMA account) or to
shareholders participating in retirement plans.
Systematic Withdrawal and Automatic Investment Plans. A Class A shareholder
may elect to receive systematic withdrawal payments from his Investment Account
through automatic payment by check or through automatic payment by direct
deposit to his bank account on either a monthly or quarterly basis. A Class A
shareholder whose shares are held within a CMA(R), CBA(R) or Retirement Account
may elect to have shares redeemed on a monthly, bimonthly, quarterly,
semiannual or annual basis through the Systematic Redemption Program, subject
to certain conditions. Regular additions of both Class A and Class B shares may
be made to an investor's Investment Account by prearranged charges of $50 or
more to his regular bank account. The Fund's Automatic Investment Program is
not available to shareholders whose shares are held in a brokerage account with
Merrill Lynch. Alternatively, investors who maintain CMA(R) accounts may
arrange to have periodic investments made in the Fund in their CMA(R) account
or in certain related accounts in amounts of $100 or more through the CMA
Automatic Investment Program.
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (the "Code"). If it so qualifies,
31
<PAGE>
the Fund (but not its shareholders) will not be subject to Federal income tax
on the part of its net ordinary income and net realized capital gains which it
distributes to Class A and Class B shareholders (together, the "shareholders").
The Fund intends to distribute substantially all of such income.
Dividends paid by the Fund from its ordinary income and distributions of the
Fund's net realized short-term capital gains (together referred to hereafter as
"ordinary income dividends") are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
(including long-term gains from certain transactions in futures and options)
("capital gain dividends") are taxable to shareholders as long-term capital
gains, regardless of the length of time the shareholder has owned Fund shares.
Distributions in excess of the Fund's earnings and profits will first reduce
the adjusted tax basis of a holder's shares and, after such adjusted tax basis
is reduced to zero, will constitute capital gains to such holder (assuming the
shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. Distributions by the Fund, whether from ordinary income or capital
gains, will not be eligible for the dividends received deduction allowed to
corporations under the Code. 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 by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% United States
withholding tax under existing provisions of the Code applicable to foreign
individuals and entities unless a reduced rate of withholding or a withholding
exemption is provided under applicable treaty law. Nonresident shareholders are
urged to consult their own tax advisers concerning the applicability of the
United States withholding tax.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
Shareholders may be able to claim United States foreign tax credits with
respect to such taxes, subject to certain conditions and limitations contained
in the Code. For example, certain retirement accounts cannot claim foreign tax
credits on investments in foreign securities held in the Fund. If more than 50%
in value of the Fund's total assets at the close of its taxable year consists
of securities of foreign corporations, the Fund will be eligible, and intends,
to file an election with the Internal Revenue Service pursuant to which
shareholders of the Fund will be required to include their proportionate shares
of such withholding taxes in their United States 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 United States income taxes. No
deductions for foreign taxes, however, may be claimed by noncorporate
shareholders who do not itemize deductions. A shareholder that is a nonresident
alien individual or a foreign corporation may be subject to United States
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
United States tax for the foreign taxes treated as having been paid by such
shareholder. The Fund will report annually to its shareholders the amount per
share of such withholding taxes.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding").
32
<PAGE>
Generally, shareholders subject to backup withholding will be those for whom no
certified taxpayer identification number is on file with the Fund or who, to
the Fund's knowledge, have furnished an incorrect number. When establishing an
account, an investor must certify under penalty of perjury that such number is
correct and that such investor is not otherwise subject to backup withholding.
Under Code Section 988, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that are
not "regulated futures contracts" and from unlisted options will generally be
treated as ordinary income or loss. Such Code Section 988 gains or losses will
generally increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company
taxable income during a taxable year, the Fund would not be able to make any
ordinary dividend distributions, and any distributions made before the losses
were realized but in the same taxable year would be recharacterized as a return
of capital to shareholders, thereby reducing the basis of each shareholder's
Fund shares.
If a Class A shareholder exercises the exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent the sales charge
paid to the Fund reduces any sales charge the shareholder would have owed upon
the purchase of the new Class A shares in the absence of the exchange
privilege. Instead, such sales charge will be treated as an amount paid for the
new Class A shares.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action
either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs which
are derived from interest on U.S. Government obligations. State law varies as
to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
yield for various specified time periods in advertisements or information
furnished to present or prospective shareholders. Average annual total return
and yield are computed separately for Class A and Class B shares in accordance
with formulas specified by the Commission.
Average annual total return quotations for the specified period will be
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 will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including the maximum sales charge in the case of
Class A shares and
33
<PAGE>
the CDSC that would be applicable to a complete redemption of the investment at
the end of the specified period in the case of Class B shares. Dividends paid
by the Fund with respect to Class A and Class B shares, to the extent any
dividends are paid, will be calculated in the same manner at the same time on
the same day and will be in the same amount, except that account maintenance
and distribution charges and any incremental transfer agency costs relating to
Class B shares will be borne exclusively by that class. The Fund will include
performance data for both Class A and Class B shares of the Fund in any
advertisement or information including performance data of the Fund.
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return
calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return and (2) the maximum applicable sales
charges will not be included with respect to annual or annualized rates of
return calculations. Aside from the effect on the performance data calculations
of including or excluding the maximum applicable sales charges, actual annual
or annualized total return data generally will be lower than average annual
total return data since the average annual rates of return reflect compounding;
aggregate total return data generally will be higher than average annual total
return data since the aggregate rates of return reflect compounding over a
longer period of time. In advertisements distributed to investors whose
purchases are subject to a reduced sales load in the case of Class A shares or
waiver of the CDSC in the case of Class B shares (such as investors in certain
retirement plans), the performance data may take into account the reduced, and
not the maximum, sales charges 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 is 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 such total return on a
hypothetical $1,000 investment in the Fund at the beginning of each specified
period.
Yield quotations will be computed based on a 30-day period by dividing (a)
net income based on the yield of each security earned during the period by (b)
the average daily number of shares outstanding during that period that were
entitled to receive dividends multiplied by the maximum offering price per
share on the last day of the period. The yield for the 30-day period ended
December 31, 1993 was 6.88% for Class A shares and 6.39% for Class B shares.
Total return and yield figures are based on the Fund's historical performance
and are not intended to indicate future performance. The Fund's total return
and yield 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 performance data
published by Lipper Analytical Services, Inc., Morningstar Publications, Inc.
("Morningstar"), Money Magazine, U.S. News & World Report, Business Week, CDA
Investment Technology, Inc., Forbes Magazine and Fortune Magazine. From time to
time, the Fund may include the Fund's Morningstar risk-adjusted performance
ratings in advertisements or supplemental sales literature. As with other
performance data, performance comparisons should not be considered
representative of the Fund's relative performance for any future period.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors of the Fund, the
Investment Adviser is primarily responsible for the execution of the Fund's
portfolio transactions. In executing such transactions, the
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<PAGE>
Investment Adviser seeks to obtain the best results for the Fund, taking into
account such factors as price (including the applicable brokerage commission or
dealer spread), size of order, difficulty of execution and operational
facilities of the firm involved and the firm's risk in positioning a block of
securities. While the Investment Adviser generally seeks reasonably competitive
commission rates or spreads, the Fund does not necessarily pay the lowest
commission or spread available.
The Fund has no obligation to deal with any broker or dealer in execution of
transactions in portfolio securities. Subject to obtaining the best price and
execution, securities firms which provided supplemental investment research to
the Investment Adviser, including Merrill Lynch, 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 Investment Adviser
under the Investment Advisory Agreement, and the expenses of the Investment
Adviser will not necessarily be reduced as a result of the receipt of such
supplemental information.
The securities in which the Fund invests are traded primarily in the over-
the-counter market. Since portfolio transactions will generally not be effected
on foreign securities exchanges, the Fund does not expect typically to incur
potential settlement delays which may occur on certain of such exchanges. 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.
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
may serve as its broker in transactions conducted on an exchange and in over-
the-counter transactions conducted on an agency basis. Costs associated with
transactions in foreign securities are generally higher than with transactions
in United States securities, although, as noted above, the Fund will endeavor
to achieve the best net results in effecting such transactions.
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of United States national securities exchanges from executing
exchange transactions for their affiliates and institutional accounts which
they manage unless the member (i) has obtained prior express authorization from
the account to effect such transactions, (ii) at least annually furnished the
account with the aggregate compensation received by the member in effecting
such transactions, and (iii) complies with any rules the Commission has
prescribed with respect to the requirements of clauses (i) and (ii). To the
extent Section 11(a) would apply to Merrill Lynch acting as a broker for the
Fund in any of its portfolio transactions executed on any such securities
exchange of which it is a member, appropriate consents have been obtained from
the Fund and annual statements as to aggregate compensation will be provided to
the Fund.
PORTFOLIO TURNOVER
Generally, the Fund does not purchase securities for short-term trading
profits. However, the Fund may dispose of securities without regard to the time
they have been held when such actions, for defensive or other reasons, appear
advisable to the Investment Adviser. While it is not possible to predict
turnover rates with any certainty, at present it is anticipated that the Fund's
annual portfolio turnover rate, under normal circumstances, will be less than
200%. (The portfolio turnover rate is calculated by dividing the lesser of
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<PAGE>
purchases or sales of portfolio securities for the particular fiscal year by
the monthly average of the value of the portfolio securities owned by the Fund
during the particular fiscal 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. For the fiscal
year ended December 31, 1993, the portfolio turnover rate was 182.88%. The
increase in the Fund's portfolio turnover rate was due to an attempt to reduce
the Fund's exposure to an increase in interest rate volatility.
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute all its net investment income. Dividends from
such net investment income will be declared daily prior to the determination of
net asset value on that day and paid monthly. Shares will accrue dividends as
long as they are issued and outstanding. Shares are issued and outstanding from
the settlement date of a purchase order to the settlement date of a redemption
order. All net realized long-term and short-term capital gains, if any, will be
distributed to the Fund's shareholders at least annually.
Certain gains or losses attributable to 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 dividend distributions, and (b)
distributions made before the losses were realized would be recharacterized as
a return of capital to shareholders, rather than as an ordinary dividend,
reducing each shareholder's tax basis in the Fund shares for Federal income tax
purposes. For a detailed discussion of the Federal tax considerations relevant
to foreign currency transactions, see "Taxes". If in any fiscal year, the Fund
has net income from certain foreign currency transactions, such income will be
distributed annually.
The per share dividends and distributions on Class B shares will be lower
than the per share dividends and distributions on Class A shares as a result of
the account maintenance, distribution and higher transfer agency fees
applicable with respect to the Class B shares. See "Additional Information--
Determination of Net Asset Value". Dividends and distributions may be
reinvested automatically in shares of the Fund at net asset value. Shareholders
may elect to receive any such dividends or distributions, or both, in cash.
Dividends and distributions are taxable to shareholders as discussed under
"Taxes" whether they are reinvested in shares of the Fund or received in cash.
DETERMINATION OF NET ASSET VALUE
The net asset value of the Fund is determined by the Investment Adviser once
daily at 4:15 P.M. following the close of normal trading on the New York Stock
Exchange on each day during which the New York Stock Exchange is open for
trading. Any assets or liabilities initially expressed in terms of non-U.S.
dollar currencies are translated into U.S. dollars at the prevailing market
rates as quoted by one or more banks or dealers on the day of valuation. The
net asset value per share is computed by dividing the value of the securities
held by the Fund plus any cash or other assets (including interest and
dividends accrued but not yet received) minus all liabilities (including
accrued expenses) by the total number of shares outstanding at such time,
rounded to the nearest cent. Expenses, including the fees payable to the
Investment Adviser and the Distributor, are accrued daily.
The net asset value per share of the Class A and Class B shares are expected
to be equivalent. Under certain circumstances, however, the per share net asset
value of the Class B shares generally will be lower than the per share net
asset value of the Class A shares reflecting the daily expense accruals of the
distribution and higher transfer agency fees applicable with respect to the
Class B shares. It is expected, however, that the per share net asset value of
the two classes will tend to converge immediately after the payment of
36
<PAGE>
dividends or distributions, which will differ by approximately the amount of
the expense accrual differential between the classes.
ORGANIZATION OF THE FUND
The Fund was incorporated under Maryland law on July 1, 1988 as a closed-end
investment company. On October 25, 1991, the shareholders of the Fund voted to
convert the Fund to an open-end investment company. Such conversion was
effected on November 15, 1991 and the Fund commenced operations as an open-end
investment company on November 18, 1991. See "General Information" in the
Statement of Additional Information. The Fund has an authorized capital of
2,000,000,000 shares of common stock, par value $0.10 per share, divided into
two classes, designated Class A and Class B Common Stock, each of which
consists of 1,000,000,000 shares. Both Class A and Class B common stock
represent an interest in the same assets of the Fund and are identical in all
respects except that the Class B shares bear certain expenses related to the
account maintenance and distribution of such shares and have exclusive voting
rights with respect to matters relating to such distribution expenditures. See
"Purchase of Shares". The Fund has received an order from the Commission
permitting the issuance and sale of an unlimited number of classes of common
stock. The Directors of the Fund may classify and reclassify the shares of the
Fund into additional classes of common stock at a future date.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matter submitted to a shareholder vote. The Fund does not intend to
hold meetings of shareholders in any year in which the Investment Company Act
does not require shareholders to act upon any of the following matters: (i)
election of directors; (ii) approval of an investment advisory agreement; (iii)
approval of a distribution agreement; and (iv) ratification of selection of
independent accountants. Also, the by-laws of the Fund require that a special
meeting of stockholders be held upon the written request of shareholders of the
Fund as required by Maryland corporate law and the Investment Company Act.
Voting rights for Directors are not cumulative. Shares issued are fully paid
and nonassessable and have no preemptive or conversion rights. Each share of
Class B Common Stock is entitled to participate equally in dividends and
distributions declared by the Fund and in the net assets of the Fund upon
liquidation or dissolution after satisfaction of outstanding liabilities.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts, the shareholder should notify in writing:
Financial Data Services, Inc.Attn: Document Evaluation UnitP.O. Box
45290Jacksonville, Florida 32232-5290
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this
please call your Merrill Lynch financial consultant or Financial Data Services,
Inc. at 800-637-3863.
37
<PAGE>
APPENDIX
RATINGS OF DEBT SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") CORPORATE RATINGS
<TABLE>
<C> <S>
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
Baa Bonds which are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest
payment 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 desirable
investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small. Caa Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of danger with
respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
</TABLE>
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
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<PAGE>
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
The term "commercial paper" as used by Moody's means promissory obligations
not having an original maturity in excess of nine months. Moody's makes no
representations as to whether such commercial paper is by any other definition
"commercial paper" or is exempt from registration under the Securities Act of
1933, as amended.
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations
are exempt from registration under the Securities Act of 1933, nor does it
represent that any specific note is a valid obligation of a rated issuer or
issued in conformity with any applicable law. Moody's employs the following
three designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers.
Issuers rated PRIME-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. PRIME-1 repayment
capacity will normally be evidenced by the following characteristics: leading
market positions in well established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well established
access to a range of financial markets and assured sources of alternate
liquidity.
Issuers rated PRIME-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory 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, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated PRIME-3 (or related supporting institutions) have an acceptable
capacity for repayment of short-term promissory obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated NOT PRIME do not fall within any of the Prime rating
categories.
If an issuer represents to Moody's that its Commercial Paper obligations are
supported by the credit of another entity or entities, then the name or names
of such supporting entity or entities are listed within 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
indicated affiliated corporations, commercial banks, insurance companies,
foreign governments or other entities, but only as one factor in the total
rating assessment. Moody's makes no representation and gives no opinion on the
legal validity or enforceability of any support arrangement. You are cautioned
to review with your counsel any questions regarding particular support
arrangements.
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS
Because of the fundamental differences between preferred stocks and bonds, a
variation of the bond rating symbols is being used in the quality ranking of
preferred stocks. The symbols, presented below, are
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<PAGE>
designed to avoid comparison with bond quality in absolute terms. It should
always be borne in mind that preferred stocks occupy 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:
<TABLE>
<C> <S>
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 that 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 protection 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 payment.
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.
</TABLE>
Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S ("STANDARD & POOR'S") CORPORATE
DEBT RATINGS
A Standard & Poor's corporate or municipal rating is a current assessment of
the creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers,
or lessees.
The debt rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
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<PAGE>
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform 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 for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
(1) likelihood of default-capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation; (2) nature of and provisions of the obligation; and
(3) protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
<TABLE>
<C> <S>
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated
categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than for debt in higher rated categories.
Debt rated BB, B, CCC, CC and C is regarded, on balance, as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal in accordance with the terms of the
obligation. BB indicates the lowest degree of speculation and C the
highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
BB Debt rated BB has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could
lead to inadequate capacity to meet timely interest and principal
payments. The BB rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied BBB--rating.
B Debt rated B has a greater vulnerability to default but presently has the
capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions would likely impair capacity or
willingness to pay interest and repay principal.
The B rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied BB or BB--rating.
CCC Debt rated CCC has a current identifiable vulnerability to default, and is
dependent upon favorable business, financial and economic conditions to
meet timely payments of interest and repayment of principal. In the event
of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC rating
category is also used for debt subordinated to senior debt that is
assigned an actual or implied B or B--rating.
</TABLE>
41
<PAGE>
<TABLE>
<C> <S>
CC The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC--debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed
but debt service payments are continued.
CI The rating CI is reserved for income bonds on which no interest is being
paid.
D Debt rated D is in default. The D rating category is also used when
interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D
rating also will be used upon the filing of a bankruptcy petition if debt
service payments are jeopardized.
</TABLE>
<TABLE>
<C> <S>
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 with the major ratings categories.
Provisional ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the
successful completion of the project being financed by
the debt being rated and indicates that payment of debt
service requirements is largely or entirely dependent
upon the successful and timely completion of the
project. This rating, however, while addressing credit
quality subsequent to completion of the project, makes
no comment on the likelihood or risk of default upon
failure of such completion. The investor should
exercise judgment with respect to such likelihood and
risk.
L The letter "L" indicates that the rating pertains to
the principal amount of those bonds to the extent that
the underlying deposit collateral is insured by the
Federal Savings & Loan Insurance Corp. or the Federal
Deposit Insurance Corp. and interest is adequately
collateralized. *
* Continuance of the rating is contingent upon Standard &
Poor's receipt of an executed copy of the escrow
agreement or closing documentation confirming
investments and cash flows.
NR Indicates that no rating has been requested, that there
is insufficient information on which to base a rating
or that Standard & Poor's does not rate a particular
type of obligation as a matter of policy.
</TABLE>
Debt Obligations of Issuers outside the United States and its territories are
rated on the same basis as domestic corporate and municipal issues. The ratings
measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank regulations
issued by the Comptroller of the Currency, Bonds rated in the top four
categories ("AAA", "AA", "A", "BBB", commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments may impose certain
rating or other standards for obligations eligible for investment by savings
banks, trust companies, insurance companies and fiduciaries generally.
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<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-1"
for the highest quality obligations to "D" for the lowest. These categories are
as follows:
<TABLE>
<C> <S>
A-1 This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) sign designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only an adequate capacity for
timely payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period.
</TABLE>
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information.
DESCRIPTION OF STANDARD & POOR'S PREFERRED STOCK RATINGS
A Standard & Poor's preferred stock rating is an assessment of the capacity
and willingness of an issuer to pay preferred stock dividends and any
applicable sinking fund obligations. A preferred stock rating differs from a
bond rating inasmuch as it is assigned to an equity issue, which issue is
intrinsically different from, and subordinated to, a debt issue. Therefore, to
reflect this difference, the preferred stock rating symbol will normally not be
higher than the bond rating symbol assigned to, or that would be assigned to,
the senior debt of the same issuer.
The preferred stock ratings are based on the following considerations:
<TABLE>
<C> <S>
I. Likelihood of payment--capacity and willingness of the issuer to meet the
timely payment of preferred stock dividends and any applicable sinking
fund requirements in accordance with the terms of the obligation.
II. Nature of, and provisions of, the issue.
III. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangements 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.
</TABLE>
43
<PAGE>
<TABLE>
<S> <C>
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 preferred
CCC stock obligations. "BB" indicates the lowest degree of speculation and "CCC" the
highest degree of speculation. While such issues will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
CC The rating "CC" is reserved for a preferred stock issue in arrears on dividends or
sinking fund payments but that is currently paying.
C A preferred stock rated "C" is a non-paying issue.
D A preferred stock rated "D" is a non-paying issue with the issuer in default on debt
instruments.
NR Indicates that no rating has been requested, that there is insufficient information
on which to base a rating, or that S&P does not rate a particular type of obligation
as a matter of policy.
</TABLE>
<TABLE>
<C> <S>
Plus (+) or minus (-): To provide more detailed indications of preferred stock
quality, the ratings from "AA" to "CCC" may be modified
by the addition of a plus or minus sign to show
relative standing within the major rating categories.
</TABLE>
The preferred stock ratings are not a recommendation to purchase or sell a
security, inasmuch as market price is not considered in arriving at the rating.
Preferred stock ratings are wholly unrelated to Standard & Poor's earnings and
dividend rankings for common stocks.
The ratings are based on current information furnished to Standard & Poor's
by the issuer, and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of such information.
DESCRIPTION OF IBCA'S LONG TERM RATINGS
<TABLE>
<C> <S>
AAA Obligations for which there is the lowest expectation of investment risk.
Capacity for timely repayment of principal and interest is substantial
such that adverse changes in business, economic, or financial conditions
are unlikely to increase investment risk significantly.
AA Obligations for which there is a very low expectation of investment risk.
Capacity for timely repayment of principal and interest is substantial.
Adverse changes in business, economic, or financial conditions may
increase investment risk albeit not very significantly.
</TABLE>
44
<PAGE>
<TABLE>
<S> <C>
A Obligations for which there is a low expectation of investment risk. Capacity for
timely repayment of principal and interest is strong, although adverse changes in
business, economic, or financial conditions may lead to increased investment risk.
BBB Obligations for which there is a low expectation of investment risk. Capacity for
timely repayment of principal and interest is adequate, although adverse changes in
business, economic, or financial conditions are more likely to lead to increased
investment risk than for obligations in higher categories.
BB Obligations for which there is a possibility of investment risk developing. Capacity
for timely repayment of principal and interest exists, but is susceptible over time
to adverse changes in business, economic, or financial conditions.
B Obligations for which investment risk exists. Timely repayment of principal and
interest is not sufficiently protected against adverse changes in business,
economic, or financial conditions.
CCC Obligations for which there is a current perceived possibility of default. Timely
repayment of principal and interest is dependent on favourable business, economic,
or financial conditions.
CC Obligations which are highly speculative or which have a high risk of default.
C Obligations which are currently in default.
</TABLE>
Note: "+" or "-" may be appended to a rating to denote relative status
within major rating categories. Ratings of BB and below are assigned
where it is considered that speculative characteristics are present.
45
<PAGE>
[This page is intentionally left blank.]
46
<PAGE>
MERRILL LYNCH WORLD INCOME FUND, INC.--AUTHORIZATION FORM
- -------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase . . . . Class A shares or . . . .
Class B shares (choose one) of Merrill Lynch World Income Fund, Inc. and
establish an Investment Account as described in the Prospectus.
Basis for establishing an Investment Account:
A. I enclose a check for $ . . . . payable to Financial Data Services,
Inc., as an initial investment (minimum $1,000, except that for retirement
plans minimum is $250) (subsequent investments $50 or more ($1 for
retirement plans)). I understand that this purchase will be executed at the
applicable offering price next to be determined after this Application is
received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information:
1. ................................ 4. ...................................
2. ................................ 5. ...................................
3. ................................ 6. ...................................
(Please list all Funds. Use a separate sheet of paper if necessary.)
Until you are notified by me in writing, the following options with respect
to dividends and distributions are elected:
Distribution Elect [_] reinvest dividends Elect [_] reinvest capital gains
Options One [_] pay dividends in cash One [_] pay capital gains in cash
If no election is made, dividends and capital gains will be reinvested
automatically at net asset value without a sales charge.
-------------
[_][_][_][_][_][_][_][_][_]
Social Security No.
or Taxpayer
(Please Print) Identification No.
Name.................................................
First Name Initial Last Name ....................,19..
Date
Name of Co-Owner (if any)............................
First Name Initial Last
Address..............................................
.....................................................
(Zip Code)
Occupation................... Name and Address of Employer ...................
.........................
.........................
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security No. or Taxpayer Identification No. and (2) that I
am not subject to backup withholding (as discussed in the Prospectus under
"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)...............
In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.
- -------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN--CLASS A SHARES ONLY (SEE TERMS AND CONDITIONS
IN THE STATEMENT OF ADDITIONAL INFORMATION)
Minimum Requirements: $ for monthly disbursement, $ for quarterly,
of shares in Merrill Lynch World Income Fund, Inc. at cost or current offering
price.
Begin systematic withdrawal on . . . . . . . . . . . . . . . , 19 . .
[Date]
Withdrawals to be made either (check one) [_] Monthly [_] Quarterly*
*Quarterly withdrawals are made on the 24th day of March, June, September and
December.
Specify withdrawal amount (check one): [_] $. . . . . . . . or [_] . . . . .%
of the current value of Class A shares in the account.
Specify withdrawal method: [_] check or [_] direct deposit to bank account
(check one and complete part (a) or (b) below):
- --------------------------------------------------------------------------------
(a) I HEREBY AUTHORIZE PAYMENT BY (b) I HEREBY AUTHORIZE PAYMENT
CHECK BY DIRECT DEPOSIT TO BANK
ACCOUNT AND (IF NECESSARY)
Draw checks payable DEBIT ENTRIES AND (A)I HEREBY
(check one) AUTHORIZE PAYMENT BY CHECK
ADJUSTMENTS FOR ANY CREDIT
[_] as indicated in Item 1. ENTRIES MADE IN ERROR TO MY ACCOUNT.
Specify type of account (check one):
[_] to the order of.................... [_] checking [_] savings
I agree that this authorization
Mail to (check one) will remain in effect until I
provide written notification to
[_] the address indicated in Item 1. Financial Data Services, Inc.
amending or terminating this
[_] Name (Please Print)................ service.
Name on your Account................
Address..................................
Bank................................
Signature of Owner....................... Bank #.........Account #............
Signature of Co-Owner (if any)........... Bank Address........................
Signature of Depositor..... Date....
Signature of Depositor (if joint
account)............................
NOTE: If Automatic Direct Deposit
is elected, your blank, unsigned
check marked "VOID" or a deposit
slip from your savings account
should accompany this Application.
- -------------------------------------------------------------------------------
47
<PAGE>
MERRILL LYNCH WORLD INCOME FUND, INC.--AUTHORIZATION FORM
- -------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Financial Data Services, Inc. draw a check or an
automated clearing house ("ACH") debit on my checking account as described
below each month to purchase Class A shares or Class B shares (choose
one) of Merrill Lynch World Income Fund, Inc. subject to the terms set forth
below.
- -------------------------------------------------------------------------------
FINANCIAL DATA SERVICES, INC. AUTHORIZATION TO HONOR CHECKS OR ACH
You are hereby authorized to draw DEBITS
checks or an ACH debit each month on DRAWN BY FINANCIAL DATA SERVICES, INC.
my bank account for investment in
Merrill Lynch World Income Fund,
Inc., as described below:
To................................ Bank
(Investor's Bank)
Bank Address ..........................
Amount of each check or ACH
debit $..........................
City...... State ...... Zip Code......
Account No. .....................
