<PAGE> 1
PROSPECTUS
October 21, 1994
MERRILL LYNCH WORLD INCOME FUND, INC.
P.O. 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.
Pursuant to the Merrill Lynch Select Pricing SM System, the Fund
offers four classes of shares, each with a different combination of sales
charges, ongoing fees and other features. The Merrill Lynch Select Pricing
System permits an investor to choose the method of purchasing shares that
the investor believes is most beneficial given the amount of the purchase,
the length of time the investor expects to hold the shares and other
relevant circumstances. See "Merrill Lynch Select Pricing SM System" on
page 4.
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 $100, and
the minimum subsequent purchase is $1. Merrill Lynch may charge its
customers a processing fee (presently $4.85) for confirming purchases and
repurchases. Purchases and redemptions directly through the Fund's
Transfer Agent are not subject to the processing fee. See "Purchase of
Shares" and "Redemption of Shares".
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE 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 October 21, 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> 2
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring
and recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
Class A(a) Class B(b) Class C(c) Class D(c)
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses:
Maximum Sales Charge Imposed on
Purchases
(as a percentage of offering price)... 4.00%(d) None None 4.00%(d)
Sales Charge Imposed on Dividend
Reinvestments ........................ None None None None
Deferred Sales Charge (as a percentage
of original purchase price or
redemption proceeds, whichever is None(e) 4.0% during the first 1.0% for one None(e)
lower) ............................... year, decreasing 1.0% year
annually thereafter
to 0.0% after the
fourth year
Exchange Fee ........................... None None None None
Annual Fund Operating Expenses (as a
percentage of average net assets)(f)
Investment Advisory Fees(g)............. 0.60% 0.60% 0.60% 0.60%
12b-1 Fees(h):
Account Maintenance Fees............... None 0.25% 0.25% 0.25%
Distribution Fees...................... None 0.50% 0.55% None
(Class B shares
convert to Class D
shares automatically
after approximately
ten years and
cease being subject
to distribution fees)
Other Expenses:
Custodial Fees........................ 0.05% 0.05% 0.05% 0.05%
Shareholder Servicing Costs(i)........ 0.07% 0.09% 0.09% 0.07%
Other................................. 0.06% 0.06% 0.06% 0.06%
-----------------------------------------------------------------------------
Total Other Expenses................ 0.18% 0.20% 0.20% 0.18%
-----------------------------------------------------------------------------
Total Fund Operating Expenses............. 0.78% 1.55% 1.60% 1.03%
=============================================================================
</TABLE>
----------
(a) Class A shares are sold to a limited group of investors including
existing Class A shareholders, certain retirement plans and investment
programs. See "Purchase of Shares-Initial Sales Charge Alternatives-
Class A and Class D Shares"-page 25.
(b) Class B shares convert to Class D shares automatically approximately
ten years after initial purchase. See "Purchase of Shares-Deferred
Sales Charge Alternatives-Class B and Class C Shares"-page 27.
(c) Prior to the date of this Prospectus, the Fund has not offered its
Class C or Class D shares to the public.
(d) Reduced for purchases of $25,000 and over. Class A or Class D
purchases of $1,000,000 or more may not be subject to an initial sales
charge. See "Purchase of Shares-Initial Sales Charge Alternatives-
Class A and Class D Shares"-page 25.
(e) Class A and Class D shares are not subject to a contingent deferred
sales charge ("CDSC"), except that purchases of $1,000,000 or more
which may not be subject to an initial sales charge will instead be
subject to a CDSC of 1.0% of amounts redeemed within the first year
after purchase.
(f) Information for Class A and Class B shares is stated for the fiscal
year ended December 31, 1993. Information under "Other Expenses" for
Class C and Class D shares is estimated for the fiscal year ending
December 31, 1994.
(g) See "Management of the Fund-Management and Advisory Arrangements"-
page 22.
(h) See "Purchase of Shares-Distribution Plans"-page 30.
(i) See "Management of the Fund-Transfer Agency Services"-page 23.
2
<PAGE> 3
EXAMPLE:
<TABLE>
<CAPTION>
Cumulative Expenses Paid for the Period of:
-----------------------------------------------
1 Year 3 Years 5 Years 10 Years
-----------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following
expenses on a $1,000 investment
including the maximum $40.00
initial sales charge (Class A
and Class D shares only) and
assuming (1) the Total Fund
Operating Expenses for each
class set forth above, (2) a 5%
annual return throughout the
periods and (3) redemption at
the end of the period:
Class A ................... $48 $64 $82 $133
Class B ................... $56 $69 $84 $185
Class C.................... $26 $50 $87 $190
Class D.................... $50 $71 $95 $161
An investor would pay the following
expenses on the same $1,000
investment assuming no
redemption at the end of the
period:
Class A ................... $48 $64 $82 $133
Class B ................... $16 $49 $84 $185
Class C.................... $16 $50 $87 $190
Class D.................... $50 $71 $95 $161
</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
("Commission") regulations. The Example should not be considered a
representation of past or future expenses or annual rates of return, and
actual expenses or annual rate of return may be more or less than those
assumed for purposes of the Example. Class B and Class C shareholders who
hold their shares for an extended period of time may pay more in Rule
12b-1 distribution fees than the economic equivalent of the maximum front
end sales charges permitted under the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. ("NASD"). Merrill Lynch
may charge its customers a processing fee (presently $4.85) for confirming
purchases and 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> 4
MERRILL LYNCH SELECT PRICING SM SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing SM System. The shares of each class may be purchased at a price
equal to the next determined net asset value per share subject to the
sales charges and or going fee arrangements described below. Shares of
Class A and Class D are sold to investors choosing the initial sales
charge alternatives, and shares of Class B and Class C are sold to
investors choosing the deferred sales charge alternatives. The Merrill
Lynch Select Pricing SM System is used by more than 50 mutual funds
advised by Merrill Lynch Asset Management, L.P. ("MLAM") or an affiliate
of MLAM, Fund Asset Management, L.P. ("FAM" or the "Investment
Adviser"). Funds advised by MLAM or FAM are referred to herein as
"MLAM-advised mutual funds".
Each Class A, Class B, Class C or Class D share of the Fund represents
an identical interest in the investment portfolio of the Fund and has the
same rights, except that Class B, Class C and Class D shares bear the
expenses of the ongoing account maintenance fees and Class B and Class C
shares bear the expenses of the ongoing distribution fees and the
additional incremental transfer agency costs resulting from the deferred
sales charge arrangements. The deferred sales charges and account
maintenance fees that are imposed on Class B and Class C shares, as well
as the account maintenance fees that are imposed on the Class D shares,
will be imposed directly against those classes and not against all assests
of the Fund and, accordingly, such charges will not affect the net asset
value of any other class or have any impact on investors choosing another
sales charge option. Dividends paid by the Fund for each class of shares
will be calculated in the same manner at the same time and will differ
only to the extent that account maintenance and distribution fees and any
incremental transfer agency costs relating to a particular class are borne
exclusively by that class. Each class has different exchange privileges.
See "Shareholder Services - Exchange Privilege".
Investors should understand that the purpose and function of the
initial sales charges with respect to the Class A and Class D shares are
the same as those of the deferred sales charges with respect to the Class
B and Class C shares in that the sales charges applicable to each class
provide for the financing of the distribution of the shares of the Fund.
The distribution-related revenues paid with respect to a class will not be
used to finance the distribution expenditures of another class. Sales
personnel may receive different compensation for selling different classes
of shares.
4
<PAGE> 5
The following table sets forth a summary of the distribution
arrangements for each class of shares under the Merrill Lynch Select
Pricing SM System, followed by a more detailed description of each class
and a discussion of the factors that investors should consider in
determining the method of purchasing shares under the Merrill Lynch Select
Pricing SM System that the investor believes is most beneficial under his
particular circumstances. More detailed information as to each class of
shares is set forth under "Purchase of Shares".
<TABLE>
<CAPTION>
Account
Maintenance Distribution Conversion
Class Sales Charge (1) Fee Fee Feature
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 4.00% initial sales No No No
charge (2), (3)
- ------------------------------------------------------------------------------
B CDSC for a period of 4 0.25% 0.50% B shares convert to D
years, at a rate of 4.0% during shares automatically
the first year, decreasing after approximately
1.0% annually to 0.0% ten years (4)
- ------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.55% No
- ------------------------------------------------------------------------------
D Maximum 4.00% initial sales 0.25% No No
charge (3)
- ------------------------------------------------------------------------------
</TABLE>
----------
(1) Initial sales charges are imposed at the time of purchase as a
percentage of the offering price. Contingent deferred sales charges
("CDSCs") are imposed if the redemption occurs within the applicable
CDSC time period. The charge will be assessed on an amount equal to
the lesser of the proceeds of redemption or the cost of the shares
being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares-Initial
Sales Charge Alternatives-Class A and Class D Shares-Eligible Class A
Investors".
(3) Reduced for purchases of $25,000 or more. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead will be subject to a 1.0% CDSC for one year. See
"Class A" and "Class D" below.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have an
eight year conversion period. If Class B shares of the Fund are
exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the
exchange will apply, and the holding period for the shares exchanged
will be tacked onto the holding period for the shares acquired.
Class A: Class A shares incur an initial sales charge when they are
purchased and bear no ongoing distribution or account maintenance
fees. Class A shares are offered to a limited group of investors and
also will be issued upon reinvestment of dividends on outstanding
Class A shares. Investors that currently own Class A shares in a
shareholder account are entitled to purchase additional Class A
shares in that account. Other eligible investors include certain
retirement plans and participants in certain investment programs. In
addition, Class A shares will be offered to Merrill Lynch & Co.,
Inc. and its subsidiaries (the term "subsidiaries", when used herein
with respect to Merrill Lynch & Co., Inc., includes MLAM, the
Investment Adviser and certain other entities directly or indirectly
wholly-owned and controlled by Merrill Lynch & Co., Inc.), and their
directors and employees, and to members of the Boards of
MLAM-advised mutual funds. The maximum initial sales charge is 4.0%,
which is reduced for purchases of $25,000 and over. Purchases of
$1,000,000 or more may not be subject to an initial sales charge but
if the initial sales charge is waived, such purchases will be
subject to a CDSC of 1.0% if the shares are redeemed within one year
after purchase. Sales charges also are reduced under a right of
accumulation which takes into account the investor's holdings of all
5
<PAGE> 6
classes of all MLAM-advised mutual funds. See "Purchase of Shares-
Initial Sales Charge Alternatives-Class A and Class D Shares".
Class B: Class B shares do not incur a sales charge when they are
purchased, but they are subject to an ongoing account maintenance
fee of 0.25%, an ongoing distribution fee of 0.50% of the Fund's
average net assets attributable to the Class B shares, and a CDSC
if they are redeemed within four years of purchase. Approximately
ten years after issuance, Class B shares will convert
automatically into Class D shares of the Fund, which are subject
to an account maintenance fee but no distribution fee; Class B
shares of certain other MLAM-advised mutual funds into which
exchanges may be made convert into Class D shares automatically
after approximately eight years. If Class B shares of the Fund
are exchanged for Class B shares of another MLAM-advised mutual
fund, the conversion period applicable to the Class B shares
acquired in the exchange will apply, and the holding period for
the shares exchanged will be tacked onto the holding period for
the shares acquired. Automatic conversion of Class B shares into
Class D shares will occur at least once a month on the basis of
the relative net asset values of the shares of the two classes on
the conversion date, without the imposition of any sales load,
fee or other charge. Conversion of Class B shares to Class D
shares will not be deemed a purchase or sale of the shares for
Federal income tax purposes. Shares purchased through
reinvestment of dividends on Class B shares also will convert
automatically to Class D shares. The conversion period for
dividend reinvestment shares and for certain retirement plans is
modified as described under "Purchase of Shares-Deferred Sales
Charge Alternatives-Class B and Class C Shares-Conversion of
Class B Shares to Class D Shares".
Class C: Class C shares do not incur a sales charge when they are
purchased, but they are subject to an ongoing account maintenance
fee of 0.25% and an ongoing distribution fee of 0.55% of the
Fund's average net assets attributable to Class C Shares. Class C
shares are also subject to a CDSC if they are redeemed within one
year of purchase. Although Class C shares are subject to a 1.0%
CDSC for only one year (as compared to four years for Class B),
Class C shares have no conversion feature and, accordingly, an
investor that purchases Class C shares will be subject to
distribution fees that will be imposed on Class C shares for an
indefinite period subject to annual approval by the Fund's Board
of Directors and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are
purchased and are subject to an ongoing account maintenance fee
of 0.25% of the Fund's average net assets attributable to Class D
Shares. Class D shares are not subject to an ongoing distribution
fee or any CDSC when they are redeemed. Purchases of $1,000,000
or more may not be subject to an initial sales charge but if the
initial sales charge is waived, such purchases will be subject to
a CDSC of 1.0% if the shares are redeemed within one year after
purchase. The schedule of initial sales charges and reductions
for Class D shares is the same as the schedule for Class A
shares. Class D shares also will be issued upon conversion of
Class B shares as described above under "Class B". See
"Purchase of Shares-Initial Sales Charge Alternatives-Class A
and Class D Shares".
The following is a discussion of the factors that investors should
consider in determining the method of purchasing shares under the Merrill
Lynch Select Pricing SM System that the investor believes is most
beneficial under his particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial
sales charge alternative may elect to purchase Class D shares or, if an
eligible investor, Class A shares. Investors choosing the initial sales
charge alternative who are eligible to purchase Class A shares should
purchase Class A shares rather than Class D shares because of the account
maintenance fee imposed on Class D shares. Investors qualifying for
significantly
6
<PAGE> 7
reduced initial sales charges may find the initial sales charge
alternative particularly attractive because similar sales charge
reductions are not available with respect to the deferred sales charges
imposed in connection with purchases of Class B or Class C shares.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time also may elect to
purchase Class A or Class D shares, because over time the accumulated
ongoing account maintenance and distribution fees on Class B or Class C
shares may exceed the initial sales charge and, in the case of Class D
shares, the account maintenance fee. Although some investors that
previously purchased Class A shares may no longer be eligible to purchase
Class A shares of other MLAM-advised mutual funds, those previously
purchased Class A shares, together with Class B, Class C and Class D share
holdings, will count toward a right of accumulation which may qualify the
investor for reduced initial sales charges on new initial sales charge
purchases. In addition, the ongoing Class B and Class C account
maintenance and distribution fees will cause Class B and Class C shares to
have higher expense ratios, pay lower dividends and have lower total
returns than the initial sales charge shares. The ongoing Class D account
maintenance fees will cause Class D shares to have a higher expense ratio,
pay lower dividends and have a lower total return than Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges
are deducted at the time of purchase, Class B and Class C shares provide
the benefit of putting all of the investor's dollars to work from the time
the investment is made. The deferred sales charge alternatives may be
particularly appealing to investors who do not qualify for a reduction in
initial sales charges. Both Class B and Class C shares are subject to
ongoing account maintenance fees and distribution fees; however, the
ongoing account maintenance and distribution fees potentially may be
offset to the extent any return is realized on the additional funds
initially invested in Class B or Class C shares. In addition, Class B
shares will be converted into Class D shares of the Fund after a
conversion period of approximately ten years, and thereafter investors
will be subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they
determine it to be most advantageous to have all their funds invested
initially and intend to hold their shares for an extended period of time.
Investors in Class B shares should take into account whether they intend
to redeem their shares within the CDSC period and, if not, whether they
intend to remain invested until the end of the conversion period and
thereby take advantage of the reduction in ongoing fees resulting from the
conversion into Class D shares. Other investors, however, may elect to
purchase Class C shares if they determine that it is advantageous to have
all their assets invested initially and they are uncertain as to the
length of time they intend to hold their assets in MLAM-advised mutual
funds. Although Class C shareholders are subject to a shorter CDSC period
at a lower rate, they forego the Class B conversion feature, making their
investment subject to account maintenance and distribution fees for an
indefinite period of time. In addition, while both Class B and Class C
distribution fees are subject to the limitations on asset-based sales
charges imposed by the NASD, the Class B distribution fees are further
limited under a voluntary waiver of asset-based sales charges. See
"Purchase of Shares-Limitations on the Payment of Deferred Sales
Charges".
7
<PAGE> 8
FINANCIAL HIGHLIGHTS
Except for the six-month period ended June 30, 1994, the financial
information in the table below has been audited in conjunction with the
annual audits of the financial statements of the Fund by Deloitte & Touche
LLP, independent auditors. Financial statements for the year ended
December 31, 1993 and the independent auditors' report thereon are
included in the Statement of Additional Information; unaudited statements
for the six months ended June 30, 1994 also are included in the Statement of
Additional Information. Financial information is not presented for Class B
shares for the period September 29, 1988 to November 18, 1991 since no
shares of that class were publicly issued prior to November 18, 1991, and
financial information is not presented for Class C and Class D shares
since no shares of those classes are publicly issued as of the date of
this Prospectus. 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 For the
Period Period Period
January 1, For the Year September 1, September 29,
1994 to Ended 1992 to 1988+ to
June 30 December 31, December 31, For the Year Ended August 31, August 31,
-----------------------------------------------------------------------------------------
1994 1993 1992 1992 1991* 1990* 1989*
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance. $ 9.28 $ 8.85 $ 9.34 $ 9.07 $ 9.48 $ 9.32 $ 9.35
-----------------------------------------------------------------------------------------
Net asset value beginning of
period:
Investment income-net........... .34 .75 .29 .99 1.12 1.23 1.03
Realized and unrealized gain
(loss) on investments and
foreign currency transactions-
net........................... (.78) .46 (.41) .40 (.16) .15 (.12)
-----------------------------------------------------------------------------------------
Total from investment operations (.44) 1.21 (.12) 1.39 .96 1.38 .91
-----------------------------------------------------------------------------------------
Less dividends and
distributions:
Investment income-net........... (.32) (.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................. (.32) (.78) (.37) (1.12) (1.37) (1.22) (.94)
-----------------------------------------------------------------------------------------
Net asset value, end of period.. $ 8.52 $ 9.28 $ 8.85 $ 9.34 $ 9.07 $ 9.48 $ 9.32
=========================================================================================
Total Investment Return + +
Based on net asset value per
share ........................ (4.60%)# 14.12% (1.26%)# 16.09% 11.50% 16.48% 9.86%#
=========================================================================================
Ratios To Average Net Assets:
Expenses, excluding distribution
fees.......................... .75%** .78% .76%** .88% .85% .86% .81%**
=========================================================================================
Expenses........................ .75%** .78% .76%** .88% .85% .86% .81%**
=========================================================================================
Investment income-net........... 7.75%** 8.22% 8.09%** 11.16% 12.38% 16.27% 10.87%**
=========================================================================================
Supplemental Data:
Net assets, end of period (in
thousands).................... $380,997 $467,625 $455,672 $526,631 $292,709 $299,700 $296,247
=========================================================================================
Portfolio turnover.............. 52.44% 182.88% 68.42% 76.18% 63.83% 99.86% 157.67%
=========================================================================================
</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.
+ +Total investment returns exclude the effects of sales loads.
#Aggregate total investment return.
<PAGE> 9
<TABLE>
<CAPTION>
Class B
----------------------------------------------------------
For the For the For the
Period Period Period
January 1, For the Year September 1, November 18,
1994 to Ended 1992 to 1991 + to
June 30 December 31, December 31, August 31,
----------------------------------------------------------
1994 1993 1992 1992
----------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
----------------------------------------------------------
Per Share Operating Performanc $ 9.28 $ 8.85 $ 9.33 $ 9.26
----------------------------------------------------------
Net asset value beginning of
period:
Investment income-net........... .31 .70 .27 .77
Realized and unrealized gain
(loss) on investments and
foreign currency transactions-
net........................... (.79) .44 (.40) -
----------------------------------------------------------
Total from investment operations (.48) 1.14 (.13) .77
----------------------------------------------------------
Less dividends and
distributions:
Investment income-net........... (.29) (.53) (.33) (.70)
Realized gain on investments-net - (.03) (.02) -
Return of capital-net........... - (.15) - -
----------------------------------------------------------
Total dividends and
distributions................. (.29) (.71) (.35) (.70)
----------------------------------------------------------
Net asset value, end of period.. $ 8.51 $ 9.28 $ 8.85 $ 9.33
==========================================================
Total Investment Return + +
Based on net asset value per
share ........................ (5.05%)# 13.27% (1.42%)# 8.61#
==========================================================
Ratios To Average Net Assets:
Expenses, excluding distribution
fees.......................... .77%** .80% .78%** .88%**
==========================================================
Expenses........................ 1.52%** 1.55% 1.53%** 1.63%**
==========================================================
Investment income-net........... 7.00%** 7.42% 7.08%** 8.02%**
==========================================================
Supplemental Data:
Net assets, end of period (in
thousands).................... $1,812,801 $2,106,120 $1,582,270 $1,514,406
Portfolio turnover.............. 52.44% 182.88% 68.42% 76.18%
==========================================================
</TABLE>
<PAGE> 10
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 exchange 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 costs, are
higher. The portfolio turnover of the Fund may be higher than that of many
investment companies. See "Portfolio Transactions-Portfolio Turnover".
9
<PAGE> 11
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 currencies based upon the
Investment Adviser's analysis of the yield, maturity and currency
considerations
10
<PAGE> 12
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).
11
<PAGE> 13
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 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,
12
<PAGE> 14
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.
13
<PAGE> 15
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, 0.23%; Baa, 2.58%;
Ba, 28.91%; B, 44.46%; Caa, 1.71%; Ca,
0.05%; and C, 0.00%. ..................... 13.54%**
</TABLE>
----------
*These data were calculated on a dollar weighted basis, computed no less
frequently than monthly.
**Percent of portfolio which is not rated by any nationally recognized
statistical rating organization.
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.
14
<PAGE> 16
Although certain risks are involved in options and futures
transactions (as discussed below in "Risk Factors in Options, Futures and
Currency Transactions"), the Investment Adviser believes that, because
the Fund will only engage in these transactions for hedging purposes, the
options and futures portfolio strategies of the Fund will not subject the
Fund to the risks frequently associated with the speculative use of
options and futures transactions. 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".
15
<PAGE> 17
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
16
<PAGE> 18
which the option is "in-the-money". This policy as to OTC options is not
a fundamental policy of the Fund and may be amended by the Directors of
the Fund without the approval of the Fund's shareholders. However, the
Fund will not change or modify this policy prior to the change or
modification by the Commission staff of its position.
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
17
<PAGE> 19
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
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 331/3% 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 maturities than the portfolio securities
being hedged. Transactions in options on futures contracts involve similar
risks.
18
<PAGE> 20
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 a primary dealer
in U.S. Government securities or an affiliate thereof. Under such agreements,
the bank or primary dealer or an affiliate thereof 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 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
19
<PAGE> 21
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. See "Investment Objective and
Policies-Investment Restrictions" in the Statement of Additional
Information. Among the more significant restrictions, the Fund may not:
20
<PAGE> 22
-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.
The Board of Directors of the Fund, at a meeting held on August 3,
1994, approved certain changes to the fundamental and non-fundamental
investment restrictions of the Fund. These changes were proposed in
connection with the creation of a set of standard fundamental and
non-fundamental investment restrictions that would be adopted, subject to
shareholder approval, by all of the non-money market mutual funds advised
by MLAM or FAM. The proposed uniform investment restrictions are designed
to provide each of these funds, including the Fund, with as much
investment flexibility as possible under the Investment Company Act and
applicable state securities regulations, help promote operational
efficiencies and facilitate monitoring of compliance. The invest-
ment objective and policies of the Fund will be unaffected by the adoption
of the proposed investment restrictions.
The full text of the proposed investment restrictions is set forth
under "Investment Objective and Policies - Current Investment
Restrictions - Proposed Uniform Investment Restrictions" in the Statement
of Additional Information. Shareholders of the Fund are currently
considering whether to approve the proposed revised investment
restrictions. If such shareholder approval is obtained, the Fund's current
investment restrictions will be replaced by the proposed restrictions, and
the Fund's Prospectus and Statement of Additional Information will be
supplemented to reflect such change.
21
<PAGE> 23
MANAGEMENT OF THE FUND
Directors
The Directors of the Fund consist 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 the
Investment Adviser and MLAM; President and Director of Princeton
Services, Inc.; Executive Vice President of Merrill Lynch & Co., Inc.
("ML & Co.") and of Merrill Lynch; and 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-Chairman of the Board, WTC Industries, Inc.; former
Chairman and Chief Executive Officer, Kinnard Investments, 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 ML & Co., a financial services holding company and
the parent of Merrill Lynch. The Investment Adviser or MLAM acts as the
investment adviser to more than 100 other registered investment companies.
MLAM also provides investment advisory services to individuals and
institutional accounts. As of August 31, 1994, the Investment Adviser and
MLAM had a total of approximately $165.7 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.
22
<PAGE> 24
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 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; no Class C shares or Class D shares had been issued during that
year.
Transfer Agency Services
Financial Data Services, Inc. (the "Transfer Agent"), which is a
wholly-owned subsidiary of ML & Co., acts as the Fund's transfer agent
pursuant to a transfer agency, dividend disbursing agency and shareholder
servicing agency agreement (the "Transfer Agency Agreement"). Pursuant
to the Transfer Agency Agreement, the Transfer Agent is responsible for
the issuance, transfer and redemption of shares and the opening and
maintenance of shareholder accounts. Pursuant to the Transfer Agency
Agreement, the Fund pays the Transfer Agent an annual fee of $11.00 per
Class A or Class D shareholder account and $14.00 per Class B or Class C
shareholder account, 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. At August 31, 1994, the
Fund had 29,418 Class A shareholder accounts, 104,372 Class B shareholder
accounts, no Class C shareholder accounts and no Class D shareholder
accounts. At this level of accounts, the annual fee payable to the
Transfer Agent would aggregate approximately $1,785,000 plus out-of-pocket
expenses.
PURCHASE OF SHARES
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), an
affiliate of MLAM, the Investment Adviser and Merrill Lynch, acts as the
distributor of shares of the Fund. Shares of the Fund are offered
continuously for sale by the Distributor and other eligible securities
dealers (including Merrill Lynch). Shares of the Fund may be purchased
from securities dealers or by mailing a purchase order directly to the
Transfer Agent. The minimum initial purchase is $1,000, except that the
minimum initial purchase for retirement plans is $100. The minimum
subsequent purchase is $50 ($1 for retirement plans).
The Fund offers its shares in four classes at a public offering price
equal to the next determined net asset value per share plus sales charges
imposed either at the time of purchase or on a deferred basis depending
upon the class of shares selected by the investor under the Merrill Lynch
Select Pricing SM System, as described below. The applicable offering
price for purchase orders is based upon the net asset value of the Fund
next
23
<PAGE> 25
determined after receipt of the purchase orders by the Distributor. As to
purchase orders received by securities dealers prior to 4:15 p.m., New
York time, which includes orders received after the determination of the
net asset value on the previous day, the applicable offering price will be
based on the net asset value as of 4:15 p.m., New York time, on the day
the orders are placed with the Distributor, provided the orders are
received by the Distributor prior to 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. The Fund or the Distributor may suspend the offering of the
Fund's shares of any class at any time in response to conditions in the
securities markets or otherwise and may thereafter resume such offering
from time to time. Any order may be rejected by the Distributor or the
Fund. Neither the Distributor nor the dealers are permitted to withhold
placing orders to benefit themselves by a price change. Merrill Lynch may
charge its customers a processing fee (presently $4.85) to confirm a sale
of shares to such customers. Purchases directly through the Fund's
Transfer Agent are not subject to the processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing SM System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold
the shares and other relevant circumstances. Shares of Class A and Class D
are sold to investors choosing the initial sales charge alternatives and
shares of Class B and Class C are sold to investors choosing the deferred
sales charge alternatives. Investors should determine whether under their
particular circumstances it is more advantageous to incur an initial sales
charge or to have the entire initial purchase price invested in the Fund
with the investment thereafter being subject to a contingent deferred
sales charge and ongoing distribution fees. A discussion of the factors
that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select Pricing SM System is set forth under
"Merrill Lynch Select Pricing SM System" on page 4.
Each Class A, Class B, Class C and Class D share of the Fund
represents identical interests in the investment portfolio of the Fund and
has the same rights, except that Class B, Class C and Class D shares bear
the expenses of the ongoing account maintenance fees, and Class B and
Class C shares bear the expenses of the ongoing distribution fees and the
additional incremental transfer agency costs resulting from the deferred
sales charge arrangements. The deferred sales charges and account
maintenance fees that are imposed on Class B and Class C shares, as well
as the account maintenance fees that are imposed on Class D shares, will
be imposed directly against those classes and not against all assets of
the Fund and, accordingly, such charges will not affect the net asset
value of any other class or have any impact on investors choosing another
sales charge option. Dividends paid by the Fund for each class of shares
will be calculated in the same manner at the same time and will differ
only to the extent that account maintenance and distribution fees and any
incremental transfer agency costs relating to a particular class are borne
exclusively by that class. Class B, Class C and Class D shares each have
exclusive voting rights with respect to the Rule 12b-1 distribution plan
adopted with respect to such class pursuant to which account maintenance
and/or distribution fees are paid. See "Distribution Plans" below. Each
class has different exchange privileges. See "Shareholder Services-
Exchange Privilege".
Investors should understand that the purpose and function of the
initial sales charges with respect to Class A and Class D shares are the
same as those of the deferred sales charges with respect to Class B and
Class C shares in that the sales charges applicable to each class provide
for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be
used to finance the distribution expenditures of another class. Sales
personnel may receive different compensation for selling different classes
of shares. Investors are advised that only Class A and Class D shares may
be available for purchase through securities dealers, other than Merrill
Lynch, which are eligible to sell shares.
24
<PAGE> 26
The following table sets forth a summary of the distribution
arrangements for each class of shares under the Merrill Lynch Select
Pricing SM System.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Account
Maintenance Distribution Conversion
Class Sales Charge (1) Fee Fee Feature
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 4.00% initial sales No No No
charge (2)(3)
- -----------------------------------------------------------------------------------------------------------------------------
B CDSC for a period of 4 0.25% 0.50% B shares convert to
years, at a rate of 4.0% during D shares automatically after
the first year, decreasing 1.0% approximately ten years (4)
annually to 0.0%
- -----------------------------------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.55% No
- -----------------------------------------------------------------------------------------------------------------------------
D Maximum 4.00% initial sales 0.25% No No
charge (3)
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
----------
(1) Initial sales charges are imposed at the time of purchase as a
percentage of the offering price. CDSCs may be imposed if the
redemption occurs within the applicable CDSC time period. The charge
will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives-Class A and Class D Shares-Eligible Class A Investors".
(3) Reduced for purchases of $25,000 or more. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead will be subject to a 1.0% CDSC for one year.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have an
eight-year conversion period. If Class B shares of the Fund are
exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the
exchange will apply, and the holding period for the shares exchanged
will be tacked onto the holding period for the shares acquired.
Initial Sales Charge Alternatives-Class A and Class D Shares
Investors choosing the initial sales charge alternatives who are
eligible to purchase Class A shares should purchase Class A shares rather
than Class D shares because there is an account maintenance fee imposed on
Class D shares.
25
<PAGE> 27
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternative is the next determined net
asset value plus varying sales charges (i.e., sales loads), as set forth
below.
<TABLE>
<CAPTION>
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** ........................................ .00 .00 .00
</TABLE>
----------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases
of $1,000,000 or more made on or after October 21, 1994. If the sales
charge is waived, such purchases will be subject to a CDSC of up to
1.0% if the shares are redeemed within one year after purchase. Class A
purchases made prior to October 21, 1994 may be subject to a CDSC if
the shares are redeemed within one year of purchase at the following
rates: 0.75% on purchases of $1,000,000 to $2,500,000; 0.40% on
purchases of $2,500,001 to $3,500,000; 0.25% on purchases of $3,500,001
to $5,000,000; and 0.20% on purchases of more than $5,000,000 in lieu
of paying an initial sales charge. The charge will be assessed as an
amount equal to the lesser of the proceeds of redemption or the cost of
the shares being redeemed. A sales charge of 0.75% will be charged on
purchases of $1 million or more of Class A or Class D shares by certain
401(k) plans.
The Distributor may reallow discounts to selected dealers and retain
the balance over such discounts. At times the Distributor may reallow the
entire sales charge to such dealers. Since securities dealers selling
Class A and Class D shares of the Fund will receive a concession equal to
most of the sales charge, they may be deemed to be underwriters under the
Securities Act. For the fiscal year ended December 31, 1993, the
Distributor received CDSCs of $1,976, all of which were paid to Merrill
Lynch, with respect to redemptions within one year after purchase of Class
A shares purchased subject to front-end sales charge waivers. For the six
months ended June 30, 1994, the Distributor received no CDSCs with respect
to redemptions within one year after purchase of Class A shares purchased
subject to front-end sales charge waivers.
Eligible Class A Investors. Class A shares are offered to a limited
group of investors and also will be issued upon reinvestment of dividends
on outstanding Class A shares. Investors that currently own Class A shares
in a shareholder account are entitled to purchase additional Class A
shares in that account. Certain employer sponsored retirement or savings
plans, including eligible 401(k) plans, may purchase Class A shares at net
asset value provided such plans meet the required minimum number of
eligible employees or required amount of assets advised by MLAM or any of
its affiliates. Class A shares are available at net asset value to
corporate warranty insurance reserve fund programs provided that the
program has $3 million or more initially invested in MLAM-advised mutual
funds. Also eligible to purchase Class A shares at net asset value are
participants in certain investment programs including TMA SM Managed
Trusts to which Merrill Lynch Trust Company provides discretionary trustee
services and certain purchases made in connection with the Merrill Lynch
Mutual Fund Adviser program. In addition, Class A shares will be offered
at net asset value to ML & Co. and its subsidiaries and their directors
and employees and to members of the Boards of MLAM-advised investment
companies, including the Fund. Certain persons who acquired shares of
certain MLAM-advised closed-end
26
<PAGE> 28
funds who wish to reinvest the net proceeds from a sale of their
closed-end fund shares of common stock in shares of the Fund also may
purchase Class A shares of the Fund if certain conditions set forth in the
Statement of Additional Information are met. For example, Class A shares
of the Fund and certain other MLAM-advised mutual funds are offered at net
asset value to shareholders of Merrill Lynch Senior Floating Rate Fund,
Inc. who wish to reinvest the net proceeds from a sale of certain of their
shares of common stock of Merrill Lynch Senior Floating Rate Fund, Inc. in
shares of such funds.
Reduced Initial Sales Charges. No initial sales charges are imposed
upon Class A and Class D shares issued as a result of the automatic
reinvestment of dividends or capital gains distributions. Class A and
Class D sales charges also may be reduced under a Right of Accumulation
and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible
Class A investors as set forth above under "Eligible Class A Investors".
Class D shares are offered at net asset value, without a sales charge,
to an investor who has a business relationship with a Merrill Lynch financial
consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Additional information concerning these reduced initial sales charges,
including information regarding investments by Employee Sponsored
Retirement or Savings Plans, is set forth in the Statement of Additional
Information.
Deferred Sales Charge Alternatives-Class B and Class C Shares
Investors choosing the deferred sales charge alternatives should
consider Class B shares if they intend to hold their shares for an
extended period of time and Class C shares if they are uncertain as to the
length of time they intend to hold their assets in MLAM-advised mutual
funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time
of purchase. As discussed below, Class B shares are subject to a four year
CDSC, while Class C shares are subject only to a one year 1.0% CDSC. On
the other hand, approximately eight years after Class B shares are issued,
such Class B shares, together with shares issued upon dividend
reinvestment with respect to those shares, are automatically converted
into Class D shares of the Fund and thereafter will be subject to lower
continuing fees. See "Conversion of Class B Shares to Class D Shares"
below. Both Class B and Class C shares are subject to an account
maintenance fee of 0.25% of net assets and Class B and Class C shares are
subject to distribution fees of 0.50% and 0.55%, respectively, of net
assets as discussed below under "Distribution Plans".
Class B and Class C shares are sold without an initial sales charge so
that the Fund will receive the full amount of the investor's purchase
payment. Merrill Lynch compensates its financial consultants for selling
Class B and Class C shares at the time of purchase from its own funds. See
"Distribution Plans" below. The proceeds from the account maintenance
fees are used to compensate Merrill Lynch for providing continuing account
maintenance activities.
Proceeds from the CDSC and the distribution fee are paid to the
Distributor and are used in whole or in part by the Distributor to defray
the expenses of dealers (including Merrill Lynch) related to providing
distribution-related services to the Fund in connection with the sale of
the Class B and Class C shares, such as the payment
27
<PAGE> 29
of compensation to financial consultants for selling Class B and Class C
shares, from the dealers' own funds. The combination of the CDSC and the
ongoing distribution fee facilitates the ability of the Fund to sell the
Class B and Class C shares without a sales charge being deducted at the
time of purchase. Approximately ten years after issuance, Class B shares
will convert automatically into Class D shares of the Fund, which are
subject to an account maintenance fee but no distribution fee; Class B
shares of certain other MLAM-advised mutual funds into which exchanges may
be made convert into Class D shares automatically after approximately
eight years. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See
"Limitations on the Payment of Deferred Sales Charges" below. The
proceeds from the ongoing account maintenance fees are used to compensate
Merrill Lynch for providing continuing account maintenance activities.
Class B shareholders of the Fund exercising the exchange privilege
described under "Shareholder Services-Exchange Privilege" will continue
to be subject to the Fund's CDSC schedule if such schedule is higher than
the CDSC schedule relating to the Class B shares acquired as a result of
the exchange.
Contingent Deferred Sales Charges-Class B Shares. Class B shares which
are redeemed within four years of purchase may be subject to a CDSC at the
rates set forth below charged as a percentage of the dollar amount subject
thereto. The charge will be assessed on an amount equal to the lesser of
the proceeds of redemption or the cost of the shares being redeemed.
Accordingly, no CDSC will be imposed on increases in net asset value above
the initial purchase price. In addition, no 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 CDSCs 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 Class B CDSC:
<TABLE>
<CAPTION>
Class B
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 or her first
28
<PAGE> 30
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 Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plans or following the death or disability
(as defined in the Internal Revenue Code of 1986, as amended) of a
shareholder. The Class B CDSC also is waived on redemptions of shares by
certain eligible 401(a) and eligible 401(k) plans. The CDSC also is waived
for any Class B shares which are purchased by eligible 401(a) or eligible
401(k) plans which are rolled over into a Merrill Lynch or Merrill Lynch
Trust Company custodied IRA and held in such account at the time of
redemption. The Class B CDSC also is waived for any Class B shares which
are purchased by a Merrill Lynch rollover IRA that was funded by a
rollover from a terminated 401(k) plan managed by the MLAM Private
Portfolio Group and held in such account at the time of redemption.
Additional information concerning the waiver of the Class B CDSC is set
forth in the Statement of Additional Information.
Contingent Deferred Sales Charges-Class C Shares. Class C shares which
are redeemed within one year after purchase may be subject to a 1.0% CDSC
charged as a percentage of the dollar amount subject thereto. The charge
will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. Accordingly, no Class
C CDSC will be imposed on increases in net asset value above the initial
purchase price. In addition, no Class C CDSC will be assessed on shares
derived from reinvestment of dividends or capital gains distributions.
In determining whether a Class C CDSC is applicable to a redemption,
the calculation will be determined in the manner that results in the
lowest possible rate being charged. Therefore, it will be assumed that the
redemption is first of shares held for over one year or shares acquired
pursuant to reinvestment of dividends or distributions and then of shares
held longest during the one-year period. The charge will not be applied to
dollar amounts representing an increase in the net asset value since the
time of purchase. A transfer of shares from a shareholder's account to
another account will be assumed to be made in the same order as a
redemption.
Conversion of Class B Shares to Class D Shares. After approximately
ten years (the "Conversion Period"), Class B shares will be converted
automatically into Class D shares of the Fund. Class D shares are subject
to an ongoing account maintenance fee of 0.25% of net assets but are not
subject to the distribution fee that is borne by Class B shares. Automatic
conversion of Class B shares into Class D shares will occur at least once
each month (on the "Conversion Date") on the basis of the relative net
asset values of the shares of the two classes on the Conversion Date,
without the imposition of any sales load, fee or other charge. Conversion
of Class B shares to Class D shares will not be deemed a purchase or sale
of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on
Class B shares also will convert automatically to Class D shares. The
Conversion Date for dividend reinvestment shares will be calculated taking
into account the length of time the shares underlying such dividend
reinvestment shares were outstanding. If at a Conversion Date the
conversion of Class B shares to Class D shares of the Fund in a single
account will result in less than $50 worth of Class B shares being left in
the account, all of the Class B shares of the Fund held in the account on
the Conversion Date will be converted to Class D shares of the Fund.
Share certificates for Class B shares of the Fund to be converted must
be delivered to the Transfer Agent at least one week prior to the
Conversion Date applicable to those shares. In the event such certificates
are not
29
<PAGE> 31
received by the Transfer Agent at least one week prior to the Conversion
Date, the related Class B shares will convert to Class D shares on the
next scheduled Conversion Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will
convert approximately eight years after initial purchase, and Class B
shares of taxable and tax-exempt fixed income MLAM-advised mutual funds
will convert approximately ten years after initial purchase. If, during
the Conversion Period, a shareholder exchanges Class B shares with an
eight-year Conversion Period for Class B shares with a ten-year Conversion
Period, or vice versa, the Conversion Period applicable to the Class B
shares acquired in the exchange will apply, and the holding period for the
shares exchanged will be tacked onto the holding period for the shares
acquired.
The Conversion Period is modified for shareholders who purchased Class
B shares through certain retirement plans which qualified for a waiver of
the CDSC normally imposed on purchases of Class B shares ("Class B
Retirement Plans"). When the first share of any MLAM-advised mutual fund
purchased by a Class B Retirement Plan has been held for ten years (i.e.,
ten years from the date the relationship between MLAM-advised mutual funds
and the Class B Retirement Plan was established), all Class B shares of
all MLAM-advised mutual funds held in that Class B Retirement Plan will be
converted into Class D shares of the appropriate Funds. Subsequent to such
conversion, that Class B Retirement Plan will be sold Class D shares of
the appropriate funds at net asset value.
Distribution Plans
The Fund has adopted separate distribution plans for Class B, Class C
and Class D shares pursuant to Rule 12b-1 under the Investment Company Act
(each a "Distribution Plan") with respect to the account maintenance
and/or distribution fees paid by the Fund to the Distributor with respect
to such classes. The Class B and Class C Distribution Plans provide for
the payment of account maintenance fees and distribution fees, and the
Class D Distribution Plan provides for the payment of account maintenance
fees.
The Distribution Plans for Class B, Class C and Class D shares each
provide that the Fund pays the Distributor an account maintenance fee
relating to the shares of the relevant class, accrued daily and paid
monthly, at the annual rate of 0.25% of the average daily net assets of
the Fund attributable to shares of the relevant class in order to
compensate the Distributor and Merrill Lynch (pursuant to a sub-agreement)
in connection with account maintenance activities.
The Distribution Plans for Class B and Class C shares each provide
that the Fund also pays the Distributor a distribution fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the
annual rate of 0.50% and 0.55%, respectively, of the average daily net
assets of the Fund attributable to the shares of the relevant class in
order to compensate the Distributor and Merrill Lynch (pursuant to a
sub-agreement) for providing shareholder and distribution services, and
bearing certain distribution-related expenses of the Fund, including
payments to financial consultants for selling Class B and Class C shares
of the Fund. The Distribution Plans relating to Class B and Class C shares
are designed to permit an investor to purchase Class B and Class C shares
through dealers without the assessment of an initial sales charge and at
the same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this
regard, the purpose and function of the ongoing distribution fees and the
CDSC are the same as those of the initial sales charge with respect to the
Class A and Class D shares of the Fund in that the deferred sales charges
provide for the financing of the distribution of the Fund's Class B and
Class C shares.
30
<PAGE> 32
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 Class B 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 $4,633,842 for the account maintenance fee and $9,267,683 for
the distribution fee pursuant to the Prior Plan and the Class B
Distribution Plan. The Fund did not begin to offer shares of Class C or
Class D publicly until the date of this Prospectus. Accordingly, no
payments have been made pursuant to the Class C or Class D Distribution
Plans prior to the date of this Prospectus.
The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the shares regardless of the
amount of expenses incurred and, accordingly, distribution-related
revenues from the Distribution Plans may be more or less than
distribution-related expenses. Information with respect to the
distribution-related revenues and expenses is presented to the Directors
for their consideration in connection with their deliberations as to the
continuance of the Class B and Class C Distribution Plans. This
information is presented annually as of December 31 of each year on a
"fully allocated accrual" basis and quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated accrual basis, revenues
consist of the account maintenance fees, distribution fees, 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). As of July 31, 1994, direct cash
revenues for the period since the commencement of operations as an
open-end investment company exceeded direct cash expenses by $6,725,731
(0.38% of Class B net assets at that date).