Please date and invest checks or As a convenience to me, I hereby
draw ACH debits on the 20th of request and authorize you to pay and
each month beginning............. charge to my account checks or ACH
(Month) debits drawn on my account by and
or as soon thereafter as possible. payable to Financial Data Services,
I agree that you are preparing these Inc. I agree that your rights in
checks or drawing these debits respect to each such check or debit
voluntarily at my request and that shall be the same as if it were a
you shall not be liable for any loss check or debit drawn on you and signed
arising from any delay in preparing personally by me. This authority is to
or failure to prepare any such check remain in effect until revoked by me
or debit. If I change banks or desire in writing. Until you receive such
to terminate or suspend this program, notice, you shall be fully protected
I agree to notify you promptly in in honoring any such check or debit. I
writing. further agree that if any such check
or debit be dishonored, whether with
I further agree that if a check or or without cause and whether
debit is not honored upon intentionally or inadvertently, you
presentation, Financial Data shall be under no liability.
Services, Inc. is authorized to
discontinue immediately the Automatic
Investment Plan and to liquidate
sufficient shares held in my account
to offset the purchase made with the
returned check or dishonored debit.
............. .......................
Date Signature of Depositor
............. .......................
Bank Account Signature of Depositor
Number
(If joint account,
.......... ........................ both must sign)
Date Signature of Depositor
........................ Note: If Automatic Investment Plan is
Signature of Depositor elected, your blank, unsigned check
(If joint account, both marked "VOID" should accompany this
must sign) Application.
- ------------------------------------------------------------------------------
4. LETTER OF INTENTION--CLASS A SHARES ONLY (SEE TERMS AND CONDITIONS IN THE
STATEMENT OF ADDITIONAL INFORMATION)
......................., 19...
Date of initial purchase
Gentlemen:
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch World Income 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 a distributor over the next 13-month period which
will equal or exceed:
<TABLE>
<S> <C> <C> <C> <C>
[_] $25,000 [_] $50,000 [_] $100,000 [_] $250,000 [_] $1,000,000
</TABLE>
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Fund prospectus.
I agree to the terms and conditions of the Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of World Income Fund, Inc. held as security.
By.................................... .......................................
Signature of Owner Signature (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:
<TABLE>
<S> <C>
(1) Name...................................... (2) Name......................................
</TABLE>
- -------------------------------------------------------------------------------
5.FOR DEALER ONLY
Branch Office, Address, Stamp. We hereby authorize Merrill Lynch
Funds Distributor, Inc. to act as our
- - agent in connection with transactions
under this authorization form and
agree to notify the Distributor of any
purchases made under a Letter of
Intention or Systematic Withdrawal
Plan. We guarantee the shareholder's
signature.
.....................................
Dealer Name and Address
- - By ..................................
This form when completed should be Authorized Signature of Dealer
mailed to: [_][_][_] [_][_][_][_]
Merrill Lynch World Income Fund, Inc. Branch-Code F/C No. ..............
c/o Financial Data Services, Inc. [_][_][_] [_][_][_][_] F/C Last Name
Transfer Agency Mutual Fund Dealer's Customer A/C No.
Operations
P.O. Box 45289
Jacksonville, Florida 32232-5289
48
<PAGE>
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49
<PAGE>
[This page is intentionally left blank.]
50
<PAGE>
INVESTMENT ADVISER
Fund Asset Management
Administrative Offices:
800 Scudders Mill Road Plainsboro, New Jersey
Mailing Address:
Box 9011 Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road Plainsboro, New Jersey
Mailing Address:
Box 9011 Princeton, New Jersey 08543-9011
CUSTODIAN
State Street Bank and Trust Company
One Heritage Drive North Quincy, Massachusetts 02171
TRANSFER AGENT
Financial Data Services, Inc.
Administrative Offices: Transfer Agency Mutual Fund Operations
4800 Deer Lake Drive East Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289 Jacksonville, Florida 32232-5289
INDEPENDENT AUDITORS
Deloitte & Touche
117 Campus Drive Princeton, New Jersey 08540
COUNSEL
Brown & Wood One World Trade Center New York, New York 10048-0557
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH
THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER IN-
FORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND, THE INVESTMENT ADVISER OR DISTRIBUTOR. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table.................................................................. 2
Alternative Sales Arrangements............................................. 4
Financial Highlights....................................................... 6
Risk Factors and Special Considerations.................................... 7
Investment Objective and Policies.......................................... 8
International Investing................................................... 9
Allocation of Investments and Risks of High Yield Risk Securities......... 10
Hedging Techniques........................................................ 12
Other Investment Policies and Practices................................... 17
Investment Restrictions................................................... 18
Management of the Fund..................................................... 19
Directors................................................................. 19
Management and Advisory Arrangements...................................... 20
Transfer Agency Services.................................................. 21
Purchase of Shares......................................................... 21
Alternative Sales Arrangements............................................ 22
Initial Sales Charge Alternative--
Class A Shares.......................................................... 23
Deferred Sales Charge Alternative--
Class B Shares.......................................................... 24
Redemption of Shares....................................................... 28
Redemption................................................................ 28
Repurchase................................................................ 29
Reinstatement Privilege--Class A Shares................................... 29
Shareholder Services....................................................... 30
Taxes...................................................................... 31
Performance Data........................................................... 33
Portfolio Transactions..................................................... 34
Portfolio Turnover........................................................ 35
Additional Information..................................................... 36
Dividends and Distributions............................................... 36
Determination of Net Asset Value.......................................... 36
Organization of the Fund.................................................. 37
Shareholder Inquiries..................................................... 37
Shareholder Reports....................................................... 37
Appendix--Ratings of Debt Securities....................................... 38
Authorization Form......................................................... 47
</TABLE>
Code # 16102
Prospectus
[ART]
- ------------------------------------------
MERRILL LYNCH WORLD INCOME FUND, INC.
April 29, 1994
Distributor: Merrill Lynch Funds Distributor, Inc.
This prospectus should be retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
- -----------------------------------
MERRILL LYNCH WORLD INCOME FUND, INC.
BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
----------------
The investment objective of Merrill Lynch World Income Fund, Inc. (the
"Fund") is to seek to provide shareholders with high current income by
investing in a global portfolio of fixed income securities denominated in
various currencies, including multinational currency units. The Fund may invest
in United States and foreign government and corporate fixed income securities,
including high yield high risk, lower rated and unrated securities. In pursuing
its investment objective, the Fund will allocate its investments among
different types of fixed income securities denominated in various currencies
based upon management's analysis of the yield, maturity and currency
considerations affecting such securities. Under normal conditions, the Fund's
investments will be denominated in at least three currencies. The Fund
presently contemplates that it will invest primarily in obligations denominated
in the currencies of the United States, Canada, Western European nations, New
Zealand and Australia as well as in European Currency Units. The Fund may seek
to hedge against interest rate and currency risks through the use of options,
futures and foreign currency transactions. Investment on an international basis
and in high yield high risk, lower rated or unrated securities involves certain
risks and special considerations. High yield high risk, lower rated debt
securities are commonly referred to as "junk bonds". There can be no assurance
that the investment objective of the Fund will be realized.
The Fund offers two classes of shares which may be purchased at a price equal
to the next determined net asset value per share, plus in both cases a sales
charge which, at the election of the purchaser, may be imposed (i) at the time
of purchase (the "Class A shares"), or (ii) on a deferred basis (the "Class B
shares"). These alternatives permit an investor to choose the method of
purchasing shares that is most beneficial given the amount of the purchase, the
length of time the investor expects to hold the shares and other circumstances.
Investors should understand that the purpose and function of the deferred sales
charges with respect to the Class B shares are the same as those of the initial
sales charge with respect to the Class A shares. Each Class A and Class B share
represents identical interests in the investment portfolio of the Fund and has
the same rights, except that Class B shares bear the expenses of the account
maintenance and distribution fees and certain other costs resulting from the
deferred sales charge arrangement and have exclusive voting rights with respect
to the account maintenance and distribution fees. The two classes also have
different exchange privileges.
----------------
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 April 29,
1994 (the "Prospectus"), which has been filed with the Securities and Exchange
Commission and can be obtained, without charge, by calling or by writing the
Fund at the above telephone number or address. This Statement of Additional
Information has been incorporated by reference into the Prospectus. Capitalized
terms used but not defined herein have the same meanings as in the Prospectus.
----------------
FUND ASSET MANAGEMENT--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
----------------
The date of this Statement of Additional Information is April 29, 1994.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek to provide shareholders with
high current income by investing in a global portfolio of fixed income
securities denominated in various currencies, including multi-national currency
units. The Fund may invest in United States and foreign government and
corporate fixed income securities, including high yield high risk, lower rated
and unrated securities. The Fund will invest at least 90% of its total assets
in such fixed income securities. In pursuing its investment objective, the Fund
will, under normal circumstances, allocate its investments among different
types of fixed income securities denominated in various currencies based upon
management's analysis of the yield, maturity and currency considerations
affecting such securities. Reference is made to "Investment Objective and
Policies" in the Prospectus for a discussion of the investment objective and
policies of the Fund.
HEDGING TECHNIQUES
Reference is made to the discussion concerning hedging techniques under the
caption "Hedging Techniques" in the Prospectus.
The Fund may engage in various portfolio strategies to hedge its portfolio
against interest rate and currency risks. These strategies include use of
options on its portfolio securities, financial and currency futures and options
on such futures and forward foreign currency transactions. While the Fund's use
of hedging strategies is intended to reduce the volatility of the net asset
value of Fund shares, the Fund's net asset value will fluctuate.
Although certain risks are involved in options and futures transactions (as
discussed below in "Risk Factors in Options and Futures Transactions"), the
Investment Adviser believes that, because the Fund will engage in these
transactions only for hedging purposes, the options and futures portfolio
strategies of the Fund will not subject the Fund to the risks frequently
associated with the speculative use of options and futures transactions.
The following information relates to the hedging instruments the Fund may
utilize with respect to interest rate and currency risks.
. The Fund may purchase and write (i.e., sell) call options and put options on
securities, enter into closing purchase transactions with respect to such
options and engage in transactions in financial futures as described below. The
Fund writes only covered options, which means that so long as the Fund is
obligated as the writer of a call option, it will own the underlying securities
subject to the option and, in the case of put options, that the Fund, through
its custodian, has deposited and maintained cash, cash equivalent, U.S.
Government securities or other high grade liquid debt 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.
Writing Options. The Fund will receive a premium from writing an option,
which increases the Fund's return on the underlying security in the event the
option expires unexercised or is closed out at a profit. The amount of the
premium will reflect, among other factors, the current market price of the
underlying security, the relationship of the exercise price to the market
price, interest rates and the time period until the expiration of the option.
By writing a call, the Fund limits its opportunity to profit from an increase
in the market value of the underlying security above the exercise price of the
option for as long as the Fund's obligation as a writer
2
<PAGE>
continues. Thus, in some periods the Fund will receive less total return and in
other periods greater total return from its hedged positions than it would have
received from underlying securities unhedged. By writing a put option, 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. To facilitate closing transactions, as
described below, the Fund will ordinarily write only options for which a
secondary market exists.
The Fund may engage in closing transactions in order to terminate outstanding
exchange-traded options that it has written. To effect a closing transaction,
the Fund purchases, prior to the exercise of an outstanding option that it has
written, an option of the same series as that on which it desires to terminate
its obligation. Profit or loss from a closing purchase transaction will depend
on whether the cost of such transaction is more or less than the premium
received on the sale of the option plus the related transaction costs.
Purchase of Options. The Fund may purchase put and call options in connection
with its hedging activities. By buying a put, the Fund has the right to sell
the underlying securities 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
expires. The Fund may also purchase call options on securities which it intends
to purchase. By purchasing a call, the Fund has the right to purchase the
underlying securities at the option price.
The Fund may enter into both exchange-traded and over-the-counter ("OTC") put
and call option transactions. OTC option transactions are two party contracts
with price and terms negotiated between the buyer and seller. The Fund will
enter into OTC option transactions only with respect to portfolio securities
for which the Investment Adviser believes there is regularly available a price
quotation from a dealer in such options. The Fund will engage in OTC options
only with member banks of the Federal Reserve System and primary dealers in
U.S. Government securities or with affiliates of such banks or dealers which
have capital of at least $50 million or whose obligations are guaranteed by an
entity having capital of at least $50 million. The staff of the Securities and
Exchange Commission (the "Commission") has taken the position that purchased
OTC options and the assets used as cover for written OTC options are illiquid
securities. For so long as the Commission staff is of that view, the Fund will
not purchase or sell OTC options (including OTC options on futures contracts)
if, as a result of such transactions, 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 options currently outstanding which
were sold by the Fund and margin deposits on the Fund's existing OTC options on
futures contracts exceed 10% of the net 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. To the extent any such options or assets may be
illiquid, it may prevent a successful sale of such options or assets, result in
a delay of sale, or reduce the amount of proceeds that otherwise might be
realized.
Futures Contracts. The Fund may purchase and sell financial futures contracts
("futures contracts") as a hedge against adverse changes in interest rates. A
futures contract is an agreement between two parties to buy and sell a
security, respectively, for a set price on a future date. The Fund may effect
transactions in futures contracts in United States and foreign agency and
government securities and corporate debt securities traded on United States and
foreign exchanges, as well as on OTC markets.
The Fund may sell futures contracts in anticipation of an increase in the
general level of interest rates. Generally, as interest rates rise, the market
value of the securities held by the Fund will fall, thus reducing the net asset
value of the Fund. This interest rate risk can be reduced without employing
futures as a hedge, by selling long-term securities and either reinvesting the
proceeds in securities with shorter maturities or by
3
<PAGE>
holding assets in cash. This strategy, however, entails increased transaction
costs in the form of dealer spreads and brokerage commissions and typically
would reduce the Fund's average yield as a result of the shortening of
maturities.
The sale of futures contracts provides an alternative means of hedging
against rising interest rates. As rates increase, the value of the Fund's short
position in the futures contracts 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 (which is done by taking
an opposite position which operates to terminate the position in the futures
contract), commissions on futures transactions are lower than transaction costs
incurred in the purchase and sale of portfolio securities.
The Fund may purchase futures contracts in anticipation of a decline in
interest rates when it is not fully invested in order to gain rapid market
exposure that may in part or entirely offset an increase in the cost of long-
term securities it intends to purchase. As such purchases are made, an
equivalent amount of futures contracts will be closed out. In a substantial
majority of these transactions, the Fund will purchase securities upon
termination of the futures contracts. Due to changing market conditions and
interest rate forecasts, however, a futures position may be terminated without
a corresponding purchase of securities.
Options on Financial Futures. The Fund may purchase and write call and put
options on futures contracts in connection with its hedging activities.
Generally, these strategies would be employed under the same market and market
sector conditions in which the Fund entered into futures contracts. The Fund
may purchase put options or write call options on futures contracts rather than
selling the underlying futures contract in anticipation of an increase in
interest rates. Similarly, the Fund may purchase call options, or write put
options on futures contracts as a substitute for the purchase of such futures
to hedge against the increased cost resulting from a decline in interest rates
of securities which the Fund intends to purchase.
RISK FACTORS IN OPTIONS AND FUTURES TRANSACTIONS
Utilization of futures transactions involves the risk of imperfect
correlation in movements in the price of futures contracts and movements in the
price of the securities which are the subject of the hedge. If the price of the
futures contract moves more or less than the price of the security, the Fund
will experience a gain or loss which will not be completely offset by movements
in the price of the debt securities which are the subject of the hedge. There
is also a risk of imperfect correlations when the securities underlying futures
contracts have different maturities than the portfolio securities being hedged.
Transactions in currency futures and options on interest rate and currency
futures contracts involve similar risks.
Prior to exercise or expiration, an exchange-traded option 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. Similarly, positions in interest rate and currency futures may be
closed out only on an exchange which provides a secondary market for such
futures. The Fund will enter into an option or futures transaction on an
exchange only if there appears to be a liquid secondary market for such options
or futures. However, there can be no assurance that a liquid secondary market
will exist for any particular call or put option or futures contract at any
specific time. Thus, it may not be possible to close an option or futures
position. 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 will
continue to be required to make daily cash payments of
4
<PAGE>
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 instruments 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 effectively
to hedge its portfolio. There is also the risk of loss by the Fund of margin
deposits in the event of the bankruptcy of a broker with whom the Fund has an
option position in a futures contract or related options.
The exchanges on which the Fund intends to conduct options transactions
generally have established limitations governing the maximum number of call or
put options on the same underlying security (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 Investment Adviser does not believe
that these trading and position limits will have any adverse impact on the
portfolio strategies for hedging the Fund's portfolio.
FORWARD FOREIGN EXCHANGE TRANSACTIONS
Generally, the foreign exchange transactions of the Fund will be conducted on
a spot, i.e., cash, basis at the spot rate for purchasing or selling currency
prevailing in the foreign exchange market. This rate under normal market
conditions differs from the prevailing exchange rate in an amount generally
less than 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 between currencies of the different countries in whose securities it
will invest as a hedge against possible variations in the foreign exchange
rates between these currencies. This is accomplished through contractual
agreements to purchase or sell a specified currency at a specified future date
and price set at the time of the contract.
The Fund's dealings in forward foreign exchange will be limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of forward foreign currency with respect to
specific receivables or payables of the Fund accruing in connection with the
purchase and sale of its portfolio securities, the sale and redemption of
shares of the Fund or the payment of dividends and distributions by the Fund.
Position hedging is the sale of forward foreign currency with respect to
portfolio security positions denominated or quoted in such foreign currency.
The Fund will not speculate in forward foreign exchange. The Fund may not
position hedge with respect to the currency of a particular country to an
extent greater than the aggregate market value (at the time of making such
sale) of the securities held in its portfolio denominated or quoted in that
particular foreign currency. If the Fund enters into a position hedging
transaction, it will place with its custodian bank cash or liquid securities in
a separate account of the Fund in an amount equal to the value of the Fund's
total assets committed to the consummation of such forward contract. If the
value of the securities placed in the separate account declines, additional
cash or securities will be placed in the account so that the value of the
account will equal the amount of the Fund's commitment with respect to such
contracts. The Fund will not enter into a forward contract with a term of more
than one year.
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<PAGE>
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 currency involved, the length of the contract period and the market
conditions then prevailing. Since transactions in foreign currency exchange are
usually conducted on a principal basis, no fees or commissions are involved.
OTHER INVESTMENT POLICIES AND PRACTICES
Convertible Securities. The convertible securities to be held by the Fund
include any corporate debt security or preferred stock which may be converted
into underlying shares of common stock. Convertible securities entitle the
holder to receive interest payments paid on corporate debt securities or the
dividend preference on a preferred stock until such time as the convertible
security matures or is redeemed or until the holder elects to exercise the
conversion privilege. Although the Fund generally expects that it will sell
convertible securities rather than convert such securities into common stock,
the Fund may, at various times, exercise conversion rights on convertible
securities called for redemption to establish holding periods for tax purposes
or for other reasons. The Fund may not invest more than 10% of its total assets
in such common stock.
Repurchase Agreements and Purchase and Sale Contracts. The Fund may invest in
securities pursuant to repurchase agreements and purchase and sale contracts.
Foreign currency-denominated agreements will be limited to purchase and sale
contracts entered into with financial institutions that have at least $50
million in capital or whose obligations are guaranteed by an entity having at
least $50 million in capital. U.S. Dollar-denominated repurchase agreements and
purchase and sale contracts may be entered into only with a member bank of the
Federal Reserve System or primary dealer in U.S. Government securities. Under
such agreements, the bank or primary dealer agrees, upon entering into the
contract, to repurchase the security at a mutually agreed upon time and price,
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.
In the case of repurchase agreements, the prices at which the trades are
conducted do not reflect accrued interest on the underlying obligations;
whereas, in the case of purchase and sale contracts, the prices take into
account accrued interest. Such agreements usually cover short periods, 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, 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 only constitute collateral
for the seller's obligation to pay the repurchase price. Therefore, the Fund
may suffer time delays and incur costs or possible losses in connection with
the disposition of the collateral. A purchase and sale contract differs from a
repurchase agreement in that the contract arrangements stipulate that the
securities are owned by the Fund. In the event of a default under such a
repurchase agreement or 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 security
and the accrued interest on the security. In such event, the
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<PAGE>
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.
Lending of Portfolio Securities. Subject to investment restriction (8) below,
the Fund may lend securities from its portfolio to approved borrowers and
receive collateral in cash or securities issued or guaranteed by the United
States Government which are maintained at all times in an amount equal to at
least 100% of the current market value of the loaned securities. The purpose of
such loans is to permit the borrower to use such securities for delivery to
purchasers when such borrower has sold short. If cash collateral is received by
the Fund, it is invested in short-term money market securities, and a portion
of the yield received in respect of such investment is retained by the Fund.
Alternatively, if securities are delivered to the Fund as collateral, the Fund
and the borrower negotiate a rate for the loan premium to be received by the
Fund for lending its portfolio securities. In either event, the total yield on
the Fund's portfolio is increased by loans of its portfolio securities. The
Fund will have the right to retain 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.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions and policies relating to the
investment of its assets and its activities, which are fundamental policies and
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities (which for this purpose and under the
Investment Company Act of 1940, as amended (the "Investment Company Act"),
means the lesser of (i) 67% of the shares represented at a meeting at which
more than 50% of the outstanding shares are represented or (ii) more than 50%
of the outstanding shares). The Fund may not:
1. Invest more than 25% of its total assets, taken at market value at the
time of each investment, in the securities of issuers in any particular
industry (including securities issued or guaranteed by the government of
any one foreign country, but excluding the U.S. Government, its agencies
and instrumentalities).
2. Make investments for the purpose of exercising control or management.
3. Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization, or
by purchase in the open market of securities of closed-end investment
companies where no underwriter or dealers' commission or profit, other than
customary broker's commission, is involved and only if immediately
thereafter not more than (i) 3% of the total outstanding voting stock of
such company is owned by the Fund, (ii) 5% of the Fund's total assets,
taken at market value, would be invested in any one such company, or (iii)
10% of the Fund's total assets, taken at market value, would be invested in
all such securities.
4. Purchase or sell real estate; provided that the Fund may invest in
securities secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein.
5. Make loans to other persons (except as provided in (6) below);
provided that for purposes of this restriction the acquisition of a portion
of bonds, debentures, or other corporate debt securities and investment in
governmental and supranational obligations, short-term commercial paper,
certificates of deposit, bankers' acceptances and repurchase agreements
shall not be deemed to be the making of a loan.
6. Lend its portfolio securities in excess of 33 1/3% of its total
assets, taken at market value; provided that such loans shall be made in
accordance with the guidelines set forth herein.
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<PAGE>
7. Issue senior securities, borrow money or pledge its assets in excess
of 33 1/3% of its total assets taken at market value (including the amount
borrowed) and then only from banks for the purpose of meeting redemption
requests or settlement of investment transactions, or for temporary or
emergency purposes. [Usually only "leveraged" investment companies may
borrow in excess of 5% of their assets; however, the Fund will not borrow
to increase income but intends only to meet redemption requests or to
settle investment transactions or for temporary or emergency purposes which
may otherwise require untimely dispositions of portfolio securities.
Interest paid on such borrowings will reduce net income.] (See restriction
(8) below regarding the exclusion from this restriction of arrangements
with respect to options, futures contracts and options on futures
contracts.) The Fund will not purchase additional portfolio securities
while outstanding borrowings exceed 5% of the Fund's total assets.
8. Mortgage, pledge, hypothecate or in any manner transfer, as security
for indebtedness, any securities owned or held by the Fund except as may be
necessary in connection with borrowings mentioned in (7) above or except as
may be necessary in connection with transactions in financial futures
contracts and options thereon.
9. Underwrite securities of other issuers except insofar as the Fund may
be deemed an underwriter under the Securities Act of 1933 in selling
portfolio securities.
Additional investment restrictions adopted by the Fund, which may be changed
by the Board of Directors, provide that the Fund may not:
1. Purchase any securities on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities. (The deposit or payment by the Fund of
initial or variation margin in connection with futures contracts or options
transactions is not considered the purchase of a security on margin.)
2. Purchase or sell commodities or commodity contracts, except that the
Fund may deal in forward foreign exchange between currencies of the
different countries in which its portfolio securities are denominated or
anticipated to be denominated, and the Fund may purchase and sell financial
and currency options, futures contracts and related options.
3. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent described herein.
4. Invest in securities which cannot be readily resold because of legal
or contractual restrictions, or which are not otherwise readily marketable,
if, regarding all such securities, more than 10% of the Fund's net assets,
taken at market value, would be invested in such securities.
5. Invest in real estate limited partnerships or oil, gas or other
mineral exploration or development programs or leases.
6. Invest in securities of unseasoned issuers, including their
predecessors, which have been in operation for less than three years and
equity securities of issuers which are not readily marketable if by reason
thereof the value of the Fund's aggregate investment in such classes of
securities will exceed 5% of its total assets.
7. Make short sales of securities or maintain a short position; provided,
however, that the Fund may sell short convertible securities "against the
box". Selling "against the box" involves owning the convertible security
and selling short the underlying common stock into which it is convertible.
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<PAGE>
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,
and the Fund will treat such assets as within this restriction (4) for so long
as the staff is of that view. However, the Fund may treat the securities it
uses as cover for written OTC options as liquid provided it follows a specified
procedure. The Fund may sell OTC options only to qualified dealers who agree
that the Fund may repurchase any OTC options it writes for a maximum price to
be calculated by a predetermined formula. In such cases, the OTC option would
be considered illiquid only to the extent that the maximum repurchase price
under the formula exceeds the intrinsic value of the option.
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". Without
such an exemptive order, the Fund would be prohibited from engaging in
portfolio transactions with Merrill Lynch or its affiliates acting as principal
and from purchasing securities in public offerings which are not registered
under the Securities Act of 1933 or are not municipal securities as defined in
the Securities Exchange Act of 1934 in which such firm or any of its affiliates
participate as an underwriter or dealer.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of each executive officer and Director is Box
9011, Princeton, New Jersey 08543-9011.
Arthur Zeikel--President and Director(1)(2)--President and Chief Investment
Officer of Fund Asset Management, L.P. (the "Investment Adviser") since 1977;
President of Merrill Lynch Asset Management, L.P. ("MLAM") since 1977 and Chief
Investment Officer since 1976; President and Director of Princeton Services,
Inc. ("Princeton Services") since 1993; Executive Vice President of Merrill
Lynch & Co., Inc. since 1990; Executive Vice President of Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") since 1990; Senior Vice
President of Merrill Lynch from 1986 to 1990; Director of Merrill Lynch Funds
Distributor, Inc. (the "Distributor").
Kenneth S. Axelson--Director(2)--75 Jameson Point Road, Rockland, Maine
04841. Executive Vice President and Director, J.C. Penney Company, Inc. until
1982; Director, UNUM Corporation, Protection Mutual Insurance Company, Zurn
Industries, Inc. and, until 1992, Central Maine Power Company and Key Trust
Company of Maine; Trustee, The Chicago Dock and Canal Trust.
Herbert I. London--Director(2)--New York University, 113-115 University
Place, New York, New York 10003. Dean, Gallatin Division of New York University
from 1978 until 1993 and Director from 1975 to 1976; Professor, New York
University since 1973; John M. Olin Professor of Humanities, New York
University since 1993; Distinguished Fellow, Herman Kahn Chair, Hudson
Institute from 1984 to 1985; Trustee, Hudson Institute since 1980; Overseer,
Center for Naval Analyses from 1983 to 1993.
Robert R. Martin--Director(2)--513 Grand Hill, St. Paul, Minnesota 55102.
Chairman and Chief Executive Officer, Kinnard Investments, Inc. from 1990 to
1993; Executive Vice President, Dain Bosworth
9
<PAGE>
from 1974 to 1989; Director, Carnegie Capital Management from 1977 to 1985 and
Chairman thereof in 1979; Director, Securities Industry Association from 1981
to 1982 and Public Securities Association from 1979 to 1980; Chairman of the
Board, WTC Industries, Inc. since 1994; Trustee, Northland College since 1992.