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch
in connection with Class B, Class C and Class D shares, and there is no
assurance that the Directors of the Fund will approve the continuance of
the Distribution Plans from year to year. However, the Distributor intends
to seek annual continuation of the Distribution Plans. In their review of
the Distribution Plans, the Directors will be asked to take into
consideration expenses incurred in connection with the account maintenance
and/or distribution of each class of shares separately. The initial sales
charges, the account maintenance fee, the distribution fee and/or the
CDSCs received with respect to one class will not be used to subsidize the
sale of shares of another class. Payments of the distribution fee on Class
B shares will terminate upon conversion of those Class B shares into Class
D shares as set forth under "Deferred Sales Charge Alternatives-Class B
and Class C Shares-Conversion of Class B Shares to Class D Shares".
31
<PAGE> 33
Limitations on the Payment of Deferred Sales Charges
The maximum sales charge rule in the Rules of Fair Practice of the
NASD imposes a limitation on certain asset-based sales charges such as the
distribution fee and the CDSC borne by the Class B and Class C shares but
not the account maintenance fee. The maximum sales charge rule is applied
separately to each class. As applicable to the Fund, the maximum sales
charge rule limits the aggregate of distribution fee payments and CDSCs
payable by the Fund to (1) 6.25% of eligible gross sales of Class B shares
and Class C shares, computed separately (defined to exclude shares issued
pursuant to dividend reinvestments and exchanges), plus (2) interest on
the unpaid balance for the respective class, computed separately, at the
prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from the payment of the distribution fee and the
CDSC). In connection with the Class B shares, the Distributor has
voluntarily agreed to waive interest charges on the unpaid balance in
excess of 0.50% of eligible gross sales. Consequently, the maximum amount
payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any
time. To the extent payments would exceed the voluntary maximum, the Fund
will not make further payments of the distribution fee with respect to
Class B shares, and any CDSCs will be paid to the Fund rather than to the
Distributor; however, the Fund will continue to make payments of the
account maintenance fee. In certain circumstances the amount payable
pursuant to the voluntary maximum may exceed the amount payable under the
NASD formula. In such circumstances payments in excess of the amount
payable under the NASD formula will not be made.
REDEMPTION OF SHARES
The Fund is required to redeem for cash all shares of the Fund upon
receipt of a written request in proper form. The redemption price is the
net asset value per share next determined after the initial receipt of
proper notice of redemption. Except for any CDSC which may be applicable,
there will be no charge for redemption if the redemption request is sent
directly to the Transfer Agent. Shareholders liquidating their holdings
will receive 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 without charge 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 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
32
<PAGE> 34
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 will not exceed 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);
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 and Class D Shares
Shareholders who have redeemed their Class A or Class D shares have a
one-time privilege to reinstate their accounts by purchasing Class A or
Class D shares, as the case may be, of the Fund at net asset value without
a sales charge up to the dollar amount redeemed. The reinstatement
privilege may be exercised by sending a notice of exercise along with a
check for the amount to be reinstated to the Transfer Agent within 30 days
after the date the request for redemption was accepted by the Transfer
Agent or the Distributor. The reinstatement will be made at the net asset
value per share next determined after the notice of reinstatement is
received and cannot exceed the amount of the redemption proceeds. The
reinstatement privilege is a one-time privilege and may be exercised by
the Class A or Class D shareholder only the first time such shareholder
makes a redemption.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below which are designed to facilitate investment in shares of
the Fund. 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:
33
<PAGE> 35
Investment Account. Each shareholder whose account (an "Investment
Account") is maintained at the Transfer Agent will receive statements, at
least quarterly, from the Transfer Agent. These statements will serve as
transaction confirmations for automatic investment purchases and the
reinvestment of ordinary income dividends, and long-term capital gain
distributions. The statements also will 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
ordinary income dividends 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 also may
maintain their accounts through Merrill Lynch. Upon the transfer of shares
out of a Merrill Lynch brokerage account, an Investment Account in the
transferring shareholder's name will be opened at the Transfer Agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the Class A or Class D shares are to be
transferred will not take delivery of shares of the Fund, a shareholder
either must redeem the Class A or Class D shares (paying any applicable
CDSC) so that the cash proceeds can be transferred to the account at the
new firm or such shareholder must continue to maintain an Investment
Account at the Transfer Agent for those Class A or Class D shares.
Shareholders interested in transferring their Class B or Class C shares
from Merrill Lynch and who do not wish to have an Investment Account
maintained for such shares at the Transfer Agent may request their new
brokerage firm to maintain such shares in an account registered in the
name of the brokerage firm for the benefit of the shareholder at the
Transfer Agent. Shareholders considering transferring a tax deferred
retirement account such as an Individual Retirement Account from Merrill
Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the retirement account is to be transferred
will not take delivery of shares of the Fund, a shareholder must either
redeem the shares (paying any applicable CDSC) so that the cash proceeds
can be transferred to the account at the new firm, or such shareholder
must continue to maintain a retirement account at Merrill Lynch for those
shares.
Exchange Privilege. Shareholders of each class of shares of the Fund
have an exchange privilege with certain other MLAM-advised mutual funds.
There is currently no limitation on the number of times a shareholder may
exercise the exchange privilege. The exchange privilege may be modified or
terminated in accordance with the rules of the Commission.
Under the Merrill Lynch Select Pricing SM System, Class A shareholders
may exchange Class A shares of the Fund for Class A shares of a second
MLAM-advised mutual fund if the shareholder holds any Class A shares of
the second fund in his account in which the exchange is made at the time
of the exchange or is otherwise eligible to purchase Class A shares of the
second fund. If the Class A shareholder wants to exchange Class A shares
for shares of a second MLAM-advised mutual fund, and the shareholder does
not hold Class A shares of the second fund in his account at the time of
the exchange and is not otherwise eligible to acquire Class A shares of
the second fund, the shareholder will receive Class D shares of the second
fund as a result of the exchange. Class D shares also may be exchanged for
Class A shares of a second MLAM-advised mutual fund at any time as long
as, at the time of the exchange, the shareholder holds Class A shares of
the second fund in the account in which the exchange is made or is
otherwise eligible to purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus
an amount equal to the difference, if any, between the sales charge
previously paid on the Class A or Class D shares being exchanged and the
sales charge payable at the time of the exchange on the shares being
acquired.
34
<PAGE> 36
Class B, Class C and Class D shares will be exchangeable with shares
of the same class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC will be exchangeable on
the basis of relative net asset value per share without the payment of any
CDSC that might otherwise be due upon redemption of the shares of the
Fund. For purposes of computing the CDSC that may be payable upon a
disposition of the shares acquired in the exchange, the holding period for
the previously owned shares of the Fund is "tacked" to the holding
period of the newly acquired shares of the other Fund.
Class A, Class B, Class C and Class D shares also will be exchangeable
for shares of certain MLAM-advised money market funds specifically
designated as available for exchange by holders of Class A, Class B, Class
C or Class D shares. The period of time that Class A, Class B, Class C or
Class D shares are held in a money market fund, however, will not count
toward satisfaction of the holding period requirement for reduction of any
CDSC imposed on such shares, if any, and, with respect to Class B shares,
toward satisfaction of the Conversion Period.
Class B shareholders of the Fund exercising the exchange privilege
will continue to be subject to the Fund's CDSC schedule if such schedule
is higher than the CDSC schedule relating to the new Class B shares. In
addition, Class B shares of the Fund acquired through use of the exchange
privilege will be subject to the Fund's CDSC schedule if such schedule is
higher than the CDSC schedule relating to the Class B shares of the
MLAM-advised mutual fund from which the exchange has been made.
Exercise of the exchange privilege is treated as a sale for Federal
income tax purposes. For further information, see "Shareholder Services-
Exchange Privilege" in the Statement of Additional Information.
The Fund's exchange privilege is modified with respect to purchases of
Class A and Class D shares under the Merrill Lynch Mutual Fund Adviser
("MFA") program. First, the initial allocation of assets is made under
the MFA program. Then, any subsequent exchange under the MFA program of
Class A or Class D shares of a MLAM-advised mutual fund for Class A or
Class D shares of the Fund will be made solely on the basis of the
relative net asset values of the shares being exchanged. Therefore, there
will not be a charge for any difference between the sales charge
previously paid on the shares of the other MLAM-advised mutual fund and
the sales charge payable on the shares of the Fund being acquired in the
exchange under the MFA program.
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. Cash payments also can be directly deposited to the shareholder's
bank account. No CDSC will be imposed on redemption of shares issued as a
result of the automatic reinvestment of dividends or capital gains
distributions.
Systematic Withdrawal. A Class A or Class D 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 or Class D
shareholder whose shares are held within a CMA(Reg), CBA(Reg) 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.
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Automatic Investment Plans. Regular additions of Class A, Class B,
Class C or Class D shares may be made to an investor's Investment Account
by prearranged charges of $50 or more to his regular bank account.
Investors who maintain CMA(Reg) accounts may arrange to have periodic
investments made in the Fund in their CMA(Reg) account or in certain
related accounts in amounts of $100 or more through the CMA(Reg) Automated
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, the
Fund (but not its shareholders) will not be subject to Federal income tax
on the part of its net ordinary income and net realized capital gains
which it distributes to Class A, Class B, Class C and Class D shareholders
(together, the "shareholders"). The Fund intends to distribute
substantially all of such income.
Dividends paid by the Fund from its ordinary income and distributions
of the Fund's net realized short-term capital gains (together referred to
hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from the Fund's net realized long-term
capital gains (including long-term gains from certain transactions in
futures and options) ("capital gain dividends") are taxable to
shareholders as long-term capital gains, regardless of the length of time
the shareholder has owned Fund shares. Distributions in excess of the
Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero,
will constitute capital gains to such holder (assuming the shares are held
as a capital asset).
Dividends are taxable to shareholders even though they are reinvested
in additional shares of the Fund. Not later than 60 days after the close
of its taxable year, the Fund will provide its shareholders with a written
notice designating the amounts of any ordinary income dividends or capital
gain dividends. Distributions by the Fund, whether from ordinary income or
capital gains, generally 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
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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"). Generally,
shareholders subject to backup withholding will be those for whom no
certified taxpayer identification number is on file with the Fund or who,
to the Fund's knowledge, have furnished an incorrect number. When
establishing an account, an investor must certify under penalty of perjury
that such number is correct and that such investor is not otherwise
subject to backup withholding.
Under Code Section 988, foreign currency gains or losses from certain
debt instruments, from certain forward contracts, from futures contracts
that are not "regulated futures contracts" and from unlisted options
will generally be treated as ordinary income or loss. Such Code Section
988 gains or losses will generally increase or decrease the amount of the
Fund's investment company taxable income available to be distributed to
shareholders as ordinary income. Additionally, if Code Section 988 losses
exceed other investment company taxable income during a taxable year, the
Fund would not be able to make any ordinary income dividend distributions,
and any distributions made before the losses were realized but in the same
taxable year would be recharacterized as a return of capital to
shareholders, thereby reducing the basis of each shareholder's Fund
shares, and resulting in a capital gain for any shareholder who received a
distribution greater than such shareholder's basis in Fund shares
(assuming the shares were held as a capital asset).
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's
basis in the Class D shares acquired will be the same as such
shareholder's basis in the Class B shares converted, and the holding
period of the acquired Class D shares will include the holding period for
the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales
charge paid to the Fund on the exchanged shares reduces any sales charge
the shareholder would have owed upon the purchase of the new shares in the
absence of the exchange privilege. Instead, such sales charge will be
treated as an amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the
automatic reinvestment of dividends or otherwise) within a 61-day period
beginning 30 days before and ending 30 days after the date that the shares
are disposed of. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For
the complete provisions, reference should be made to the pertinent Code
sections and the Treasury regulations promulgated thereunder. The Code and
the Treasury regulations are subject to change by legislative or
administrative action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to
state and local taxes.
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Certain states exempt from state income taxation dividends paid by
RICs which are derived from interest on U.S. Government obligations. State
law varies as to whether dividend income attributable to U.S. Government
obligations is exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding
specific questions as to Federal, foreign, state or local taxes. Foreign
investors should consider applicable foreign taxes in their evaluation of
an investment in the Fund.
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, Class
B, Class C and Class D 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 any CDSC that would be applicable to a complete redemption of
the investment at the end of the specified period such as in the case of
Class B and Class C shares and the maximum sales charge in the case of
Class A and Class D shares. Dividends paid by the Fund with respect to
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 fees and distribution
charges and any incremental transfer agency costs relating to each class
of shares will be borne exclusively by that class. The Fund will include
performance data for all classes of shares of the Fund in any
advertisement or information including performance data of the Fund.
The Fund also may quote total return and aggregate total return
performance data for various specified time periods. Such data will be
calculated substantially as described above, except that (1) the rates of
return calculated will not be average annual rates, but rather, actual
annual, annualized or aggregate rates of return and (2) the maximum
applicable sales charges will not be included with respect to 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 waiver of the CDSC in the case of Class B shares
(such as investors in certain retirement plans) or to reduced sales
charges in the case of Class A and Class D shares, 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.
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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 June 30, 1994 was 8.19% for Class A shares and 7.76%
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
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
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<PAGE> 41
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 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
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<PAGE> 42
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 each class of shares will
be reduced as a result of any account maintenance, distribution and
transfer agency fees applicable with respect to such class of 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 shares of all classes of the Fund is
determined once daily at 4:15 P.M., New York time, 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 any
account maintenance and/or distribution fees payable to the Distributor,
are accrued daily. The Fund employs Merrill Lynch Securities Pricing
Service ("MLSPS"), an affiliate of the Investment Adviser, to provide
certain securities prices for the Fund. The Fund's arrangement with MLSPS
was not effective until after the close of the Fund's most recently
completed fiscal year end. Consequently, no fees were paid by the Fund to
MLSPS for pricing services during the Fund's most recently completed
fiscal year end.
The per share net asset value per share of the Class A shares
generally will be higher than the per share net asset value of the other
classes, reflecting the daily expense accruals of the account maintenance,
distribution and higher transfer agency fees applicable with respect to
Class B and Class C shares and the daily expense accruals of the account
maintenance fees applicable with respect to Class D shares; moreover, the
per share net asset value of Class D shares generally will be higher than
the per share net asset value of the Class B and Class C shares,
reflecting the daily expense accruals of the distribution fees and higher
transfer agency fees applicable with respect to Class B and Class C
shares. It is expected, however, that the per share net asset value of the
classes will tend to converge immediately after the payment of dividends
or distributions, which will differ by approximately the amount of the
expense accrual differentials 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 4,000,000,000 shares of common stock,
par value $0.10 per share, divided into four classes, designated Class A,
Class B, Class C and Class D Common Stock, each of which consists of
1,000,000,000 shares. Shares of Class A, Class B, Class C and Class D
common stock
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represent interests in the same assets of the Fund and are identical in
all respects except that the Class B, Class C and Class D shares bear
certain expenses related to the account maintenance associated with such
shares, and Class B and Class C shares bear certain expenses related to
the distribution of such shares. Each class has exclusive voting rights
with respect to matters relating to account maintenance and distribution
expenditures, as applicable. See "Purchase of Shares". The Fund has
received an order from the Commission permitting the issuance and sale of
multiple classes of common stock. The Directors of the Fund may classify
and reclassify the shares of the Fund into additional classes of common
stock at a future date.
Shareholders are entitled to one vote for each share held and
fractional votes for fractional shares held and will vote on the election
of Directors and any other matter submitted to a shareholder vote. The
Fund does not intend to hold meetings of shareholders in any year in which
the Investment Company Act does not require shareholders to act upon any
of the following matters: (i) election of directors; (ii) approval of an
investment advisory agreement; (iii) approval of a distribution agreement;
and (iv) ratification of selection of independent accountants. 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 rights. Shares have the conversion
rights described in this Prospectus. Each share of Common Stock is
entitled to participate equally in dividends and distributions declared by
the Fund and in the net assets of the Fund upon liquidation or dissolution
after satisfaction of outstanding liabilities except, as noted above, the
Class B, Class C and Class D shares bear certain additional expenses.
Shareholder Inquiries
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
Shareholder Reports
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of
the number of accounts such shareholder has. If a shareholder wishes to
receive separate copies of each report and communication for each of the
shareholder's related accounts, the shareholder should notify in writing:
Financial Data Services, Inc.
Attn: TAMFO
P.O. Box 45289
Jacksonville, Florida 32232-5289
The written notification should include the shareholder's name,
address, tax identification number and Merrill Lynch, Pierce, Fenner &
Smith Incorporated and/or mutual fund account numbers. If you have any
questions regarding this please call your Merrill Lynch financial
consultant or Financial Data Services, Inc. at 800-637-3863.
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APPENDIX
RATINGS OF DEBT SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") CORPORATE
RATINGS
Aaa-Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edge". Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa-Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A-Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
Baa-Bonds which are rated Baa are considered as medium grade
obligations; i.e., they are neither highly protected nor poorly secured.
Interest 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.
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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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 designed to
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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:
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.
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.
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.
45
<PAGE> 47
The ratings are based, in varying degrees, on the following
considerations:
I. 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;
II. nature of and provisions of the obligation; and
III. protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under
the laws of bankruptcy and other laws affecting creditors' rights.
AAA Debt rated AAA has the highest rating assigned by Standard
& Poor's. Capacity to 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.
CC The rating CC is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC
rating.
46
<PAGE> 48
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.
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.
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.
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:
47
<PAGE> 49
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.
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:
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.
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".
48
<PAGE> 50
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
B regarded, on balance, as predominately speculative with
CCC respect to the issuer's capacity to pay preferred stock
obligations. "BB" indicates the lowest BB 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.
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.
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
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.
49
<PAGE> 51
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.
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.
50
<PAGE> 52
MERRILL LYNCH WORLD INCOME FUND, INC.-AUTHORIZATION FORM (PART 1)
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
1. Share Purchase Application
I, being of legal age, wish to purchase: (choose one)
/ / Class A shares / / Class B shares / / Class C shares / / Class D
shares
of Merrill Lynch World Income Fund, Inc. and establish an Investment Account
as described in the Prospectus. In the event that I am not eligible to
purchase Class A shares, I understand that Class D shares will be
purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $............ payable to Financial Data
Services, Inc. as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price
next to be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds
that would qualify for the right of accumulation as outlined in the
Statement of Additional Information: (Please list all funds. Use a
separate sheet of paper if necessary.)
1. ................................. 4. .................................
2. ................................. 5. .................................
3. ................................. 6. .................................
Name......................................................................
First Name Initial Last Name
Name of Co-Owner (if any).................................................
First Name Initial Last Name
Address............................................ Date....................
............................................................
(Zip Code)
Occupation.......................... Name and Address of Employer.......
...................................
...................................
............................................................................
Signature of Owner Signature of Co-Owner (if any)
2. Dividend and Capital Gain Distribution Options
Ordinary Income Dividends Long-term Capital Gains
Select / / Reinvest Select / / Reinvest
One: / / Cash One / / Cash
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
If cash, specify how you would like your distributions paid to you:
/ / Check or / / Direct Deposit to bank account
If direct deposit to bank account is selected, please complete below:
I hereby authorize payment of dividend and capital gain distributions by
direct deposit to my bank account and, if necessary, debit entries and
adjustments for any credit entries made to my account in accordance with
the terms I have selected on the Merrill Lynch World Income Fund
Authorization Form.
Specify type of account (check one) / / checking / / savings
Name on your account .....................................................
Bank Name ............ Bank Number ............ Account Number ...........
Bank address .............................................................
I agree that this authorization will remain in effect until I provide
written notification to Financial Data Services, Inc. amending or
terminating this service.
Signature of Depositor ...................................................
Signature of Depositor ....................... Date ......................
(if joint account, both must sign)
Note: If direct deposit to bank account is selected, your blank, unsigned
check marked "VOID" or a deposit slip from your savings account should
accompany this application.
51
<PAGE> 53
3. Social Security Number or Taxpayer Identification Number
Social Security Number or Taxpayer
Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security Number or Taxpayer Identification Number and
(2) that I am not subject to backup withholding (as discussed in the
Prospectus under "Taxes") either because I have not been notified that I am
subject thereto as a result of a failure to report all interest or dividends,
or the Internal Revenue Service ("IRS") has notified me that I am no longer
subject thereto.
Instruction: You must strike out the language in (2) above if you have
been notified that you are subject to backup withholding due to
underreporting and if you have not received a notice from the IRS that
backup withholding has been terminated. The undersigned authorizes the
furnishing of this certification to other Merrill Lynch sponsored mutual
funds.
Signature of Owner ........... Signature of Co-Owner (if any)...........
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
4. Letter of Intention - Class A and D shares only (See terms and
conditions in the Statement of Additional Information)
.............................., 19....
Dear Sir/Madam: Date of initial purchase
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 the Merrill Lynch
Funds Distributor, Inc. acts as distributor over the next 13 month period
which will equal or exceed:
/ / $25,000 / / $50,000 / / $100,000 / / $250,000 / / $1,000,000
Each purchase will be made at the then reduced offering price
applicable to the amount checked above, as described in the Merrill Lynch
World Income Fund Prospectus.
I agree to the terms and conditions of this Letter of Intention. I
hereby irrevocably constitute and appoint Merrill Lynch Funds Distributor,
Inc., my attorney, with full power of substitution, to surrender for
redemption any or all shares of Merrill Lynch World Income Fund, Inc. held
as security.
By .............................. .......................................
Signature of Owner Signature of Co-Owner (If registered in
joint parties, both must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name........................... (2) Name..........................
Account Number..................... Account Number....................
5. For Dealer Only We hereby authorize Merrill Lynch Funds
Distributor, Inc. to act as our agent in
Branch Office, Address, Stamp 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.......................................
----------------------------- Authorized Signature of Dealer
This form, when completed, should be
mailed to:
Merrill Lynch World Income Fund, Inc. ----------- ---------
c/o Financial Data Services, Inc. Branch-Code F/C No.
Transfer Agency Mutual Fund
P.O. Box 45289 ----------------------------
Jacksonville, FL 32232-5289 Dealer's Customer Account No.
-------------
F/C Last Name
52
<PAGE> 54
MERRILL LYNCH WORLD INCOME FUND, INC.-AUTHORIZATION FORM (PART 2)
Note: This form is required to apply for the Systematic Withdrawal or
Automatic Investment Plans only.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
1. Account Registration
Name of Owner ........................
Name of Co-Owner (if any) ............
Address ..............................
.............................. -----------------------------------
Social Security Number
or Taxpayer Identification Number
Account Number ..........................
(if existing account)
2. Systematic Withdrawal Plan-Class A and D Shares Only (See terms and
conditions in the Statement of Additional Information)
Minimum Requirements: $10,000 for monthly disbursements, $5,000 for
quarterly, of / / Class A or / / Class D shares in Merrill Lynch World
Income Fund, Inc. at cost or current offering price. Withdrawals to be made
either (check one) / / Monthly on the 24th day of each month, or /
/ Quarterly on the 24th day of March, June, September and December. If the
24th falls on a weekend or holiday, the next succeeding business day will
be utilized. Begin systematic withdrawal on ---------- (month) or as soon as
possible thereafter.
Specify how you would like your withdrawal paid to you (check one): / /
$---------- or / /----------% of the current value of / / Class A or / /
Class D shares in the account.
Specify withdrawal method: / / check or / / direct deposit to bank account
(check one and complete part (a) or (b) below):
Draw checks payable (check one)
(a) I hereby authorize payment by check
/ / as indicated in Item 1.
/ / to the order of......................................................
Mail to (check one)
/ / the address indicated in Item 1.
/ / Name (please print)..................................................
Address ..................................................................
..................................................................
Signature of Owner..................... Date.....................
Signature of Co-Owner (if any)....................................
(b) I hereby authorize payment by direct deposit to bank account and, if
necessary, debit entries and adjustments for any credit entries made to my
account. I agreee that this authorization will remain in effect until I
provide written notification to Financial Data Services, Inc. amending or
terminating this service.
Specify type of account (check one) / / checking / / savings
Name on your account .....................................................
Bank Name.................................................................
Bank Number........................ Account Number........................
Bank Address..............................................................
..........................................................................
Signature of Depositor....................... Date.......................
Signature of Depositor....................................................
(if joint account, both must sign)
Note: If direct deposit is elected, your blank, unsigned check marked
"VOID" or a deposit slip from your savings account should accompany this
application.
53
<PAGE> 55
3. Application for Automatic Investment Plan
I hereby request that Financial Data Services, Inc. draw an automated
clearing house ("ACH") debit on my checking account as described below
each month to purchase: (choose one)
/ / Class A shares / / Class B shares / / Class C shares / / Class D
shares
of Merrill Lynch World Income Fund, Inc. subject to the terms set forth
below. In the event that I am not eligible to purchase Class A shares, I
understand that Class D shares will be purchased.
----------
FINANCIAL DATA SERVICES, INC. AUTHORIZATION TO HONOR ACH DEBITS
You are hereby authorized to draw an DRAWN BY FINANCIAL DATA SERVICES, INC.
ACH debit each month on my bank
To.................................Bank
account for investment in Merrill (Investor's Bank)
Lynch World Income Fund, Inc. as
indicated below: Bank Address......................
Amount of each ACH debit $...........
City........State....Zip Code.....
Account Number.......................
Please date and invest ACH debits on As a convenience to me, I hereby
the 20th of each month beginning request and authorize you to pay
and charge to my account ACH debits
drawn on my account by and payable
to Financial Data Services, Inc. I
agree that your rights in respect
.................................... to each such debit shall be the
same as if it were a check drawn on
.................................... you and signed personally by me.
This authority is to remain in
effect until revoked personally by
me in writing. Until you receive
............................. (month) such notice, you shall be fully
or as soon thereafter as possible. protected in honoring any such
I agree that you are drawing these debit. I further agree that if any
ACH debits voluntarily at my request with or without cause and whether
and that you shall not be liable for intentionally or inadvertently,
any loss arising from any delay in you shall be under no liability.
preparing or failure to prepare any
such debit. If I change banks or . . . . . . . . . . . . . . . . . .
desire to terminate or suspend this Date Signature of Depositor
program, I agree to notify you
promptly in writing. I hereby . . . . . . . . . . . . . . . . . .
authorize you to take any action to Bank Account Number
correct erroneous ACH debits of my
bank account or purchases of fund . . . . . . . . . . . . . . . . . .
shares including liquidating shares of Signature of Depositor
the Fund and credit my bank account. I
further agree that if a check or debit (If joint account, both must sign)
is not honored upon presentation,
Financial Data Services, Inc. is
authorized to discontinue immediately
the Automatic Investment Plan and to
liquidate sufficient shares held in my
account to offset the purchase made
with the dishonored debit.
............ ........................
Date Signature of Depositor
........................
Signature of Depositor
(If joint account, both
must sign)
Note: If Automatic Investment Plan is elected, your blank, unsigned check
marked "VOID" should accompany this
Application.
54
<PAGE> 56
Investment Adviser
Fund Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
Distributor
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, Massachusetts 02101
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 LLP
117 Campus Drive
Princeton, New Jersey 08540
Counsel
Brown & Wood
One World Trade Center
New York, New York 10048-0557
<PAGE> 57
<TABLE>
<CAPTION>
<S> <C>
====================================================== ======================================================
No person has been authorized to give any Prospectus
information or to make any representations,
other than those contained in this Prospectus,
in connection with the offer contained in this
Prospectus, and, if given or made, such other
information or 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 (Paste-up art)
lawfully be made.
----------
TABLE OF CONTENTS
Page
----
Fee Table................................... 2
Merrill Lynch Select Pricing SM System...... 4 MERRILL LYNCH
Financial Highlights........................ 8 WORLD INCOME
Risk Factors and Special Considerations..... 9 FUND, INC.
Investment Objective and Policies........... 10
International Investing.................... 11
Allocation of Investments and Risks of
High Yield High Risk Securities......... 12
Hedging Techniques........................ 14
Other Investment Policies and Practices... 19
Investment Restrictions................... 20
Management of the Fund...................... 22
Directors................................. 22
Management and Advisory Arrangements...... 22
Transfer Agency Services.................. 23 October 21, 1994
Purchase of Shares.......................... 23 Distributor:
Initial Sales Charge Alternatives-Class A Merrill Lynch
and Class D Shares...................... 25 Funds Distributor, Inc.
Deferred Sales Charge Alternatives-Class B
and Class C Shares...................... 27 This prospectus should be
Distribution Plans........................ 30 retained for future reference.
Limitations on the Payment of Deferred
Sales Charges........................... 32
Redemption of Shares........................ 32
Redemption................................ 32
Repurchase................................ 33
Reinstatement Privilege-Class A and Class
D Shares................................ 33
Shareholder Services........................ 33
Taxes....................................... 36
Performance Data............................ 38
Portfolio Transactions...................... 39
Portfolio Turnover........................ 40
Additional Information...................... 40
Dividends and Distributions............... 40
Determination of Net Asset Value.......... 41
Organization of the Fund.................. 41
Shareholder Inquiries..................... 42
Shareholder Reports....................... 42
Appendix-Ratings of Debt Securities......... 43
Authorization Form.......................... 51
Code #16102-1094
====================================================== ======================================================
</TABLE>
<PAGE> 58
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH WORLD INCOME FUND, INC.
P.O. 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.
Pursuant to the Merrill Lynch Select Pricing SM System, the Fund
offers four classes of shares each with a different combination of sales
charges, ongoing fees and other features. The Select Pricing System
permits an investor to choose the method of purchasing shares that the
investor believes is most beneficial given the amount of the purchase, the
length of time the investor expects to hold the shares and other relevant
circumstances.
----------
This Statement of Additional Information of the Fund is not a
prospectus and should be read in conjunction with the Prospectus of the
Fund, dated October 21, 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 October 21, 1994.
<PAGE> 59
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
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
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<PAGE> 60
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 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.
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<PAGE> 61
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 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.
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<PAGE> 62
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.
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.
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<PAGE> 63
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 a primary dealer in U.S. Government securities or an affiliate thereof.
Under such agreements, the bank or primary dealer or an affiliate thereof
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 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
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<PAGE> 64
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.
Current 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 331/3% of its total
assets, taken at market value; provided that such loans shall be made in
accordance with the guidelines set forth herein.
7. Issue senior securities, borrow money or pledge its assets in
excess of 331/3% 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.
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<PAGE> 65
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.
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
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<PAGE> 66
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.
Proposed Uniform Investment Restrictions. As discussed in the
Prospectus under "Investment Objective and Policies-Other Investment
Policies and Practices-Investment Restrictions", the Board of Directors
of the Fund has approved the replacement of the Fund's existing investment
restrictions with the fundamental and non-fundamental investment
restrictions set forth below. These uniform investment restrictions have
been proposed for adoption by all of the non-money market mutual funds
advised by Fund Asset Management, L.P. (the "Investment Adviser") or its
affiliate, Merrill Lynch Asset Management, L.P. ("MLAM"). The investment
objective and policies of the Fund will be unaffected by the adoption of
the proposed investment restrictions.
Shareholders of the Fund are currently considering whether to approve
the proposed revised investment restrictions. If such shareholder approval
is obtained, the Fund's current investment restrcitions will be replaced
by the proposed restrictions, and the Fund's Prospectus and Statement of
Additional Information will be supplemented to reflect such change.
Under the proposed fundamental investment restrictions, the Fund may
not:
1. Invest more than 25% of its assets, taken at market value, in
the securities of issuers in any particular industry (excluding the
U.S. Government and its agencies and instrumentalities).
2. Make investments for the purpose of exercising control or
management.
3. Purchase or sell real estate, except that, to the extent
permitted by applicable law, the Fund may invest in securities
directly or indirectly secured by real estate or interests therein or
issued by companies which invest in real estate or interests therein.
4. Make loans to other persons, except that the acquisition of
bonds, debentures or other corporate debt securities and investment in
government obligations, commercial paper, pass-through instruments,
certificates of deposit, bankers acceptances, repurchase agreements or
any similar instruments shall not be deemed to be the making of a
loan, and except further that the Fund may lend its portfolio
securities provided that the lending of portfolio securities may be
made only in accordance with applicable law and the guidelines set
forth in the Fund's Prospectus and Statement of Additional
Information, as they may be amended from time to time.
5. Issue senior securities to the extent such issuance would
violate applicable law.
6. Borrow money, except that (i) the Fund may borrow from banks
(as defined in the Investment Company Act) in amounts up to 331/3% of
its total assets (including the amount borrowed), (ii) the Fund may
borrow up to an additional 5% of its total assets for temporary
purposes, (iii) the Fund may obtain such short-term credit as may be
necessary for the clearance of purchases and sales of portfolio
securities and (iv) the Fund may purchase securities on margin to the
extent permitted by applicable law. The Fund may not pledge its assets
other than to secure such borrowings or, to the extent permitted by
the Fund's investment policies as set forth in its Prospectus and
Statement of Additional Information, as they may be amended from time
to time, in connection with hedging transactions, short sales,
when-issued and forward commitment transactions and similar investment
strategies.
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<PAGE> 67
7. Underwrite securities of other issuers except insofar as the
Fund technically may be deemed an underwriter under the Securities Act
of 1933, as amended (the "Securities Act"), in selling portfolio
securities.
8. Purchase or sell commodities or contracts on commodities,
except to the extent that the Fund may do so in accordance with
applicable law and the Fund's Prospectus and Statement of Additional
Information, as they may be amended from time to time, and without
registering as a commodity pool operator under the Commodity Exchange
Act.
Under the proposed non-fundamental investment restrictions, the Fund
may not:
a. Purchase securities of other investment companies, except to
the extent such purchases are permitted by applicable law.
b. Make short sales of securities or maintain a short position,
except to the extent permitted by applicable law. The Fund currently
does not intend to engage in short sales, except short sales "against
the box".
c. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be
marketed, redeemed or put to the issuer or a third party, if at the
time of acquisition more than 15% of its total assets would be
invested in such securities. This restriction shall not apply to
securities which mature within seven days or securities which the
Board of Directors of the Fund has otherwise determined to be liquid
pursuant to applicable law. Notwithstanding the 15% limitation herein,
to the extent the laws of any state in which the Fund's shares are
registered or qualified for sale require a lower limitation, the Fund
will observe such limitation. As of the date hereof, therefore, the
Fund will not invest more than 10% of its total assets in securities
which are subject to this investment restriction (c). Securities
purchased in accordance with Rule 144A under the Securities Act (a
"Rule 144A security") and determined to be liquid by the Fund's
Board of Directors are not subject to the limitations set forth in
this investment restriction (c). Notwithstanding the fact that the
Board may determine that a Rule 144A security is liquid and not
subject to limitations set forth in this investment restriction (c),
the State of Ohio does not recognize Rule 144A securities as
securities that are free of restrictions as to resale. To the extent
required by Ohio law, the Fund will not invest more than 5% of its
total assets in securities of isssuers that are restricted as to
disposition, including Rule 144A securities.
d. Invest in warrants if, at the time of acquisition, its
investments in warrants, valued at the lower of cost or market value,
would exceed 5% of the Fund's net assets; included within such
limitation, but not to exceed 2% of the Fund's net assets, are
warrants which are not listed on the New York Stock Exchange or
American Stock Exchange or a major foreign exchange. For purposes of
this restriction, warrants acquired by the Fund in units or attached
to securities may be deemed to be without value.
e. Invest in securities of companies having a record, together
with predecessors, of less than three years of continuous operation,
if more than 5% of the Fund's total assets would be invested in such
securities. This restriction shall not apply to mortgage-backed
securities, asset-backed securities or obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
f. Purchase or retain the securities of any issuer, if those
individual officers and directors of the Fund, the officers and
general partner of the Investment Adviser, the directors of such
general partner or the officers and directors of any subsidiary
thereof each owning beneficially more than one-half of one percent of
the securities of such issuer own in the aggregate more than 5% of the
securities of such issuer.
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g. Invest in real estate limited partnership interests or
interests in oil, gas or other mineral leases, or exploration or
development programs, except that the Fund may invest in securities
issued by companies that engage in oil, gas or other mineral
exploration or development activities.
h. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Fund's
Prospectus and Statement of Additional Information, as they may be
amended from time to time.
i. Notwithstanding fundamental investment restriction (6) above,
borrow amounts in excess of 331/3% 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
transactions, or for temporary or emergency purposes. In addition, the
Fund will not purchase securities while outstanding borrowings exceed 5%
of the Fund's total assets.
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
P.O. 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") (which
term as used herein includes its corporate predecessors) since 1977;
President of Merrill Lynch Asset Management, L.P. ("MLAM") (which term
as used herein includes its corporate predecessors) 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. ("ML & Co.") since 1990;
Executive Vice President of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") since 1990; Senior Vice President of
Merrill Lynch from 1985 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, and, until 1994, Grumman Corporation and 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)-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 Naval Institute since 1980; Overseer, Center for
Naval Analyses from 1983 to 1993; Director, Damon Corp. since 1991.
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 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.
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<PAGE> 69
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 and Associate
Professor from 1983 to 1989; Trustee, The Common Fund, since 1989;
Director, Quantec Limited since 1991 and Teknekron Software Systems since
1994.
Terry K. Glenn-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 of the
Distributor since 1986 and Director thereof since 1991.
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 of MLAM since 1980; Senior Vice President
of Princeton Services since 1993.
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 LLP 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 thereof 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 thereof 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 September 30, 1994, the officers and Directors of the Fund as a
group (13 persons) owned an aggregate of less than 1% of the outstanding
shares of common stock of ML & Co. and owned an aggregate of less than 1%
of the outstanding shares of the Fund.
The Fund pays each Director not affiliated with ML & Co. or its
affiliates an annual fee of $5,000 for serving as a Director plus $500 for
each meeting of the Board attended. The Fund also pays each member of the
Audit and Nominating Committee, which consists of the unaffiliated
Directors, an annual fee of $1,000 plus $250 for each meeting attended.
The Fund reimburses each unaffiliated Director for his out-of-pocket
expenses relating to attendance at Board and Committee meetings. For the
year ended December 31, 1993, fees and expenses paid to the nonaffiliated
Directors aggregated $40,553.
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<PAGE> 70
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.
The State of California imposes limitations on the expenses of the
Fund. At the date of this Statement of Additional Information, these
annual 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. The Investment Adviser's
obligation to reimburse the Fund is limited to the amount of the
investment advisory fee. No 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 ML & Co. or any of its affiliates. 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
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<PAGE> 71
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 its shares. 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-Distribution Plans".
The Investment Adviser is a limited partnership, the partners of which
are ML & Co., Fund Asset Management, Inc. and Princeton Services.
Duration and Termination. Unless earlier terminated as described
herein, 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.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing SM System: Class A and Class D shares are sold to investors
choosing the initial sales charge alternatives, and Class B and Class C
shares are sold to investors choosing the deferred sales charge
alternatives. Each Class A, Class B, Class C and Class D share of the Fund
represents an identical interest in the investment portfolio of the Fund
and has the same rights, except that Class B, Class C and Class D shares
bear the expenses of the ongoing account maintenance fees, and Class B and
Class C shares bear the expenses of the ongoing distribution fees and the
additional incremental transfer agency costs resulting from the deferred
sales charge arrangements. Class B, Class C and Class D shares each have
exclusive voting rights with respect to the Rule 12b-1 distribution plan
adopted with respect to such class pursuant to which account maintenance
and/or distribution fees are paid. Each class has different exchange
privileges. See "Shareholder Services-Exchange Privilege".
The Merrill Lynch Select Pricing SM System is used by more than 50
mutual funds advised by MLAM or its affiliate, the Investment Adviser.
Funds advised by MLAM or the Investment Adviser are referred to herein as
"MLAM-advised mutual funds".
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offering of each class of
shares of the Fund (the "Distribution Agreements"). The Distribution
Agreements obligate the Distributor to pay certain expenses in connection
with the offering of each class of shares of the Fund. After the
prospectuses, statements of additional information and periodic reports
have been prepared, set in type and mailed to shareholders, the
Distributor pays for the printing and distribution of copies thereof used
in connection with the offering to dealers and investors. The Distributor
also pays for other supplementary sales literature and advertising costs.
The Distribution Agreements are subject to the same renewal requirements
and termination provisions as the Investment Advisory Agreement described
above.
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<PAGE> 72
Initial Sales Charge Alternatives-Class A and Class D 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 and
Class D shares of the Fund, refers to a single purchase by an individual
or to concurrent purchases, which in the aggregate are at least equal to
the prescribed amounts, by an individual, his spouse and their children
under the age of 21 years purchasing shares for his or their own account
and to single purchases by a trustee or other fiduciary purchasing shares
for a single trust estate or single fiduciary account although more than
one beneficiary is involved. The term "purchase" also includes purchases
by any "company", as that term is defined in the Investment Company Act,
but does not include purchases by any such company which has not been in
existence for at least six months or which has no purpose other than the
purchase of shares of the Fund or shares of other registered investment
companies at a discount; provided, however, that it shall not include
purchases by any group of individuals whose sole organizational nexus is
that the participants therein are credit cardholders of a company,
policyholders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser.
Closed-End Fund Investment Option. Class A shares of the Fund and
other MLAM-advised mutual funds ("Eligible Class A shares") are offered
at net asset value to shareholders of certain closed-end funds advised by
the Investment Adviser or MLAM who purchased such closed-end fund shares
prior to October 21, 1994 and wish to reinvest the net proceeds of a sale
of their closed-end fund shares of common stock in Eligible Class A
shares, if the conditions set forth below are satisfied. Alternatively,
closed-end fund shareholders who purchase such shares on or after October
21, 1994 and wish to reinvest the net proceeds from a sale of their
closed-end fund shares are offered Class A shares (if eligible to buy
Class A shares) or Class D shares of the Fund and other MLAM-advised
mutual funds ("Eligible Class D shares"), if the following conditions
are met. First, the sale of closed-end fund shares must be made through
Merrill Lynch, and the net proceeds therefrom must be immediately
reinvested in Eligible Class A or Class D shares. Second, the closed-end
fund shares must either have been acquired in the initial public offering
or be shares representing dividends from shares of common stock acquired
in such offering. Third, the closed-end fund shares must have been
continuously maintained in a Merrill Lynch securities account. Fourth,
there must be a minimum purchase of $250 to be eligible for the investment
option. Class A shares of the Fund are offered at net asset value to
shareholders of Merrill Lynch Senior Floating Rate Fund (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 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.
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<PAGE> 73
Reduced Initial Sales Charges
Rights of Accumulation. Reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to
purchase shares of the Fund subject to an initial sales charge at the
offering price applicable to the total of (a) the public offering price of
the shares then being purchased plus (b) an amount equal to the then
current net asset value or cost, whichever is higher, of the purchaser's
combined holdings of all classes of shares of the Fund and of other
MLAM-advised mutual funds. For any such right of accumulation to be made
available, the Distributor must be provided at the time of purchase, by
the purchaser or the purchaser's securities dealer, with sufficient
information to permit confirmation of qualification. Acceptance of the
purchase order is subject to such confirmation. The right of accumulation
may be amended or terminated at any time. Shares held in the name of a
nominee or custodian under pension, profit-sharing, or other employee
benefit plans may not be combined with other shares to qualify for the
right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A or Class D shares of the Fund
or of any other MLAM-advised mutual funds made within a 13-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 or Class D shares; however, its execution will result in the
purchaser paying a lower sales charge at the appropriate quantity purchase
level. A purchase not originally made pursuant to a Letter of Intention
may be included under a subsequent Letter of Intention executed within 90
days of such purchase if the Distributor is informed in writing of this
intent within such 90-day period. The value of Class A and Class D shares
of the Fund and of other MLAM-advised mutual funds presently held, at cost
or maximum offering price (whichever is higher), on the date of the first
purchase under the Letter of Intention, may be included as a credit toward
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 $25,000), the investor will be notified
and must pay, within 20 days of the expiration of such Letter, the
difference between the sales charge on the Class A or Class D shares
purchased at the reduced rate and the sales charge applicable to the
shares actually purchased through the Letter. Class A or Class D shares
equal to at least five percent of the intended amount will be held in
escrow during the 13-month period (while remaining registered in the name
of the purchaser) for this purpose. The first purchase under the Letter of
Intention must be at least five percent of the dollar amount of such
Letter. If a purchase during the term of such Letter would otherwise be
subject to a further reduced sales charge based on the right of
accumulation, the purchaser will be entitled on that purchase and
subsequent purchases to that further reduced percentage sales charge but
there will be no retroactive reduction of the sales charges on any
previous purchase. The value of any shares redeemed or otherwise disposed
of by the purchaser prior to termination or completion of the Letter of
Intention will be deducted from the total purchases made under such
Letter. An exchange from a MLAM-advised money market fund into the Fund
that creates a sales charge will count toward completing a new or existing
Letter of Intention from the Fund.
TMA SM Managed Trusts. Class A shares are offered to TMA SM Managed
Trusts to which Merrill Lynch Trust Company provides discretionary trustee
services at net asset value.