Joseph L. May--Director(2)--424 Church Street, Suite 2000, Nashville,
Tennessee 37219. Attorney in private practice since 1984; President, May and
Athens Hosiery Mills Division, Wayne-Gossard Corporation from 1954 to 1983;
Vice President, Wayne-Gossard Corporation from 1972 to 1983; Chairman, The May
Corporation (personal holding company) from 1972 to 1983; Director, Signal
Apparel Co. from 1972 to 1989.
Andre F. Perold--Director(2)--Morgan Hall, Soldiers Field, Boston,
Massachusetts 02163. Professor, Harvard Business School since 1989 and
Associate Professor from 1983 to 1989; Trustee, The Common Fund, since 1989;
Director, Quantec Investment Technology (a private United Kingdom Company).
Terry K. Glenn--Executive Vice President(1)(2)--Executive Vice President of
the Investment Adviser and MLAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President and Director of the
Distributor since 1986.
N. John Hewitt--Senior Vice President(1)(2)--Senior Vice President of MLAM
since 1976; Manager of the Investment Adviser's Fixed Income Mutual Fund and
Insurance Portfolio Groups.
Vincent T. Lathbury, III--Vice President(1)(2)--Vice President and Portfolio
Manager of the Investment Adviser and MLAM since 1982; Vice President and
Manager of Bond Department of INA Capital Management, Inc. from 1979 to 1982.
Donald C. Burke--Vice President(1)(2)--Vice President and Director of
Taxation of MLAM since 1990; employee of Deloitte & Touche from 1982 to 1990.
Robert Parish--Vice President(1)(2)--Vice President and Portfolio Manager of
the Investment Adviser since 1991; Portfolio Manager of Templeton International
from 1986 to 1991; and Vice President from 1989.
Gerald M. Richard--Treasurer(1)(2)--Senior Vice President and Treasurer of
the Investment Adviser and MLAM since 1984; Vice President of the Distributor
since 1981 and Treasurer since 1984; Senior Vice President and Treasurer of
Princeton Services since 1993.
Mark B. Goldfus--Secretary(1)(2)--Vice President of the Investment Adviser
and MLAM since 1985.
- --------
(1) Interested person, as defined in the Investment Company Act of 1940, of the
Fund.
(2) Such Director or officer is a director, trustee or officer of certain other
investment companies for which the Investment Adviser or MLAM acts as
investment adviser or manager.
At March 31, 1994, the officers and Directors of the Fund as a group (13
persons) owned an aggregate of less than 1/4 of 1% of the outstanding shares of
common stock of Merrill Lynch & Co., Inc. and owned an aggregate of less than
1% of the outstanding shares of the Fund.
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<PAGE>
The Fund pays each Director not affiliated with the Investment Adviser a fee
of $5,000 per year plus $500 per meeting attended, together with such
Director's actual out-of-pocket expenses relating to attendance at meetings.
The Fund also compensates members of its Audit Committee, which consists of all
of the nonaffiliated Directors. For the year ended December 31, 1993, fees and
expenses paid to the nonaffiliated Directors aggregated $40,553.
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 may be held by, or be appropriate investments for, other funds or
investment advisory clients for which the Investment Adviser 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 Investment Adviser for the Fund or other funds for which it acts as
investment adviser or for its 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
Investment Adviser 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 an amended investment advisory agreement with the
Investment Adviser (the "Investment Advisory Agreement"). The Investment
Adviser also served as the Fund's Investment Adviser prior to the conversion of
the Fund from a closed-end investment company to an open-end investment
company. The Investment Adviser receives for its services to the Fund monthly
compensation at the annual rate of 0.60% of the average daily net assets of the
Fund. For the fiscal year ended August 31, 1992, the total fees paid by the
Fund to the Investment Adviser aggregated $3,503,719. During such period, the
Fund operated as a closed-end investment company from September 1, 1991 to
November 17, 1991 and commenced operations as an open-end company on November
18, 1991. For the period September 1, 1992 to December 31, 1992 and the year
ended December 31, 1993, the total fees paid by the Fund to the Investment
Adviser aggregated $4,182,579 and $13,902,958, respectively.
California imposes limitations on the expenses of the Fund. These expense
limitations require that the Investment Adviser reimburse the Fund in any
amount necessary to prevent the aggregate ordinary operating expenses
(excluding taxes, brokerage fees and commissions, distribution fees and
extraordinary charges such as litigation costs) from exceeding in any fiscal
year 2.5% of the Fund's first $30 million of average net assets, 2.0% of the
next $70 million of average net assets and 1.5% of the remaining average net
assets. Such reimbursement, if any, will be subtracted from the monthly
advisory fee. No fee payment will be made to the Investment Adviser during any
fiscal year which will cause such expenses to exceed the most restrictive
expense limitation at the time of such payment. For the period September 1,
1992 to December 31, 1992 and the year ended December 31, 1993, no amounts were
required to be reimbursed to the Fund pursuant to such operating expense
limitations.
The Investment Advisory Agreement obligates the Investment Adviser 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
Investment Adviser or any of its
11
<PAGE>
subsidiaries. The Fund pays all other expenses incurred in the operation of the
Fund, including, among other things, taxes, expenses for legal and auditing
services, costs of printing proxies, stock certificates, shareholder reports
and prospectuses and statements of additional information (except to the extent
paid by the Distributor), charges of the custodian, any subcustodian and
transfer agent, expenses of redemption of shares, Securities and Exchange
Commission fees, expenses of registering the shares under Federal, state or
foreign laws, fees and expenses of nonaffiliated 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 Investment Adviser and the Fund reimburses the
Investment Adviser for its costs in connection with such services. For the
period September 1, 1992 to December 31, 1992, and for the year ended December
31, 1993, the Fund reimbursed the Investment Adviser $48,000 and $169,845,
respectively, for accounting services. The Distributor will pay the promotional
expenses of the Fund in connection with the offering of shares of the Fund.
Certain expenses will be financed by the Fund pursuant to a distribution plan
in compliance with Rule 12b-1 under the Investment Company Act. See "Purchase
of Shares--Deferred Sales Charge Alternative--Class B Shares--Distribution
Plan".
The Investment Adviser is a limited partnership, the partners of which are
Merrill Lynch & Co., Inc., Merrill Lynch Investment Management, Inc. and
Princeton Services, Inc.
Duration and Termination. Unless earlier terminated as described below, the
Investment Advisory Agreement will remain in effect from year to year if
approved annually (a) by the 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 contract or interested persons (as defined in the Investment Company
Act) of any such party. Such contracts are not assignable and may be terminated
without penalty on 60 days' written notice at the option of either party
thereto or by the vote of the shareholders of the Fund.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
ALTERNATIVE SALES ARRANGEMENTS
The Fund issues two classes of shares: Class A shares are sold to investors
choosing the initial sales charge alternative, and Class B shares are sold to
investors choosing the deferred sales charge alternative. Each class of shares
represents an interest in the same portfolio of investments of the Fund, has
the same rights and is identical in all respects, except that Class B shares
bear the expenses of the deferred sales charge arrangements and any expenses
(including incremental transfer agency costs) resulting from such sales
arrangements, as well as the expenses paid by the account maintenance fee, and
have exclusive voting rights with respect to the Rule 12b-1 distribution plan
pursuant to which the distribution fee is paid. The two classes also have
different exchange privileges. See "Shareholder Services--Exchange Privilege".
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<PAGE>
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offering of Class A and Class B
shares of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the
offering of the Class A and Class B shares of the Fund. After the prospectuses,
statements of additional information and periodic reports have been prepared,
set in type and mailed to shareholders, the Distributor pays for the printing
and distribution of copies thereof used in connection with the offering to
dealers and investors. The Distributor also pays for other supplementary sales
literature and advertising costs. The Distribution Agreements are subject to
the same renewal requirements and termination provisions as the Investment
Advisory Agreement described above.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The gross sales charges for the sale of Class A shares for the period
November 18, 1991 (commencement of operations as an open-end investment
company) through August 31, 1992, the Fund's previous fiscal year end were
$4,726,625, of which the Distributor received $80,169 and Merrill Lynch
received $4,646,456. The gross sales charges for the sale of Class A shares for
the period September 1, 1992 through December 31, 1992, were $299,333, of which
the Distributor received $26,084 and Merrill Lynch received $273,249. The gross
sales charges for the sale of Class A shares for the year ended December 31,
1993 were $1,391,093, of which the Distributor received $118,553 and Merrill
Lynch received $1,272,540.
The term "purchase", as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A shares of
the Fund, refers to a single purchase by an individual or to concurrent
purchases, which in the aggregate are at least equal to the prescribed amounts,
by an individual, his spouse and their children under the age of 21 years
purchasing shares for his or their own account and to single purchases by a
trustee or other fiduciary purchasing shares for a single trust estate or
single fiduciary account although more than one beneficiary is involved. The
term "purchase" also includes purchases by any "company", as that term is
defined in the Investment Company Act, but does not include purchases by any
such company which has not been in existence for at least six months or which
has no purpose other than the purchase of shares of the Fund or shares of other
registered investment companies at a discount; provided, however, that it shall
not include purchases by any group of individuals whose sole organizational
nexus is that the participants therein are credit cardholders of a company,
policyholders of an insurance company, customers of either a bank or broker-
dealer or clients of an investment adviser.
REDUCED INITIAL SALES CHARGES--CLASS A SHARES
Rights of Accumulation. Reduced sales charges are applicable through a right
of accumulation under which eligible investors are permitted to purchase Class
A shares of the Fund at the offering price applicable to the total of (a) the
dollar amount then being purchased plus (b) an amount equal to the then current
net asset value or cost, whichever is higher, of the purchaser's combined
holdings of the Class A shares and Class B shares of the Fund and of any other
investment company with an initial sales charge or a deferred sales charge for
which the Distributor acts as the distributor. For any such right of
accumulation to be made available, the Distributor must be provided at the time
of purchase, by the purchaser or the purchaser's securities dealer, with
sufficient information to permit confirmation of qualification. Acceptance of
the purchase order is subject to such confirmation. The right of accumulation
may be amended or terminated at any time.
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<PAGE>
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $100,000 or more of the Class A shares of the Fund or of any other
investment company with an initial sales charge or a deferred sales charge for
which the Distributor acts as the distributor made within a thirteen-month
period starting with the first purchase pursuant to the Letter of Intention in
the form provided in the Prospectus. The Letter of Intention is available only
to investors whose accounts are maintained at the Fund's Transfer Agent. The
Letter of Intention is not available to employee benefit plans for which
Merrill Lynch provides plan participant record-keeping services. The Letter of
Intention is not a binding obligation to purchase any amount of Class A
shares; however, its execution will result in the purchaser paying a lower
sales charge at the appropriate quantity purchase level. A purchase not
originally made pursuant to a Letter of Intention may be included under a
subsequent Letter of Intention executed within 90 days of such purchase if the
Distributor is informed in writing of this intent within such 90-day period.
The value of Class A shares of the Fund and of other investment companies with
an initial sales charge or a deferred sales charge for which the Distributor
acts as the distributor presently held, at cost or maximum offering price
(whichever is higher), on the date of the first purchase under the Letter of
Intention, may be included as a credit toward the 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 does not
equal the amount stated in the Letter of Intention (minimum of $100,000), the
investor will be notified and must pay, within 20 days of the expiration of
such Letter, the difference between the sales charge on the Class A shares
purchased at the reduced rate and the sales charge applicable to the shares
actually purchased through the Letter. Class A shares equal to at least five
percent of the intended amount will be held in escrow during the thirteen-
month period (while remaining registered in the name of the purchaser) for
this purpose. The first purchase under the Letter of Intention must be at
least five percent of the dollar amount of such Letter. If a purchase during
the term of such Letter would otherwise be subject to a further reduced sales
charge based on the right of accumulation, the purchaser will be entitled on
that purchase and subsequent purchases to that further reduced percentage
sales charge but there will be no retroactive reduction of the sales charges
on any previous purchase. The value of any shares redeemed or otherwise
disposed of by the purchaser prior to termination or completion of the Letter
of Intention will be deducted from the total purchases made under such Letter.
An exchange from Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement
Reserves Money Fund, Merrill Lynch Treasury Fund, Merrill Lynch Institutional
Tax-Exempt Fund or Merrill Lynch U.S.A. Government Reserves into the Fund that
creates a sales charge will count toward completing a new or existing Letter
of Intention from the Fund.
Employer Sponsored Retirement and Savings Plans. Class A shares are offered
at net asset value to employer sponsored retirement or savings plans, such as
tax qualified retirement plans within the meaning of Section 401(a) of the
Code, deferred compensation plans within the meaning of Sections 403(b) and
457 of the Code, other deferred compensation arrangements, VEBA plans, and
non-qualified After Tax Savings and Investment programs, maintained on the
Merrill Lynch Group Employee Services system, herein referred to as "Employer
Sponsored Retirement or Savings Plans", provided the plan has $5 million or
more in existing plan assets initially invested in portfolios, mutual funds or
trusts advised by FAM either directly or through an affiliate. Class A shares
are being offered at net asset value to Employer Sponsored Retirement or
Savings Plans, provided the plan has accumulated $5 million or more in
existing plan assets invested in mutual funds advised by FAM charging a front-
end sales charge or contingent deferred sales charge. Assets of Employer
Sponsored Retirement or Savings Plans sponsored by the same sponsor or an
affiliated sponsor may be aggregated. The Class A share reduced load
breakpoints also apply to these aggregated assets. Class A shares are being
offered at net asset value to multiple plans sponsored by the same sponsor or
an affiliated sponsor provided that the addition of one or more of the
multiple plans results in aggregate assets of $5 million or
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more invested in portfolios, mutual funds or trusts advised by FAM either
directly or through an affiliate. Employer Sponsored Retirement or Savings
Plans are also offered Class A shares at net asset value, provided such plans
initially have 1,000 or more employees eligible to participate in the plans.
Employees eligible to participate in Employer Sponsored Retirement or Savings
Plans of the same sponsoring employer or its affiliates may be aggregated. Tax
qualified retirement plans within the meaning of Section 401(a) of the Code
meeting any of the foregoing requirements and which are provided specialized
services (e.g., plans whose participants may direct on a daily basis their plan
allocations among a wide range of investments including individual corporate
equities and other securities in addition to mutual fund shares) by the Merrill
Lynch Blueprint SM Program, are offered Class A shares at a price equal to net
asset value per share plus a reduced sales charge of 0.50%. Any Employer
Sponsored Retirement or Savings Plan which does not meet the above described
qualifications to purchase Class A shares at net asset value has the option of
purchasing Class A shares at the sales charge schedule disclosed in the
Prospectus, or if the Employer Sponsored Retirement or Savings Plan is a
qualified retirement plan and meets the specified requirements, then it may
purchase Class B shares with a waiver of the contingent deferred sales charge
upon redemption. The minimum initial and subsequent purchase requirements are
waived in connection with all the above referenced Employer Sponsored
Retirement or Savings Plans.
Purchase Privileges of Certain Persons. Directors of the Fund, directors and
trustees of certain other Merrill Lynch-sponsored investment companies,
directors of Merrill Lynch & Co., Inc., employees of Merrill Lynch & Co., Inc.
and its subsidiaries, and any trust, pension, profit-sharing or other benefit
plan for such persons, may purchase Class A shares of the Fund at net asset
value. Reductions in or exemptions from the imposition of a sales load are due
to the nature of the investors and/or the reduced sales effort that will be
needed in obtaining such investments. Under such programs, the Fund realizes
economies of scale and reduction of sales related expenses by virtue of
familiarity with the Fund.
Class A shares of the Fund will be offered at net asset value, without sales
charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor if the following
conditions are satisfied. First, the investor must purchase Class A shares of
the Fund with proceeds from a redemption of shares of a mutual fund that was
sponsored by the financial consultant's previous firm and imposed a sales
charge either at the time of purchase or on a deferred basis. Second, such
redemption must have been made within 60 days prior to the investment in the
Fund, and the proceeds from the redemption must have been maintained in the
interim in cash or a money market fund.
Closed-End Fund Option. Class A shares of the Fund and certain other mutual
funds advised by the Investment Adviser or MLAM (the "Eligible Class A shares")
are offered at net asset value to shareholders of certain closed-end funds
advised by the Investment Adviser or MLAM who wish to reinvest the net proceeds
of a sale of their closed-end fund shares of common stock in Eligible Class A
shares, if the conditions set forth below are satisfied. First, the sale of
closed-end fund shares must be made through Merrill Lynch, and the net proceeds
therefrom must be immediately reinvested in Eligible Class A shares. Second,
the closed-end fund shares must have either been acquired in the initial public
offering or be shares representing dividends from shares of common stock
acquired in such offering. Third, the closed-end fund shares must have been
continuously maintained in a Merrill Lynch securities account. Fourth, there
must be a minimum purchase of $250 to be eligible for the investment option.
Class A shares of the Fund are offered at net asset value to shareholders of
Merrill Lynch Senior Floating Rate Fund (formerly known as Merrill Lynch Prime
Fund, Inc.) ("Senior Floating Rate Fund") who wish to reinvest the net proceeds
from a sale of certain of
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their shares of common stock of Senior Floating Rate Fund in shares of the
Fund. In order to exercise this investment option, Senior Floating Rate Fund
shareholders must sell their Senior Floating Rate Fund shares to the Senior
Floating Rate Fund in connection with a tender offer conducted by the Senior
Floating Rate Fund and reinvest the proceeds immediately in the Fund. This
investment option is available only with respect to the proceeds of Senior
Floating Rate Fund shares as to which no Early Withdrawal Charge as defined in
the prospectus is applicable. Purchase orders from Senior Floating Rate Fund
shareholders wishing to exercise this investment option will be accepted only
on the day that the related Senior Floating Rate Fund tender offer terminates
and will be effected at the net asset value of the Fund at such day.
TMASM Managed Trusts. Class A shares are offered to TMASM Managed Trusts to
which Merrill Lynch Trust Company provides discretionary trustee services at
net asset value plus a reduced sales charge of 0.50% of the offering price,
which is 0.50% of the net amount invested.
Acquisition of Certain Investment Companies. The public offering price of
Class A shares may be reduced to the net asset value per Class A share in
connection with the acquisition of the assets of or merger or consolidation
with a personal holding company or a public or private investment company. The
value of the assets or company acquired in a tax-free transaction may be
adjusted in appropriate cases to reduce possible adverse tax consequences to
the Fund which might result from an acquisition of assets having net
unrealized appreciation which is disproportionately higher at the time of
acquisition than the realized or unrealized appreciation of the Fund.
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
Distribution Plan. Reference is made to "Purchase of Shares--Deferred Sales
Charge Alternative--Class B Shares--Distribution Plan" in the Prospectus for
certain information with respect to the Distribution Plan of the Fund.
The payment of the distribution fee with respect to the Class B shares is
subject to the provisions of Rule 12b-1 under the Investment Company Act.
Among other things, the Distribution Plan provides that the Distributor shall
provide and the Directors shall review quarterly reports of the disbursement
of the distribution fees paid to the Distributor. In their consideration of
the Distribution Plan, the Directors must consider all factors they deem
relevant, including information as to the benefits of the Distribution Plan to
the Fund and the Class B shareholders. The Distribution Plan further provides
that so long as the Distribution Plan remains in effect, the selection and
nomination of Directors who are not "interested persons" of the Fund, as
defined in the Investment Company Act (the "Independent Directors"), shall be
committed to the discretion of the Independent Directors then in office. In
approving the Distribution Plan in accordance with Rule 12b-1, the Independent
Directors concluded that there is a reasonable likelihood that the
Distribution Plan will benefit the Fund and the Class B shareholders. The
Distribution Plan can be terminated at any time, without penalty, by the vote
of a majority of the Independent Directors or by the vote of the holders of a
majority of the outstanding Class B voting securities of the Fund. The
Distribution Plan cannot be amended to increase materially the amount to be
spent by the Fund without Class B shareholder approval, and all material
amendments are required to be approved by the vote of Directors, including a
majority of the Independent Directors who have no direct or indirect financial
interest in the Distribution Plan, cast in person at a meeting called for that
purpose. Rule 12b-1 further requires that the Fund preserve copies of the
Distribution Plan and any reports made pursuant to the plan for a period of
not less than six years from the date of the Distribution Plan or such report,
the first two years in an easily accessible place.
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REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended only for periods during which trading on the New
York Stock Exchange is restricted as determined by the Commission or such
Exchange is closed (other than customary weekend and holiday closings) for any
period during which an emergency exists, as defined by the Commission, as a
result of which disposal of portfolio securities or determination of the net
asset value of the Fund is not reasonably practicable, and for such other
periods as the Commission may by order permit for the protection of
shareholders of the Fund.
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending on the market value of the securities held by the
Fund at such time.
CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
As discussed in the Prospectus under "Purchase of Shares--Deferred Sales
Charge Alternative--Class B Shares", while Class B shares redeemed within four
years of purchase are subject to a contingent deferred sales charge under most
circumstances, the charge is waived on redemptions of Class B shares in
connection with certain post-retirement withdrawals from an Individual
Retirement Account ("IRA") or other retirement plan or following the death or
disability of a Class B shareholder. Redemptions for which the waiver applies
are: (a) any partial or complete redemption in connection with a 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 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
period November 18, 1991 (the commencement of operations of Class B shares)
through August 31, 1992, the Fund's previous fiscal year end, the Distributor
received contingent deferred sales charges of $156,203, all of which was paid
to Merrill Lynch. For the period September 1, 1992 to December 31, 1992, the
Fund's current fiscal year end, the Distributor received contingent deferred
sales charges of $1,161,871, all of which was paid to Merrill Lynch. For the
fiscal year ended December 31, 1993, the Distributor received contingent
deferred sales charges of $4,162,049, all of which was paid to Merrill Lynch.
Retirement Plans. Any Retirement Plan which does not meet the qualifications
to purchase Class A shares at net asset value has the option of purchasing
Class A shares at the sales charge schedule disclosed in the Prospectus, or if
the Retirement Plan meets the following requirements, then it may purchase
Class B shares with a waiver of the contingent deferred sales charge upon
redemption. The contingent deferred sales charge is waived for any Eligible
401(k) Plan redeeming Class B shares. The contingent deferred sales charge is
also waived for redemptions from 401(a) plans qualified under the Code,
provided, however, each such plan has the same or an affiliated sponsoring
employer as an Eligible 401(k) Plan purchasing MLAM-advised mutual fund Class B
shares ("Eligible 401(a) Plan"). The contingent deferred sales charge is waived
for any Class B shares which are purchased by an Eligible 401(k) Plan or
Eligible 401(a) Plan and are rolled over into a Merrill Lynch, Pierce, Fenner &
Smith Incorporated or Merrill Lynch Trust Company custodied Individual
Retirement Account and held in such account at the time of redemption. The
minimum initial and subsequent purchase requirements are waived in connection
with all the above-referenced Retirement Plans.
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PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors of the Fund, the
Investment Adviser is primarily responsible for the execution of the Fund's
portfolio transactions. In executing such transactions, the Investment Adviser
seeks to obtain the best results for the Fund, taking into account such factors
as price (including the applicable brokerage commission or dealer spread), size
of order, difficulty of execution and operational facilities of the firm
involved and the firm's risk in positioning a block of securities. While the
Investment Adviser generally seeks reasonably competitive commission rates or
spreads, the Fund does not necessarily pay the lowest commission or spread
available.
The Fund has no obligation to deal with any broker or dealer in execution of
transactions in portfolio securities. Subject to obtaining the best price and
execution, securities firms which provided supplemental investment research to
the Investment Adviser, including Merrill Lynch, 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 Investment Adviser
under the Investment Advisory Agreement, and the expenses of the Investment
Adviser will not necessarily be reduced as a result of the receipt of such
supplemental information.
The securities in which the Fund invests are traded primarily in the over-
the-counter market. Since portfolio transactions will generally not be effected
on foreign securities exchanges, the Fund does not expect typically to incur
potential settlement delays which may occur on certain of such exchanges. 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.
Under the 1940 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 may serve as its
broker in transactions conducted on an exchange and in over-the-counter
transactions conducted on an agency basis. Costs associated with transactions
in foreign securities are generally higher than with transactions in United
States securities, although, as noted above, the Fund will endeavor to achieve
the best net results in effecting such transactions.
For the fiscal year ended August 31, 1992, the Fund paid total brokerage
commissions of $31,302, of which $28,125 or 89.9% was paid to Merrill Lynch for
effecting 94.4% of the aggregate dollar amount of transactions in which the
Fund paid brokerage commissions. During such period the Fund operated as a
closed-end investment company from September 1, 1991 to November 15, 1991 and
commenced operations as an open-end investment company on November 18, 1991.
For the period September 1, 1992 to December 31, 1992, the Fund engaged in no
transaction with Merrill Lynch. For the fiscal year ended December 31, 1993,
the Fund paid total brokerage commissions of $96,336, of which $65,410 or 67.9%
was paid to Merrill Lynch for effecting 67.1% of the aggregate dollar amount of
transactions on which the Fund paid brokerage commissions.
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the United States national securities exchanges from
executing exchange transactions for their affiliates and
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institutional accounts which they manage unless the member (i) has obtained
prior express authorization from the account to effect such transactions, (ii)
at least annually furnishes the account with a statement of 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.
While the Fund generally does not expect to engage in trading for short-term
gains, it will effect portfolio transactions without regard to holding period
if, in the judgment of the Fund's investment adviser, Fund Asset Management,
L.P. (the "Investment Adviser"), 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. Accordingly, while the
Fund anticipates that its annual turnover rate should not exceed 200% under
normal conditions, it is impossible to predict portfolio turnover rates. The
portfolio turnover rate is calculated by dividing the lesser of the Fund's
annual sales or purchases of portfolio securities (exclusive of purchases or
sales of all 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. For the fiscal year ended August 31, 1991, the portfolio
turnover rate was 63.83%. For the fiscal year ended August 31, 1992, the
portfolio turnover rate was 76.18%. During such period, the Fund operated as a
closed-end investment company from September 1, 1991 to November 15, 1991 and
commenced operations as an open-end investment company on November 18, 1991.
For the period September 1, 1992 to December 31, 1992, the portfolio turnover
rate was 68.42%. For the fiscal year ended December 31, 1993, the portfolio
turnover rate was 182.88%. The increase in the Fund's portfolio turnover rate
was due to an attempt to reduce the Fund's exposure to an increase in interest
rate volatility. High portfolio turnover involves correspondingly greater
transaction costs in the form of dealer spreads and brokerage commissions,
which are borne directly by the Fund. Such turnover also has certain tax
consequences for the Fund. See "Taxes".
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 by the Investment
Adviser once daily, Monday through Friday, at 4:15 P.M. on each day during
which the New York Stock Exchange is open for trading. The New York Stock
Exchange is not open on New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Any
assets or liabilities initially expressed in terms of non-U.S. dollar
currencies are translated into U.S. dollars at the prevailing market rates as
quoted by one or more banks or dealers on the day of valuation. Net asset value
per share is computed by dividing the sum of the value of the securities held
by the Fund plus any cash or other assets minus all liabilities by the total
number of shares outstanding at such time, rounded to the nearest cent.
Expenses, including the fees payable to the Investment Adviser and Distributor,
are accrued daily. The net asset value per share of the Class A and Class B
shares are expected to be equivalent. Under certain circumstances, however, the
per share net asset value of the Class B shares may be lower than the per share
net asset value of the Class A shares reflecting the higher daily expense
accruals of the distribution and transfer agency fees applicable with respect
to the Class B shares. Even under those circumstances, the per share net asset
value of the two classes eventually will tend to converge immediately after the
payment of dividends, which will differ by approximately the amount of the
expense accrual differential between the classes.