Employer Sponsored Retirement and Savings Plans. Class A and Class D
shares are offered at net asset value to employer sponsored retirement or
savings plans, such as tax qualified retirement plans within the
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<PAGE> 74
meaning of Section 401(a) of the Code, deferred compensation plans within
the meaning of Sections 403(b) and 457 of the Code, other deferred
compensation arrangements, Voluntary Employee Benefits Association plans,
and non-qualified After Tax Savings and Investment programs, maintained on
the Merrill Lynch Group Employee Services system, herein referred to as
"Employer Sponsored Retirement or Savings Plans", provided the plan has
accumulated $20 million or more in MLAM-advised mutual funds (in the case
of Class A shares) or $5 million or more in MLAM-advised mutual funds (in
the case of Class D shares). Class D shares may be offered at net asset
value to new Employer Sponsored Retirement or Savings Plans, provided the
plan has $3 million or more initially invested in MLAM-advised mutual
funds. Assets of Employer Sponsored Retirement or Savings Plans sponsored
by the same sponsor or an affiliated sponsor may be aggregated. Class A
and Class D shares also are offered at net asset value to Employer
Sponsored Retirement or Savings Plans that have at least 1,000 employees
eligible to participate in the plan (in the case of Class A shares) or
between 500 and 999 employees eligible to participate in the plan (in the
case of Class D shares). Employees eligible to participate in Employer
Sponsored Retirement or Savings Plans of the same sponsoring employer or
its affiliates may be aggregated. Tax qualified retirement plans within
the meaning of Section 401(a) of the Code meeting any of the foregoing
requirements and which are provided specialized services (e.g., plans
whose participants may direct on a daily basis their plan allocations
among a wide range of investments including individual corporate equities
and other securities in addition to mutual fund shares) by the Merrill
Lynch Blueprint SM Program, are offered Class A shares at a price equal to
net asset value per share plus a reduced sales charge of 0.50%. Any
Employer Sponsored Retirement or Savings Plan which does not meet the
above described qualifications to purchase Class A shares at net asset
value has the option of (i) purchasing Class A shares at the initial sales
charge schedule and possible CDSC schedule disclosed in the Prospectus if
it is otherwise eligible to purchase Class A shares, (ii) purchasing Class
D shares at the initial sales charge and possible CDSC schedule disclosed
in the Prospectus, (iii) if the Employer Sponsored Retirement or Savings
Plan meets the specified requirements, purchasing Class B shares with a
waiver of the CDSC upon redemption, or if the Employer Sponsored
Retirement or Savings Plan does not qualify to purchase Class B shares
with a waiver of the CDSC upon redemption, purchasing Class C shares at
the CDSC schedule disclosed in the Prospectus. The minimum initial and
subsequent purchase requirements are waived in connection with all the
above referenced Employer Sponsored Retirement or Savings Plans.
Purchase Privileges of Certain Persons. Directors of the Fund, members of
the Boards of other MLAM-advised investment companies, ML & Co. and its
subsidiaries (the term "subsidiaries", when used herein with respect to ML &
Co., includes MLAM, the Investment Adviser and certain other entities
directly or indirectly wholly-owned and controlled by ML & Co.), and their
directors and employees, and any trust, pension, profit-sharing or other
benefit plan for such persons, may purchase Class A shares of the Fund at net
asset value. 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 D shares of the Fund will be offered at net asset value, without
a sales charge, to an investor who has a business relationship with a
financial consultant who joined Merrill Lynch from another investment firm
within six months prior to the date of purchase by such investor if the
following conditions are satisfied. First, the investor must advise
Merrill Lynch that it will purchase Class D shares of the Fund with
proceeds from a redemption of a mutual fund that was sponsored by the
financial consultant's previous firm and was subject to a sales charge
either at the time of purchase or on a deferred basis. Second, the
investor also must establish that such redemption had been made within 60
days prior to the investment in the Fund, and the proceeds from the
redemption had been maintained in the interim in cash or a money market
fund.
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<PAGE> 75
Class D shares of the Fund are also offered at net asset value,
without a sales charge, to an investor who has a business relationship
with a Merrill Lynch financial consultant and who has invested in a mutual
fund sponsored by a non-Merrill Lynch company for which Merrill Lynch has
served as a selected dealer and where Merrill Lynch has either received or
given notice that such arrangement will be terminated ("notice"), if the
following conditions are satisfied: First, the investor must purchase
Class D shares of the Fund with proceeds from a redemption of shares of
such other mutual fund and such fund was subject to a sales charge either
at the time of purchase or on a deferred basis; and second, such purchase
of Class D shares must be made within 90 days after such notice.
Class D shares of the Fund will be offered at net asset value, without
a sales charge, to an investor who has a business relationship with a
Merrill Lynch financial consultant and who has invested in a mutual fund
for which Merrill Lynch has not served as a selected dealer if the
following conditions are satisfied: First, the investor must advise
Merrill Lynch that it will purchase Class D shares of the Fund with
proceeds from the redemption of such shares of other mutual funds and that
such shares have been outstanding for a period of no less than six months.
Second, such purchase of Class D shares must be made within 60 days after
the redemption and the proceeds from the redemption must be maintained in
the interim in cash or a money market fund.
Acquisition of Certain Investment Companies. The public offering price
of Class D shares may be reduced to the net asset value per Class D share
in connection with the acquisition of the assets of or merger or
consolidation with a personal holding company or a public or private
investment company. The value of the assets or company acquired in a
tax-free transaction may be adjusted in appropriate cases to reduce
possible adverse tax consequences to the Fund which might result from an
acquisition of assets having net unrealized appreciation which is
disproportionately higher at the time of acquisition than the realized or
unrealized appreciation of the Fund. The issuance of Class D shares for
consideration other than cash is limited to bona fide reorganizations,
statutory mergers or other acquisitions of portfolio securities which (i)
meet the investment objective and policies of the Fund; (ii) are acquired
for investment and not for resale (subject to the understanding that the
disposition of the Fund's portfolio securities shall at all times remain
within its control); and (iii) are liquid securities, the value of which
is readily ascertainable, which are not restricted as to transfer either
by law or liquidity of market (except that the Fund may acquire through
such transactions restricted or illiquid securities to the extent the Fund
does not exceed the applicable limits on acquisition of such securities
set forth under "Investment Objective and Policies" herein).
Reductions in or exemptions from the imposition of a sales load are
due to the nature of the investors and/or the reduced sales efforts that
will be needed in obtaining such investments.
Distribution Plans
Reference is made to "Purchase of Shares-Distribution Plan" in the
Prospectus for certain information with respect to the separate
distribution plans for Class B, Class C and Class D shares pursuant to
Rule 12b-1 under the Investment Company Act (each a "Distribution Plan")
with respect to the account maintenance and/or distribution fees paid by
the Fund to the Distributor with respect to such classes.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act.
Among other things, each Distribution Plan provides that the Distributor
shall provide and the Directors shall review quarterly reports of the
disbursement of the account maintenance fees and/or distribution fees paid
to the Distributor. In their consideration of each Distribution Plan, the
Directors must consider all factors they deem relevant, including
information as to the benefits of the Distribu-
18
<PAGE> 76
tion Plan to the Fund and its related class of shareholders. Each
Distribution Plan further provides that so long as the Distribution Plan
remains in effect, the selection and nomination of Directors who are not
"interested persons" of the Fund, as defined in the Investment Company
Act (the "Independent Directors"), shall be committed to the discretion
of the Independent Directors then in office. In approving each
Distribution Plan in accordance with Rule 12b-1, the Independent Directors
concluded that there is a reasonable likelihood that such Distribution
Plan will benefit the Fund and its related class of shareholders. Each
Distribution Plan can be terminated at any time, without penalty, by the
vote of a majority of the Independent Directors or by the vote of the
holders of a majority of the outstanding Class B voting securities of the
Fund. A Distribution Plan cannot be amended to increase materially the
amount to be spent by the Fund without the approval of the related class
of shareholders, and all material amendments are required to be approved
by the vote of Directors, including a majority of the Independent
Directors who have no direct or indirect financial interest in such
Distribution Plan, cast in person at a meeting called for that purpose.
Rule 12b-1 further requires that the Fund preserve copies of each
Distribution Plan and any reports made pursuant to the plan for a period
of not less than six years from the date of such Distribution Plan or such
report, the first two years in an easily accessible place.
Limitations on the Payment of Deferred Sales Charges
The maximum sales charge rule in the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. ("NASD") imposes a
limitation on certain asset-based sales charges such as the distribution
fee and the CDSC borne by the Class B and Class C shares but not the
account maintenance fee. The maximum sales charge rule is applied
separately to each class. As applicable to the Fund, the maximum sales
charge rule limits the aggregate of distribution fee payments and CDSCs
payable by the Fund to (1) 6.25% of eligible gross sales of Class B shares
and Class C shares, computed separately (defined to exclude shares issued
pursuant to dividend reinvestments and exchanges), plus (2) interest on
the unpaid balance for the respective class, computed separately, at the
prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from the payment of the distribution fee and the
CDSC). In connection with the Class B shares, the Distributor has
voluntarily agreed to waive interest charges on the unpaid balance in
excess of 0.50% of eligible gross sales. Consequently, the maximum amount
payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any
time. To the extent payments would exceed the voluntary maximum, the Fund
will not make further payments of the distribution fee with respect to
Class B shares, and any CDSCs will be paid to the Fund rather than to the
Distributor; however, the Fund will continue to make payments of the
account maintenance fee. In certain circumstances the amount payable
pursuant to the voluntary maximum may exceed the amount payable under the
NASD formula. In such circumstances payment in excess of the amount
payable under the NASD formula will not be made.
19
<PAGE> 77
The following table sets forth comparative information as of June 30,
1994 with respect to the Class B shares of the Fund indicating the maximum
allowable payments that can be made under the NASD maximum sales charge
rule and the Distributor's voluntary maximum for the period November 18,
1988 (commencement of the public offering of Class B shares) to June 30,
1994. Since Class C shares of the Fund had not been publicly issued prior
to the date of this Statement of Additional Information, information
concerning Class C shares is not yet provided below.
<TABLE>
<CAPTION>
Data Calculated as of June 30, 1994
-----------------------------------------------------------------------------------------------------
In Thousands
Annual
Distribution
Allowable Amounts Fee at
Eligible Aggregate Interest Maximum Previously Aggregate 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........... $2,038,341 $127,396 $14,035 $141,431 $26,777 $114,654 $9,064
Under Distributor's
Voluntary Waiver.. $2,038,341 $127,396 $10,192 $137,588 $26,777 $110,811 $9,064
</TABLE>
----------
(1) Purchase price of all eligible Class B shares sold since November 18,
1988 (commencement of the public offering of Class B shares) other
than shares acquired through dividend reinvestment and the exchange
privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0% as permitted under the
NASD Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. Of
the distribution fee payments made prior to July 6, 1993 under a prior
plan at the 0.75% rate, 0.50% of average daily net assets has been
treated as a distribution fee and 0.25% of average daily net assets
has been deemed to have been a service fee and not subject to the NASD
maximum sales charge rule. See "Purchase of Shares-Distribution
Plans" in the Prospectus.
(4) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any CDSC payments) is
amortizing the unpaid balance. No assurance can be given that payments
of the distribution fee will reach either the voluntary maximum or the
NASD maximum.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for
certain information as to the redemption and repurchase of Fund shares.
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.
Deferred Sales Charge-Class B Shares
As discussed in the Prospectus under "Purchase of Shares-Deferred Sales
Charge Alternatives-Class B and Class C Shares", while Class B shares
redeemed within four years of purchase are subject to a CDSC under most
circumstances, the charge is waived on redemp-
20
<PAGE> 78
tions 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 591/2 in the case of an IRA or
other retirement plan, or part of a series of equal periodic payments (not
less frequently than annually) made for the life (or life expectancy), or any
redemption resulting from the tax-free return of an excess contribution to an
IRA; or (b) any partial or complete redemption following the death or
disability (as defined in the Code) of a Class B shareholder (including one
who owns the Class B shares as joint tenant with his or her spouse) provided
the redemption is requested within one year of the death or initial
determination of disability. For the 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 CDSCs 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 or Class D shares at net asset value
has the option of purchasing Class A or Class D shares at the sales charge
schedule disclosed in the Prospectus, or if the Retirement Plan meets the
following requirements, then it may purchase Class B shares with a waiver
of the CDSC upon redemption. The CDSC is waived for any Eligible 401(k)
Plan redeeming Class B shares. "Eligible 401(k) Plan" is defined as a
retirement plan qualified under Section 401(k) of the Code with a salary
reduction feature offering a menu of investments to plan participants. The
CDSC also is 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 Class B shares
of MLAM-advised mutual funds ("Eligible 401(a) Plan"). Other tax
qualified retirement plans within the meaning of Section 401(a) and 403(b)
of the Code which are provided specialized services (e.g., plans whose
participants may direct on a daily basis their plan allocations among a
menu of investments) by independent administration firms contracted
through Merrill Lynch also may purchase Class B shares with a waiver of
the CDSC. The CDSC also is waived for any Class B shares which are
purchased by an Eligible 401(k) Plan or Eligible 401(a) Plan and are
rolled over into a Merrill Lynch or Merrill Lynch Trust Company custodied
Individual Retirement Account and held in such account at the time of
redemption. The Class B CDSC also is waived for any Class B shares which
are purchased by a Merrill Lynch rollover IRA that was funded by a
rollover from a terminated 401(k) plan managed by the MLAM Private
Portfolio Group and held in such account at the time of redemption. The
minimum initial and subsequent purchase requirements are waived in
connection with all the above-referenced Retirement Plans.
PORTFOLIO TRANSACTIONS
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.
21
<PAGE> 79
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
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, 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
22
<PAGE> 80
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 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 per share net
asset value of the Class B, Class C and Class D shares may be lower than
the per share net asset value of the Class A shares reflecting the higher
daily expense accruals of the account maintenance, distribution and higher
transfer agency fees applicable with respect to the Class B and Class C
shares and the daily expense accruals of the account maintenance fees
applicable with respect to the Class D shares; moreover, the per share net
asset value of the Class B and Class C shares generally will be lower than
the per share net asset value of its Class D shares reflecting the daily
expense accruals of the distribution fees and higher transfer agency fees
applicable with respect to the Class B and Class C shares of the Fund.
Even under those circumstances, the per share net asset value of the four
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.
Securities traded in the over-the-counter market are valued at the
most recent bid price or yield equivalents as 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
23
<PAGE> 81
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 statements, at least quarterly,
from the Transfer Agent. These statements will serve as transaction
confirmations for automatic investment purchases and the reinvestment of
ordinary income dividends and long-term capital gain distributions. The
statements also will 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, 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 or Class D shares from Merrill
Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the Class A or Class D shares are to be
transferred will not take delivery of shares of the Fund, a shareholder
either must redeem the Class A or Class D shares (paying any applicable
CDSC) so that the cash proceeds can be transferred to the account at the
new firm or such shareholder must continue to maintain an Investment
Account at the Transfer Agent for those Class A or Class D shares.
Shareholders interested in transferring their Class B or Class C shares
from Merrill Lynch and who do not wish to have an Investment Account
maintained for such shares at the Transfer Agent may request their new
brokerage firm to maintain such shares in an account registered in the
name of the brokerage firm for the benefit of the shareholder at the
Transfer Agent.
Automatic Investment Plans
A shareholder may make additions to an Investment Account at any time
by purchasing Class A shares (if he or she is an eligible Class A investor
as described in the Prospectus) or Class B, Class C or Class D shares at
the applicable public offering price either through the shareholder's
securities dealer, or by mail directly to the
24
<PAGE> 82
Transfer Agent, acting as agent for such securities dealer. Voluntary
accumulation also can be made through a service known as the Automatic
Investment Plan whereby the Fund is authorized through pre-authorized
checks or automated clearing house debits of $50 or more to charge the
regular bank account of the shareholder on a regular basis to provide
systematic additions to the Investment Account of such shareholder.
Alternatively, investors who maintain CMA(Reg) accounts may arrange to
have periodic investments made in the Fund, in their CMA(Reg) accounts or
in certain related accounts in the amount of $100 or more ($1 for
retirement accounts) through the CMA(Reg) Automated Investment Program.
Automatic Reinvestment of Dividends and Capital Gains Distributions
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions
will be reinvested automatically in additional shares of the Fund. Such
reinvestment will be at the net asset value of shares of the Fund as of
the close of business on the ex-dividend date of the dividend or
distribution. Shareholders may elect in writing to receive either their
dividends or capital gains distributions, or both, in cash, in which event
payment will be mailed or direct deposited on or about the payment date.
Shareholders may, at any time, notify the Transfer Agent in writing or
by telephone (1-800-MER-FUND) that they no longer wish to have their
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 and Class D Shares
A Class A or Class D 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 or Class D shares of the Fund
having a value, based on cost or the current offering price, of $5,000 or
more and monthly withdrawals are available for shareholders with Class A
or Class D shares with such a value of $10,000 or more.
At the time of each withdrawal payment, sufficient Class A or Class D
shares are redeemed from those on deposit in the shareholder's account to
provide the withdrawal payment specified by the shareholder. The
shareholder may specify either a dollar amount or a percentage of the
value of his Class A or Class D shares. Redemptions will be made at net
asset value as determined at the close of business on the New York Stock
Exchange (currently 4:00 P.M., New York City time) on the 24th day of each
month or the 24th day of the last month of each quarter, whichever is
applicable. If the Exchange is not open for business on such date, the
Class A or Class D shares will be redeemed at the close of business on the
following business day. The check for the withdrawal payment will be
mailed, or the direct deposit for the withdrawal payment will be made, on
the next business day following redemption. When a shareholder is making
systematic withdrawals, dividends and distributions on all Class A or
Class D shares in the Investment Account are reinvested automatically in
Class A or Class D shares. A shareholder's Systematic Withdrawal Plan may
be terminated at any time, without charge or penalty, by the shareholder,
the Fund, the Fund's transfer agent or the Distributor. Withdrawal
payments should not be considered as dividends, yield or income. Each
withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be reduced
correspondingly. Purchases of additional Class A or Class D shares
concurrent with withdrawals are ordinarily disadvantageous to the
shareholder because of sales charges and tax liabilities. The Fund will
not knowingly accept
25
<PAGE> 83
purchase orders for Class A or Class D shares of the Fund from investors
who maintain a systematic withdrawal plan unless such purchase is equal to
at least one year's scheduled withdrawals or $1,200, whichever is greater.
Periodic investments may not be made into an Investment Account in which
the shareholder has elected to make systematic withdrawals.
A Class A or Class D shareholder whose shares are held within a
CMA(Reg), CBA(Reg) 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
$100, 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
Shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds listed below. Under
the Merrill Lynch Select Pricing SM System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second
MLAM-advised mutual fund if the shareholder holds any Class A shares of
the second fund in his account in which the exchange is made at the time
of the exchange or is otherwise eligible to purchase Class A shares of the
second fund. If the Class A shareholder wants to exchange Class A shares
for shares of a second MLAM-advised mutual fund, but does not hold Class A
shares of the second fund in his account at the time of the exchange and
is not otherwise eligible to acquire Class A shares of the second fund,
the shareholder will receive Class D shares of the second fund as a result
of the exchange. Class D shares also may be exchanged for Class A shares
of a second MLAM-advised mutual fund at any time as long as, at the time
of the exchange, the shareholder holds Class A shares of the second fund
in the account in which the exchange is made or is otherwise eligible to
purchase Class A shares of the second fund. Class B, Class C and Class D
shares will be exchangeable with shares of the same class of other
MLAM-advised mutual funds. For purposes of computing the CDSC that may be
payable upon a disposition of the shares acquired in the exchange, the
holding period for the previously owned shares of the Fund is
26
<PAGE> 84
"tacked" to the holding period of the newly acquired shares of the other
Fund as more fully described below. Class A, Class B, Class C and Class D
shares also will be exchangeable for shares of certain MLAM-advised money
market funds specifically designated below as available for exchange by
holders of Class A, Class B, Class C or Class D shares. Shares with a net
asset value of at least $100 are required to qualify for the exchange
privilege, and any shares utilized in an exchange must have been held by
the shareholder for 15 days. It is contemplated that the exchange
privilege may be applicable to other new mutual funds whose shares may be
distributed by the Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding
Class A or Class D shares") for Class A or Class D shares of another
MLAM-advised mutual fund ("new Class A or Class D shares") are
transacted on the basis of relative net asset value per Class A or Class D
share, respectively, plus an amount equal to the difference, if any,
between the sales charge previously paid on the outstanding Class A or
Class D shares and the sales charge payable at the time of the exchange on
the new Class A or Class D shares. With respect to outstanding Class A or
Class D shares as to which previous exchanges have taken place, the
"sales charge previously paid" shall include the aggregate of the sales
charges paid with respect to such Class A or Class D shares in the initial
purchase and any subsequent exchange. Class A or Class D shares issued
pursuant to dividend reinvestment are sold on a no-load basis in each of
the funds offering Class A or Class D shares. For purposes of the exchange
privilege, Class A and Class D shares acquired through dividend
reinvestment shall be deemed to have been sold with a sales charge equal
to the sales charge previously paid on the Class A or Class D shares on
which the dividend was paid. Based on this formula, Class A and Class D
shares of the Fund generally may be exchanged into the Class A or Class D
shares of the other funds or into shares of the Class A and Class D money
market funds without a sales charge.
In addition, each of the funds with Class B and Class C shares
outstanding ("outstanding Class B or Class C shares") offers to exchange
its Class B or Class C shares for Class B or Class C shares, respectively
("new Class B or Class C shares"), of another MLAM-advised mutual fund
on the basis of relative net asset value per Class B or Class C share
without the payment of any CDSC that might otherwise be due on redemption
of the outstanding shares. Class B shareholders of the Fund exercising the
exchange privilege will continue to be subject to the Fund's CDSC schedule
if such schedule is higher than the CDSC schedule relating to the new
Class B shares acquired through use of the exchange privilege. In
addition, Class B shares of the Fund acquired through use of the exchange
privilege will be subject to the Fund's CDSC schedule if such schedule is
higher than the CDSC schedule relating to the Class B shares of the Fund
from which the exchange has been made. For purposes of computing the sales
load that may be payable on a disposition of the new Class B or Class C
shares, the holding period for the outstanding Class B or Class C shares
is "tacked" to the holding period of the new Class B or Class C shares.
For example, an investor may exchange Class B shares of the Fund for those
of Merrill Lynch Special Value Fund ("Special Value Fund") 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 Special Value Fund 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 Special Value Fund Class B shares, the
investor will be deemed to have held the new Class B shares for more than
five years.
Shareholders also may exchange shares of the Fund into shares of a
money market fund advised by the Investment Adviser or its affiliates, but
the period of time that Class B or Class C shares are held in a money
market fund will not count towards satisfaction of the holding period
requirement for purposes of reducing the CDSC or with respect to Class B
shares, towards satisfaction of the conversion period. However, shares of
a
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money market fund which were acquired as a result of an exchange for Class
B or Class C shares of a fund may, in turn, be exchanged back into Class B
or Class C shares, respectively, of any fund offering such shares, in
which event the holding period for Class B or Class C shares of the fund
will be aggregated with previous holding periods for purposes of reducing
the CDSC. Thus, for example, an investor may exchange Class B shares of
the Fund for shares of Merrill Lynch Institutional Fund ("Institutional
Fund") after having held the Fund Class B shares for two and a half years
and three years later decide to redeem the shares of Institutional Fund
for cash. At the time of this redemption, the 2% CDSC that would have been
due had the Class B shares of the Fund been redeemed for cash rather than
exchanged for shares of Institutional Fund will be payable. If, instead of
such redemption the shareholder exchanged such shares for Class B shares
of a fund which the shareholder continued to hold for an additional two
and a half years, a subsequent redemption will not incur a CDSC.
Set forth below is a description of the investment objectives of the
other funds into which exchanges can be made:
Funds Issuing Class A, Class B, Class C and Class D Shares:
Merrill Lynch Adjustable Rate
Securities Fund, Inc. .........High current income consistent with a
policy of limiting the degree of
fluctuation in net asset value of fund
shares resulting from movements in
interest rates through investment
primarily in a portfolio of adjustable
rate securities.
Merrill Lynch Americas Income
Fund, Inc. ................. A high level of current income, consistent
with prudent investment risk, by
investing primarily in debt securities
denominated in a currency of a country
located in the Western Hemisphere (i.e.,
North and South America and the
surrounding waters).
Merrill Lynch Arizona Limited Maturity
Municipal Bond Fund ...........A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of income exempt
from Federal and Arizona income taxes as
is consistent with prudent investment
management through investment in a
portfolio primarily of intermediate-term
investment grade Arizona Municipal Bonds.
Merrill Lynch Arizona Municipal
Bond Fund ................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide investors
with as high a level of income exempt
from Federal and Arizona income taxes as
is consistent with prudent investment
management.
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Merrill Lynch Arkansas Municipal
Bond Fund.................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
Arkansas income taxes as is consistent
with prudent investment management.
Merrill Lynch Asset Growth
Fund, Inc. .................. High total investment return, consistent
with prudent risk, from investment in
United States and foreign equity, debt
and money market securities the
combination of which will be varied both
with respect to types of securities and
markets in response to changing market
and economic trends.
Merrill Lynch Asset Income Fund,
Inc. ....................... A high level of current income through
investment primarily in United States
fixed income securities.
Merrill Lynch Balanced Fund for
Investment and Retirement ......As high a level of total investment return
as is consistent with a relatively low
level of risk through investment 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 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 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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Merrill Lynch California Municipal
Bond Fund ................... A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
California income taxes as is consistent
with prudent investment management.
Merrill Lynch Capital Fund, Inc. The highest total investment return
consistent with prudent risk through a
fully managed investment policy utilizing
equity, debt and convertible securities.
Merrill Lynch Colorado Municipal
Bond Fund ................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
Colorado income taxes as is consistent
with prudent investment management.
Merrill Lynch Connecticut Municipal
Bond Fund.................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
Connecticut income taxes as is consistent
with prudent investment management.
Merrill Lynch Corporate Bond
Fund, Inc. ................. Current income from three separate
diversified portfolios of fixed income
securities.
Merrill Lynch Developing Capital
Markets Fund, Inc. ...........Long-term appreciation through investment
in securities, principally equities, of
issuers in countries having smaller
capital markets.
Merrill Lynch Dragon Fund, Inc. Capital appreciation primarily through
investment in equity and debt securities
of issuers domiciled in developing
countries located in Asia and the Pacific
Basin.
Merrill Lynch EuroFund ...........Capital appreciation primarily through
investment in equity securities of
corporations domiciled in Europe.
Merrill Lynch Federal Securities
Trust ...................... High current return through investments in
U.S. Government and Government agency
securities, including GNMA
mortgage-backed certificates and other
mortgage-backed Government securities.
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Merrill Lynch Florida Limited Maturity
Municipal Bond Fund ...........A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of income exempt
from Federal income taxes as is
consistent with prudent investment
management while serving to offer
shareholders the opportunity to own
securities exempt from Florida intangible
personal property taxes through
investment in a portfolio primarily of
intermediate-term investment grade
Florida Municipal Bonds.
Merrill Lynch Florida Municipal
Bond Fund ................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal
income taxes as is consistent with
prudent investment management, while
seeking to offer shareholders the
opportunity to own 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 investment return consistent
with prudent risk through a fully managed
investment policy utilizing United States
and foreign equity, debt and money market
securities, the combination of which will
be varied from time to time both with
respect to 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 government and corporate
bonds denominated in various currencies
and multi-national currency units.
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Merrill Lynch Global Convertible
Fund, Inc. ................. High total return from investment primarily
in an internationally diversified
portfolio of convertible debt securities,
convertible preferred stock and
"synthetic" convertible securities
consisting of a combination of debt
securities or preferred stock and
warrants or options.
Merrill Lynch Global Holdings, Inc.
(residents of Arizona must
meet The highest total investment return
investor suitability consistent with prudent risk through
standards) ................ worldwide investment in an
internationally diversified portfolio of
securities.
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 SmallCap
Fund, Inc. .................. Long-term growth of capital by investing
primarily in equity securities of issuers
with relatively small market
capitalizations located in various
foreign countries and in the United
States.
Merrill Lynch Global Utility
Fund, Inc. ................. Capital appreciation and current income
through investment of at least 65% of its
total assets in equity and debt
securities issued by domestic and foreign
companies primarily engaged in the
ownership and operation of facilities
used to generate, transmit or distribute
electricity, telecommunications, gas or
water.
Merrill Lynch Growth Fund for
Investment and Retirement ..... Growth of capital and, secondarily, income
from investment in a diversified
portfolio of equity securities placing
principal emphasis on those securities
which management of the fund believes to
be undervalued.
Merrill Lynch Healthcare Fund, Inc.
(residents of Wisconsin
must meet Capital appreciation through worldwide
investor suitability investment in equity securities of
standards) ................ companies that derive or are expected to
derive a substantial portion of their
sales from products and services in
healthcare.
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Merrill Lynch International
Equity Fund ................. Capital appreciation and, secondarily,
income by investing in a diversified
portfolio of equity securities of issuers
located in countries other than the
United States.
Merrill Lynch Latin America
Fund, Inc. ................. Capital appreciation by investing primarily
in Latin American equity and debt
securities.
Merrill Lynch Maryland Municipal
Bond Fund ................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
Maryland income taxes as is consistent
with prudent investment management.
Merrill Lynch Massachusetts
Limited Maturity Municipal
Bond Fund ................... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of income exempt
from Federal and Massachusetts income
taxes as is consistent with prudent
investment management through investment
in a portfolio primarily of
intermediate-term investment grade
Massachusetts Municipal Bonds.
Merrill Lynch Massachusetts
Municipal Bond Fund .......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
Massachusetts income taxes as is
consistent with prudent investment
management.
Merrill Lynch Michigan Limited
Maturity Municipal Bond Fund .. A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of income exempt
from Federal and Michigan income taxes as
is consistent with prudent investment
management through investment in a
portfolio primarily of intermediate-term
investment grade Michigan Municipal
Bonds.
Merrill Lynch Michigan Municipal
Bond Fund ................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
Michigan income taxes as is consistent
with prudent investment management.
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Merrill Lynch Minnesota Municipal
Bond Fund ................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
Minnesota personal income taxes as is
consistent with prudent investment
management.
Merrill Lynch Municipal Bond
Fund, Inc. ................. Tax-exempt income from three separate
diversified portfolios of municipal
bonds.
Merrill Lynch Municipal
Intermediate Term Fund ...... Currently the only portfolio of Merrill
Lynch Municipal Series Trust, a series
fund, whose objective is to provide as
high a level as possible of income exempt
from Federal income taxes by investing in
investment grade obligations with a
dollar weighted average maturity of five
to twelve years.
Merrill Lynch New Jersey Limited
Maturity Municipal Bond Fund .. A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of income exempt
from Federal and New Jersey income taxes
as is consistent with prudent investment
management through 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 to provide as high a
level of income exempt from Federal and
New Jersey income taxes as is consistent
with prudent investment management.
Merrill Lynch New Mexico
Municipal Bond Fund ............A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
New Mexico income taxes as is consistent
with prudent investment management.
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Merrill Lynch New York Limited
Maturity Municipal Bond Fund .. A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of income exempt
from Federal, New York State and New York
City income taxes as is consistent with
prudent investment management through
investment in a portfolio primarily of
intermediate-term grade New York
Municipal Bonds.
Merrill Lynch New York Municipal
Bond Fund ................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal, New
York State and New York City income taxes
as is consistent with prudent investment
management.
Merrill Lynch North Carolina
Municipal Bond Fund ...........A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
North Carolina income taxes as is
consistent with prudent investment
management.
Merrill Lynch Ohio Municipal
Bond Fund ................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
Ohio income taxes as is consistent with
prudent investment management.
Merrill Lynch Oregon Municipal
Bond Fund ................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
Oregon income taxes as is consistent with
prudent investment management.
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.
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Merrill Lynch Pennsylvania
Municipal Bond Fund ...........A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
Pennsylvania personal income taxes as is
consistent with prudent investment
management.
Merrill Lynch Phoenix Fund, Inc. Long-term growth of capital by investing in
equity and fixed income securities,
including tax-exempt securities, of
issuers in weak financial condition or
experiencing poor operating results
believed to be undervalued relative to
the current or prospective condition of
such issuer.
Merrill Lynch 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 to provide as high a
level of income exempt from Federal
income taxes as is consistent with
prudent investment management by
investing primarily in a portfolio of
long-term, investment grade obligations
issued by the State of Texas, its
political subdivisions, agencies and
instrumentalities.
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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.
Class A Share Money Market Funds:
Merrill Lynch Ready Assets
Trust ...................... Preservation of capital, liquidity and the
highest possible current income
consistent with the foregoing objectives
from the short-term money market
securities in which the Trust invests.
Merrill Lynch Retirement Reserves
Money Fund (available only
for
exchanges within certain Currently the only portfolio of Merrill
retirement plans) ......... Lynch Retirement Series Trust, a series
fund, whose objectives are current
income, preservation of capital and
liquidity available from investing in a
diversified portfolio of short-term money
market securities.
Merrill Lynch U.S.A. Government
Reserves .................... Preservation of capital, current income and
liquidity available from investing in
direct obligations of the U.S. Government
and repurchase agreements relating to
such securities.
Merrill Lynch U.S. Treasury
Money Fund .................. Preservation of capital, liquidity and
current income through investment
exclusively in a diversified portfolio of
short-term marketable securities which
are direct obligations of the U.S.
Treasury.
Class B, Class C and Class D Share Money Market Funds:
Merrill Lynch Government Fund ... A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
consistent with liquidity and security of
principal from investment in securities
issued or guaranteed by the U.S.
Government, its agencies and
instrumentalities and in repurchase
agreements secured by such obligations.
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Merrill Lynch Institutional Fund A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide maximum current
income consistent with liquidity and the
maintenance of a high-quality portfolio
of money market securities.
Merrill Lynch Institutional
Tax-Exempt Fund .............. A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
exempt from Federal income taxes,
preservation of capital and liquidity
available from investing in a diversified
portfolio of short-term, high quality
municipal bonds.
Merrill Lynch Treasury Fund ... A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
consistent with liquidity and security of
principal from investment in direct
obligations of the U.S. Treasury and up
to 10% of its total assets in repurchase
agreements secured by such obligations.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, shareholders should contact their
Merrill Lynch financial consultant, who will advise the Fund of the
exchange. Shareholders of the Fund, and shareholders of the other funds
described above with shares for which certificates have not been issued,
may exercise the exchange privilege by wire through their securities
dealers. The Fund reserves the right to require a properly completed
Exchange Application. This exchange privilege may be modified or
terminated in accordance with the rules of the Commission. The Fund
reserves the right to limit the number of times an investor may exercise
the exchange privilege. Certain funds may suspend the continuous offering
of their shares at any time and thereafter may resume such offering from
time to time. The exchange privilege is available only to U.S.
shareholders in states where the exchange legally may be made.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends and Distributions
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> 96
Taxes
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal
Revenue Code of 1986, as amended (the "Code"). If it so qualifies, the
Fund (but not its shareholders) will not be subject to Federal income tax
on the part of its net ordinary income and net realized capital gains
which it distributes to Class A, Class B, Class C and Class D shareholders
(together, the "shareholders"). The Fund intends to distribute
substantially all of such income.
Dividends paid by the Fund from its ordinary income and distributions
of the Fund's net realized short-term capital gains (together referred to
hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from the Fund's net realized long-term
capital gains (including long-term gains from certain transactions in
futures and options) ("capital gain dividends") are taxable to
shareholders as long-term capital gains, regardless of the length of time
the shareholder has owned Fund shares. Distributions in excess of the
Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero,
will constitute capital gains to such holder (assuming the shares are held
as a capital asset). 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, generally 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 no
certified taxpayer identification number is on file with the Fund or who,
to the Fund's knowledge, have furnished an incorrect number. When
establishing an account, an investor must certify under penalty of perjury
that such number is correct and that such investor is not otherwise
subject to backup withholding.
Dividends and interest received by the Fund may give rise to
withholding and other taxes imposed by foreign countries. Tax conventions
between certain countries and the 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
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<PAGE> 97
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 among the Class A, Class B, Class C and Class D
shareholders according to a method (which it believes is consistent with
the Securities and Exchange Commission exemptive order permitting the
issuance and sale of multiple classes of stock) that is based on the gross
income allocable to Class A, Class B, Class C and Class D shareholders
during the taxable year, or such other method as the Internal Revenue
Service may prescribe.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's
basis in the Class D shares acquired will be the same as such
shareholder's basis in the Class B shares converted, and the holding
period of the acquired Class D shares will include the holding period for
the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring such shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales
charge paid to the Fund on the exchanged shares reduces any sales charge
the shareholder would have owed upon the purchase of the new shares in the
absence of the exchange privilege. Instead, such sales charge will be
treated as an amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the
automatic reinvestment of dividends or otherwise) within a 61-day period
beginning 30 days before and ending 30 days after the date that the shares
are disposed of. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss.
The Code requires a RIC to pay a nondeductible 4% excise tax to the
extent the RIC does not distribute, during each calendar year, 98% of its
ordinary income, determined on a calendar year basis, and 98% of its
capital gains, determined, in general, on an October 31 year end, plus
certain undistributed amounts from previous years. While the Fund intends
to distribute its income and capital gains in the manner necessary to
avoid imposition of the 4% excise tax, there can be no assurance that
sufficient amounts of the Fund's taxable income and capital gains will be
distributed to avoid entirely the imposition of the tax. In such event,
the Fund will be liable for the tax only on the amount by which it does
not meet the foregoing distribution requirements.
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.
40
<PAGE> 98
A forward foreign exchange contract that is a Section 1256 contract
will be marked to market, as described above. However, the character of
gain or loss from such a contract will generally be ordinary under Code
Section 988. The Fund may, nonetheless, elect to treat the gain or loss
from certain forward foreign exchange contracts as capital. In this case,
gain or loss realized in connection with a forward foreign exchange
contract that is a Section 1256 contract will be characterized as 60%
long-term and 40% short-term capital gain or loss.
Code Section 1092, which applies to certain "straddles", may affect
the taxation of the Fund's transactions in options, futures and forward
foreign exchange contracts. Under Section 1092, the Fund may be required
to postpone recognition for tax purposes of losses incurred in certain
closing transactions in options, futures and forward foreign exchange
contracts.
One of the requirements for qualification as a RIC is that less than
30% of the Fund's gross income be derived from gains from the sale or
other disposition of securities held for less than three months.
Accordingly, the Fund may be restricted in effecting closing transactions
within three months after entering into an 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.
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 income dividend distributions,
and any distributions made before the losses were realized but in the same
taxable year would be recharacterized as a return of capital to
shareholders, thereby reducing the basis of each shareholder's Fund
shares, and resulting in a capital gain for any shareholder who received a
distribution greater than 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.
41
<PAGE> 99
Ordinary income and capital gain dividends may also be subject to
state and local taxes.
Certain states exempt from state income taxation dividends paid by
RICs which are derived from interest on U.S. Government obligations. State
law varies as to whether dividend income attributable to U.S. Government
obligations is exempt from state income tax.
Shareholders are urged to consult their own tax advisers regarding
specific questions as to Federal, foreign, state or local taxes. Foreign
investors should consider applicable foreign taxes in their evaluation of
an investment in the Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return
and other total return data, 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, Class B, Class C
and Class D 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 and Class D shares and the CDSC that
would be applicable to a complete redemption of the investment at the end
of the specified period in the case of Class B and Class C shares.
The Fund also may quote annual, average 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.
42
<PAGE> 100
Set forth below is total return and yield information for the Class A
and Class B shares of the Fund for the periods indicated. Since Class C
and Class D shares have not been issued prior to the date of this
Statement of Additional Information, performance information concerning
Class C and Class D shares is not yet provided.
<TABLE>
<CAPTION>
Class A Shares Class B Shares
-------------------------------------- ---------------------------------------
Expressed as Redeemable value Expressed as Redeemable value
a percentage of a hypothetical a percentage of a hypothetical
based on a $1,000 investment based on a $1,000 investment
hypothetical at the end of hypothetical at the end of
$1,000 investment the period $1,000 investment the period
------------------ ----------------- ----------------- -----------------
Average Annual Total Return
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
One Year Ended June 30, 1994........ (3.18%) $ 968.20 (3.72%) $ 962.80
Five Years Ended June 30, 1994 ..... 9.96% $1,607.50
November 18, 1991 to June 30, 1994.. 4.90% $1,133.40
September 29, 1988 to June 30, 1994. 9.77% $1,709.60
Annual Total Return
(excluding maximum applicable sales charges)
Six Months Ended June 30, 1994...... (4.60%) $ 954.00 (5.05%) $ 949.50
One Year Ended December 31, 1993 ... 14.12% $1,141.20 13.27% $1,132.70
1992............................... 6.15% $1,061.50 5.34% $ 1053.40
1991............................... 23.12% $1,231.20
1990............................... 10.03% $1,100.30
1989............................... 6.82% $1,068.20
September 29, 1988 to December 31,
1988.............................. 6.49% $1,064.90
November 18, 1991 to December 31,
1991.............................. 1.64% $1,016.40
Aggregate Total Return
(including maximum applicable sales charges)
November 18, 1991 to June 30, 1994 . 13.34% $1,133.40
September 29, 1988 to June 30, 1994* 70.96% $1,709.60
Yield
30 Days Ended June 30, 1994......... 8.19% 7.76%
</TABLE>
----------
* The Fund operated as a closed-end investment company from September 29,
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
or Class D shares or the waiver of the CDSC in the case of Class B
shares applicable to certain investors, as described under
"Purchase of Shares" and "Redemption of Shares", respectively, the
total return data quoted by the Fund in advertisements directed to such
investors may take into account the reduced, and not the maximum, sales
charge or may take into account the CDSC and therefore may reflect greater
total return since, due to the reduced sales charges or the waiver of
sales charges, a lower amount of expenses is deducted.
43
<PAGE> 101
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 4,000,000,000 shares of Common Stock, par value
$0.10 per share, divided into four classes, designated Class A, Class B,
Class C and Class D Common Stock, 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. Class A, Class B, Class C and Class D Common
Stock represent an interest in the same assets of the Fund and are
identical in all respects except that the Class B, Class C and Class D
shares bear certain expenses related to the account maintenance and/or
distribution of such shares and have exclusive voting rights with respect
to matters relating to such expenditures. The Fund has received an order
from the Commission permitting the issuance and sale of multiple classes
of Common Stock. The Board of Directors of the Fund may classify and
reclassify the shares of the Fund into additional classes of Common Stock
at a future date.
Shareholders are entitled to one vote for each 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. Generally,
under Maryland law, a meeting of shareholders may be called for any
purpose on the written request of the holders of at least 25% of the
outstanding shares of the Fund. 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 rights. Redemption
and conversion 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.
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 as of June 30, 1994 is set forth below. Information
is not provided for Class C and Class D shares since no Class C or Class D
shares were publicly offered prior to the date of this Statement of
Additional Information.
44
<PAGE> 102
<TABLE>
<CAPTION>
Class A Class B
------------ -----------------
<S> <C> <C>
Net Assets.............................. $380,996,640 $1,812,715,902
============ =================
Number of Shares Outstanding............ 44,739,930 213,004,234
============ =================
Net Asset Value Per Share (net assets
divided by number of shares
outstanding).......................... $ 8.52 $ 8.51
Sales Charge (for Class A shares: 4.00%
of offering price (4.17% of net asset
value per share))*.................... 0.36 **
------------ -----------------
Offering Price.......................... $ 8.88 $ 8.51
============ =================
</TABLE>
----------
* Rounded to the nearest one-hundredth percent; assumes maximum sales
charge is applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a contingent deferred sales charge on redemption of
shares. See "Purchase of Shares-Deferred Sales Charge Alternatives-Class B
and Class C Shares" in the Prospectus.
Independent Auditors
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540,
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, P.O. Box 351, Boston, Massachusetts
02101 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.
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.
45
<PAGE> 103
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 September 30, 1994.
46
<PAGE> 104
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 LLP
Princeton, New Jersey
February 4, 1994
47
<PAGE> 105
<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> <C> <C> <C> <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
<PAGE> 106
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
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>
<PAGE> 107
<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> <C> <C> <C> <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
<PAGE> 108
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
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
<PAGE> 109
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>
<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> <C> <C> <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
<PAGE> 110
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
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
<PAGE> 111
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
<PAGE> 112
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>
<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> <C> <C> <C> <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
<PAGE> 113
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
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
<PAGE> 114
<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., $8.00 (f) 3,000,000 2,955,000 0.11
<PAGE> 115
Waste Management 81,779 ++Environmental Systems Co. (Series A) 1,567,383 1,635,580 0.06
Total Investments in United States
Convertible Preferred Stocks, Common
Stocks & Warrants 27,024,112 31,867,259 1.24
Total Investments in
North American Securities 1,360,337,155 1,402,333,395 54.49
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
PACIFIC Face Value Percent of
BASIN Industries Amount Fixed--Income Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
Australia
Foreign Government Australia Government Bonds:
Obligations-- A$ 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
<PAGE> 116
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):
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
<PAGE> 117
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>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<CAPTION>
SHORT-TERM Face Value Percent of
SECURITIES Amount Issues Cost (Note 1a) Net Assets
<S> <C> <C> <C> <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
<PAGE> 118
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.
</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
=========== ===========
<PAGE> 119
++++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.