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Securities traded in the over-the-counter market are valued at the last
available bid price or yield equivalents obtained from one or more dealers in
the over-the-counter market prior to the time of valuation. When the Fund
writes a call option, the amount of the premium received is recorded on the
books of the Fund as an asset and an equivalent liability. The amount of the
liability is subsequently valued to reflect the current market value of the
option written, based upon the last asked price in the case of exchange-traded
options or, in the case of options traded in the over-the-counter market, the
average of the last asked price as obtained from one or more dealers. Options
purchased by the Fund are valued at their last bid price in the case of
exchange-traded options or in the case of options traded in the over-the-
counter market, the average of the last bid price as obtained from two or more
dealers unless there is only one dealer, in which case that dealer's price is
used. Portfolio securities which are traded on stock exchanges are valued at
the last sale price on the principal market on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. Other investments,
including futures contracts and related options, are stated at market value or
otherwise at the fair value at which it is expected they may be resold, as
determined in good faith by or under the direction 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 by or 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 such
service and copies of the various plans described below can be obtained from
the Fund, the Distributor or Merrill Lynch.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive quarterly statements from the Transfer
Agent. These quarterly statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of taxable ordinary income
dividends, tax-exempt income and long-term capital gain distributions. The
quarterly 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 the automatic
investment purchase and the reinvestment of taxable ordinary income dividends,
tax-exempt income 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 from Merrill Lynch to another brokerage firm
or financial institution should be aware that, if the firm to which the Class A
shares are to be transferred will not take delivery of shares of the Fund, a
shareholder either must redeem the Class A shares so that the cash proceeds can
be transferred to the account at the new firm or such shareholder must continue
to maintain an Investment Account at the Transfer Agent for those Class A
shares. Shareholders interested in transferring their Class B shares from
Merrill Lynch and who do not wish to have an Investment Account maintained for
such shares at the Transfer Agent may
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<PAGE>
request their new brokerage firm to maintain such shares in an account
registered in the name of the brokerage firm for the benefit of the
shareholder. If the new brokerage firm is willing to accommodate the
shareholder in this manner, the shareholder must request that he be issued
certificates for his shares and then must turn the certificates over to the new
firm for re-registration as described in the preceding sentence.
AUTOMATIC INVESTMENT PLAN
A shareholder may make additions to an Investment Account at any time by
purchasing Class A or Class B shares at the applicable public offering price
either through the shareholder's securities dealer, or by mail directly to the
Transfer Agent, acting as agent for such securities dealer. Voluntary
accumulation can also be made through a service known as the Automatic
Investment Plan whereby the Fund is authorized through pre-authorized checks of
$50 or more to charge the regular bank account of the shareholder on a regular
basis to provide systematic additions to the Investment Account of such
shareholder. Alternatively, investors who maintain CMA(R) accounts may arrange
to have periodic investments made in the Fund, in their CMA(R) accounts or in
certain related accounts in the amount of $100 or more through the CMA(R)
Automatic Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
reinvested automatically in additional shares of the Fund. Such reinvestment
will be at the net asset value of shares of the Fund, without sales charge, as
of the close of business on the ex-dividend date of the dividend or
distribution. Shareholders may elect in writing to receive either their
dividends or capital gains distributions, or both, in cash, in which event
payment will be mailed on or about the payment date.
Shareholders may, at any time, notify the Transfer Agent in writing or by
telephone (1-800-MER-FUND) that they no longer wish to have their dividend
and/or capital gains distributions reinvested in shares of the Fund or vice
versa and, commencing ten days after the receipt by the Transfer Agent of such
notice, those instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS--CLASS A SHARES
A Class A shareholder may elect to make systematic withdrawals from an
Investment Account on either a monthly or quarterly basis as provided below.
Quarterly withdrawals are available for shareholders who have acquired Class A
shares of the Fund having a value, based on cost or the current offering price,
of $5,000 or more and monthly withdrawals for shareholders with Class A shares
with such a value of $10,000 or more.
At the time of each withdrawal payment, sufficient Class A shares are
redeemed from those on deposit in the shareholder's account to provide the
withdrawal payment specified by the shareholder. The shareholder may specify
either a dollar amount or a percentage of the value of his Class A shares.
Redemptions will be made at net asset value as determined at the close of
business on the New York Stock Exchange on the 24th day of each month or the
24th day of the last month of each quarter, whichever is applicable. If the
Exchange is not open for business on such date, the Class A shares will be
redeemed at the close of business on the following business day. The check for
the withdrawal payment will be mailed, or the direct deposit for the withdrawal
payment will be made, on the next business day following redemption. When a
shareholder is making systematic withdrawals, dividends and distributions on
all Class A shares in the Investment Account
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<PAGE>
are reinvested automatically in the Fund's Class A shares. A shareholder's
Systematic Withdrawal Plan may be terminated at any time, without charge or
penalty, by the shareholder, the Fund, the Transfer Agent or the Distributor.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be reduced
correspondingly. Purchases of additional Class A shares concurrent with
withdrawals are ordinarily disadvantageous to the shareholder because of sales
charges and tax liabilities. The Fund will not knowingly accept purchase orders
for Class A shares of the Fund from investors who maintain a systematic
withdrawal plan unless such purchase is equal to at least one year's scheduled
withdrawals or $1,200, whichever is greater. Periodic investments may not be
made into an Investment Account in which the shareholder has elected to make
systematic withdrawals.
A Class A shareholder whose shares are held within a CMA(R), CBA(R) or
Retirement Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the Systematic Redemption
Program. The minimum fixed dollar amount redeemable is $25. The proceeds of
systematic redemptions will be posted to the shareholder's account five
business days after the date the shares are redeemed. Monthly systematic
redemptions will be made at net asset value on the first Monday of each month,
bimonthly systematic redemptions will be made at net asset value on the first
Monday of every other month, and quarterly, semiannual or annual redemptions
are made at net asset value on the first Monday of months selected at the
shareholder's option. If the first Monday of the month is a holiday, the
redemption will be processed at net asset value on the next business day. The
Systematic Redemption Program is not available if Company shares are being
purchased within the account pursuant to the Automatic Investment Program. For
more information on the Systematic Redemption Program eligible shareholders
should contact their Financial Consultant.
RETIREMENT PLANS
Self-directed individual retirement accounts and other retirement plans are
available from Merrill Lynch. Under these plans, investments may be made in the
Fund and in certain of the other mutual funds sponsored by Merrill Lynch as
well as in other securities. Merrill Lynch charges an initial establishment fee
and an annual custodial fee for each account. Information with respect to these
plans is available on request from Merrill Lynch. The minimum initial purchase
to establish any such plan is $250, and the minimum subsequent purchase is $1.
Capital gains and income received in each of the plans referred to above are
exempt from Federal taxation until distributed from the plans. Investors
considering participations in any such plan should review specific tax laws
relating thereto and should consult their attorneys or tax advisers with
respect to the establishment and maintenance of any such plan.
EXCHANGE PRIVILEGE
Class A and Class B shareholders of the Fund may exchange their Class A or
Class B shares of the Fund for shares of the same class of Merrill Lynch
Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income Fund,
Inc., Merrill Lynch Arizona Limited Maturity Municipal Bond Fund, Merrill Lynch
Arizona Municipal Bond Fund, Merrill Lynch Balanced Fund for Investment and
Retirement, Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California
Insured Municipal Bond Fund, Merrill Lynch California Limited Maturity
Municipal Bond Fund, Merrill Lynch California Municipal Bond Fund, Merrill
Lynch Capital Fund, Inc., Merrill Lynch Colorado Municipal Bond Fund, Merrill
Lynch Corporate Bond Fund, Inc., Merrill Lynch Developing Capital Markets Fund,
Inc. (shares of which are deemed Class A shares for
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purposes of the exchange privilege), Merrill Lynch Dragon Fund, Inc., Merrill
Lynch EuroFund, Merrill Lynch Federal Securities Trust, Merrill Lynch Florida
Limited Maturity Municipal Bond Fund, Merrill Lynch Florida Municipal Bond
Fund, Merrill Lynch Fund For Tomorrow, Inc., Merrill Lynch Fundamental Growth
Fund, Inc., Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global
Bond Fund for Investment and Retirement, Merrill Lynch Global Convertible Fund,
Inc., Merrill Lynch Global Holdings (residents of Arizona must meet investor
suitability standards), Merrill Lynch Global Resources Trust, Merrill Lynch
Global Utility Fund, Inc., Merrill Lynch Growth Fund for Investment and
Retirement, Merrill Lynch Healthcare Fund, Inc. (residents of Wisconsin must
meet investor suitability standards), Merrill Lynch International Equity Fund,
Inc., Merrill Lynch Latin America Fund, Inc., Merrill Lynch Maryland Municipal
Bond Fund, Merrill Lynch Massachusetts Limited Maturity Municipal Bond Fund,
Merrill Lynch Massachusetts Municipal Bond Fund, Merrill Lynch Michigan Limited
Maturity Municipal Bond Fund, Merrill Lynch Michigan Municipal Bond Fund,
Merrill Lynch Minnesota Municipal Bond Fund, Merrill Lynch Municipal Bond Fund,
Inc., Merrill Lynch Municipal Intermediate Term Fund, Merrill Lynch New Jersey
Limited Maturity Municipal Bond Fund, Merrill Lynch New Jersey Municipal Bond
Fund, Merrill Lynch New York Limited Maturity Municipal Bond Fund, Merrill
Lynch New York Municipal Bond Fund, Merrill Lynch North Carolina Municipal Bond
Fund, Merrill Lynch Ohio Municipal Bond Fund, Merrill Lynch Oregon Municipal
Bond Fund, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Pennsylvania Limited
Maturity Municipal Bond Fund, Merrill Lynch Pennsylvania Municipal Bond Fund,
Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Short-Term Global Income Fund,
Merrill Lynch Special Value Fund, Inc., Merrill Lynch Strategic Dividend Fund,
Merrill Lynch Technology Fund, Inc., Merrill Lynch Texas Municipal Bond Fund
and Merrill Lynch Utility Income Fund, Inc., on the basis described below. In
addition, Class A shareholders of the Fund may exchange their Class A shares
for shares of Merrill Lynch U.S.A. Government Reserves, Merrill Lynch U.S.
Treasury Money Fund and Merrill Lynch Ready Assets Trust (or Merrill Lynch
Retirement Reserves Money Fund if the exchange occurs within certain retirement
plans) (together, the "Class A money market funds") and Class B shareholders of
the Fund may exchange their Class B shares for shares of Merrill Lynch
Government Fund, Merrill Lynch Institutional Fund, Merrill Lynch Treasury Fund
and Merrill Lynch Institutional Tax-Exempt Fund (together, the "Class B money
market funds") on the basis described below. Shares with a net asset value of
at least $250 are required to qualify for the exchange privilege and any shares
utilized in an exchange must have been held by the shareholder for at least 15
days. It is contemplated that the exchange privilege may be applicable to other
new mutual funds whose shares may be distributed by the Distributor. The
exchange privilege available to participants in the Merrill Lynch BlueprintSM
Program may be different from that available to other investors.
Under the exchange privilege, each of the funds with Class A shares
outstanding offers to exchange its Class A shares ("new Class A shares") for
Class A shares ("outstanding Class A shares") of any of the other funds, on the
basis of relative net asset value per Class A share, plus an amount equal to
the difference, if any, between the sales charge previously paid on the
outstanding Class A shares and the sales charge payable at the time of the
exchange on the new Class A shares. With respect to outstanding Class A shares
as to which previous exchanges have taken place, the "sales charge previously
paid" shall include the aggregate of the sales charges paid with respect to
such Class A shares in the initial purchase and any subsequent exchange. Class
A shares issued pursuant to dividend reinvestment are sold on a no-load basis
in each of the funds offering Class A shares. For purposes of the exchange
privilege, Class A shares acquired through dividend reinvestment shall be
deemed to have been sold with a sales charge equal to the sales charge
previously paid on the Class A shares on which the dividend was paid. Based on
this formula, Class A shares of the Fund generally may be exchanged into the
Class A shares of the other funds or into shares of the Class A money market
funds without a sales charge.
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In addition, each of the funds with Class B shares outstanding offers to
exchange its Class B shares (the "new Class B shares") for Class B shares
("outstanding Class B shares") of any of the other funds on the basis of
relative net asset value per Class B share without the payment of any
contingent deferred sales load that might otherwise be due on redemption of the
outstanding shares. Class B shareholders of the Fund exercising the exchange
privilege will continue to be subject to the Fund's contingent deferred sales
load schedule if such schedule is higher than the deferred sales load schedule
relating to the new Class B shares acquired through use of the exchange
privilege. In addition, Class B shares of the Fund acquired through use of the
exchange privilege will be subject to the Fund's contingent deferred sales
charge schedule if such schedule is higher than the deferred sales load
schedule relating to the Class B shares of the Fund from which the exchange has
been made. For purposes of computing the sales load that may be payable on a
disposition of the new Class B shares, the holding period for the outstanding
Class B shares is "tacked" to the holding period of the new Class B shares. For
example, an investor may exchange Class B shares of the Fund for those of
Merrill Lynch Global Resources Trust (formerly known as Merrill Lynch Natural
Resources Trust) after having held the Fund's Class B shares for two and a half
years. The 2% sales charge that generally would apply to a redemption would not
apply to the exchange. Three years later the investor may decide to redeem the
Class B shares of Merrill Lynch Global Resources Trust and receive cash. There
will be no contingent deferred sales load due on this redemption since by
"tacking" the two and a half year holding period of the Fund's Class B shares
to the three year holding period for the Merrill Lynch Global Resources Trust
Class B shares, the investor will be deemed to have held the new Class B shares
for more than five years.
Shareholders also may exchange Class A shares and Class B shares from any of
the funds into shares of the Class A money market funds and the Class B money
market funds, respectively, but the period of time that Class B shares are held
in a Class B money market fund will not count towards satisfaction of the
holding period requirement for purposes of reducing the contingent deferred
sales load. However, shares of a Class B money market fund which were acquired
as a result of an exchange for Class B shares of a fund may, in turn, be
exchanged back into Class B shares of any fund offering such shares, in which
event the holding period for Class B shares of the fund will be aggregated with
previous holding periods for purposes of reducing the contingent deferred sales
load. Thus, for example, an investor may exchange Class B shares of the Fund
for shares of Merrill Lynch Institutional Fund after having held the Fund Class
B shares for two and a half years and three years later decide to redeem the
shares of Merrill Lynch Institutional Fund for cash. At the time of this
redemption, the 2% contingent deferred sales load that would have been due had
the Class B shares of the Fund been redeemed for cash rather than exchanged for
shares of Merrill Lynch Institutional Fund will be payable. If, instead of such
redemption the shareholder exchanged such shares for Class B shares of a fund
which the shareholder continues to hold for an additional two and a half years,
a subsequent redemption will not incur a contingent deferred sales load.
The investment objectives of the other funds into which exchanges can be made
are as follows:
Merrill Lynch Adjustable Rate
Securities Fund, Inc. ........
High current income consistent with a policy
of limiting the degree of fluctuation in net
asset value by investing primarily in a
portfolio of adjustable rate securities,
consisting principally of mortgage-backed
and asset backed securities.
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Merrill Lynch Americas Income
Fund, Inc. ..............
A high level of current income, consistent
with prudent investment risk, by investing
primarily in debt securities denominated in
a currency of a country located in the
Western Hemisphere (i.e., North and South
America and the surrounding waters).
Merrill Lynch Arizona Limited
Maturity Municipal Bond Fund..
A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and Arizona income taxes as is
consistent with prudent investment
management through investment in a portfolio
primarily of intermediate-term investment
grade Arizona Municipal Bonds.
Merrill Lynch Arizona
Municipal Bond Fund...........
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide investors with as
high a level of income exempt from Federal
and Arizona income taxes as is consistent
with prudent investment management.
Merrill Lynch Balanced Fund
for Investment and
Retirement....................
As high a level of total investment return as
is consistent with reasonable risk by
investing in common stock and other types of
securities, including fixed income
securities and convertible securities.
Merrill Lynch Basic Value
Fund, Inc. ...................
Capital appreciation and, secondarily, income
through investments in securities, primarily
equities, that are undervalued and therefore
represent basic investment value.
Merrill Lynch California
Insured Municipal Bond Fund...
A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund, whose
objective is to provide shareholders with as
high a level of income exempt from Federal
and California income taxes as is consistent
with prudent investment management through
investment in a portfolio primarily of
insured California Municipal Bonds.
Merrill Lynch California
Limited Maturity Municipal
Bond Fund................ A portfolio of Merrill Lynch Multi-State
Limited Maturity Series Trust, a series
fund, whose objective is to provide
shareholders with as high a level of income
exempt from Federal and California income
taxes as is consistent with prudent
investment management through investment in
a portfolio primarily of intermediate-term
investment grade California Municipal Bonds.
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<PAGE>
Merrill Lynch California
Municipal Bond Fund...........
A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund, whose
objective is to provide investors as high a
level of income exempt from Federal and
California income taxes as is consistent
with prudent investment management.
Merrill Lynch Capital Fund, The highest total investment return
Inc. ......................... consistent with prudent risk through a fully
managed investment policy utilizing equity,
debt and convertible securities.
Merrill Lynch Colorado
Municipal Bond Fund......
A portfolio of Merrill Lynch Multi-State
Municipal Series, a series fund, whose
objective is as high a level of income
exempt from Federal and Colorado income
taxes as is consistent with prudent
investment management.
Merrill Lynch Corporate Bond
Fund, Inc. ...................
Current income from three separate
diversified portfolios of fixed income
securities.
Merrill Lynch Developing
Capital Markets Fund, Inc. ...
Long-term appreciation through investment in
securities, principally equities, of issuers
in countries having smaller capital markets.
Merrill Lynch Dragon Fund,
Inc. ......................... Capital appreciation primarily through
investment in equity and debt securities of
issuers domiciled in developing countries
located in Asia and the Pacific Basin, other
than Japan, Australia and New Zealand.
Merrill Lynch EuroFund.........
Capital appreciation primarily through
investment in equity securities of
corporations domiciled in Europe.
Merrill Lynch Federal
Securities Trust..............
High current return through investments in
U.S. Government and Government agency
securities, including GNMA mortgage-backed
certificates and other mortgage-backed
Government securities.
Merrill Lynch Florida Limited
Maturity Municipal Bond Fund..
A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is as high a
level of income exempt from Federal income
taxes as is consistent with prudent
investment management while serving to offer
shareholders the opportunity to own
securities exempt from Florida intangible
personal property taxes through investment
in a portfolio primarily of intermediate-
term investment grade Florida Municipal
Bonds.
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<PAGE>
Merrill Lynch Florida
Municipal Bond Fund...........
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide investors with as
high a level of income exempt from Federal
income taxes as is consistent with prudent
investment management, while seeking to
offer shareholders the opportunity to own
shares exempt from Florida intangible
personal property taxes.
Merrill Lynch Fund For
Tomorrow, Inc. .......... Long-term growth through investment in a
portfolio of good quality securities,
primarily common stock, potentially
positioned to benefit from demographic and
cultural changes as they affect consumer
markets.
Merrill Lynch Fundamental
Growth Fund, Inc. ............
Long-term growth of capital through
investment in a diversified portfolio of
equity securities placing particular
emphasis on companies that have exhibited
above-average growth rates in earnings.
Merrill Lynch Global
Allocation Fund, Inc. ........
High total return consistent with prudent
risk through a fully managed investment
policy utilizing United States and foreign
equity, debt and money market securities,
the combination of which will be varied from
time to time both with respect to the types
of securities and markets in response to
changing market and economic trends.
Merrill Lynch Global Bond Fund
for Investment and
Retirement....................
High total investment return from investment
in a global portfolio of debt investments
denominated in various currencies and multi-
national currency units.
Merrill Lynch Global
Convertible Fund, Inc. .......
High total return from investment primarily
in an internationally diversified portfolio
of convertible debt securities, convertible
preferred stock and "synthetic" convertible
securities consisting of a combination of
debt securities or preferred stock and
warrants or options.
Merrill Lynch Global Holdings
(residents of Arizona must
meet investor suitability
standards)...............
The highest total investment return
consistent with prudent risk through
worldwide investment in an internationally
diversified portfolio of securities.
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<PAGE>
Merrill Lynch Global Resources
Trust....................
Long-term growth and protection of capital
from investment in securities of domestic
and foreign countries that possess
substantial natural resource assets.
Merrill Lynch Global Utility
Fund, Inc. ...................
Capital appreciation and current income
through investment of at least 65% of its
total assets in equity and debt securities
issued by domestic and foreign companies
which are primarily engaged in the ownership
and operation of facilities used to
generate, transmit or distribute
electricity, telecommunications, gas or
water.
Merrill Lynch Government Fund..
A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
consistent with liquidity and security of
principal from investment in securities
issued or guaranteed by the U.S. Government,
its agencies and instrumentalities and in
repurchase agreements secured by such
obligations.
Merrill Lynch Growth Fund for
Investment and Retirement.....
Growth of capital and, secondarily, income
from investment in a diversified portfolio
of equity securities placing principal
emphasis on those securities which
management of the fund believes to be
undervalued.
Merrill Lynch Healthcare Fund,
Inc. (residents of Wisconsin
must meet investor
suitability standards)...
Capital appreciation through worldwide
investment in equity securities of companies
that derive or are expected to derive a
substantial portion of their sales from
products and services in healthcare.
Merrill Lynch Institutional
Fund.......................... A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide maximum current
income consistent with liquidity and the
maintenance of a high quality portfolio of
money market securities.
Merrill Lynch Institutional
Tax-Exempt Fund...............
A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
exempt from Federal income taxes,
preservation of capital and liquidity
available from investing in a diversified
portfolio of short-term, high quality
municipal bonds.
Merrill Lynch International
Equity Fund..............
Capital appreciation and, secondarily, income
by investing in a diversified portfolio of
equity securities of issuers located in
countries other than the United States.
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Merrill Lynch Latin America
Fund, Inc. ..............
Capital appreciation by investing primarily
in Latin American equity and debt
securities.
Merrill Lynch Maryland
Municipal Bond Fund......
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is as high a level of income
exempt from Federal and Maryland income
taxes as is consistent with prudent
investment management.
Merrill Lynch Massachusetts
Limited Maturity Municipal
Bond Fund................
A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is as high a
level of income exempt from Federal and
Massachusetts income taxes as is consistent
with prudent investment management through
investment in a portfolio primarily of
intermediate-term investment grade
Massachusetts Municipal Bonds.
Merrill Lynch Massachusetts
Municipal Bond Fund...........
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is as high a level of income
exempt from Federal and Massachusetts income
taxes as is consistent with prudent
investment management.
Merrill Lynch Michigan Limited
Maturity Municipal Bond Fund..
A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is as high a
level of income exempt from Federal and
Michigan income taxes as is consistent with
prudent investment management through
investment in a portfolio primarily of
intermediate-term investment grade Michigan
Municipal Bonds.
Merrill Lynch Michigan
Municipal Bond Fund...........
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is as high a level of income
exempt from Federal and Michigan income
taxes as is consistent with prudent
investment management.
Merrill Lynch Minnesota
Municipal Bond Fund...........
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is as high a level of income
exempt from Federal and Minnesota income
taxes as is consistent with prudent
investment management.
Merrill Lynch Municipal Bond
Fund, Inc. ...................
Tax-exempt income from three separate
diversified portfolios of municipal bonds.
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<PAGE>
Merrill Lynch Municipal
Intermediate Term Fund... Currently the only portfolio of Merrill Lynch
Municipal Series Trust, a series fund, whose
objective is to provide as high a level as
possible of income exempt from Federal
income taxes by investing in investment
grade obligations with a dollar weighted
average maturity of five to twelve years.
Merrill Lynch New Jersey
Limited Maturity Municipal
Bond Fund ............... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is as high a
level of income exempt from Federal and New
Jersey income taxes as is consistent with
prudent investment management through
investment in a portfolio primarily of
intermediate-term investment grade New
Jersey Municipal Bonds.
Merrill Lynch New Jersey
Municipal Bond Fund...........
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is as high a level of income
exempt from Federal and New Jersey income
taxes as is consistent with prudent
investment management.
Merrill Lynch New York Limited
Maturity Municipal Bond Fund..
A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is as high a
level of income exempt from Federal, New
York State and New York City income taxes as
is consistent with prudent investment
management through investment in a portfolio
primarily of intermediate-term grade New
York Municipal Bonds.
Merrill Lynch New York
Municipal Bond Fund...........
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is as high a level of income
exempt from Federal, New York State and New
York City income taxes as is consistent with
prudent investment management.
Merrill Lynch North Carolina
Municipal Bond Fund...........
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is as high a level of income
exempt from Federal and North Carolina
income taxes as is consistent with prudent
investment management.
Merrill Lynch Ohio Municipal
Bond Fund.....................
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide investors with as
high a level of income exempt from Federal
and Ohio income taxes as is consistent with
prudent investment management.
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<PAGE>
Merrill Lynch Oregon Municipal
Bond Fund................
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is as high a level of income
exempt from Federal and Oregon income taxes
as is consistent with prudent investment
management.
Merrill Lynch Pacific Fund,
Inc. ......................... Capital appreciation by investing in equity
securities of corporations domiciled in Far
Eastern and Western Pacific countries,
including Japan, Australia, Hong Kong and
Singapore.
Merrill Lynch Pennsylvania
Limited Maturity Municipal
Bond Fund................
A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and Pennsylvania income taxes as is
consistent with prudent investment
management through investment in a portfolio
of intermediate-term investment grade
Pennsylvania Municipal Bonds.
Merrill Lynch Pennsylvania
Municipal Bond Fund...........
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is as high a level of income
exempt from Federal and Pennsylvania income
taxes as is consistent with prudent
investment management.
Merrill Lynch Phoenix Fund, Long-term growth of capital by investing in
Inc. ......................... equity and fixed income securities,
including tax-exempt securities, of issuers
in weak financial condition or experiencing
poor operating results believed to be
undervalued relative to the current or
prospective condition of such issuer.
Merrill Lynch Ready Assets Preservation of capital, liquidity and the
Trust......................... highest possible current income consistent
with the foregoing objectives from the
short-term money market securities in which
the Trust invests.
Merrill Lynch Retirement
Reserves Money Fund
(available only if the
exchange occurs within
certain retirement plans).....
Currently the only portfolio of Merrill Lynch
Retirement Series Trust, a series fund,
whose objectives are current income,
preservation of capital and liquidity
available from investing in a diversified
portfolio of short-term money market
securities.
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<PAGE>
Merrill Lynch Short-Term
Global Income Fund, Inc. .....
As high a level of current income as is
consistent with prudent investment
management from a global portfolio of high
quality debt securities denominated in
various currencies and multi-national
currency units and having remaining
maturities not exceeding three years.
Merrill Lynch Special Value
Fund, Inc. ...................
Long-term growth of capital from investments
in securities, primarily common stocks, of
relatively small companies believed to have
special investment value and emerging growth
companies regardless of size.
Merrill Lynch Strategic
Dividend Fund.................
Long-term total return from investment in
dividend paying common stocks which yield
more than Standard & Poor's 500 Composite
Stock Price Index.
Merrill Lynch Technology Fund,
Inc. .........................
Capital appreciation through worldwide
investment in equity securities of companies
that derive or are expected to derive a
substantial portion of their sales from
products and services in technology.
Merrill Lynch Texas Municipal
Bond Fund.....................
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is as high a level of income
exempt from Federal income taxes as is
consistent with prudent investment
management by investing primarily in a
portfolio of long-term, investment grade
obligations issued by the State of Texas,
its political subdivisions, agencies and
instrumentalities.
Merrill Lynch Treasury Fund....