*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)
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) $(4,117,851)
-----------
<PAGE> 120
Foreign Currency Sold
A$ 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>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<PAGE> 121
<CAPTION>
As of December 31, 1993
<S> <C> <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>
<PAGE> 122
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the
Year Ended
Dec. 31, 1993
<S> <C> <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>
<PAGE> 123
<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> <C> <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>
<PAGE> 124
<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> <C> <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
-------- -------- -------- -------- -------- --------
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%
======== ======== ======== ======== ======== ========
<PAGE> 125
<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> <C> <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.
</FN>
See Notes to Financial Statements.
</TABLE>
<PAGE> 126
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 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.
<PAGE> 127
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.
(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.
<PAGE> 128
(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 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.
<PAGE> 129
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
============== ==============
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 $ -- $ --
============== ==============
<PAGE> 130
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:
<PAGE> 131
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 $ -- $ --
============== ==============
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)
============== ==============
<PAGE> 132
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
============== ==============
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
============== ==============
<PAGE> 133
The following semi-annual financial statements for the Fund for the
period ended June 30, 1994 are unaudited.
These unaudited interim financial statements reflect all adjustments
which are, in the opinion of management, necessary to a fair statement of
the results for the interim period presented. All such adjustments are of
a normal recurring nature.
68
<PAGE> 134
<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> <C> <C> <C> <C> <C> <C> <C>
Argentina Banking US$ 6,750,000 Banco Rio de la Plata, S.A., 8.75%
due 12/15/2003 $ 6,882,000 $ 5,678,438 0.3%
Energy 5,000,000 Hydroelectrica Alicura, 8.375%
due 3/15/1999 4,978,900 4,587,500 0.2
4,000,000 Transportadora de Gas del Sur, 7.75%
due 12/23/1998++++ 4,072,500 3,650,000 0.2
9,500,000 YPF S.A., 8.00% due 2/15/2004 9,181,750 8,027,500 0.4
-------------- -------------- ------
18,233,150 16,265,000 0.8
<PAGE> 135
Foreign 10,000,000 Republic of Argentina, 8.375%
Government due 12/20/2003 9,936,800 8,225,000 0.4
Obligations
Industrial 7,000,000 Compania Naviera Perez Companc
Services S.A.C.F.I.M.F.A. S.A., 8.375%
due 7/30/1998 7,120,334 6,588,750 0.3
Telecommuni- 7,500,000 Telecom Argentina Stet-France
cations Telecom, S.A., 8.375% due
10/18/2000 7,471,125 6,740,625 0.3
7,000,000 Telefonica de Argentina, S.A.,
8.375% due 10/01/2000 7,025,800 6,335,000 0.3
-------------- -------------- ------
14,496,925 13,075,625 0.6
Total Fixed-Income Investments
in Argentina 56,669,209 49,832,813 2.4
Colombia Foreign 7,800,000 Republic of Colombia, 7.25% due
Government 2/23/2004 7,746,238 6,912,750 0.3
Obligations
--Agency
Total Fixed-Income Investments
in Colombia 7,746,238 6,912,750 0.3
Mexico Banking 3,000,000 Grupo Financiero Bancomer, S.A.
de C.V., 8.00% due 7/07/1998++++ 3,063,750 2,880,000 0.1
Food & Beverage 4,000,000 Fomento Economico Mexico, S.A. de
C.V. (Femsa), 9.50% due 7/22/1997 4,141,875 4,040,000 0.2
3,500,000 Grupo Embotellador de Mexico, S.A. de
C.V. (GEMEX), 10.75% due 11/19/1997 3,752,500 3,640,665 0.2
-------------- -------------- ------
7,894,375 7,680,665 0.4
Foreign 6,000,000 Banco Nacional de Commerce Exterior,
Government 8.00% due 8/05/2003 5,947,500 5,070,000 0.2
& Agency 4,000,000 Nafinsa, 10.625% due 11/22/2001 4,420,000 4,010,000 0.2
Obligations Pound 10,000,000 United Mexican States, Government
Sterling Bond, 12.25% due 12/03/1998 17,422,208 16,217,555 0.7
-------------- -------------- ------
27,789,708 25,297,555 1.1
<PAGE> 136
Industrial Cemex, S.A.:
Services US$ 7,000,000 8.875% due 6/10/1998 6,977,500 6,877,500 0.3
3,500,000 10.00% due 11/05/1999 3,572,875 3,526,250 0.2
4,000,000 Empresas ICA Sociedad Controladora,
S.A. de C.V., 9.75% due 2/11/1998 4,057,500 4,020,000 0.2
-------------- -------------- ------
10,607,875 14,423,750 0.7
Retail Stores 2,210,000 Controladora Comercial Mexicana, S.A.,
8.75% due 4/21/1998 2,236,615 2,138,175 0.1
Total Fixed-Income Investments in
Mexico 55,592,323 52,420,145 2.4
Trinidad Foreign Republic of Trinidad and Tobago:
& Tobago Government 2,000,000 11.50% due 11/20/1997 2,100,000 2,040,000 0.1
Obligations 4,000,000 9.75% due 11/03/2000 3,991,600 3,800,000 0.2
-------------- -------------- ------
6,091,600 5,840,000 0.3
Total Fixed-Income Investments in
Trinidad & Tobago 6,091,600 5,840,000 0.3
Uruguay Foreign 5,000,000 Republica Orient de Uruguay, 7.25%
Government due 3/07/2001 4,983,750 4,737,500 0.2
Obligations
Total Fixed-Income Investments in
Uruguay 4,983,750 4,737,500 0.2
Total Fixed-Income Investments in
Latin American and Caribbean
Securities 131,083,120 119,743,208 5.6
NORTH
AMERICA
<PAGE> 137
Canada Food & Beverage US$ 10,000,000 Canandaigua Wine, 8.75%
due 12/15/2003 10,000,000 8,800,000 0.4
Foreign Canadian Government Bonds:
Government C$ 55,000,000 6.50% due 9/01/1998 42,281,930 36,494,211 1.7
Obligations 19,000,000 7.75% due 9/01/1999 13,781,086 13,074,530 0.6
98,500,000 6.50% due 6/01/2004 71,099,256 58,836,288 2.7
-------------- -------------- ------
127,162,272 108,405,029 5.0
Total Fixed-Income Investments
in Canada 137,162,272 117,205,029 5.4
United Air Transport US$ 7,100,000 United Air Pass-Through, 10.125%
States due 3/22/2015 7,684,046 6,420,885 0.3
15,000,000 USAir Inc., 10.375% due 3/01/2013 15,000,000 13,200,000 0.6
-------------- -------------- ------
22,684,046 19,620,885 0.9
Broadcasting & 12,000,000 Cablevision Systems Corp., 14.00%
Publishing due 11/15/2003 12,971,250 12,210,000 0.6
10,190,000 Century Communications Corp., 11.875%
due 10/15/2003 10,701,550 10,826,875 0.5
10,000,000 Continental Cablevision, 9.50%
due 8/01/2013 10,000,000 9,125,000 0.4
13,000,000 Heritage Media Corp., 11.00%
due 6/15/2002 13,295,625 13,390,000 0.6
15,000,000 K-III Communications Corp., 10.625%
due 5/01/2002 15,125,000 15,150,000 0.7
10,000,000 Videotron Group, Ltd. Co., 10.25%
due 10/15/2002 10,043,750 10,100,000 0.5
-------------- -------------- ------
72,137,175 70,801,875 3.3
Building 15,300,000 Pacific Lumber Co., 10.50% due
Materials 3/01/2003 15,462,750 14,879,250 0.7
USG Corp.:
10,000,000 10.25% due 12/15/2002 9,968,750 10,000,000 0.5
11,035,000 8.75% due 3/01/2017 9,717,469 9,324,575 0.4
-------------- -------------- ------
35,148,969 34,203,825 1.6
<PAGE> 138
Business 18,500,000 ADT Operations, 9.25% due 8/01/2003 18,573,188 17,251,250 0.8
Services 8,000,000 Bell & Howell Co., Series B, 10.75%
due 10/01/2002 8,000,000 8,240,000 0.4
-------------- -------------- ------
26,573,188 25,491,250 1.2
</TABLE>
<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> <C> <C> <C> <C> <C> <C> <C>
United Chemicals US$ 12,000,000 Uniroyal Chemical Co., 9.00%
States due 9/01/2000 $ 12,000,000 $ 11,400,000 0.5%
(continued)
Conglomerates 20,000,000 Coltec Industries Inc., 10.25%
due 4/01/2002 20,387,500 20,200,000 0.9
9,500,000 Gillette Holdings, 12.25% due
6/30/2002 9,737,500 10,070,000 0.5
5,000,000 Jordan Industries Inc., 10.375%
due 8/01/2003 4,850,000 4,862,500 0.2
9,000,000 Sequa Corp., 9.375% due 12/15/2003 9,000,000 8,820,000 0.4
10,100,000 Sherritt Gordon, Ltd., 9.75%
due 4/01/2003 10,148,750 9,973,750 0.5
10,000,000 Southern Pacific Rail Co., 9.375%
due 8/15/2005 10,000,000 10,000,000 0.5
-------------- -------------- ------
64,123,750 63,926,250 3.0
Consumer Goods Liggett Group, Inc.:
8,000,000 11.50% due 2/01/1999 7,724,541 5,600,000 0.3
4,199,000 16.50% due 2/01/1999 4,199,000 3,149,250 0.1
30,350,000 Revlon Worldwide, 25.55%* due
3/15/1998 19,698,097 12,443,500 0.6
-------------- -------------- ------
31,621,638 21,192,750 1.0
Containers Owens Illinois:
2,500,000 10.00% due 8/01/2002 2,503,125 2,493,750 0.1
20,000,000 11.00% due 12/01/2003 21,906,563 21,200,000 1.0
6,100,000 Silgan Holdings Corp., 11.75%
due 6/15/2002 6,194,875 6,344,000 0.3
-------------- -------------- ------
30,604,563 30,037,750 1.4
<PAGE> 139
Energy Clark Oil Co.:
8,360,000 10.50% due 12/01/2001 8,827,300 8,610,800 0.4
4,000,000 9.50% due 9/15/2004 4,000,000 4,040,000 0.2
7,000,000 Clark R & M Holdings, Inc., 10.92%*
due 2/15/2000 3,912,118 3,850,000 0.2
Gulf Canada Resources, Ltd.:
10,000,000 9.00% due 8/15/1999 9,158,438 9,800,000 0.4
6,500,000 9.25% due 1/15/2004 6,458,855 5,980,000 0.3
Maxus Energy Corp.:
6,500,000 9.875% due 10/15/2002 6,485,050 6,175,000 0.3
1,000,000 11.50% due 11/15/2015 1,051,250 1,030,000 0.0
6,050,000 Oryx Energy Co., 10.375% due 9/15/2018 6,098,058 6,187,275 0.3
15,000,000 Rowan Companies, Inc., 11.875%
due 12/01/2001 15,590,000 15,900,000 0.7
15,000,000 Seagull Energy Corp., 8.625%
due 8/01/2005 15,000,000 13,800,000 0.6
10,000,000 Trans Texas Gas Corp., 10.50%
due 9/01/2000 10,000,000 10,000,000 0.5
-------------- -------------- ------
86,581,069 85,373,075 3.9
Entertainment 28,465,000 Marvel Holdings, Inc., 13.24%*
due 4/15/1998 18,551,193 17,505,975 0.8
5,000,000 Spectravision Inc., 16.01%* due
10/01/2001 3,920,996 3,000,000 0.1
4,500,000 Time Warner Inc., 6.58%* due
12/17/2012 1,364,648 1,361,250 0.1
-------------- -------------- ------
23,836,837 21,867,225 1.0
Financial Services 17,375,000 Lomas Mortgage USA, 10.25% due
10/01/2002 17,387,500 17,027,500 0.8
10,000,000 Penn Financial Corp., 9.25%
due 12/15/2003 10,000,000 9,300,000 0.4
10,000,000 Reliance Group Holdings, 9.00%
due 11/15/2000 10,000,000 9,100,000 0.4
-------------- -------------- ------
37,387,500 35,427,500 1.6
<PAGE> 140
Food & Beverage 10,000,000 Coca-Cola Bottling Co., 9.00%
due 11/15/2003 10,005,000 9,100,000 0.4
20,000,000 Del Monte Corp., 10.00% due 5/01/2003 20,025,313 18,200,000 0.8
25,000,000 Grand Union Co., 11.25% due 7/15/2000 25,524,063 24,500,000 1.1
20,000,000 Heileman Acquisition, 9.625%
due 1/31/2004 20,000,000 18,250,000 0.8
18,000,000 Penn Traffic Co., 9.625% due 4/15/2005 18,308,350 16,920,000 0.8
20,000,000 Pueblo Xtra International Inc.,
9.50% due 8/01/2003 20,111,875 18,000,000 0.8
10,000,000 Specialty Foods Corp., 10.25%
due 8/15/2001 10,000,000 9,050,000 0.4
-------------- -------------- ------
123,974,601 114,020,000 5.1
Health Services American Medical International Inc.:
2,502,500 6.50% due 5/30/1997 2,029,634 2,364,863 0.1
11,000,000 11.25% due 6/01/2015 11,535,625 11,605,000 0.5
15,000,000 Continental Medical Systems, Inc.,
10.875% due 8/15/2002 15,029,063 14,400,000 0.7
Healthtrust--The Hospital Co.:
14,000,000 10.75% due 5/01/2002 14,516,500 14,210,000 0.6
7,000,000 8.75% due 3/15/2005 6,938,750 6,300,000 0.3
2,500,000 MEDIQ, Inc., 11.125% due 7/01/1999 2,500,000 2,500,000 0.1
-------------- -------------- ------
52,549,572 51,379,863 2.3
High Technology 15,000,000 Computervision Corp., 10.875%
due 8/15/1997 15,025,000 14,175,000 0.6
Home Building Del Webb Corp.:
9,250,000 10.875% due 3/31/2000 9,376,875 9,065,000 0.4
3,500,000 9.75% due 3/01/2003 3,472,455 3,255,000 0.2
Kaufman & Broad Home, Inc.:
3,000,000 10.375% due 9/01/1999 3,030,000 3,045,000 0.1
5,250,000 9.375% due 5/01/2003 5,217,188 4,908,750 0.2
Ryland Group, Inc.:
3,750,000 10.50% due 7/15/2002 3,733,850 3,731,250 0.2
12,250,000 9.625% due 6/01/2004 11,991,250 11,453,750 0.5
-------------- -------------- ------
36,821,618 35,458,750 1.6
<PAGE> 141
Hotels & Casinos 1,906,000 Gold River Hotel & Casino Corp.,
11.375% due 8/31/1999 2,645,548 1,867,880 0.1
10,000,000 Greate Bay Properties, Inc., 10.875%
due 1/15/2004 9,996,250 8,000,000 0.4
4,260,000 MGM Grand Hotel Financial Corp.,
12.00% due 5/01/2002 4,526,100 4,600,800 0.2
14,000,000 Showboat, Inc., 9.25% due 5/01/2008 13,866,250 12,530,000 0.6
2,931,933 Trump Taj Mahal Funding, Inc., 11.35%
due 11/15/1999 (a) (c) 2,351,343 2,332,355 0.1
-------------- -------------- ------
33,385,491 29,331,035 1.4
Leisure Time 5,925,000 AMC Entertainment, Inc., 12.625%
due 8/01/2002 6,017,020 6,517,500 0.3
Paper 10,000,000 Container Corp. of America, 9.75%
due 4/01/2003 10,200,000 9,500,000 0.4
15,000,000 Fort Howard Corp., 9.00% due
2/01/2006 15,007,500 12,750,000 0.6
10,000,000 Riverwood International Corp., 11.25%
due 6/15/2002 10,385,750 10,350,000 0.5
Stone Container Group:
7,375,000 11.875% due 12/01/1998 7,327,125 7,577,813 0.3
12,000,000 9.875% due 2/01/2001 11,614,610 11,130,000 0.5
-------------- -------------- ------
54,534,985 51,307,813 2.3
</TABLE>
<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> <C> <C> <C> <C> <C> <C> <C>
United Restaurants & US$ 10,000,000 Family Restaurant Inc., 9.75%
States Food Services due 2/01/2002 $ 10,000,000 $ 9,100,000 0.4%
(concluded) Flagstar Corp.:
3,000,000 10.75% due 9/15/2001 3,172,500 2,895,000 0.1
2,000,000 10.875% due 12/01/2002 2,000,000 1,920,000 0.1
14,000,000 11.375% due 9/15/2003 14,000,000 12,740,000 0.6
20,000,000 Foodmaker, Inc., 9.75% due 6/01/2002 19,554,250 17,900,000 0.8
-------------- -------------- ------
48,726,750 44,555,000 2.0
<PAGE> 142
Retail Stores 2,000,000 Big B Inc., 6.50% due 3/15/2003** 2,366,800 2,150,000 0.1
13,000,000 Specialty Retailers, Inc., 10.00%
due 8/15/2000 13,112,500 12,740,000 0.6
-------------- -------------- ------
15,479,300 14,890,000 0.7
Textiles 15,000,000 WestPoint Stevens Inc., 8.75%
due 12/15/2001 15,093,750 13,725,000 0.6
Transport Services 9,750,000 Viking Star Shipping Co., 9.625%
due 7/15/2003 9,786,563 9,457,500 0.4
US Government 27,000,000 United States Treasury Note, 6.25%
Obligations due 8/15/2023 26,478,984 22,705,313 1.0
Utilities--Electric 4,000,000 CTC Mansfield Funding Corp., 11.125%
due 9/30/2016 4,301,250 3,871,440 0.2
Midland Cogeneration:
9,129,565 10.33% due 7/23/2002 (b) 9,392,385 9,026,035 0.4
10,000,000 13.25% due 7/23/2006 11,183,750 10,596,500 0.5
9,100,000 Tucson Electric Power Co., 10.732%
due 1/01/2013 8,713,250 8,508,500 0.4
-------------- -------------- ------
33,590,635 32,002,475 1.5
Total Fixed-Income Investments in
the United States 914,163,004 858,867,634 39.2
<CAPTION>>
Convertible Bonds
<S> <C> <C> <C> <C> <C> <C>
United Aerospace 1,775,000 Orbital Sciences Corp., 6.75%
States due 3/01/2003** 2,567,330 2,094,500 0.1
Airlines Delta Air Lines, Inc.:
16,585,948 9.375% due 9/11/2007 16,869,236 15,748,026 0.7
10,000,000 10.50% due 4/30/2016 10,287,500 9,749,600 0.4
-------------- -------------- ------
27,156,736 25,497,626 1.1
Biotechnology 4,000,000 Genzyme Corp., 6.75% due 10/01/2001 3,798,750 3,570,000 0.2
Broadcasting & 200,000 Jones Intercable Inc., 7.50%
Publishing due 6/01/2007** 202,000 196,000 0.0
Building & 650,000 Kumagai Gumi Ltd., 4.875% due
Construction 12/08/1998 623,675 581,750 0.0
1,500,000 Toll Brothers Inc., 4.75% due
1/15/2004 1,500,000 1,192,500 0.1
1,750,000 US Home Corp., 4.875% due 11/01/2005 1,741,000 1,172,500 0.1
-------------- -------------- ------
3,864,675 2,946,750 0.2
Chemicals 33,860,000 GI Holdings, Inc., 12.07%*
due 10/01/1998 21,149,076 20,569,950 0.9
Computers 2,500,000 Data General Corp., 7.75% due
6/01/2001 2,479,375 1,975,000 0.1
<PAGE> 143
Electronics 2,000,000 Wilcox & Gibbs Inc., 7.00%
due 8/01/2014** 2,040,000 1,620,000 0.1
Zenith Electric Corp.:**++++
1,000,000 8.50% due 11/19/2000 1,217,700 1,080,000 0.1
1,500,000 8.50% due 1/18/2001 1,500,000 1,584,375 0.1
-------------- -------------- ------
4,757,700 4,284,375 0.3
Food & Beverage 3,000,000 Boston Chicken Inc., 4.50%
due 2/01/2004 3,000,000 2,347,500 0.1
3,000,000 Farm Fresh, Inc., 7.50% due 3/01/2010 1,562,500 1,899,888 0.1
-------------- -------------- ------
4,562,500 4,247,388 0.2
Food--Retail 2,610,000 Giant Group, Ltd., 7.00% due
4/15/2006** 2,700,960 2,440,350 0.1
Healthcare 1,000,000 IVAX Corp., 6.50% due 11/15/2001 987,500 813,750 0.0
Home Building Engle Homes, Inc.:
2,300,000 7.00% due 3/01/2003++++ 2,369,000 2,047,000 0.1
500,000 7.00% due 3/01/2003 427,500 427,500 0.0
-------------- -------------- ------
2,796,500 2,474,500 0.1
Industrial Services 500,000 Mascotech, Inc., 4.50% due 12/15/2003 500,000 325,625 0.0
3,120,000 Mediplex Group, Inc., 6.50%
due 8/01/2003 3,648,717 3,588,000 0.2
1,015,000 Sanifill Inc., 7.50% due 6/01/2006** 1,073,068 1,015,000 0.0
500,000 United Engineers Malaysia Ltd., 2.00%
due 3/01/2004 531,250 456,875 0.0
3,605,000 Wainoco Oil Corp., 7.75% due
6/01/2014 3,201,115 3,208,450 0.1
-------------- -------------- ------
8,954,150 8,593,950 0.3
Insurance 1,500 Westbridge Capital Corp., 3.375%
due 2/15/2001 1,500,000 1,451,250 0.1
Mining Coeur D'Alene Mines Corp.:**
2,000,000 7.00% due 11/30/2002 2,112,500 2,560,000 0.1
1,500,000 6.375% due 1/31/2004 1,500,000 1,335,000 0.1
-------------- -------------- ------
3,612,500 3,895,000 0.2
Paper 2,000,000 Albany International Corp., 5.25%
due 3/15/2002 1,813,596 1,790,000 0.1
Pharmaceuticals 2,600,000 Bindley Western Industries, Inc.,
6.50% due 10/01/2002 2,563,000 2,314,000 0.1
<PAGE> 144
Restaurants 1,920,000 Daka International, Inc., 7.00%
due 3/15/2003** 2,037,421 2,208,000 0.1
Technology 2,000,000 Conner Peripherals Inc., 6.50%
due 3/01/2002** 1,795,600 1,630,000 0.1
Telecommunications 3,105,000 Intelcom Group Inc., 7.00%
due 10/30/1998** 3,105,394 2,322,981 0.1
Transportation 711,000 Builders Transport & Trucking Co.,
8.00% due 8/15/2005** 716,332 647,010 0.0
Waste Management 1,000,000 Phillips Environmental, Inc., 6.00%
due 10/15/2000 1,000,000 1,090,000 0.1
2,000,000 USA Waste Services Inc., 8.50%
due 10/15/2002 2,331,250 2,040,000 0.1
-------------- -------------- ------
3,331,250 3,130,000 0.2
Total Investments in United States
Convertible Bonds 106,452,345 99,092,380 4.6
<CAPTION>
Shares Convertible Preferred Stocks, Value Percent of
Held Common Stocks & Warrants Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
United Airlines 60,000 AMR Corp., $3.00 (Series A),
States Conv. Pfd.++++ $ 2,711,250 $ 2,640,000 0.1%
52,500 Delta Air Lines Inc., $3.50
(Series C), Conv. Pfd. 2,756,900 2,375,625 0.1
25,000 United Airlines Corp., $6.25 (Series
A), Conv. Pfd.++++ 2,482,500 2,131,250 0.1
-------------- -------------- ------
7,950,650 7,146,875 0.3
</TABLE>
<PAGE> 145
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
NORTH AMERICA Shares Convertible Preferred Stocks, Value Percent of
(concluded)Industries Held Common Stocks and Warrents Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
United Banking & Finance 48,300 Rochester Community Savings Bank
States (Series B) $ 1,387,224 $ 1,545,600 0.1
(concluded) 36,300 Southern National Corp., Pfd. $1.6875 1,158,678 1,125,300 0.1
55,200 Union Planters Corp. 1,949,405 1,890,600 0.1
-------------- -------------- ------
4,495,307 4,561,500 0.3
Computers 42,500 Storage Technology Corp.,
$3.50, Conv. Pfd.** 2,355,987 3,060,000 0.1
Electronics 60,000 Cooper Industries, $8.00 1,536,750 1,365,000 0.1
Environmental 3,500,000 ++Allied Waste Industries, Inc.,
Conv. Pfd. 3,500,000 3,864,700 0.2
Food & Beverage 231,500 RJR Nabisco, Inc. 1,534,269 1,533,687 0.1
High Technology 91,053 Anacomp, Inc. (Warrants) (d) 120,000 125,198 0.0
Hotels & Casinos 18,270 Buckhead of America Corp. 51,647 45,675 0.0
75,000 Gold River Hotel & Casino Corp.