A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
consistent with liquidity and security of
principal from investment in direct
obligations of the U.S. Treasury and up to
10% of its total assets in repurchase
agreements secured by such obligations.
Merrill Lynch U.S.A.
Government Reserves...........
Preservation of capital, current income and
liquidity available from investing in direct
obligations of the U.S. Government and
repurchase agreements relating to such
securities.
Merrill Lynch U.S. Treasury
Money Fund....................
Preservation of capital, liquidity and
current income through investment
exclusively in a diversified portfolio of
short-term marketable securities which are
direct obligations of the U.S. Treasury.
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Merrill Lynch Utility Income
Fund, Inc. ..............
High current income through investment in
equity and debt securities issued by
companies which are primarily engaged in the
ownership or operation of facilities used to
generate, transmit or distribute
electricity, telecommunications, gas or
water.
Before effecting an exchange, shareholders of the Fund should obtain a
currently effective prospectus of the fund into which the exchange is to be
made. Exercise of the exchange privilege is treated as a sale for Federal
income tax purposes and, depending on the circumstances, a short- or long-term
capital gain or loss may be realized. In addition, a shareholder exchanging
shares of any of the funds may be subject to a backup withholding tax unless
such shareholder certifies under penalty of perjury that the taxpayer
identification number on file with any such fund is correct and that such
shareholder is not otherwise subject to backup withholding. See "Dividends,
Distributions and Taxes" below.
To exercise the exchange privilege, shareholders should contact their Merrill
Lynch financial consultant, who will advise the Fund of the exchange, or, if
the exchange does not involve a money market fund, the shareholder may write to
the Transfer Agent requesting that the exchange be effected. Such letter must
be signed exactly as the account is registered with signatures guaranteed by an
"eligible guarantor institution" as such is defined in Rule 17Ad-15 under the
Securities Exchange Act of 1934, as amended, the existence and validity of
which may be verified by the Transfer Agent through the use of industry
publications. Shareholders of the Fund, and shareholders of the other funds
described above with shares for which certificates have not been issued, may
exercise the exchange privilege by wire through their securities dealers. The
Fund reserves the right to require a properly completed Exchange Application.
This exchange privilege may be modified or terminated in accordance with the
rules of the Commission. The Fund reserves the right to limit the number of
times an investor may exercise the exchange privilege. Certain funds may
suspend the continuous offering of their shares to the general public at any
time and may thereafter resume such offering from time to time. The exchange
privilege is available only to U.S. shareholders in states where the exchange
legally may be made.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute all its net investment income. Dividends from
such net investment income will be declared daily prior to the determination of
net asset value on that day and paid monthly. Net investment income for
dividend purposes consists of interest earned less expenses of the Fund accrued
for that dividend period. Shares will accrue dividends as long as they are
issued and outstanding. Shares are issued and outstanding as of the settlement
date of a purchase order to the settlement date of a redemption order. All net
realized long-term capital gains, if any, will be distributed to the Fund's
shareholders at least annually.
See "Shareholder Services--Automatic Reinvestment of Dividends and Capital
Gains Distributions" for information concerning the manner in which dividends
and distributions may be automatically reinvested 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 discussed below whether they are reinvested in shares of the
Fund or received in cash.
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<PAGE>
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (the "Code"). If it so qualifies, the Fund (but not
its shareholders) will not be subject to Federal income tax on the part of its
net ordinary income and net realized capital gains which it distributes to
Class A and Class B shareholders (together, the "shareholders"). The Fund
intends to distribute substantially all of such income.
Dividends paid by the Fund from its ordinary income and distributions of the
Fund's net realized short-term capital gains (together referred to hereafter as
"ordinary income dividends") are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
(including long-term gains from certain transactions in futures and options)
("capital gain dividends") are taxable to shareholders as long-term capital
gains, regardless of the length of time the shareholder has owned Fund shares.
Distributions in excess of the Fund's earnings and profits will first reduce
the adjusted tax basis of a holder's shares and, after such adjusted tax basis
is reduced to zero, will constitute capital gains to such holder (assuming the
shares are held as a capital asset). Any loss upon the sale or exchange of Fund
shares held for six months or less, however, will be treated as long-term
capital loss to the extent of any capital gain dividends received by the
shareholder.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. Distributions by the Fund, whether from ordinary income or capital
gains, will not be eligible for the dividends received deduction allowed to
corporations under the Code. 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 by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% United States
withholding tax under existing provisions of the Code applicable to foreign
individuals and entities unless a reduced rate of withholding or a withholding
exemption is provided under applicable treaty law. Nonresident shareholders are
urged to consult their own tax advisers concerning the applicability of the
United States 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 a certified taxpayer identification
number is not 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 United States may reduce or eliminate such taxes.
Shareholders may be able to claim United States foreign tax credits with
respect to such taxes, subject to certain conditions and limitations contained
in the Code. For example, certain retirement accounts cannot claim foreign tax
credits on investments in foreign securities held in the Fund. If more than 50%
in value of the Fund's total assets at the close of its taxable year consists
of securities of foreign corporations,
34
<PAGE>
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 United
States 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 United States income taxes. No deductions for foreign taxes, however, may
be claimed by noncorporate shareholders who do not itemize deductions. A
shareholder that is a nonresident alien individual or a foreign corporation may
be subject to United States 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 United States tax for the foreign taxes
treated as having been paid by such shareholder. The Fund will report annually
to its shareholders the amount per share of such withholding taxes. For this
purpose, the Fund will allocate foreign taxes and foreign source income between
the Class A and Class B shareholders according to a method (which it believes
is consistent with the Securities and Exchange Commission exemptive order
permitting the issuance and sale of an unlimited number of classes of stock)
that is based on the gross income allocable to Class A and Class B shareholders
during the taxable year, or such other method as the Internal Revenue Service
may prescribe.
If a Class A shareholder exercises the exchange privilege within 90 days of
acquiring such shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent the sales charge
paid to the Fund reduces any sales charge the shareholder would have owed upon
the purchase of the new Class A shares in the absence of the exchange
privilege. Instead, such sales charge will be treated as an amount paid for the
new Class A shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether under the Automatic
Dividend Reinvestment Plan or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its
capital gains, determined, in general, on an October 31 year end, plus certain
undistributed amounts from previous years. While the Fund intends to distribute
its income and capital gains in the manner necessary to avoid imposition of the
4% excise tax, there can be no assurance that sufficient amounts of the Fund's
taxable income and capital gains will be distributed to avoid entirely the
imposition of the tax. In such event, the Fund will be liable for the tax only
on the amount by which it does not meet the foregoing distribution
requirements.
TAX TREATMENT OF OPTIONS, FUTURES AND FORWARD FOREIGN EXCHANGE TRANSACTIONS
The Fund may write, purchase or sell options, futures or forward foreign
exchange contracts. Options and futures contracts that are "Section 1256
contracts" will be "marked to market" for Federal income tax purposes at the
end of each taxable year, i.e., each such option or futures contract will be
treated as sold for its fair market value on the last day of the taxable year.
Unless such contract is a 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), Section 1256 contracts will be 60% long-term
and 40% short-term capital gain or loss. The mark-to-market rules outlined
above, however, will not apply to certain transactions entered into by the Fund
solely to reduce the risk of changes in price or interest or currency exchange
rates with respect to its investments.
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under
35
<PAGE>
Code Section 988. The Fund may, nonetheless, elect to treat the gain or loss
from certain forward foreign exchange contracts as capital. In this case, gain
or loss realized in connection with a forward foreign exchange contract that is
a Section 1256 contract will be characterized as 60% long-term and 40% short-
term capital gain or loss.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's transactions in options, futures and forward foreign
exchange contracts. Under Section 1092, the Fund may be required to postpone
recognition for tax purposes of losses incurred in certain closing transactions
in options, futures and forward foreign exchange contracts.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income may be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the
Fund may be restricted in effecting closing transactions within three months
after entering into an options or futures contract.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether the Fund qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options, foreign currency
futures, and forward foreign currency contracts will be valued for purposes of
the RIC diversification requirements applicable to the Fund. The Fund may
request a private letter ruling from the Internal Revenue Service on some or
all of these issues.
Under Code Section 988, special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency
(i.e.,unless certain special rules apply, currencies other than the United
States 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 dividend distributions, and any
distributions made before the losses were realized but in the same taxable year
would be recharacterized as a return of capital to shareholders, thereby
reducing the basis of each shareholder's Fund shares, and resulting in a
capital gain for any shareholder who received a distribution greater than such
shareholder's 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. Finally, Section
988 losses with respect to foreign currency denominated tax-exempt securities
may be subject to disallowance.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action
either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
36
<PAGE>
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, as well as yield, in advertisements or information
furnished to present or prospective shareholders. From time to time, the Fund
may include the Fund's Morningstar Publications, Inc. risk-adjusted performance
ratings in advertisements as supplemental sales literature. Total return is
based on the Fund's historical performance and is not intended to indicate
future performance. Average annual total return and yield are determined
separately for Class A and Class B shares in accordance with formulas specified
by the Commission.
Average annual total return quotations for the specified periods are computed
by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including the maximum sales charge in the case of
Class A shares and the contingent deferred sales charge that would be
applicable to a complete redemption of the investment at the end of the
specified period in the case of Class B shares.
The Fund also may quote annual, average and annualized total return and
aggregate total return performance data, both as a percentage and as a dollar
amount based on a hypothetical $1,000 investment, for various periods other
than those noted below. Such data will be computed as described above, except
that (1) as required by the period of the quotations, actual annual, annualized
or aggregate data, rather than average annual data, may be quoted and (2) the
maximum applicable sales charges will not be included. Actual annual or
annualized total return data generally will be lower than average annual total
return data since the average rates of return reflect compounding of return;
aggregate total return data generally will be higher than average annual total
return data since the aggregate rates of return reflect compounding over a
longer period of time.
37
<PAGE>
Set forth below is total return and yield information for the Class A and
Class B shares of the Fund for the periods indicated:
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
------------------------------------ ------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
EXPRESSED AS A OF A HYPOTHETICAL EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END OF THE ON A HYPOTHETICAL AT THE END OF THE
$1,000 INVESTMENT PERIOD $1,000 INVESTMENT PERIOD
------------------ ----------------- ------------------ -----------------
AVERAGE ANNUAL TOTAL RETURN (INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended December
31, 1993............... 9.56% $1,095.66 9.27% $1,092.70
Five Years Ended Decem-
ber 31, 1993........... 10.97% $1,109.70
Ten Years Ended December
31, 1993...............
November 18, 1991 to De-
cember 31, 1993........ 8.67% $1,192.70
September 29,1988 to De-
cember 31, 1993........ 11.74% $1,792.10
<CAPTION>
ANNUAL TOTAL RETURN (EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended December
31, 1993............... 14.12% $1,141.20 13.27% $1,132.70
<CAPTION>
AGGREGATE ANNUAL TOTAL RETURN (INCLUDING MAXIMUM APPLICABLE SALES
CHARGES)
<S> <C> <C> <C> <C>
November 18, 1991 to De-
cember 31, 1993*....... 19.27% $1,192.70
September 29, 1988 to
December 31, 1993*..... 79.21% $1,792.10
<CAPTION>
YIELD
<S> <C> <C> <C> <C>
30 days ended December
31, 1993............... 6.88% 6.39%
</TABLE>
- --------
*The Fund operated as a closed-end investment company from September 1988
until November 15, 1991 and commenced operations as an open-end investment
company on November 18, 1991.
In order to reflect the reduced sales charges in the case of Class A shares
or the waiver of the contingent deferred sales charge in the case of Class B
shares applicable to certain investors, as described under "Purchase of Shares"
and "Redemption of Shares", respectively, the total return data quoted by the
Fund in advertisements directed to such investors may take into account the
reduced, and not the maximum, sales charge or may take into account the
contingent deferred sales charge and therefore may reflect greater total return
since, due to the reduced sales charges or the waiver of sales charges, a lower
amount of expenses is deducted.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund was incorporated under Maryland law on July 1, 1988 as a closed-end
investment company. On October 25, 1991, the shareholders of the Fund voted to
convert the Fund to an open-end investment company. The Fund was converted to
an open-end investment company on November 15, 1991 and commenced operations as
such on November 18, 1991. The Fund has an authorized capital of 2,000,000,000
shares of Common Stock, par value $0.10 per share, divided into two classes,
designated Class A and Class B
38
<PAGE>
Common Stock, each of which consists of 1,000,000,000 shares. At the time of
conversion of the Fund into an open-end investment company, the Fund had
approximately 32,447,786 shares of Common Stock outstanding, all of which were
reclassified into shares of Class A Common Stock upon such conversion. Both
Class A and Class B Common Stock represent an interest in the same assets of
the Fund and are identical in all respects except that the Class B shares bear
certain expenses related to the account maintenance and distribution of such
shares and have exclusive voting rights with respect to matters relating to
such expenditures. The Fund has received an order from the Commission
permitting the issuance and sale of an unlimited number of classes of Common
Stock. The Board of Directors of the Fund may classify and reclassify the
shares of the Fund into additional classes of Common Stock at a future date.
Shareholders are entitled to one vote for each full 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. Under the By-laws of the Fund, a special meeting of
shareholders may be called for any purpose on the written request of the
holders of at least 10% of the outstanding shares of the Fund. Voting rights
for Directors are not cumulative. Shares issued are fully paid and non-
assessable and have no preemptive or conversion rights. Redemption rights are
discussed elsewhere herein and in the Prospectus. Each share of Class B Common
Stock is entitled to participate equally in dividends and distributions
declared by the Fund and in the net assets of the Fund upon liquidation or
dissolution after satisfaction of outstanding liabilities. Stock certificates
will be issued by the Transfer Agent only on specific request. Certificates for
fractional shares are not issued in any case.
The Investment Adviser provided the initial capital for the Fund by
purchasing 31,050,000 shares for $290,317,500. Such shares were acquired for
investment and can only be disposed of by redemption. The organizational
expenses of the Fund were paid by the Fund and are being amortized over a
period not exceeding five years. The proceeds realized by the Investment
Adviser (or any subsequent holder) upon redemption of any of such shares will
be reduced by the proportionate amount of the unamortized organizational
expenses which the number of shares redeemed bears to the number of shares
initially purchased.
39
<PAGE>
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class A and
Class B shares of the Fund based on the Fund's net assets and number of shares
outstanding on the balance sheet date of December 31, 1993 is as follows:
TABLE*
<TABLE>
<CAPTION>
CLASS A CLASS B
------------ --------------
<S> <C> <C>
Net Assets......................................... $467,624,734 $2,106,119,547
============ ==============
Number of Shares Outstanding....................... 50,377,518 227,042,238
============ ==============
Net Asset Value Per Share (net assets divided by
number of shares outstanding)..................... $ 9.28 $ 9.28
Sales Charge (for Class A shares: 4.00% of offering
price (4.17% of net asset value per share))*...... $ 0.39 $ **
------------ --------------
Offering Price..................................... $ 9.67 $ 9.28
============ ==============
</TABLE>
- --------
*Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.
**Class B shares are not subject to an initial sales charge but may be subject
to a contingent deferred sales charge on redemption of shares within four
years of purchase. See "Purchase of Shares--Deferred Sales Charge
Alternative--Class B Shares" herein and in the Prospectus.
INDEPENDENT AUDITORS
Deloitte & Touche, 117 Campus Drive, Princeton, New Jersey 08540, have been
selected as the independent auditors of the Fund. The selection of independent
auditors is subject to ratification by the shareholders of the Fund. The
independent auditors are responsible for auditing the annual financial
statements of the Fund.
CUSTODIAN
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, acts as the custodian of the Fund's assets. 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 investment.
TRANSFER AGENT
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, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
40
<PAGE>
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on December 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 of 1933 and the Investment Company Act, to which
reference is hereby made.
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's shares on March 31, 1994.
41
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch World Income Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch World Income Fund, Inc. as of
December 31, 1993, the related statements of operations for the year then ended
and changes in net assets for the year then ended and the four-month period
ended December 31, 1992 and the financial highlights for the periods presented.
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
December 31, 1993 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 World
Income Fund, Inc. as of December 31, 1993, the results of its operations, the
changes in its net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche
Princeton, New Jersey
February 4, 1994
42
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
LATIN AMERICA
AND THE Face Value Percent of
CARIBBEAN Industries Amount Fixed-Income Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Argentina
Automobiles US$ 5,570,000 Sevel Argentina, S.A., 8.50%
due 11/17/1996 $ 5,608,200 $ 5,674,438 0.22%
Banking 2,000,000 Banco de Galicia y Buenos Aires, S.A.,
9.75% due 10/08/1997 2,097,500 2,120,000 0.08
3,000,000 Banco Frances del Rio de la Plata, S.A.,
8.50% due 7/15/1998 3,012,500 3,090,000 0.12
------------ ------------ ----
5,110,000 5,210,000 0.20
Energy 2,000,000 ++Transportadora de Gas de Sur, 7.75% due
12/23/1998 2,010,000 2,002,500 0.08
Foreign Government Republic of Argentina:
Obligations 7,000,000 8.25% due 8/02/2000 7,038,405 7,188,125 0.28
10,000,000 8.375% due 12/20/2003 9,936,800 10,137,500 0.39
------------ ------------ ----
16,975,205 17,325,625 0.67
Industrial Services 8,560,000 Compania Naviera Perez Companc
S.A.C.F.I.M.F.A. S.A., 8.375%
due 7/30/1998 8,678,150 8,709,800 0.34
Telecommunications 7,500,000 Telecom Argentina Stet--France Telecom,
S.A., 8.375% due 10/18/2000 7,471,125 7,687,500 0.30
7,000,000 Telefonica de Argentina, S.A., 8.375% due
10/01/2000 7,025,800 7,166,250 0.28
------------ ------------ ----
14,496,925 14,853,750 0.58
Total Fixed-Income Investments in Argentina 52,878,480 53,776,113 2.09
Colombia
Foreign Government 3,000,000 Financiera Energetica Nacional, S.A., 6.625%
Obligations--Agency due 12/13/1996 2,977,500 2,981,250 0.12
Total Fixed-Income Investments in Colombia 2,977,500 2,981,250 0.12
Mexico
Banking 2,000,000 Banco del Atlantico SNC, 7.875%
due 11/05/1998 1,993,100 2,017,500 0.08
1,700,000 Banco Nacional Mexico, S.A. (BANAMEX),
9.125% due 4/06/2000 1,770,563 1,859,375 0.07
6,500,000 ++Grupo Financiero Bancomer, S.A. de C.V.,
8.00% due 7/07/1998 6,477,250 6,796,563 0.26
------------ ------------ ----
10,240,913 10,673,438 0.41
Broadcasting & 2,500,000 Grupo Televisa, S.A. de C.V., 10.00%
Publishing due 11/09/1997 2,674,375 2,787,500 0.11
Food & Beverage 4,400,000 Fomento Economico Mexicano, S.A. de C.V.
(Femsa), 9.50% due 7/22/1997 4,553,875 4,785,000 0.19
1,500,000 Gruma, S.A. de C.V., 9.75% due 3/09/1998 1,499,250 1,659,375 0.06
3,500,000 Grupo Embotellador de Mexico, S.A. de C.V.
(GGEMEX), 10.75% due 11/19/1997 3,752,500 3,920,000 0.15
------------ ------------ ----
9,805,625 10,364,375 0.40
Foreign Government & 2,000,000 Banco Nacional of Commerce Exterior, 8.00%
Agency Obligations due 8/05/2003 2,002,500 2,045,000 0.08
</TABLE>
43
<PAGE>
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
4,000,000 Nacional Financiera, 10.625%
due 11/22/2001 4,420,000 4,695,000 0.18
Pound
Sterling 10,000,000 United Mexican States, Government Bond,
12.25% due 12/03/1998 17,422,207 17,265,996 0.67
------------ ------------ ----
23,844,707 24,005,996 0.93
Industrial Services Cemex, S.A.:
4,250,000 ++8.875% due 6/10/1998 4,230,025 4,571,406 0.18
2,500,000 10.00% due 11/05/1999 2,570,375 2,828,125 0.11
4,000,000 8.50% due 8/31/2000 4,049,800 4,262,500 0.17
3,500,000 Empresas ICA Sociedad Controladora, S.A.
de C.V., 9.75% due 2/11/1998 3,589,375 3,871,875 0.15
------------ ------------ ----
14,439,575 15,533,906 0.61
Retail Stores 2,210,000 Controladora Comercial Mexicana, S.A. de
C.V. (COMERCI), 8.75% due 4/21/1998 2,236,615 2,314,975 0.09
7,140,000 El Puerto de Liverpool, S.A.
de C.V., 7.25% due 10/19/1996 7,180,350 7,229,250 0.28
------------ ------------ ----
9,416,965 9,544,225 0.37
Total Fixed-Income Investments in Mexico 70,422,160 72,909,440 2.83
Trinidad & Tobago
Foreign Government Republic of Trinidad and Tobago:
Obligations 2,000,000 11.50% due 11/20/1997 2,100,000 2,170,000 0.08
4,000,000 9.75% due 11/03/2000 3,991,600 4,120,000 0.16
------------ ------------ ----
6,091,600 6,290,000 0.24
Total Fixed-Income Investments in
Trinidad & Tobago 6,091,600 6,290,000 0.24
Total Fixed-Income Investments in
Latin American and Caribbean Securities 132,369,740 135,956,803 5.28
</TABLE>
44
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
NORTH Face Value Percent of
AMERICA Industries Amount Fixed-Income Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Canada
Food & Beverage US$ 10,000,000 Canandaigua Wine, 8.75% due 12/15/2003 $ 10,000,000 $ 10,025,000 0.39%
Foreign Government Canadian Government Bonds:
Obligations C$ 80,000,000 6.50% due 9/01/1998 61,439,136 62,344,411 2.42
80,000,000 7.50% due 12/01/2003 63,245,396 64,259,819 2.50
------------ ------------ ----
124,684,532 126,604,230 4.92
Total Fixed-Income Investments in Canada 134,684,532 136,629,230 5.31
United States
Air Transport Delta Air Lines, Inc.:
US$ 16,746,911 9.375% due 9/11/2007 (b) 17,032,948 17,258,043 0.67
10,000,000 10.50% due 4/30/2016 10,287,500 10,693,470 0.42
7,100,000 United Air Pass-Through, 10.125%
due 3/22/2015 7,684,046 7,805,215 0.30
15,000,000 USAir, 10.375% due 3/01/2013 15,000,000 14,977,305 0.58
------------ ------------ ----
50,004,494 50,734,033 1.97
Broadcasting & 12,000,000 Cablevision Systems Corp., 14.00%
Publishing due 11/15/2003 12,971,250 12,525,000 0.49
10,190,000 Century Communications Corp., 11.875%
due 10/15/2003 10,701,550 11,693,025 0.45
10,000,000 Continental Cablevision,
9.50% due 8/01/2013 10,000,000 11,150,000 0.43
13,000,000 Heritage Media, 11.00% due 6/15/2002 13,295,625 14,332,500 0.56
15,000,000 K-III Communications Corp., 10.625%
due 5/01/2002 15,125,000 16,275,000 0.63
10,000,000 Newscorporation of America Holdings, Inc.,
9.125% due 10/15/1999 9,688,500 11,200,000 0.44
5,000,000 Storer Communications, Inc., 10.00%
due 5/15/2003 4,587,500 5,050,000 0.20
10,000,000 Videotron Group, Ltd. Co., 10.25%
due 10/15/2002 10,043,750 11,050,000 0.42
------------ ------------ ----
86,413,175 93,275,525 3.62
Building Materials 15,300,000 Pacific Lumber Co., 10.50% due 3/01/2003 15,462,750 15,797,250 0.61
USG Corp.:
10,000,000 10.25% due 12/15/2002 9,968,750 10,250,000 0.40
11,035,000 8.75% due 3/01/2017 9,717,469 10,152,200 0.39
------------ ------------ ----
35,148,969 36,199,450 1.40
Business Services 20,000,000 ADT Operations, 9.25% due 8/01/2003 20,073,188 20,500,000 0.80
10,000,000 Bell & Howell Co., Series B, 10.75%
due 10/01/2002 10,000,000 10,925,000 0.42
------------ ------------ ----
30,073,187 31,425,000 1.22
Capital Goods 6,000,000 Rexnord Corp., 10.75% due 7/01/2002 6,000,000 7,200,000 0.28
Cellular Telephones 5,000,000 Paging Network, Inc., 11.75% due 5/15/2002 5,000,000 5,637,500 0.22
& Paging 7,775,000 Rogers Communication, Inc., 10.875%
due 4/15/2004 7,809,875 8,669,125 0.34
------------ ------------ ----
12,809,875 14,306,625 0.56
</TABLE>
45
<PAGE>
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
Chemicals 33,860,000 G-I Holdings, Inc., 11.964%*
due 10/01/1998 20,032,213 21,585,750 0.83
12,000,000 Uniroyal Chemical, 9.00% due 9/01/2000 12,000,000 12,240,000 0.48
------------ ------------ ----
32,032,213 33,825,750 1.31
Conglomerates Coltec Industries:
5,000,000 9.75% due 11/01/1999 5,312,500 5,350,000 0.21
20,000,000 10.25% due 4/01/2002 20,387,500 21,450,000 0.83
11,000,000 Gillette Holdings, 12.25% due 6/30/2002 11,275,000 11,990,000 0.47
15,000,000 Jordan Industries, 10.375% due 8/01/2003 14,850,000 15,225,000 0.59
Sequa Corp.:
13,018,000 10.50% due 5/01/1998 13,393,630 13,603,810 0.53
9,000,000 9.375% due 12/15/2003 9,000,000 9,045,000 0.35
10,100,000 Sherritt Gordon, Ltd., 9.75% due 4/01/2003 10,148,750 10,150,500 0.39
10,000,000 Southern Pacific Rail Co.,
9.375% due 8/15/2005 10,000,000 10,650,000 0.41
------------ ------------ ----
94,367,380 97,464,310 3.78
Consumer Goods 10,000,000 Liggett Group, Inc., 11.50% due 2/01/1999 9,701,123 7,350,000 0.29
30,350,000 Revlon Worldwide, 12.00%* due 3/15/1998 18,605,506 15,478,500 0.60
------------ ------------ ----
28,306,629 22,828,500 0.89
Containers Owens Illinois:
5,000,000 10.00% due 8/01/2002 5,006,250 5,306,250 0.21
20,000,000 11.00% due 12/01/2003 21,906,562 23,000,000 0.89
6,100,000 Silgan Holdings Corp., 11.75%
due 6/15/2002 6,194,875 6,542,250 0.25
------------ ------------ ----
33,107,687 34,848,500 1.35
Energy Clark Oil Co.:
8,360,000 10.50% due 12/01/2001 8,827,300 9,018,350 0.35
4,000,000 9.50% due 9/15/2004 4,000,000 4,200,000 0.16
7,000,000 Clark R & M Holdings, Inc., 11.391%*
due 2/15/2000 3,720,259 3,823,750 0.15
13,300,000 Ferrell Gas Co., Inc.,
11.625% due 12/15/2003 13,670,165 14,413,875 0.56
10,000,000 Gulf Canada Resources, Ltd., 9.00%
due 8/15/1999 9,158,438 9,916,500 0.39
Maxus Energy Corp.:
6,500,000 9.875% due 10/15/2002 6,485,050 6,483,750 0.25
1,000,000 11.50% due 11/15/2015 1,051,250 1,050,000 0.04
5,000,000 Oryx Energy Co., 10.375% due 9/15/2018 4,956,310 5,387,405 0.21
15,000,000 Rowan Companies, Inc., 11.875%
due 12/01/2001 15,590,000 16,687,500 0.65
15,000,000 Seagull Energy Corp., 8.625% due 8/01/2005 15,000,000 14,925,000 0.58
10,000,000 Trans Texas Gas Corp., 10.50% due 9/01/2000 10,000,000 10,500,000 0.41
9,100,000 Tucson Electric, 10.732% due 1/01/2013 8,713,250 8,872,500 0.34
------------ ------------ ----
101,172,022 105,278,630 4.09
Entertainment 28,465,000 Marvel Holdings, Inc., 12.392%*
due 4/15/1998 17,570,382 18,573,412 0.72
</TABLE>
46
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
NORTH AMERICA Face Value Percent of
(continued) Industries Amount Fixed--Income Investments Cost (Note 1a) Net Assets
<S> <S> <C> <C> <C> <C> <C>
United States (continued)
Financial Services US$ 17,375,000 Lomas Mortgage USA, 10.25% due 10/01/2002 $ 17,387,500 $ 18,243,750 0.71%
10,000,000 Penn Financial Corp., 9.25%
due 12/15/2003 10,000,000 10,100,000 0.39
10,000,000 Reliance Group Holdings,
9.00% due 11/15/2000 10,000,000 10,075,000 0.39
------------- ------------- ----
37,387,500 38,418,750 1.49
Food & Beverage 6,000,000 Coca-Cola Bottling Co., 9.00%
due 11/15/2003 6,000,000 5,985,000 0.23
17,250,000 Del Monte Corp., 10.00% due 5/01/2003 17,337,187 16,991,250 0.66
25,000,000 Grand Union Co., 11.25% due 7/15/2000 25,524,063 26,250,000 1.02
18,000,000 Penn Traffic Co., 9.625% due 4/15/2005 18,308,350 18,675,000 0.73
19,250,000 Pueblo Xtra, 9.50% due 8/01/2003 19,348,750 19,442,500 0.76
10,000,000 Seven-Up Bottling Co., 11.50%
due 8/01/1999 10,096,250 10,175,000 0.40
15,000,000 Specialty Foods, 10.25% due 8/15/2001 15,000,000 15,262,500 0.59
------------- ------------- ----
111,614,600 112,781,250 4.39
Health Services American Medical International:
2,502,500 6.50% due 5/30/1997 2,029,634 2,452,450 0.10
11,000,000 11.25% due 6/01/2015 11,535,625 11,660,000 0.45
15,000,000 Continental Medical Systems, 10.875%
due 8/15/2002 15,029,063 15,525,000 0.60
Epic Properties, Inc.:
5,000,000 Series B-1, 11.375% due 7/15/2001 5,287,500 5,575,000 0.22
4,470,177 Series B-2, 11.50% due 7/15/2001 (b) 4,738,388 5,006,599 0.19
Healthtrust--The Hospital Co.:
14,000,000 10.75% due 5/01/2002 14,516,500 15,680,000 0.61
7,000,000 8.75% due 3/15/2005 6,938,750 7,245,000 0.28
5,000,000 MEDIQ, Inc., 11.125% due 7/01/1999 5,000,000 5,250,000 0.20
------------- ------------- ----
65,075,460 68,394,049 2.65
High Technology 7,000,000 Anacomp, Inc., 15.00% due 11/01/2000 8,001,250 8,050,000 0.31
15,000,000 Computervision Corp., 10.875%
due 8/15/1997 15,025,000 13,725,000 0.53
------------- ------------- ----
23,026,250 21,775,000 0.84
Home Building Del Webb:
9,250,000 10.875% due 3/31/2000 9,376,875 9,828,125 0.38
3,500,000 9.75% due 3/01/2003 3,472,455 3,578,750 0.14
Kaufman & Broad Home, Inc.:
9,000,000 10.375% due 9/01/1999 9,050,000 9,630,000 0.37
5,250,000 9.375% due 5/01/2003 5,217,188 5,420,625 0.21
Ryland Group, Inc.:
8,250,000 10.50% due 7/15/2002 8,166,530 8,703,750 0.34
7,750,000 9.625% due 6/01/2004 7,750,000 7,779,063 0.30
------------- ------------- ----
43,033,048 44,940,313 1.74
Hotels & Casinos 13,060,000 Bally's Park Place Funding, Inc., 11.875%
due 8/15/1999 13,203,700 14,072,150 0.55
1,906,000 Gold River Hotel & Casino Corp., 11.375%
due 8/31/1999 2,645,548 1,543,860 0.06
</TABLE>
47
<PAGE>
<TABLE>
<S> <S> <C> <C> <C> <C> <C>
11,010,000 MGM Grand Hotel Financial Corp., 12.00%
due 5/01/2002 11,608,963 12,744,075 0.50
14,000,000 Showboat, Inc., 9.25% due 5/01/2008 13,866,250 14,280,000 0.55
15,000,000 Treasure Island Finance Corp., 9.875%
due 10/01/2000 15,026,250 16,387,500 0.64
5,385,000 Trump Taj Mahal Funding, Inc., 11.35%
due 11/15/1999 (a)(c) 4,018,682 5,282,749 0.21
------------- ------------- ----
60,369,393 64,310,334 2.51
Leisure Time AMC Entertainment, Inc.:
8,000,000 11.875% due 8/01/2000 8,050,500 8,900,000 0.35
5,925,000 12.625% due 8/01/2002 6,017,020 6,739,687 0.26
------------- ------------- ----
14,067,520 15,639,687 0.61
Paper 10,000,000 Container Corp. of America, 9.75%
due 4/01/2003 10,200,000 10,325,000 0.40
10,000,000 Riverwood International, 11.25%
due 6/15/2002 10,385,750 10,900,000 0.42
Stone Container Group:
10,000,000 10.75% due 6/15/1997 9,615,000 9,212,500 0.36
7,000,000 11.875% due 12/01/1998 7,122,750 7,105,000 0.28
------------- ------------- ----
37,323,500 37,542,500 1.46
Restaurants & Flagstar Corp.:
Food Services 2,000,000 10.875%* due 12/01/2002 2,000,000 2,065,000 0.08
14,000,000 11.375% due 9/15/2003 14,000,000 14,420,000 0.56
Foodmaker Inc.:
20,000,000 9.75% due 6/01/2002 19,554,250 20,250,000 0.79
250,000 9.75% due 11/01/2003 246,100 246,250 0.01
------------- ------------- ----
35,800,350 36,981,250 1.44
Retail Stores 10,000,000 Bradlees, Inc., 11.00% due 8/01/2002 10,240,625 10,737,500 0.42
10,000,000 ++Specialty Retailers, 10.00%
due 8/15/2000 10,000,000 10,200,000 0.40
------------- ------------- ----
20,240,625 20,937,500 0.82
Textiles 10,000,000 West Point Stevens Inc., 8.75%
due 12/15/2001 10,000,000 10,075,000 0.39
Transport Services 9,750,000 Viking Star Shipping, 9.625% due 7/15/2003 9,786,562 10,018,125 0.39
US Government & 9,500,000 Student Loan Marketing Association, 14.25%
Agency Obligations due 3/07/1994 9,951,675 6,661,875 0.26
82,000,000 United States Treasury Notes, 5.75%
due 8/15/2003 82,149,375 81,718,166 3.18
------------- - ------------ ----
92,101,050 88,380,041 3.44
Utilities 10,000,000 Midland Funding Corp. II, 13.25%
due 7/23/2006 11,183,750 11,760,250 0.46
10,000,000 Texas--New Mexico Power Co., 9.25%
due 9/15/2000 10,000,000 10,450,000 0.41
------------- ------------- ----
21,183,750 22,210,250 0.87
Utilities--Gas 9,194,053 Midland Cogeneration, 10.33%
due 7/23/2002 (b) 9,458,731 9,476,154 0.37
Total Fixed-Income Investments in the
United States 1,117,474,353 1,147,839,938 44.60
</TABLE>
48
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
NORTH AMERICA Face Value Percent of
(concluded) Industries Amount Convertible Bonds Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
United States (concluded)
Aerospace US$ 3,275,000 Orbital Sciences Corp., 6.75%
due 3/01/2003** $4,459,643 $4,928,875 0.19%
Automobile Parts 2,000,000 Arvin Industries Inc., 7.50%
due 9/30/2014** 2,145,000 2,320,000 0.09
Biotechnology 2,500,000 Genzyme Corp., 6.75% due 10/01/2001 2,382,500 2,375,000 0.09
Building 1,500,000 ++Kumagai Gumi Ltd., 4.875% due 12/08/1998 1,500,000 1,507,500 0.06
1,750,000 US Home Corp., 4.875% due 11/01/2005 1,741,000 1,695,313 0.07
---------- ---------- ----
3,241,000 3,202,813 0.13
Computers 2,500,000 Data General Corp., 7.75% due 6/01/2001 2,479,375 2,406,250 0.09
Disk Drives 2,685,000 Quantum Corp., 6.375% due 4/01/2002** 2,562,740 2,725,275 0.11
Electronics 1,500,000 Comptronix Corp., 6.75% due 3/01/2002 1,015,500 1,158,750 0.05
608,000 Park Electrochemical, 7.25%
due 6/15/2006** 604,960 699,960 0.03
1,000,000 ++Zenith Electric Corp., 8.50%
due 11/19/2000 1,000,000 990,000 0.04
---------- ---------- ----
2,620,460 2,848,710 0.12
Energy 2,250,000 Box Energy Corp., 8.25% due 12/01/2002** 2,733,219 2,953,125 0.11
Entertainment 2,269,000 Savoy Pictures Entertainment, 7.00%
due 7/01/2003** 2,543,172 2,847,595 0.11
Food & Beverage 3,000,000 Farm Fresh, Inc., 7.50% due 3/01/2010 1,562,500 1,980,000 0.08
Healthcare 2,000,000 IVAX Corp., 6.50% due 11/15/2001 1,971,250 2,150,000 0.08
2,251,000 Medaphis Corp., 6.50% due 1/01/2000** 2,510,100 2,746,220 0.11
---------- ---------- ----
4,481,350 4,896,220 0.19
Home Building 2,500,000 ++Engle Homes, Inc., 7.00% due 3/01/2003 2,575,000 2,850,000 0.11
Industrials 2,000,000 Coeur D'Alene Mines Corp., 7.00%
due 11/30/2002** 2,112,500 2,970,000 0.12
3,183,000 ++Manpower, Inc., 6.25% due 10/01/2002** 3,298,025 3,608,726 0.14
3,755,000 Wainoco Oil Corp., 7.75% due 6/01/2014 3,324,115 3,426,438 0.13
---------- ---------- ----
8,734,640 10,005,164 0.39
Office Equipment 5,000,000 Staples, Inc., 5.00% due 11/01/1999** 4,789,135 5,237,500 0.20
Oil & Gas Diversified 2,165,000 Western Company of North America, 7.25%
due 1/15/2015** 1,847,080 2,165,000 0.08
Paper 2,000,000 Albany International Corp., 5.25%
due 3/15/2002 1,804,770 1,900,000 0.07
Pharmaceuticals 4,000,000 Air & Water Technologies Corp., 8.00%
due 5/15/2015 3,895,630 3,840,000 0.15
2,600,000 Bindley Western Industries, Inc., 6.50%
due 10/01/2002 2,563,000 2,483,000 0.10
2,000,000 Ciba-Geigy Corp., 6.25% due 3/15/2016 2,227,500 2,080,000 0.08
---------- ---------- ----
8,686,130 8,403,000 0.33
Restaurants 1,920,000 Daka International, Inc., 7.00%
due 3/15/2003** 2,037,421 2,116,800 0.08
Retail Stores 3,475,000 Big B Inc., 6.50% due 3/15/2003** 3,921,938 4,065,750 0.16
1,550,000 Home Depot, Inc., 4.50% due 2/15/1997** 1,937,500 1,819,313 0.07
---------- ---------- ----
5,859,438 5,885,063 0.23
Semiconductors 2,318,000 LTX Corp., 13.50% due 4/15/2011 2,359,360 2,291,923 0.09
Software 2,000,000 Sterling Software, 5.75% due 2/01/2003** 1,958,375 2,400,000 0.09
</TABLE>
49
<PAGE>
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
Technology 2,000,000 Conner Peripherals Inc., 6.50%
due 3/01/2002** 1,795,600 1,800,000 0.07
Telecommunications 3,000,000 Intelcom Group Inc., 7.00%
due 10/30/1998 (a)** 3,000,000 3,196,155 0.12
Waste Management 1,000,000 Phillips Environmental, 6.00%
due 10/15/2000 1,000,000 1,000,000 0.04
3,000,000 USA Waste Services Inc., 8.50%
due 10/15/2002 3,496,250 3,262,500 0.13
---------- ---------- ----
4,496,250 4,262,500 0.17
Total Investments in Convertible Bonds 81,154,158 85,996,968 3.34
<CAPTION>
Shares Convertible Preferred Stocks,
Held Common Stocks & Warrants
<S> <C> <C> <C> <C> <C>
United States
Airlines 60,000 ++AMR Corp., $3.00 (Series A), Conv. Pfd. 3,000,000 3,157,500 0.12
52,500 Delta Air Lines Inc.,
$3.50 (Series C), Conv. Pfd. 2,756,900 2,828,438 0.11
25,000 ++United Airlines Corp., $3.50 (Series A),
Conv. Pfd. 2,482,500 2,743,750 0.11
------------- ------------- -----
8,239,400 8,729,688 0.34
Banking & Finance 40,000 Olympic Financial Ltd., $2.00, Conv. Pfd. 1,000,000 1,180,000 0.05
48,300 Rochester Community Savings Bank
(Series B) 1,387,224 1,424,850 0.06
------------- ------------- -----
2,387,224 2,604,850 0.11
Computers 42,500 Storage Technology Corp., $3.50,
Conv. Pfd. 2,355,987 3,357,500 0.13
Environmenta l3,500,000 ++Allied Waste, Conv. Pfd. (f) 3,500,000 4,056,938 0.16
High Technology 91,053 Anacomp, Inc. (Warrants) (d)(f) 120,000 227,632 0.01
Hotels & Casinos 16,432 Buckhead of America Corp. (f) 41,080 94,484 0.00
75,000 Gold River Hotel & Casino Corp.
Liquidating Trust (f) 75,000 53,437 0.00
30,000 Gold River Hotel & Casino Corp.
(Series B)(e)(f) 219,738 112,500 0.01
6,000 Trump Taj Mahal Funding, Inc.
(Class A) (f) 3,000 132,000 0.01
------------- ------------- -----
338,818 392,421 0.02
Industrial 58,800 Petrolane, Inc. (f) 683,550 543,900 0.02
10,000 UGI Corp. (Warrants)(d)(f) 43,750 8,750 0.00
------------- ------------- -----
727,300 552,650 0.02
Insurance 40,000 ++Alexander & Alexander Services Inc.,
$3.625 (Holding Co.) 1,788,000 1,835,000 0.07
Machinery 120,000 AGCO Corp., $1.625, Conv. Pfd. 3,000,000 5,520,000 0.21
Software 120,000 ++Network Imaging Corp., $8.00 (f) 3,000,000 2,955,000 0.11
Waste Management 81,779 ++Environmental Systems Co. (Series A) 1,567,383 1,635,580 0.06
Total Investments in United States
Convertible Preferred Stocks, Common
Stocks & Warrants 27,024,112 31,867,259 1.24
Total Investments in
North American Securities 1,360,337,155 1,402,333,395 54.49
</TABLE>
50
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
PACIFIC Face Value Percent of
BASIN Industries Amount Fixed--Income Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Australia
Foreign Government Australia Government Bonds:
Obligations-- A$ 46,000,000 7.00% due 8/15/1998 $ 32,190,054 $ 32,230,173 1.25%
Regional & Agency 52,600,000 9.50% due 8/15/2003 41,981,677 42,639,626 1.66
25,315,779 FANMAC, Ltd., #17, 15.00% due 7/15/2002 (b) 19,285,336 19,358,412 0.75
Queensland Treasury Corp., Global Notes:
29,000,000 12.00% due 7/15/1999 24,131,236 24,689,280 0.96
8,500,000 12.00% due 8/15/2001 6,506,943 7,554,959 0.29
16,000,000 Victoria Finance, 10.25% due 9/15/1999 12,512,667 12,677,247 0.49
26,000,000 Western Australia Treasury Corp., 12.00%
due 8/01/2001 22,511,312 23,055,995 0.90
------------ ------------ ----
159,119,225 162,205,692 6.30
Total Fixed-Income Investments
in Australia 159,119,225 162,205,692 6.30
New Zealand
Foreign Government NZ$ 7,000,000 New Zealand Government Bonds, 8.00%
Obligations due 11/15/1995 3,888,339 4,092,568 0.16
Total Fixed-Income Investments
in New Zealand 3,888,339 4,092,568 0.16
Philippines
Banking US$ 6,000,000 ++Development Bank of the Philippines, 8.00%
due 7/22/1998 5,991,700 6,093,750 0.24
3,000,000 Philippine National Bank, 6.625%
due 12/09/1996 2,987,400 2,970,000 0.12
------------ ------------ ----
8,979,100 9,063,750 0.36
Utilities 5,000,000 National Power Corp., 7.625% due 11/15/2000 5,000,000 4,871,750 0.19
Total Fixed-Income Investments in the
Philippines 13,979,100 13,935,500 0.55
Total Fixed-Income in Pacific
Basin Securities 176,986,664 180,233,760 7.01
WESTERN
EUROPE
Belgium
Foreign Government Bf 1,250,000,000 Government of Belgium, 7.25% due 4/29/2004 35,279,977 36,676,481 1.43
Obligations
Total Fixed-Income Investments in Belgium 35,279,977 36,676,481 1.43
Denmark
Foreign Government Denmark Government Bonds:
Obligations Dkr 330,000,000 9.75% due 2/10/1995 54,608,291 50,409,579 1.96
326,500,000 7.00% due 12/15/2004 51,460,767 51,452,157 2.00
------------ ------------ ----
106,069,058 101,861,736 3.96
Total Fixed-Income Investments in Denmark 106,069,058 101,861,736 3.96
Italy
Financial Services 30,000,000,000 The Goldman Sachs Group, L.P., 15.00%
due 8/16/1994 (1) 18,748,125 18,509,875 0.72
Foreign Government Buoni Poliennali del Tesoro
Obligations (Italian Government Bonds):
</TABLE>
51
<PAGE>
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
Lit 20,600,000,000 11.50% due 3/01/1998 12,772,488 13,238,951 0.51
128,400,000,000 9.00% due 10/01/1998 77,734,632 77,199,568 3.00
------------ ------------ ----
90,507,120 90,438,519 3.51
Total Fixed-Income Investments in Italy 109,255,245 108,948,394 4.23
Portugal
Supranational Esc 750,000,000 European Investment Bank, 15.50%
Entities due 7/12/1995 6,389,454 4,520,373 0.18
Total Fixed-Income Investments in Portugal 6,389,454 4,520,373 0.18
Spain
Foreign Government Government of Spain:
Obligations Pta 10,000,000,000 9.00%* due 2/28/1997 73,392,716 71,695,211 2.79
6,281,000,000 10.50% due 10/30/2003 53,271,447 50,823,191 1.97
------------ ------------ ----
126,664,163 122,518,402 4.76
Total Fixed-Income Investments in Spain 126,664,163 122,518,402 4.76
Sweden
Foreign Government Skr 298,000,000 Government of Sweden, 10.250% due 5/05/2003 42,953,543 43,430,653 1.69
Obligations-- 100,000,000 SBAB, 12.50% due 1/23/1997 14,062,736 13,799,559 0.53
Regional & Agency ------------ ------------ ----
57,016,279 57,230,212 2.22
Total Fixed-Income Investments in Sweden 57,016,279 57,230,212 2.22
United Kingdom
Foreign Government United Kingdom Gilt:
Obligations Pound 62,000,000 7.75% due 9/08/2006 98,513,487 103,090,500 4.01
Sterling 14,300,000 8.00% due 9/27/2013 23,228,170 24,827,490 0.96
------------ ------------ ----
121,741,657 127,917,990 4.97
Total Fixed-Income Investments in the
United Kingdom 121,741,657 127,917,990 4.97
Total Investments in Western European
Securities 562,415,833 559,673,588 21.75
</TABLE>
52
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<CAPTION>
SHORT-TERM Face Value Percent of
SECURITIES Amount Issues Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Mexico
Government Mxn 30,465,160 Mexican Cetes, 0.00%* due 2/03/1994 $ 9,683,010 $ 9,710,851 0.38%
Obligations
Total Short-Term Investments in Mexico 9,683,010 9,710,851 0.38
United States
Commercial Paper++++ US$ 20,000,000 CSW Inc., 3.30% due 1/20/1994 19,968,833 19,968,833 0.78
73,414,000 General Electric Capital Corp., 3.22%
due 1/03/1994 73,414,000 73,414,000 2.85
10,000,000 Gesco Industries Inc., 3.32% due 1/13/1994 9,990,778 9,990,778 0.39
50,000,000 Goldman Sachs & Co., 3.30% due 1/10/1994 49,967,917 49,967,917 1.94
27,000,000 PHH Corp., 3.22% due 1/26/1994 26,944,455 26,944,455 1.05
22,900,000 Sheffield Receivables Co., 3.32%
due 1/06/1994 22,893,664 22,893,664 0.89
-------------- --------------- ------
203,179,647 203,179,647 7.89
US Government & 50,000,000 Federal National Mortgage Association,
Agency Obligations 3.12% due 1/19/1994 49,930,667 49,930,667 1.94
Total Short-Term Investments in the
United States 253,110,314 253,110,314 9.83
Total Investments in Short-Term
Securities 262,793,324 262,821,165 10.21
Total Investments $2,494,902,716 $ 2,541,018,711 98.74
==============
Short Sales (Proceeds--$27,710,903)** (31,669,856) (1.24)
Unrealized Depreciation on Forward Foreign Exchange Contracts*** (240,216) (0.01)
Put Options Purchased (Premium Paid--$230,395)+++ 11,523 0.00
Call Options Written (Premium Received--$234,902)+++++ (287,938) (0.01)
Other Assets Less Liabilities 64,912,057 2.52
-------------- ------
Net Assets $2,573,744,281 100.00%
============== ======
<FN>
(a)Represents a pay-in-kind security which may pay interest/dividends
in additional face/shares.
(b)Subject to principal paydowns as a result of prepayments or refinancings
of the underlying mortgage instruments. As a result, the average life may
be substantially less than the original maturity.
(c)Each $1,000 face amount contains one non-detachable share of Taj Mahal
Holding Corp.'s Class B redeemable Common Stock.
(d)Warrants entitle the Fund to purchase a predetermined number of shares
of Common Stock. The purchase price and number of shares are subject
to adjustment under certain conditions until the expiration date.
(e)Each share of Series B stock contains a right which entitles the holder
to purchase a predetermined number of shares of Preferred Stock.
(f)Non-income producing security.
(1)Indexed instrument for which yield-to-maturity, if any, will be deter-
mined by the relative value of the foreign reference rates.
++Restricted securities as to resale. The value of the Fund's investment in
restricted securities is approximately $55,004,000, representing 2.14% of
net assets.
*Represents the yield to maturity.
**Covered Short Sales entered into as of December 31, 1993 are as follows:
Shares Issue Value
(Note 1i)
150,100 Agco Corp. $(5,140,925)
24,500 Arvin Industries, Inc. (784,000)
213,500 Big B Inc. (2,668,750)
155,400 Box Energy Corp. (1,864,800)
45,500 Coeur D'Alene Mines Corp. (978,250)
30,800 Conner Peripherals Inc. (450,450)
110,300 Daka International, Inc. (1,282,238)
31,000 Home Depot, Inc. (1,224,500)
70,000 Intelcom Group (1,225,000)
107,050 Manpower, Inc. (1,886,756)
60,300 Medaphis Corp. (1,989,900)
197,900 Orbital Sciences (4,056,950)
13,200 Park Electrochemical (308,550)
81,200 Quantum Corp. (1,167,250)
</TABLE>
53
<PAGE>
<TABLE>
<S> <C>
<FN>
Acquisition Value
Issue Date Cost (Note 1a)
Alexander & Alexander
Services Inc., $3.625
(Holding Co.) 12/21/1993 $1,788,000 $1,835,000
Allied Waste ($1,000 Pfd.) 9/23/1993 3,500,000 4,056,938
AMR Corp., $3.00 (Series A) 3/03/1993 3,000,000 3,157,500
Cemex S.A., 8.875% due 6/10/1998 5/27/1993 4,230,025 4,571,406
Development Bank of the
Philippines, 8.00% due 7/22/1998 6/30/1993 5,991,700 6,093,750
Engle Homes, Inc., 7.00%
due 3/01/2003 3/11/1993-5/21/1993 2,575,000 2,850,000
Environmental Systems Co.,
$1.75 (Series A) 5/03/1993 1,567,383 1,635,580
Grupo Financiero
Bancomer, S.A. de C.V.,
8.00% due 7/07/1998 6/11/1993 6,477,250 6,796,563
Kumagai Gumi Ltd.,
4.875% due 12/08/1998 5/03/1993 1,500,000 1,507,500
Manpower, Inc., 6.25% due
10/01/2002 5/18/1993-5/21/1993 3,298,025 3,608,726
Network Imaging Corp., $8.00 12/07/1993 3,000,000 2,955,000
Specialty Retailers, 10.00%
due 8/15/2000 7/22/1993 10,000,000 10,200,000
Transportadora de Gas
de Sur, 7.75% due 12/23/1998 12/30/1993 2,010,000 2,002,500
United Airlines Corp.,
$3.50 (Series A) 3/03/1993 2,482,500 2,743,750
Zenith Electric Corp., 8.50%
due 11/19/2000 11/24/1993 1,000,000 990,000
Total $52,419,883 $55,004,213
=========== ===========
++++Commercial Paper is traded on a discount basis; the interest rates shown
are the discount rates paid at the time of purchase by the Fund.
95,700 Savoy Pictures Entertainment (2,009,700)
96,600 Staples, Inc. (2,439,150)
53,000 Sterling Software (1,503,875)
53,500 Western Co. of North America (688,812)
Total (proceeds-$27,710,903) $(31,669,856)
============
***Forward foreign exchange contracts as of December 31, 1993 are as follows:
Unrealized
Expiration Appreciation
Date (Depreciation)
Foreign Currency Purchased
C$ 212,182,607 January 1994 $ 351,360
DM 450,040,529 January 1994 (4,305,234)
Pta 1,586,436,575 January 1994 (25,539)
Fmk 112,039,136 January 1994 (81,757)
Lit 102,313,301,600 January 1994 (158,983)
NZ$ 18,300,806 January 1994 102,302
Total (US$ Commitment--$523,260,668) $(4,117,851)
-----------
Foreign Currency Sold
A$ 120,952,574 January 1994 $ (781,591)
Bf 1,232,032,100 January 1994 324,054
C$ 205,495,999 January 1994 (1,174,264)
DM 372,567,387 January 1994 3,839,601
Dkr 42,728,889 January 1994 124,222
Pta 5,168,287,259 January 1994 1,145,465
Fmk 149,318,042 January 1994 133,162
Frf 224,705,389 January 1994 401,424
Pound sterling 21,502,527 January 1994 238,313
Lit 138,926,992,816 January 1994 (146,953)
NZ$ 7,238,224 January 1994 (85,773)
Skr 478,634,768 January 1994 (140,025)
Total (US$ Commitment--$769,500,968) $3,877,635
----------
Total Unrealized Depreciation on Forward
Foreign Exchange Contracts--Net $ (240,216)
==========
+++Put options purchased as of December 31, 1993 are as follows:
Value
Par Value Premiums (Notes 1a
Subject to Put Issue Paid & 1d)
$50,100,000 DM currency put option, strike price
2.505, expiring 1/20/94 $230,395 $11,523
Total Put Options Purchased $230,395 $11,523
======== =======
+++++Call options written as of December 31, 1993 are as follows:
Value
Par Value Premiums (Notes 1a
Subject to Call Issue Received & 1d)
$51,080,000 Pound sterling currency call option,
strike price 2.554, knock out
Pound sterling, expiring 1/20/94 $234,902 $(287,938)
Total Call Options Written $234,902 $(287,938)
======== =========
</TABLE>
54
<PAGE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of December 31, 1993
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$2,494,902,716) (Note 1a) $2,541,018,711
Put options purchased, at value (cost--$230,395) (Notes 1a & 1d) 11,523
Foreign cash (Note 1c) 1,252,845
Cash 143,162
Receivables:
Interest $ 55,242,497
Short sales (Note 1i) 27,282,035
Securities sold 24,487,291
Capital shares sold 6,232,955
Dividends 62,770 113,307,548
------------
Prepaid registration fees and other assets (Note 1g) 122,460
--------------
Total assets 2,655,856,249
Liabilities: Common stocks sold short, at market value (proceeds--$27,710,903) (Note 1i) 31,669,856
Unrealized depreciation on forward foreign exchange contracts (Note 1c) 240,216
Call options written, at value (premiums received--$234,902) (Notes 1a & 1d) 287,938
Payables:
Securities purchased 25,348,764
Dividends to shareholders (Note 1h) 14,673,312
Capital shares redeemed 5,779,027
Distributor (Note 2) 1,423,767
Investment adviser (Note 2) 1,394,539
Forward exchange contract (Note 1c) 90,393
Short sales dividends (Note 1i) 13,411 48,723,213
------------
Accrued expenses and other liabilities 1,190,745
--------------
Total liabilities 82,111,968
--------------
Net Assets: Net assets $2,573,744,281
==============
Net Assets Class A Common Stock, $.10 par value, 1,000,000,000 shares authorized $ 5,037,752
Consist of: Class B Common Stock, $.10 par value, 1,000,000,000 shares authorized 22,704,224
Paid-in capital in excess of par 2,523,124,461
Accumulated realized capital losses on investments and foreign currency
transactions--net (18,458,151)
Unrealized appreciation on investments and foreign currency transactions--net 41,335,995
--------------
Net assets $2,573,744,281
==============
Net Asset Class A-Based on net assets of $467,624,734 and 50,377,518 shares outstanding $ 9.28
==============
Value: Class B-Based on net assets of $2,106,119,547 and 227,042,238 shares outstanding $ 9.28
==============
See Notes to Financial Statements.
</TABLE>
55
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the
Year Ended
Dec. 31, 1993
<S> <S> <C> <C>
Investment Interest and discount earned (net of $1,292,433 foreign withholding tax) $ 206,949,484
Income Dividend income 991,949
(Notes 1e --------------
& 1f):
Total income 207,941,433
--------------
Expenses: Investment advisory fees (Note 2) 13,902,958
Distribution fees--Class B (Note 2) 13,901,525
Transfer agent fees--Class B (Note 2) 1,646,476
Custodian fees 1,162,086
Registration fees (Note 1g) 593,300
Transfer agent fees--Class A (Note 2) 359,490
Printing and shareholder reports 255,957
Accounting services (Note 2) 169,845
Pricing fees 112,938
Professional fees 109,269
Directors' fees and expenses 40,553
Other 24,191
--------------
Total expenses 32,278,588
--------------
Investment income--net 175,662,845
--------------
Realized & Realized gain (loss) from:
Unrealized Investments--net $ 62,063,244
Gain (Loss) Foreign currency transactions--net (46,877,299) 15,185,945
on Invest- Change in unrealized appreciation/depreciation on: ------------
ments & Investments--net 98,325,889
Foreign Foreign currency transactions--net (79,606) 98,246,283
Currency ------------ --------------
Trans- Net realized and unrealized gain on investments and foreign currency transactions 113,432,228
actions-- --------------
Net (Notes Net Increase in Net Assets Resulting from Operations $ 289,095,073
1c, 1f & 3): ==============
See Notes to Financial Statements.
</TABLE>
56
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year For the Four
Ended Months Ended
Increase (Decrease) in Net Assets: Dec. 31, 1993 Dec. 31, 1992
<S> <S> <C> <C>
Operations: Investment income--net $ 175,662,845 $ 63,045,040
Realized gain (loss) on investments and foreign currency transactions 15,185,945 (49,365,781)
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net 98,246,283 (42,590,216)
-------------- --------------
Net increase (decrease) in net assets resulting from operations 289,095,073 (28,910,957)
-------------- --------------
Dividends & Investment income--net:
Distributions Class A (29,629,878) (18,879,217)
to Class B (106,918,287) (57,359,550)
Shareholders Realized gain on investments--net:
(Note 1h): Class A (1,417,282) (972,869)
Class B (6,362,072) (3,345,631)
Return of capital:
Class A (8,487,578) --
Class B (30,627,102) --
Net decrease in net assets resulting from dividends -------------- --------------
and distributions to shareholders (183,442,199) (80,557,267)
-------------- --------------
Capital Share Net increase in net assets derived from capital share transactions 430,150,076 106,372,763
Transactions -------------- --------------
(Note 4):
Net Assets: Total increase (decrease) in net assets 535,802,950 (3,095,461)
Beginning of period 2,037,941,331 2,041,036,792
-------------- --------------
End of period $2,573,744,281 $2,037,941,331
============== ==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Class A
For the
The following per share data and ratios have been For the For the Four Period
derived from information provided in the financial Year Months Sept. 29,
statements. Ended Ended 1988++ to
Dec. 31, Dec. 31, For the Year Ended August 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1993 1992 1992 1991 1990 1989
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 8.85 $ 9.34 $ 9.07 $ 9.48 $ 9.32 $ 9.35
Operating -------- -------- -------- -------- -------- --------
Performance: Investment income--net .75 .29 .99 1.12 1.23 1.03
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net .46 (.41) .40 (.16) .15 (.12)
-------- -------- -------- -------- -------- --------
Total from investment operations 1.21 (.12) 1.39 .96 1.38 .91
-------- -------- -------- -------- -------- --------
</TABLE>
57
<PAGE>
<TABLE>
<S> <S> <C> <C> <C> <C> <C> <C>
Less dividends and distributions:
Investment income--net (.58) (.35) (1.12) (1.37) (1.17) (.94)
Realized gain on investments--net (.03) (.02) -- -- (.05) --
Return of capital--net (.17) -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total dividends and distributions (.78) (.37) (1.12) (1.37) (1.22) (.94)
-------- -------- -------- -------- -------- --------
Net asset value, end of period $ 9.28 $ 8.85 $ 9.34 $ 9.07 $ 9.48 $ 9.32
======== ======== ======== ======== ======== ========
Total Based on net asset value per share 14.12% (1.26%)+++16.09% 11.50% 16.48% 9.86%+++
Investment ======== ======== ======== ======== ======== ========
Return:**
Ratios to Expenses .78% .76%* .88% .85% .86% .81%*
Average ======== ======== ======== ======== ======== ========
Net Assets: Investment income-net 8.22% 8.09%* 11.16% 12.38% 16.27% 10.87%*
======== ======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $467,625 $455,672 $526,631 $292,709 $299,700 $296,247
Data: ======== ======== ======== ======== ======== ========
Portfolio turnover 182.88% 68.42% 76.18% 63.83% 99.86% 157.67%
======== ======== ======== ======== ======== ========
<CAPTION>
Class B
For the
The following per share data and ratios have been derived For the For the Period
from information provided in the financial statements. Year Four Months Nov. 18,
Ended Ended 1991++ to
Dec. 31, Dec. 31, Aug. 31,
1993 1992 1992
Increase (Decrease) in Net Asset Value:
<S> <S> <C> <C> <C>
Per Share Net asset value, beginning of period $ 8.85 $ 9.33 $ 9.26
Operating ----------- ---------- ---------
Performance: Investment income--net .70 .27 .77
Realized and unrealized gain(loss) on investments and foreign currency
transactions--net .44 (.40) --
----------- ---------- ---------
Total from investment operations 1.14 (.13) .77
Less dividends and distributions: ----------- ---------- ---------
Investment income--net (.53) (.33) (.70)
Realized gain on investments--net (.03) (.02) --
Return of capital--net (.15) -- --
----------- ---------- ---------
Total dividends and distributions (.71) (.35) (.70)
----------- ---------- ---------
Net asset value, end of period $ 9.28 $ 8.85 $ 9.33
=========== ========== =========
Total Based on net asset value per share 13.27% (1.42%)+++ 8.61%+++
Investment =========== ========== =========
Return:**
Ratios to Expenses, excluding distribution fees .80% .78%* .88%*
Average =========== ========== =========
Net Assets: Expenses 1.55% 1.53%* 1.63%*
=========== ========== =========
Investment income--net 7.42% 7.08%* 8.02%*
=========== ========== =========
Supplemental Net assets, end of period (in thousands) $2,106,120 $1,582,270 $1,514,406
Data: =========== ========== ==========
Portfolio turnover 182.88% 68.42% 76.18%
=========== ========== ==========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
58
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch World Income 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 both Class A and Class
B Shares. Class A Shares are sold with a front-end sales charge. Class B
Shares may be subject to a contingent deferred sales charge. Both classes
of shares have identical voting, dividend, liquidation and other rights
and the same terms and conditions, except that Class B Shares bear certain
expenses related to the distribution of such shares and have exclusive
voting rights with respect to matters relating to such distribution
expenditures. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of Securities--Securities traded in the over-the-counter
market are valued at the last available bid price or yield equivalents
obtained from one or more dealers in the over-the-counter market prior
to the time of valuation. Portfolio securities which are traded on
stock exchanges are valued at the last sale price on the principal
market on which such securities are traded, as of the close of busi-
ness on the day the securities are being valued or, lacking any sales,
at the last available bid price. Options traded on exchanges are
valued at the last asked price for options written and last bid price
for options purchased. Options traded in the over-the-counter market
are valued at the average of the last asked price as obtained from
one or more dealers for options written and at the average of the
last bid price as obtained from two or more dealers, unless there
is only one dealer, in which case that dealer's price is used for
options purchased. Short-term securities with less than sixty days
to maturity are valued at amortized cost, which approximates market.
Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or
under the direction of the Board of Directors of the Fund.
(b) Repurchase Agreements--The Fund invests in US Government securities
pursuant to repurchase agreements with a member bank of the Federal
Reserve System or a primary dealer in US Government securities. Under
such agreements, the bank or primary dealer agrees to repurchase the
security at a mutually agreed upon time and price. The Fund takes
possession of the underlying securities, marks to market such securities
and, if necessary, receives additional 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
(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 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) Reclassifications--Certain 1992 amounts have been reclassified
to conform to the 1993 presentations.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, Inc. ("FAMI"), a wholly-owned subsidiary of Merrill
Lynch Investment Management, Inc. ("MLIM"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. and a Distribution Agreement
and a Distribution Plan with Merrill Lynch Funds Distributor, Inc.
("MLFD" or "Distributor") a wholly-owned subsidiary of MLIM.
Effective January 1, 1994, the investment advisory business of FAMI
reorganized from a corporation to a limited partnership. The general
partner of FAMI is Princeton Services, Inc., an indirect wholly-owned
subsidiary of Merrill Lynch & Co.
FAMI 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 0.60%, on an annual basis, of the average daily
value of the Fund's net assets. Certain of the states in which the shares
of the Fund are qualified for sale impose limitations on the expenses of
the Fund. The most restrictive annual expense limitation requires that the
Investment Adviser reimburse the Fund to the extent the Fund's expenses
(excluding interest, taxes, distribution fees, brokerage fees and commissions,
and extraordinary items) exceed 2.5% of the Fund's first $30 million of
average daily net assets, 2.0% of the next $70 million of average daily
net assets, and 1.5% of the average daily net assets in excess thereof.
No fee payment will be made to FAMI during any fiscal year which will
cause such expenses to exceed the most restrictive expense limitation at
the time of such payment.
The Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule
12b-1 under the Investment Company Act of 1940, pursuant
59
<PAGE>
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) such transactions
expressed in foreign currencies into US dollars. Realized and unrealized gains
or losses from investments include the effects of foreign exchange rates on
investments.
The Fund is authorized to enter into forward foreign exchange contracts
as a hedge against either specific transactions or portfolio positions.
Such contracts are not entered on the Fund's records. However, the effect
on operations is recorded from the date the Fund enters into such contracts.
Premium or discount is amortized over the life of the contracts.
(d) Options--The Fund can write covered call options and purchase
put options. When the Fund writes an option, an amount equal to the
premium received by the Fund is reflected as an asset and an equiva-
lent liability. The amount of the liability is subsequently marked
to market to reflect the current market value of the option written.
When a security is sold through an exercise of an option, the related
premium received or paid is deducted from or added to the basis of
the security sold. When an option expires (or the Fund enters into
a closing transaction), the Fund realizes a gain or loss on the option
to the extent that the premium received or paid on the written option
and purchased option is greater than or less than the premium paid or
received on the closing transaction.
Written and purchased options are non-income producing investments.
(e) Income Taxes--It is the Fund's policy to comply with the require-
ments of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its share-
holders. Therefore, no Federal income tax provision is required. Under
the applicable foreign tax law, a withholding tax may be imposed on
interest and capital gains at various rates.
(f) Security Transactions and Investment Income--Security trans-
actions are recorded on the dates the transactions are entered into
(the trade dates). Interest income (including amortization of dis-
count) is recognized on the accrual basis. Realized gains and losses
on security transactions are determined on the identified cost basis.
(g) Deferred Organization Expenses and Prepaid Registration Fees--
Deferred organization expenses are charged to expense on a straight-
line basis over a five-year period. Prepaid registration fees are
charged to expense as the related shares are issued.
(h) Dividends and Distributions--Dividends from net investment income,
excluding transaction gains/losses, are declared daily and paid monthly.
Distributions of capital gains are recorded on the ex-dividend dates.
to which MLFD receives a fee from the Fund for the sale of Class B Shares at the
end of each month at the annual rate of 0.75% of the average daily net assets
attributable to Class B Shares of the Fund to compensate the Distributor for
services provided and the expenses borne by it under the Plan. As authorized by
the Plan, the Distributor has entered into an agreement with Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), an affiliate of MLIM, which provides for
the compensation of MLPF&S for providing distribution-related services to the
Fund. For the year ended December 31, 1993, MLFD earned $13,901,525 under the
Plan, all of which was paid to MLPF&S pursuant to the agreement.
For the year ended December 31, 1993, MLFD earned underwriting discounts
of $118,553, and MLPF&S earned dealer concessions of $1,272,540 on the
sales of the Fund's Class A Shares. MLPF&S also received contingent
deferred sales charges of $4,162,049 relating to Class B Share transactions
in during the year.
Accounting services are provided to the Fund by FAMI at cost.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of Merrill
Lynch & Co., Inc., is the Fund's transfer agent.
Certain officers and/or directors of the Fund are officers and/or directors
of MLPF&S, MLFD, FAMI, MLIM, and/or Merrill Lynch & Co., Inc.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for
the year ended December 31, 1993 were $3,865,381,201 and $3,606,566,850,
respectively.
Net realized and unrealized gains (losses) as of December 31, 1993
were as follows:
Realized Unrealized
Gains Gains
(Losses) (Losses)
Investments:
Long-term $ 62,063,300 $ 46,088,155
Short-term (56) 27,840
Short sales -- (3,958,953)
-------------- --------------
Total investments 62,063,244 42,157,042
-------------- --------------
Currency Transactions:
Options purchased (218,872)
Options written (942,583) (53,036)
Foreign currency transactions (67,830,013) (308,923)
Forward foreign exchange contracts 21,895,297 (240,216)
-------------- --------------
Total currency transactions (46,877,299) (821,047)
-------------- --------------
Total $ 15,185,945 $ 41,335,995
============== ==============
60
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
Transactions in call options purchased for the year ended
December 31, 1993 were as follows:
Premiums
Call Options Purchased Par Value Paid
Outstanding call options purchased
at beginning of year $ 35,000,000 $ 155,750
Options expired (35,000,000) (155,750)
-------------- --------------
Outstanding call options purchased
at end of year $ -- $ --
============== ==============
Transactions in put options purchased for the year ended
December 31, 1993 were as follows:
Premiums
Put Options Purchased Par Value Paid
Outstanding put options
purchased at beginning of year -- --
Options purchased $1,329,151,000 $ 1,055,614
Options exercised (29,051,000) (398,200)
Options expired (1,250,000,000) (427,019)
-------------- --------------
Outstanding put options
purchased at end of year $ 50,100,000 $ 230,395
============== ==============
Transactions in call options written for the year ended December 31,
1993 were as follows:
Par Value
Covered by Premiums
Call Options Written Written Options Received
Outstanding call options
written at beginning of year -- --
Options written $1,329,680,000 $ 813,721
Options closed (28,600,000) --
Options exercised -- (151,800)
Options expired (1,250,000,000) (427,019)
-------------- --------------
Outstanding call options
written at end of year $ 51,080,000 $ 234,902
============== ==============
Transactions in put options written for the year ended December 31,
1993 were as follows:
As of December 31, 1993, net unrealized appreciation for Federal income
tax purposes aggregated $41,423,028, of which $71,963,908 related to
appreciated securities and $30,540,880 related to depreciated securities.
The aggregate cost of investments, plus premiums paid for options
purchased, less premiums received for options written, at December 31,
1993 for Federal income tax purposes was $2,467,649,412.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions
was $430,150,076 and $106,372,763 for the year ended December 31,
1993 and for the period ended December 31, 1992, respectively.
Transactions in shares of capital for Class A and Class B Shares were
as follows:
Class A Shares for the Year Dollar
Ended December 31, 1993 Shares Amount
Shares sold 9,678,184 $ 88,499,395
Shares issued to shareholders in
reinvestment of dividends and
distributions 1,510,091 13,811,988
-------------- --------------
Total issued 11,188,275 102,311,383
Shares redeemed (12,293,992) (112,364,468)
-------------- --------------
Net decrease (1,105,717) $ (10,053,085)
============== ==============
Class A Shares for the Four Months Dollar
Ended December 31, 1992 Shares Amount
Shares sold 2,518,530 $ 22,927,597
Shares issued to shareholders in
reinvestment of dividends 941,825 8,406,560
-------------- --------------
Total issued 3,460,355 31,334,157
Shares redeemed (8,388,139) (75,774,081)
-------------- --------------
Net decrease (4,927,784) $ (44,439,924)
============== ==============
Class B Shares for the Year Dollar
Ended December 31, 1993 Shares Amount
Shares sold 72,899,782 $ 666,438,413
Shares issued to shareholders in
reinvestment of dividends and
distributions 7,596,227 69,595,664
-------------- --------------
Total issued 80,496,009 736,034,077
Shares redeemed (32,339,396) (295,830,916)
-------------- --------------
Net increase 48,156,613 $ 440,203,161
============== ==============
61
<PAGE>
Par Value
Covered by Premiums
Put Options Written Written Options Received
Outstanding put options written at
beginning of year $ 70,000,000 $ 1,027,268
Options written 139,400,000 1,904,396
Options expired (77,400,000) (860,750)
Options exercised (132,000,000) (2,070,914)
-------------- --------------
Outstanding put options written at
end of year $ -- $ --
============== ==============
Class B Shares for the Four Months Dollar
Ended December 31, 1992 Shares Amount
Shares sold 28,784,511 $ 261,420,886
Shares issued to shareholders in
reinvestment of dividends 3,463,058 30,879,275
-------------- --------------
Total issued 32,247,569 292,300,161
Shares redeemed (15,687,293) (141,487,474)
-------------- --------------
Net increase 16,560,276 $ 150,812,687
============== ==============
62
<PAGE>
[This page is intentionally left blank.]
63
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies.......................................... 2
Hedging Techniques........................................................ 2
Risk Factors in Options and Futures Transactions.......................... 4
Forward Foreign Exchange Transactions..................................... 5
Other Investment Policies and Practices................................... 6
Investment Restrictions................................................... 7
Management of the Fund..................................................... 9
Directors and Officers.................................................... 9
Management and Advisory Arrangements...................................... 11
Purchase of Shares......................................................... 12
Alternative Sales Arrangements............................................ 12
Initial Sales Charge Alternative -- Class A Shares........................ 13
Reduced Initial Sales Charges -- Class A Shares........................... 13
Deferred Sales Charge Alternative --
Class B Shares........................................................... 16
Redemption of Shares....................................................... 17
Contingent Deferred Sales Charge --
Class B Shares........................................................... 17
Portfolio Transactions..................................................... 18
Determination of Net Asset Value........................................... 19
Shareholder Services....................................................... 20
Investment Account........................................................ 20
Automatic Investment Plan................................................. 21
Automatic Reinvestment of Dividends and Capital Gains Distributions....... 21
Systematic Withdrawal Plans -- Class A Shares............................. 21
Retirement Plans.......................................................... 22
Exchange Privilege........................................................ 22
Dividends, Distributions and Taxes......................................... 33
Dividends and Distributions............................................... 33
Taxes..................................................................... 34
Tax Treatment of Options and Futures Transactions......................... 35
Special Rules for Certain Foreign
Currency Transactions.................................................... 36
Performance Data........................................................... 37
General Information........................................................ 38
Description of Shares..................................................... 38
Computation of Offering Price Per Share................................... 40
Independent Auditors...................................................... 40
Custodian................................................................. 40
Transfer Agent............................................................ 40
Legal Counsel............................................................. 40
Reports to Shareholders................................................... 41
Additional Information.................................................... 41
Independent Auditors' Report............................................... 42
Financial Statements....................................................... 43
</TABLE>
Code #16103
Statement of Additional Information
[ART]
- --------------------------------------
MERRILL LYNCH WORLD INCOME FUND, INC.
April 29, 1994
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements
Contained in Part A:
Financial Highlights for the fiscal year ended December 31, 1993,
the period September 1, 1992 to December 31, 1992, the fiscal years
ended August 31, 1992, 1991 and 1990 and the period September 29,
1988 (commencement of operations) to August 31, 1989.
Contained in Part B:
Schedule of Investments as of December 31, 1993.
Statement of Assets and Liabilities as of December 31, 1993.
Statement of Operations for the year ended December 31, 1993.
Statements of Changes in Net Assets for the four months ended
December 31, 1992 and for the year ended December 31, 1993.
Financial Highlights for the year ended December 31, 1993, for the
four months ended December 31, 1992, for each of the years in the
three-year period ended August 31, 1992 and for the period September
29, 1988 to August 31, 1989.
(b)Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
1(a) --Articles of Amendment and Restatement, dated November 8, 1991. (c)
(b) --Articles Supplementary, dated October 27, 1992. (d)
2 --Revised By-Laws of Registrant. (c)
3 --None.
4(a) --Specimen certificate for Class A shares of common stock of
Registrant. (c)
(b) --Specimen certificate for Class B shares of common stock of
Registrant. (c)
5(a) --Investment Advisory Agreement between Registrant and Fund Asset
Management. (b)
(b) --Supplement to Investment Advisory Agreement with Fund Asset
Management.
6(a) --Class A Distribution Agreement between Registrant and Merrill Lynch
Funds Distributor, Inc. (b)
(b) --Class B Distribution Agreement between Registrant and Merrill Lynch
Funds Distributor, Inc. (b)
(c) --Letter Agreement between the Fund and Merrill Lynch Funds
Distributor, Inc. dated September 15, 1993, in connection with the
Merrill Lynch Mutual Fund Adviser Program.
7 --None.
8 --Custody Agreement between Registrant and State Street Bank and Trust
Company. (a)
9 --Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between Registrant and Financial Data
Services, Inc. (b)
10 --None.
11(a) --Consent of Deloitte & Touche, independent auditors for Registrant.
(b) --Consent of Morningstar, Inc. (d)
12 --None.
13 --None.
14 --None.
15 --Amended and Restated Class B Distribution Plan of Registrant and
Distribution Plan Sub-Agreement.
16 --None.
</TABLE>
C-1
<PAGE>
- --------
(a) Incorporated by reference to the Registrant's initial Registration
Statement on Form N-2 (File No. 811-5603) as filed with the Securities and
Exchange Commission on July 1, 1988.
(b) Incorporated by reference to the Registrant's initial Registration
Statement on Form N-1A (File Nos. 33-42681 and 811-5603) as filed with the
Securities and Exchange Commission on September 17, 1991.
(c) Incorporated by reference to the Registrant's Pre-Effective Amendment No. 1
to the Registration Statement on Form N-1A (File Nos. 33-42681 and 811-
5603) as filed with the Securities and Exchange Commission on November 15,
1991.
(d) Incorporated by reference to the Registrant's Post-Effective Amendment No.
1 to the Registration Statement on Form N-1A (File Nos. 33-42681 and 811-
5603) as filed with the Securities and Exchange Commission on December 24,
1992.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The Registrant is not controlled by or under common control with any person.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF RECORD
HOLDERS AT
TITLE OF CLASS FEBRUARY 28, 1994
-------------- -----------------
<S> <C>
Class A shares of Common Stock, par value $0.10 per share..... 1,926
Class B shares of Common Stock, par value $0.10 per share..... 2,239
</TABLE>
ITEM 27. INDEMNIFICATION.
Reference is made to Article VI of Registrant's Articles of Incorporation,
Article VI of Registrant's By-Laws, Section 2-418 of the Maryland General
Corporation Law and Section 9 of the Class A and Class B Distribution
Agreements.
Insofar as the conditional advancing of indemnification moneys for actions
based on the Investment Company Act of 1940, as amended (the "Investment
Company 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 on receipt of a written promise by, or on behalf of, the
recipient to repay that amount of the advance which exceeds the amount to which
it is ultimately determined that he is entitled to receive from the Registrant
by reason of indemnification; and (iii)(a) such promise must be secured by a
surety bond, other suitable insurance or an equivalent form of security which
assures that any repayments may be obtained by the Registrant without delay or
litigation, which bond, insurance or other form of security must be provided by
the recipient of the advance, or (b) a majority of a quorum of the Registrant's
disinterested, non-party Directors, or an independent legal counsel in a
written opinion, shall determine, based upon a review of readily available
facts that the recipient of the advance ultimately will be found entitled to
indemnification.
In Section 9 of the Class A and Class B Distribution Agreements relating to
the securities being offered hereby, the Registrant agrees to indemnify the
Distributor and each person, if any, who controls the
C-2
<PAGE>
Distributor within the meaning of the Securities Act of 1933, as amended (the
"Securities Act"), against certain types of civil liabilities arising in
connection with the Registration Statement or Prospectus and Statement of
Additional Information.
Insofar as indemnification for liabilities arising under the Securities 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 Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a Director,
officer, or controlling person of the Registrant and the principal underwriter
in connection with the successful defense of any action, suit or proceeding) is
asserted by such Director, officer or controlling person or the principal
underwriter in connection with the shares being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Merrill Lynch Asset Management, L.P. ("MLAM"), acts as investment adviser for
the following investment companies: Convertible Holdings, Inc., Merrill Lynch
Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income Fund,
Inc., Merrill Lynch Balanced Fund for Investment and Retirement, Merrill Lynch
Capital Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc.,
Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fund For
Tomorrow, Inc., Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch
Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Holdings, Merrill Lynch Global Resources
Trust, Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Growth Fund for
Investment and Retirement, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch
High Income Municipal Bond Fund, Inc., Merrill Lynch Institutional Intermediate
Fund, Merrill Lynch International Equity Fund, Merrill Lynch Latin America
Fund, Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund,
Inc., Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Series Trust,
Merrill Lynch Senior Floating Rate Fund, 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., Merrill Lynch Variable Series Funds, Inc. Fund Asset
Management, L.P. ("FAM"), an affiliate of MLAM, also acts as the investment
adviser for the following investment companies: Apex Municipal Fund, Inc., CBA
Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State
Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate
Fund Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate
High Yield Fund II, Inc., Emerging Tigers Fund, Inc., Financial Institutions
Series Trust, Income Opportunities Fund 1999, Inc., Income Opportunities Fund
2000, Inc., Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California
Municipal Series Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch
Federal Securities Trust, Merrill Lynch Funds for Institutions Series, Merrill
Lynch Multi-State 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., MuniAssets Fund, Inc., MuniBond Income Fund, Inc., The
Municipal Fund Accumulation Program, Inc., MuniEnhanced Fund, Inc., MuniInsured
Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest California
Insured Fund, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund,
Inc., MuniVest New Jersey Insured Fund, Inc.,
C-3
<PAGE>
MuniVest New York Insured Fund, Inc., MuniVest Pennsylvania Insured Fund,
MuniYield Arizona Fund, Inc., MuniYield Arizona Fund II, Inc., MuniYield
California Fund, Inc., MuniYield California Insured Fund, Inc., MuniYield
California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield Florida
Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield
Insured Fund II, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan
Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey
Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New York
Insured Fund II, Inc., MuniYield New York Insured Fund III, Inc., MuniYield
Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality Fund II,
Inc., Senior High Income Portfolio, Inc., Senior High Income Portfolio II,
Inc., Senior Strategic Income Fund, Inc., Taurus MuniCalifornia Holdings, Inc.,
Taurus MuniNew York Holdings, Inc. and Worldwide DollarVest, Inc. The address
of each of these investment companies is Box 9011, Princeton, New Jersey 08543-
9011, except that the address of Merrill Lynch Funds for Institutions Series
and Merrill Lynch Institutional Intermediate Fund is One Financial Center, 15th
Floor, Boston, Massachusetts 02111-2646. The address of MLAM, Merrill Lynch
Funds Distributor, Inc. ("MLFD") and FAM is also Box 9011, Princeton, New
Jersey 08543-9011. The address of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and Merrill Lynch & Co., Inc. ("ML & Co.") is
World Financial Center, North Tower, 250 Vesey Street, New York, New York
10281.
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or employment
of a substantial nature in which each such person has been engaged since August
31, 1990, for its own account or in the capacity of director, officer, partner
or trustee. In addition, Mr. Zeikel is President, Mr. Glenn is Executive Vice
President and Mr. Richard is Treasurer of substantially all the investment
companies described in the preceding paragraph and Messrs. Durnin, Giordano,
Harvey, Hewitt, Kirstein, and Monagle are directors or officers of one or more
of such companies.
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
---- ------------------ ----------------------------------
<S> <C> <C>
ML & Co. ..... Limited Partner Financial Services Holding Company
Fund Asset
Management,
Inc. ........ Limited Partner Investment Advisory Services
Princeton
Services,
Inc.
("Princeton
Services")... General Partner General Partner of MLAM
Arthur Zeikel. President President of MLAM; Director of
Princeton Services; Director of MLFD;
Executive Vice President of ML&Co.;
Executive Vice President of Merrill
Lynch
Terry K. Executive Vice President Executive Vice President of MLAM;
Glenn........ Executive Vice President and Director
of Princeton Services; President and
Director of MLFD; Director of
Financial Data Services, Inc.
("FDS"); President of Princeton
Administrators, L.P.
Bernard J. Senior Vice President Senior Vice President of MLAM; Senior
Durnin....... Vice President of Princeton Services
Vincent R. Senior Vice President Senior Vice President of MLAM; Senior
Giordano..... Vice President of Princeton Services
Elizabeth Senior Vice President Senior Vice President of MLAM
Griffin......
Norman R. Senior Vice President Senior Vice President of MLAM; Senior
Harvey....... Vice President of Princeton Services
N. John Hewitt Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
---- ------------------ ----------------------------------
<S> <C> <C>
Philip L. Senior Vice President, Senior Vice President, General Counsel
Kirstein.... General Counsel, and Secretary of MLAM; Senior Vice
and Secretary President, General Counsel, Director
and Secretary of Princeton Services;
Director of MLFD
Ronald M. Senior Vice President and Senior Vice President of MLAM; Senior
Kloss....... Controller Vice President and Controller of
Princeton Services
Stephen M.M. Senior Vice President Executive Vice President of Princeton
Miller...... Services
Joseph T. Senior Vice President Senior Vice President of MLAM; Senior
Monagle, Vice President of Princeton Services
Jr. ........
Gerald M. Senior Vice President and Senior Vice President and Treasurer of
Richard..... Treasurer MLAM; Senior Vice President and
Treasurer of Princeton Services; Vice
President and Treasurer of MLFD
Richard L. Senior Vice President Senior Vice President of MLAM; Vice
Rufener..... President of MLFD; Senior Vice
President of Princeton Services
Ronald L. Senior Vice President Senior Vice President of MLAM; Senior
Welburn..... Vice President of Princeton Services
Anthony Senior Vice President Senior Vice President of Princeton
Wiseman..... Services
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and for each of
the open-end investment companies referred to in the first paragraph of Item 28
except Apex Municipal Fund, Inc., CBA Money Fund, CMA Government Securities
Fund, CMA Money Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt
Fund, CMA Treasury Fund, Convertible Holdings, Inc., The Corporate Fund
Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate High
Yield Fund II, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities
Fund 2000, Inc., MuniAssets Fund, Inc., MuniBond Income Fund, Inc., The
Municipal Fund Accumulation Program, Inc., MuniEnhanced Fund, Inc., MuniInsured
Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest California
Insured Fund, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund,
Inc., MuniVest New Jersey Fund, Inc., MuniVest New York Insured Fund, Inc.,
MuniVest Pennsylvania Fund, MuniYield Arizona Fund, MuniYield Arizona Fund II,
Inc., MuniYield California Fund, Inc., MuniYield California Insured Fund, Inc.,
MuniYield California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield
Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc.,
MuniYield Insured Fund II, Inc., MuniYield Michigan Fund, Inc., MuniYield
Michigan Insured Fund, Inc., MuniYield Insured Fund II, Inc., MuniYield
Michigan Fund Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey
Fund, Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured
Fund, Inc., MuniYield New York Insured Fund II, Inc., MuniYield New York
Insured Fund III, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund,
Inc., MuniYield Quality Fund II, Inc., Senior High Income Portfolio, Inc.,
Senior High Income Portfolio II, Inc., Senior Strategic Income Fund, Inc.,
Taurus MuniCalifornia Holdings, Inc., Taurus MuniNew York Holdings, Inc. and
Worldwide DollarVest, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is Box 9011,
Princeton, New Jersey 08543-9011, except that the address of
C-5
<PAGE>
Messrs. Crook, Aldrich, Breen, Fatseas, Graczyk, and Wasel is One Financial
Center, Boston, Massachusetts 02111-2665.
<TABLE>
<CAPTION>
(2) (3)
(1) POSITION(S) AND OFFICES POSITIONS(S) AND OFFICES
NAME WITH MLFD WITH REGISTRANT
---- ----------------------- ------------------------
<S> <C> <C>
Terry K. Glenn.......... President and Director Executive Vice President
Arthur Zeikel........... Director President and Director
Philip L. Kirstein...... Director None
William E. Aldrich...... Senior Vice President None
Robert W. Crook......... Senior Vice President None
Michael Brady........... Vice President None
William M. Breen........ Vice President None
Sharon Creveling........ Vice President and Assistant Treasurer None
Mark A. DeSario......... Vice President None
James T. Fatseas........ Vice President None
Stanley Graczyk......... Vice President None
Debra W. Landsman-Yaros. Vice President None
Michelle T. Lau......... Vice President None
Gerald M. Richard....... Vice President and Treasurer Treasurer
Richard L. Rufener...... Vice President None
Salvatore Venezia....... Vice President None
William Wasel........... Assistant Vice President None
Robert Harris........... Secretary None
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act and the rules thereunder will be maintained
at the offices of the Registrant and Financial Data Services, Inc.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the Fund--Management
and Advisory Arrangements" in the Prospectus constituting Part A of the
Registration Statement and under "Management of the Fund--Management and
Advisory Arrangements" in the Statement of Additional Information constituting
Part B of the Registration Statement, Registrant is not a party to any
management-related service contract.
ITEM 32. UNDERTAKINGS.
Not applicable.
C- 6
<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 THE
REQUIREMENTS FOR EFFECTIVENESS OF THIS REGISTRATION STATEMENT PURSUANT TO RULE
485(B) UNDER THE SECURITIES ACT OF 1933 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE TOWNSHIP OF PLAINSBORO, AND THE STATE OF NEW JERSEY, ON THE
28TH DAY OF APRIL, 1994.
Merrill Lynch World Income Fund, Inc.
(Registrant)
/s/ Arthur Zeikel
By:_______________________________
(Arthur Zeikel, President)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND
ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Arthur Zeikel President and Director April 28, 1994
- ------------------------------------ (Principal Executive
(Arthur Zeikel) Officer)
/s/ Gerald M. Richard Treasurer (Principal April 28, 1994
- ------------------------------------ Financial and Accounting
(Gerald M. Richard) Officer)
Kenneth S. Axelson* Director
- ------------------------------------
(Kenneth S. Axelson)
Herbert I. London* Director
- ------------------------------------
(Herbert I. London)
Robert R. Martin* Director
- ------------------------------------
(Robert R. Martin)
Joseph L. May* Director
- ------------------------------------
(Joseph L. May)
Andre F. Perold* Director
- ------------------------------------
(Andre F. Perold)
/s/ Arthur Zeikel
*By____________________________ April 28, 1994
(Arthur Zeikel, Attorney-
in-Fact)
C-7
<PAGE>
MERRILL LYNCH WORLD INCOME FUND, INC.
POWER OF ATTORNEY
-----------------
I, Robert R. Martin, do hereby authorize Arthur Zeikel, Terry K. Glenn or
Gerald M. Richard, or any of them, as attorney-in-fact, to sign on my behalf,
individually and in my capacity as Director of Merrill Lynch World Income Fund,
Inc., any amendments to this Registration Statement (including post-effective
amendments) and to file the same, with all exhibits thereto, with the
Securities and Exchange Commission.
Dated: October 14, 1993
/s/ Robert R. Martin
----------------------------------------
(Robert R. Martin)
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NO. DESCRIPTION OF EXHIBIT NUMBER
------- ---------------------- ----------
<C> <S> <C>
1(a) --Articles of Amendment and Restatement, dated November
8, 1991. (c)
(b) --Articles Supplementary, dated October 27, 1992. (d)
2 --Revised By-Laws of Registrant. (c)
3 --None.
4(a) --Specimen certificate for Class A shares of common stock
of Registrant. (c)
(b) --Specimen certificate for Class B shares of common stock
of Registrant. (c)
5(a) --Investment Advisory Agreement between Registrant and
Fund Asset Management. (b)
(b) --Supplement to Investment Advisory Agreement with Fund
Asset Management.
6(a) --Class A Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (b)
(b) --Class B Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (b)
(c) --Letter Agreement between the Fund and Merrill Lynch
Funds Distributor, Inc., dated September 15, 1993, in
connection with the Merrill Lynch Mutual Fund Adviser
Program.
7 --None.
8 --Custody Agreement between Registrant and State Street
Bank and Trust Company. (a)
9 --Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement between
Registrant and Financial Data Services, Inc. (b)
10 --None.
11(a) --Consent of Deloitte & Touche, independent auditors for
Registrant.
(b) --Consent of Morningstar, Inc. (d)
12 --None.
13 --None.
14 --None.
15 --Amended and Restated Class B Distribution Plan of
Registrant and Distribution Plan Sub-Agreement.
16 --None.
</TABLE>
- --------
(a) Incorporated by reference to the Registrant's initial Registration
Statement on Form N-2 (File No. 811-5603) as filed with the Securities and
Exchange Commission on July 1, 1988.
(b) Incorporated by reference to the Registrant's initial Registration
Statement on Form N-1A (File Nos. 33-42681 and 811-5603) as filed with the
Securities and Exchange Commission on September 17, 1991.
(c) Incorporated by reference to the Registrant's Pre-Effective Amendment No. 1
to the Registration Statement on Form N-1A (File Nos. 33-42681 and 811-
5603) as filed with the Securities and Exchange Commission on November 15,
1991.
(d) Incorporated by reference to the Registrant's Post-Effective Amendment No.
1 to the Registration Statement on Form N-1A (File Nos. 33-42681 and 811-
5603) as filed with the Securities and Exchange Commission on December 24,
1992.
<PAGE>
GRAPHICS APPENDIX LIST
PAGE WHERE
GRAPHIC
APPEARS DESCRIPTION OF GRAPHIC OR CROSS-REFERENCE
- -------------------------------------------------------------------------------
Back cover of Collage of international postage stamps
Prospectus and
back cover of
Statement of
Additional
Information
<PAGE>
SUPPLEMENT TO INVESTMENT ADVISORY AGREEMENT
WITH
FUND ASSET MANAGEMENT
As of January 1, 1994 Fund Asset Management was reorganized as a limited
partnership, formally known as Fund Asset Management, L.P. ("FAM"). The general
partner of FAM is Princeton Services, Inc. and the limited partners are Fund
Asset Management, Inc. and Merrill Lynch & Co., Inc. Pursuant to Rule
202(a)(1)-1 under the Investment Advisers Act of 1940 and Rule 2a-6 under the
Investment Company Act of 1940 such reorganization did not constitute an
assignment of this investment advisory agreement since it did not involve a
change of control or management of the investment adviser. Pursuant to the
requirements of Section 205 of the Investment Advisers Act of 1940, however,
Fund Asset Management hereby supplements this investment advisory agreement by
undertaking to advise you of any change in the membership of the partnership
within a reasonable time after any such change occurs.
By /s/ Arthur Zeikel
---------------------------
Dated: January 3, 1994
<PAGE>
September 15, 1993
Merrill Lynch Funds Distributor, Inc.
Post Office Box 9011
Princeton, New Jersey 08543-9011
Each of the undersigned open-end investment companies (the "Funds") has
entered into a Distribution Agreement with Merrill Lynch Funds Distributor, Inc.
(the "Distributor"). Under the terms of such agreements, the Distributor is
authorized to offer shares of each Fund and to purchase, as principal, such
number of shares from each of the Funds as are needed to fill unconditional
orders for shares of such Fund placed with the Distributor by investors or by
securities dealers.
This letter confirms the agreement by each Fund with the Distributor that,
in connection with the Merrill Lynch Mutual Fund Adviser program, the
Distributor and its affiliate, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, are also authorized
<PAGE>
to offer and sell shares of such Fund, as agent for the Fund, to participants in
such program. This letter further confirms that the terms of the Distribution
Agreement between each Fund and the Distributor shall apply to such sales,
including terms as to the offering price of shares, the proceeds to be paid to
each Fund, the duties of the Distributor, the payment of expenses and
indemnification obligations of each Fund and the Distributor.
If the foregoing is consistent with your understanding of our agreement,
please sign and return one copy of the enclosed agreement.
Very truly yours,
The Investment Companies listed
on Schedule A hereto
By: /s/ Terry K. Glenn
____________________________
Authorized Signatory
Accepted as of the date
set forth above
Merrill Lynch Funds Distributor, Inc.
By: /s/ Gerald M. Richard
_________________________________
Authorized Signatory
2
<PAGE>
The Declaration of Trust establishing each investment company listed on
Schedule A hereto which has been organized as a Massachusetts trust (each, a
"Fund"), a copy of which, together with all amendments thereto, is on file in
the office of the Secretary of the Commonwealth of Massachusetts, provides that
the name of the Fund refers to the Trustees under the Declaration collectively
as Trustees, but not as individuals or personally; and no Trustee, shareholder,
officer, employee or agent of the Fund shall be held to any personal liability,
nor shall resort be had to their private property for the satisfaction of any
obligation or claim or otherwise in connection with the affairs of the Fund, but
the Fund estate only shall be liable.
3
<PAGE>
SCHEDULE A
----------
EQUITY FUNDS:
Merrill Lynch Balanced Fund for Investment and Retirement
Merrill Lynch Basic Value Fund, Inc.
Merrill Lynch Capital Fund, Inc.
Merrill Lynch Developing Capital Markets Fund, Inc.
Merrill Lynch Dragon Fund, Inc.
Merrill Lynch EuroFund
Merrill Lynch Fundamental Growth Fund, Inc.
Merrill Lynch Fund for Tomorrow, Inc.
Merrill Lynch Global Allocation Fund, Inc.
Merrill Lynch Global Utility Fund, Inc.
Merrill Lynch Growth Fund for Investment and Retirement
Merrill Lynch Healthcare Fund, Inc.
Merrill Lynch International Equity Fund
Merrill Lynch International Holdings, Inc.
Merrill Lynch Latin America Fund, Inc.
Merrill Lynch Natural Resources Trust
Merrill Lynch Pacific Fund, Inc.
Merrill Lynch Phoenix Fund, Inc.
Merrill Lynch Special Value Fund, Inc.
Merrill Lynch Strategic Dividend Fund
Merrill Lynch Technology Fund, Inc.
Merrill Lynch Utility Income Fund, Inc.
FIXED INCOME FUNDS:
Merrill Lynch Adjustable Rate Securities Fund, Inc.
Merrill Lynch Americas Income Fund, Inc.
Merrill Lynch Corporate Bond Fund, Inc.
Merrill Lynch Federal Securities Trust
Merrill Lynch Global Bond Fund for Investment and Retirement
Merrill Lynch Global Convertible Fund, Inc.
Merrill Lynch Short-Term Global Income Fund, Inc.
Merrill Lynch World Income Fund, Inc.
TAX-EXEMPT FIXED INCOME FUNDS:
Merrill Lynch Arizona Municipal Bond Fund
Merrill Lynch California Municipal Bond Fund
Merrill Lynch California Insured Municipal Bond Fund
Merrill Lynch Florida Municipal Bond Fund
Merrill Lynch Massachusetts Municipal Bond Fund
Merrill Lynch Michigan Municipal Bond Fund
Merrill Lynch Minnesota Municipal Bond Fund
Merrill Lynch Municipal Bond Fund, Inc.
A-1
<PAGE>
Merrill Lynch Municipal Income Fund
Merrill Lynch New Jersey Municipal Bond Fund
Merrill Lynch New York Municipal Bond Fund
Merrill Lynch North Carolina Municipal Bond Fund
Merrill Lynch Ohio Municipal Bond Fund
Merrill Lynch Pennsylvania Municipal Bond Fund
Merrill Lynch Texas Municipal Bond Fund
INSTITUTIONAL MONEY MARKET FUNDS:
Merrill Lynch Institutional Fund
Merrill Lynch Government Fund
Merrill Lynch Treasury Fund
Merrill Lynch Institutional Tax-Exempt Fund
A-2
<PAGE>
EXHIBIT 99.11(a)
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch World Income Fund, Inc.:
We consent to the use in Post-Effective Amendment No. 3 to Registration
Statement No. 33-42681 of our report dated February 4, 1994 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
Deloitte & Touche
Princeton, New Jersey
April 27, 1994
<PAGE>
AMENDED AND RESTATED
CLASS B DISTRIBUTION PLAN
OF
MERRILL LYNCH WORLD INCOME FUND, INC.
PURSUANT TO RULE 12b-1
DISTRIBUTION PLAN made as of the 18th day of November, 1991, and amended
and restated as of September 18, 1992, by and between Merrill Lynch World Income
Fund, Inc., a Maryland corporation (the "Fund"), and Merrill Lynch Funds
Distributor, Inc., a Delaware corporation ("MLFD").
W I T N E S S E T H :
-------------------
WHEREAS, the Fund is engaged in business as an open-end investment company
registered under the Investment Company Act of 1940, as amended (the "Investment
Company Act"); and
WHEREAS, MLFD is a securities firm engaged in the business of selling
shares of investment companies either directly to purchasers or through other
securities dealers; and
WHEREAS, the Fund has entered into a Class B Shares Distribution Agreement
with MLFD, pursuant to which MLFD acts as the exclusive distributor and
representative of the Fund in the offer and sale of Class B shares of common
stock, par value $0.10 per share (the "Class B shares"), of the Fund to the
public; and
WHEREAS, the Fund has entered into a Class B Distribution Plan (the "Prior
Plan") pursuant to Rule 12b-1 under the Investment Company Act; and
WHEREAS, the Fund desires to adopt this Amended and Restated Class B
Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment
Company Act, pursuant to which the Fund will pay an account maintenance fee and
a distribution fee to MLFD with respect to the Fund's Class B shares; and
WHEREAS, the Directors of the Fund have determined that there is a
reasonable likelihood that adoption of the Plan will benefit the Fund and its
Class B shareholders;
<PAGE>
NOW, THEREFORE, the Fund hereby adopts, and MLFD hereby agrees to the terms
of, the Plan in accordance with Rule 12b-1 under the Investment Company Act on
the following terms and conditions:
1. The Fund shall pay MLFD an account maintenance fee under the Plan at
the end of each month at the annual rate of 0.25% of average daily net assets of
the Fund relating to Class B shares to compensate MLFD and securities firms with
which MLFD enters into related agreements pursuant to Paragraph 3 hereof ("Sub-
Agreements") for account maintenance activities with respect to Class B
shareholders of the Fund.
2. The Fund shall pay MLFD a distribution fee under the Plan at the end of
each month at the annual rate of 0.50% of average daily net assets of the Fund
relating to Class B shares to compensate MLFD and securities firms with which
MLFD enters into related Sub-Agreements for providing sales and promotional
activities and services. Such activities and services will relate to the sale,
promotion and marketing of the Class B shares of the Fund. Such expenditures
may consist of sales commissions to financial consultants for selling Class B
shares of the Fund, compensation, sales incentives and payments to sales and
marketing personnel, and the payment of expenses incurred in its sales and
promotional activities, including advertising expenditures related to the Fund
and the costs of preparing and distributing promotional materials. The
distribution fee may also be used to pay the financing costs of carrying the
unreimbursed expenditures described in this Paragraph 2. Payment of the
distribution fee described in this Paragraph 2 shall be subject to any
limitations set forth in any applicable regulation of the National Association
of Securities Dealers, Inc.
3. The Fund hereby authorizes MLFD to enter into Sub-Agreements with
certain securities firms ("Securities Firms"), including Merrill Lynch, Pierce,
Fenner & Smith Incorporated, to provide compensation to such Securities Firms
for activities and services of the type referred to in Paragraphs 1 and 2
hereof. MLFD may reallocate all or a portion of its account maintenance fee or
distribution fee to such Securities Firms as compensation for the above-
mentioned activities and services. Such Sub-Agreement shall provide that the
Securities Firms shall provide MLFD with such information as is reasonably
necessary to permit MLFD to comply with the reporting requirements set forth in
Paragraph 4 hereof.
2
<PAGE>
4. MLFD shall provide the Fund for review by the Board of Directors, and
the Directors shall review, at least quarterly, a written report complying with
the requirements of Rule 12b-1 regarding the disbursement of the account
maintenance fee and the distribution fee during such period.
5. The Plan will be submitted for approval by a vote of at least a
majority, as defined in the Investment Company Act, of the outstanding Class B
voting securities of the Fund held by the public.
6. The Plan shall not take effect until it has been approved, together
with any related agreements, by (a) the Directors of the Fund and (b) those
Directors of the Fund who are not "interested persons" of the Fund, as defined
in the Investment Company Act, and have no direct or indirect financial interest
in the operation of this Plan or any agreements related to it (the "Rule 12b-1
Directors"), cast in person at a meeting or meetings called for the purpose of
voting on the Plan and such related agreements.
7. The Plan shall continue in effect for so long as such continuance is
specifically approved at least annually in the manner provided for approval of
the Plan in Paragraph 6.
8. The Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Directors, or by vote of a majority of the outstanding Class B voting
securities of the Fund.
9. The Plan may not be amended to increase materially the rate of payments
by the Fund provided for herein unless such amendment is approved by at least a
majority, as defined in the Investment Company Act, of the outstanding Class B
voting securities of the Fund, and by the Directors of the Fund in the manner
provided for in Paragraph 6 hereof, and no material amendment to the Plan shall
be made unless approved in the manner provided for approval and annual renewal
in Paragraph 6 hereof.
10. While the Plan is in effect, the selection and nomination of Directors
who are not interested persons, as defined in the Investment Company Act, of the
Fund shall be committed to the discretion of the Directors who are not
interested persons.
11. The Fund shall preserve copies of the Plan and any related agreements
and all reports made pursuant to Paragraph 4 hereof, for a period of not less
than six years from the date of the Plan, or the agreements or such report, as
the case may be, the first two years in an easily accessible place.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Plan as of the
date first above written.
MERRILL LYNCH WORLD INCOME FUND, INC.
By /s/ Mark B. Goldfus
__________________________________
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By /s/ Gerald M. Richard
__________________________________
4
<PAGE>
AMENDED AND RESTATED
CLASS B SHARES DISTRIBUTION PLAN SUB-AGREEMENT
AGREEMENT made as of the 18th day of November, 1991, and amended and
restated as of September 18, 1992, by and between Merrill Lynch Funds
Distributor, Inc. ("MLFD"), and Merrill Lynch, Pierce, Fenner & Smith
Incorporated (the "Securities Firm").
W I T N E S S E T H :
--------------------
WHEREAS, MLFD has entered into an agreement with Merrill Lynch World Income
Fund, Inc., a Maryland corporation (the "Fund"), pursuant to which it acts as
the exclusive distributor for the sale of Class B shares of common stock, par
value $0.10 per share (the "Class B shares"), of the Fund; and
WHEREAS, MLFD and the Fund have entered into an Amended and Restated
Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment
Company Act of 1940 (the "Act") pursuant to which MLFD receives an account
maintenance fee from the Fund at the annual rate of 0.25% of average daily net
assets of the Fund relating to Class B shares for account maintenance activities
related to Class B shares of the Fund and a distribution fee from the Fund at
the annual rate of 0.50% of average daily net assets of the Fund relating to
Class B shares for providing sales and promotional activities and services
related to the distribution of Class B shares of the Fund; and
WHEREAS, MLFD desires the Securities Firm to perform certain account
maintenance activities and sales and promotional activities and services for the
Fund's Class B shareholders and the Securities Firm is willing to perform such
activities and services;
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties hereby agree as follows:
1. The Securities Firm shall provide account maintenance activities with
respect to the Class B shares of the Fund of the types referred to in Paragraph
1 of the Plan.
2. The Securities Firm shall provide sales and promotional activities and
services with respect to the sale of the Class B shares of the Fund, and incur
distribution expenditures, of the types referred to in Paragraph 2 of the Plan.
1
<PAGE>
3. As compensation for its activities and services performed under this
Sub-Agreement, MLFD shall pay the Securities Firm an account maintenance fee and
a distribution fee at the end of each calendar month in an amount agreed upon by
the parties hereto.
4. The Securities Firm shall provide MLFD, at least quarterly, such
information as reasonably requested by MLFD to enable MLFD to comply with the
reporting requirements of Rule 12b-1 regarding the disbursement of the account
maintenance fee and the distribution fee during such period referred to in
Paragraph 4 of the Plan.
5. This Sub-Agreement shall not take effect until it has been approved by
votes of a majority of both (a) the Directors of the Fund and (b) those
Directors of the Fund who are not "interested persons" of the Fund, as defined
in the Act, and have no direct or indirect financial interest in the operation
of the Plan, this Agreement or any agreements related to the Plan or this
Agreement (the "Rule 12b-1 Directors"), cast in person at a meeting or meetings
called for the purpose of voting on this Agreement.
6. This Agreement shall continue in effect for as long as such continuance
is specifically approved at least annually in the manner provided for approval
of the Plan in Paragraph 6.
7. This Agreement shall automatically terminate in the event of its
assignment or in the event of the termination of the Plan or any amendment to
the Plan that requires such termination.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By /s/ Gerald M. Richard
__________________________________
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By /s/ David C. Conine
__________________________________
2