Liquidating Trust 75,000 53,438 0.0
30,000 Gold River Hotel & Casino Corp.
(Series B) (e) 219,738 106,875 0.0
6,000 Trump Taj Mahal Funding, Inc.
(Class A) 3,000 138,000 0.0
-------------- -------------- ------
349,385 343,988 0.0
Industrial 58,800 Petrolane, Inc. 683,550 617,400 0.0
10,000 UGI Corp. (Warrants) (d) 43,750 11,250 0.0
-------------- -------------- ------
727,300 628,650 0.0
Oil & Gas 52,300 Gerrity Oil & Gas Corp. 830,550 849,875 0.0
Diversified 20,000 Western Gas Resources, Inc. 1,000,000 875,000 0.0
-------------- -------------- ------
1,830,550 1,724,875 0.0
Paper Products 40,000 Boise Cascade Corp. (Series E) 1,025,520 885,000 0.0
83,400 James River Corp. of Virginia
(Series P) 1,438,650 1,469,925 0.1
-------------- -------------- ------
2,464,170 2,354,925 0.1
<PAGE> 146
Software 116,400 Network Imaging Corporation, $8.00 2,910,000 2,531,700 0.1
Total Investments in United States
Convertible Preferred Stocks, Common
Stocks & Warrants 29,774,368 29,241,098 1.3
Total Investments in
North American Securities 1,187,551,989 1,104,406,141 50.5
<CAPTION>
PACIFIC Face
BASIN Amount Fixed-Income Investments
<S> <C> <C><C> <C> <C> <C> <C>
Australia Foreign Australia Government Bonds:
Government A$ 46,000,000 7.00% due 8/15/1998 33,910,610 31,486,125 1.4
Obligations-- 52,600,000 9.50% due 8/15/2003 45,394,682 38,111,079 1.7
Regional 25,000,000 9.00% due 9/15/2004 17,198,853 17,485,573 0.8
& Agency 9,000,000 Queensland Treasury Corp., Domestic
Notes, 8.00% due 7/14/1999 6,136,331 6,221,126 0.3
41,500,000 Queensland Treasury Corp., Global
Notes, 8.00% due 5/14/2003 31,269,513 27,275,190 1.2
16,000,000 Victoria Financial Corp., 10.25%
due 9/15/1999 13,083,725 12,034,292 0.6
-------------- -------------- ------
146,993,714 132,613,385 6.0
Total Fixed-Income Investments in
Australia 146,993,714 132,613,385 6.0
Japan Foreign Yen 85,000,000 Makita Electric Works Co., Ltd., 3.60%
Government due 3/31/1999 938,422 1,015,601 0.0
Obligations 100,000,000 Matsushita Electric Industrial Co.,
2.70% due 5/31/2002 1,215,582 1,271,436 0.1
50,000,000 No. 8 Nippon Oil Co., 2.80% due
3/31/2000 594,095 640,284 0.0
50,000,000 Sagami Railway, 3.80% due 9/30/1999 593,777 616,438 0.0
25,000,000 Yamato Transport Co. Ltd., 3.90%
due 3/30/2001 304,151 331,684 0.0
-------------- -------------- ------
3,646,027 3,875,443 0.1
Total Fixed-Income Investments
in Japan 3,646,027 3,875,443 0.1
Total Fixed-Income Investments in
Pacific Basin Securities 150,639,741 136,488,828 6.1
WESTERN
EUROPE
Denmark Foreign Dkr 426,500,000 Denmark Government Bonds, 7.00%
Government due 12/15/2004 67,067,232 61,968,042 2.8
Obligations
Total Fixed-Income Investments
in Denmark 67,067,232 61,968,042 2.8
Germany Consumer US$ 10,000,000 Tarkett International, 9.50%
Products due 3/01/2002 10,000,000 9,250,000 0.4
Total Fixed-Income Investments
in Germany 10,000,000 9,250,000 0.4
Hungary Federal Agencies 5,000,000 National Bank of Hungary, 8.80%
due 10/01/2002 5,281,250 4,475,000 0.2
Total Fixed-Income Investments
in Hungary 5,281,250 4,475,000 0.2
Italy Financial
Services Lit 30,000,000,000 The Goldman Sachs Group, L.P.,
15.00% due 8/16/1994 (1) 18,748,125 18,789,738 0.9
Foreign Buoni Poliennali del Tesoro
Government (Italian Government Bonds):
Obligations 25,000,000,000 12.00% due 9/18/1998 16,883,056 16,369,848 0.7
123,400,000,000 9.00% due 10/01/1998 74,680,868 74,376,478 3.4
-------------- -------------- ------
91,563,924 90,746,326 4.1
Total Fixed-Income Investments
in Italy 110,312,049 109,536,064 5.0
Portugal Supranational Esc 750,000,000 European Investment Bank, 15.50%
Entities due 7/12/1995 6,389,454 4,710,591 0.2
Total Fixed-Income Investments
in Portugal 6,389,454 4,710,591 0.2
Spain Foreign Government of Spain:
Government Pta 10,000,000,000 9.00%* due 2/28/1997 73,392,716 74,834,286 3.4
Obligations 5,900,000,000 8.30% due 12/15/1998 42,367,579 41,423,619 1.9
2,000,000,000 8.00% due 5/30/2004 13,465,991 12,655,238 0.6
-------------- -------------- ------
129,226,286 128,913,143 5.9
Total Fixed-Income Investments
in Spain 129,226,286 128,913,143 5.9
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<CAPTION>
WESTERN EUROPE Shares Convertible Preferred Stocks, Value Percent of
(concluded)Industries Held Common Stocks and Warrents Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C> <C>
Sweden Foreign Government of Sweden:
Government Skr 402,000,000 11.00% due 1/21/1999 $ 58,502,186 $ 55,042,666 2.5%
Obligations-- 276,000,000 10.25% due 5/05/2003 38,049,515 36,460,089 1.7
Regional 102,000,000 SBAB, 11.00% due 1/21/1999 14,229,266 13,632,512 0.6
& Agency --------------- -------------- ------
110,780,967 105,135,267 4.8
Total Fixed-Income Investments
in Sweden 110,780,967 105,135,267 4.8
United Foreign Pound 2,000,000 Hanson Trust PLC, 9.50% due
Kingdom Government Sterling 1/31/2006 3,559,598 3,279,938 0.2
Obligations United Kingdom Gilt:
46,000,000 7.00% due 11/06/2001 71,171,278 64,699,661 3.0
62,000,000 8.50% due 7/16/2007 108,675,423 94,740,030 4.3
--------------- -------------- ------
183,406,299 162,719,629 7.5
Total Fixed-Income Investments in
the United Kingdom 183,406,299 162,719,629 7.5
Total Investments in Western European
Securities 622,463,537 586,707,736 26.8
<PAGE> 147
<CAPTION>
SHORT-TERM
SECURITIES Issue
<S> <C> <C> <C> <C> <C> <C> <C>
United Commercial Paper*** US$ 40,000,000 Banc One Diversified Services Corp.,
States 4.35% due 7/22/1994 39,898,500 39,898,500 1.8
62,629,000 General Electric Capital Corp.,
4.30% due 7/01/1994 62,629,000 62,629,000 2.8
50,000,000 National Australia Funding
(Delaware), Inc., 4.27% due
7/18/1994 49,899,180 49,899,180 2.2
50,000,000 Wal-Mart Stores, Inc., 4.20%
due 7/07/1994 49,965,000 49,965,000 2.2
--------------- -------------- ------
202,391,680 202,391,680 9.0
Total Short-Term Investments in the
United States 202,391,680 202,391,680 9.0
Total Investments in Short-Term
Securities 202,391,680 202,391,680 9.0
<CAPTION>
OPTIONS Premiums
PURCHASED Paid
<S> <C> <C> <C> <C> <C> <C>
Currency Call A$ 15,000,000 Australian Dollar, expiring September
Options Purchased 1994 at A$8.69 220,380 94,095 0.0
Currency Put A$ 32,000,000 Australian Dollar, expiring September
Options Purchased 1994 at A$.725 358,400 389,760 0.0
DM 18,000,000 Deutschemark, expiring July 1994
at DM1.639 37,889 4,393 0.0
--------------- -------------- ------
396,289 394,153 0.0
<PAGE> 148
Total Options Purchased 616,669 488,248 0.0
Total Investments 2,294,746,736 2,150,225,841 98.0
<CAPTION>
OPTIONS WRITTEN Premiums Received
<S> <C> <C> <C> <C> <C> <C>
Currency Call A$ 32,000,000 Australian Dollar, expiring
Options Written September 1994 at A$.735 (358,400) (336,336) 0.0
15,000,000 Australian Dollar, expiring
September 1994 at A$.810 (88,152) (37,470) 0.0
--------------- -------------- ------
(446,552) (373,806) 0.0
Currency Put A$ 15,000,000 Australian Dollar, expiring September
Options Written 1994 at A$.940 (132,228) (479,805) 0.0
Total Options Written (578,780) (853,611) 0.0
Total Investments Net of Currency Options Written $ 2,294,167,956 2,149,372,230 98.0
===============
Short Sales (Proceeds--$17,243,388)** (15,262,613) (0.7)
Unrealized Depreciation on Forward Foreign Exchange Contracts+++ (9,597,658) (0.4)
Other Assets Less Liabilities 69,200,583 3.1
-------------- ------
Net Assets $2,193,712,542 100.0%
============== ======
<PAGE> 149
<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.
(1)Indexed instrument for which the yield-to-maturity, if any, will be deter-
mined by the relative value of the foreign currency indicated.
*Represents the yield to maturity.
**Covered Short Sales entered into as of June 30, 1994 are as follows:
</FN>
Value
Shares Issue (Note 1i)
107,600 Big B Inc. $ (1,250,850)
10,800 Builders Transport & Trucking Co. (147,150)
88,400 Coeur D'Alene Mines Corp. (1,646,450)
40,000 Conner Peripherals Inc. (485,000)
110,300 Daka International, Inc. (1,447,688)
10,300 Giant Group, Ltd. (110,725)
115,700 Intelcom Group Inc. (1,316,088)
7,900 Jones Intercable Inc. (97,762)
117,300 Orbital Sciences Corp. (1,906,125)
12,500 Sanifill Inc. (315,625)
85,900 Storage Technology Corp. (2,802,487)
88,598 Sun Healthcare Group, Inc. (1,650,138)
11,000 Wilcox & Gibbs Inc. (70,125)
227,200 Zenith Electric Corp. (2,016,400)
Total (proceeds--$17,243,388) $(15,262,613)
============
***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.
++Restricted securities as to resale.
Acquisition Value
Issue Date Cost (Note 1a)
Allied Waste Industries, Inc. Conv. Pfd. 9/23/1993 $3,500,000 $ 3,864,700
Total $3,500,000 3,864,700
---------- -----------
++++Other Restricted Securities 16,012,625
Total Restricted Securities--0.9% $19,877,325
===========
<PAGE> 150
+++Forward foreign exchange contracts as of June 30, 1994 are as follows:
Unrealized
Expiration Appreciation
Date (Depreciation)
Foreign Currency Purchased
A$ 76,176,483 July 1994 $ 461,423
Bf 529,833,333 July 1994 115,171
C$ 16,564,800 July 1994 (17,639)
DM 125,265,212 July 1994 2,229,250
Total (US$ Commitment--$159,771,094) $ 2,788,205
------------
Foreign Currency Sold
A$ 146,406,563 July 1994 $ (799,898)
Bf 1,226,704,400 July 1994 (266,653)
C$ 41,981,149 July 1994 89,362
DM 386,440,725 July 1994 (6,321,034)
Pound Sterling 37,767,134 July 1994 (942,630)
Lit 80,785,250,000 July 1994 (857,365)
Pta 10,831,530,684 July 1994 (1,608,371)
Skr 491,184,417 July 1994 (1,656,826)
Yen 385,000,000 July 1994 (22,448)
Total (US$ Commitment-$664,889,678) $(12,385,863)
------------
Total Unrealized Depreciation on Forward
Foreign Exchange Contracts-Net $ (9,597,658)
============
See Notes to Financial Statements.
</TABLE>
<PAGE> 151
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of June 30, 1994
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$2,294,130,067) (Note 1a) $2,149,737,593
Options purchased, at value (cost--$616,669) (Notes 1a & 1d) 488,248
Cash 4,280,636
Receivables:
Securities sold $ 57,172,153
Interest 52,188,513
Short sales (Note 1i) 17,243,388
Capital shares sold 2,027,507
Dividends 669,694
Options written 358,400 129,659,655
------------
Prepaid registration fees and other assets (Note 1g) 122,460
--------------
Total assets 2,284,288,592
--------------
Liabilities: Common stocks sold short, at market value (proceeds--$17,243,388) (Note 1i) 15,262,613
Unrealized depreciation on forward foreign exchange contracts (Note 1c) 9,597,658
Options written, at value (premiums received--$578,780) (Notes 1a & 1d) 853,611
Payables:
Securities purchased 45,464,449
Capital shares redeemed 8,120,510
Dividends to shareholders (Note 1h) 4,620,292
Distributor (Note 2) 1,138,842
Investment adviser (Note 2) 1,103,267
Options purchased 358,400
Forward foreign exchange contract (Note 1c) 60,081 60,865,841
------------
Accrued expenses and other liabilities 3,996,327
--------------
Total liabilities 90,576,050
Net Assets: Net assets $2,193,712,542
==============
<PAGE> 152
Net Assets Class A Common Stock, $0.10 par value, 1,000,000,000 shares authorized $ 4,473,993
Consist of: Class B Common Stock, $0.10 par value, 1,000,000,000 shares authorized 21,300,423
Paid-in capital in excess of par 2,351,791,868
Accumulated realized capital losses on investments and foreign currency
transactions--net (32,043,383)
Unrealized depreciation on investments and foreign currency transactions--net (151,810,359)
--------------
Net assets $2,193,712,542
==============
Net Asset Class A--Based on net assets of $380,996,640 and 44,739,930 shares outstanding $ 8.52
Value: ==============
Class B--Based on net assets of $1,812,715,902 and 213,004,234 shares outstanding $ 8.51
==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Six Months Ended June 30, 1994
<S> <C> <C> <C>
Investment Interest and discount earned (net of $515,156 foreign withholding tax) $ 99,576,652
Income Dividend income 808,185
(Notes 1e & 1f): Other income 520,588
--------------
Total income 100,905,425
--------------
Expenses: Distribution fees--Class B (Note 2) 7,317,655
Investment advisory fees (Note 2) 7,113,842
Transfer agent fees--Class B (Note 2) 900,891
Custodian fees 403,326
Transfer agent fees--Class A (Note 2) 170,480
Printing and shareholder reports 133,801
Accounting services (Note 2) 123,805
Pricing fees 52,098
Professional fees 47,100
Registration fees (Note 1g) 44,024
Short sale of dividends 28,865
Directors' fees and expenses 23,646
Other 23,261
--------------
Total expenses 16,382,794
--------------
Investment income--net 84,522,631
--------------
<PAGE> 153
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net $ 8,486,241
(Loss) on Foreign currency transactions--net (22,071,473) (13,585,232)
Investments & ------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net (184,568,741)
(Notes 1c, 1f & Foreign currency transactions--net (8,577,613) (193,146,354)
3): ------------ --------------
Net realized and unrealized loss on investments and foreign currency
transactions (206,731,586)
--------------
Net Decrease in Net Assets Resulting from Operations $ (122,208,955)
==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Six For the Year
Months Ended Ended
Increase (Decrease) in Net Assets: June 30, 1994 Dec. 31, 1993
<S> <C> <C> <C>
Operations: Investment income--net $ 84,522,631 $ 175,662,845
Realized gain (loss) on investments and foreign currency transactions--net (13,585,232) 15,185,945
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net (193,146,354) 98,246,283
-------------- --------------
Net increase (decrease) in net assets resulting from operations (122,208,955) 289,095,073
-------------- --------------
<PAGE> 154
Dividends & Investment income--net:
Distributions to Class A (16,272,636) (29,629,878)
Shareholders Class B (68,249,995) (106,918,287)
(Note 1h): Realized gain on investments--net:
Class A -- (1,417,282)
Class B -- (6,362,072)
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 (84,522,631) (183,442,199)
-------------- --------------
Capital Share Net increase (decrease) in net assets derived from capital share transactions (173,300,153) 430,150,076
Transactions -------------- --------------
(Note 4):
Net Assets: Total increase (decrease) in net assets (380,031,739) 535,802,950
Beginning of period 2,573,744,281 2,037,941,331
-------------- --------------
End of period $2,193,712,542 $2,573,744,281
============== ==============
See Notes to Financial Statements.
</TABLE>
<PAGE> 155
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Class A
For the
The following per share data and For the Six Four
ratios have been derived from information Months For the Year Months
provided in the financial statements Ended Ended Ended
June 30, Dec. 31, Dec. 31, For the Year Ended August 31,
Increase (Decrease) in Net Asset Value: 1994++ 1993 1992 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.28 $ 8.85 $ 9.34 $ 9.07 $ 9.48 $ 9.32
Operating --------- --------- --------- --------- --------- --------
Performance: Investment income--net .34 .75 .29 .99 1.12 1.23
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net (.78) .46 (.41) .40 (.16) .15
--------- --------- --------- --------- --------- --------
Total from investment operations (.44) 1.21 (.12) 1.39 .96 1.38
--------- --------- --------- --------- --------- --------
Less dividends and distributions:
Investment income--net (.32) (.58) (.35) (1.12) (1.37) (1.17)
Realized gain on investments--net -- (.03) (.02) -- -- (.05)
Return of capital--net -- (.17) -- -- -- --
--------- --------- --------- --------- --------- --------
Total dividends and distributions (.32) (.78) (.37) (1.12) (1.37) (1.22)
--------- --------- --------- --------- --------- --------
Net asset value, end of period $ 8.52 $ 9.28 $ 8.85 $ 9.34 $ 9.07 $ 9.48
========= ========= ========= ========= ========= ========
Total Investment Based on net asset value per share (4.60%)+++ 14.12% (1.26%)+++ 16.09% 11.50% 16.48%
Return:** ========= ========= ========= ========= ========= ========
Ratios to Average Expenses .75%* .78% .76%* .88% .85% .86%
Net Assets: ========= ========= ========= ========= ========= ========
Investment income--net 7.75%* 8.22% 8.09%* 11.16% 12.38% 16.27%
========= ========= ========= ========= ========= ========
Supplemental Net assets, end of period
Data: (in thousands) $ 380,997 $ 467,625 $ 455,672 $ 526,631 $ 292,709 $299,700
========= ========= ========= ========= ========= ========
Portfolio turnover 52.44% 182.88% 68.42% 76.18% 63.83% 99.86%
========= ========= ========= ========= ========= ========
<PAGE> 156
</TABLE>
<TABLE>
<CAPTION> Class B
The following per share data and ratios For the Six For the For the For the Period
have been derived from information Months Year Four Months Nov. 18,
provided in the financial statements. Ended Ended Ended 1991+ to
June 30, Dec. 31, Dec. 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1994++ 1993 1992 1992
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.28 $ 8.85 $ 9.33 $ 9.26
Operating ---------- ---------- ---------- ----------
Performance: Investment income--net .31 .70 .27 .77
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net (.79) .44 (.40) --
---------- ---------- ---------- ----------
Total from investment operations (.48) 1.14 (.13) .77
---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.29) (.53) (.33) (.70)
---------- ---------- ---------- ----------
Realized gain on investments--net -- (.03) (.02) --
Return of capital--net -- (.15) -- --
---------- ---------- ---------- ----------
Total dividends and distributions (.29) (.71) (.35) (.70)
---------- ---------- ---------- ----------
Net asset value, end of period $ 8.51 $ 9.28 $ 8.85 $ 9.33
========== ========== ========== ==========
Total Investment Based on net asset value per share (5.05%)+++ 13.27% (1.42%)+++ 8.61%+++
Return:** ========== ========== ========== ==========
Ratios to Average Expenses, excluding distribution fees .77%* .80% .78%* .88%*
Net Assets: ========== ========== ========== ==========
Expenses 1.52%* 1.55% 1.53%* 1.63%*
========== ========== ========== ==========
Investment income--net 7.00%* 7.42% 7.08%* 8.02%*
========== ========== ========== ==========
<PAGE> 157
Supplemental Net assets, end of period (in thousands) $1,812,801 $2,106,120 $1,582,270 $1,514,406
Data: ========== ========== ========== ==========
Portfolio turnover 52.44% 182.88% 68.42% 76.18%
========== ========== ========== ==========
*Annualized.
**Total investment returns exclude the effects of sales loads.
+Commencement of Operations.
++Based on average number of shares outstanding during the period.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
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
account maintenance and 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 remaining maturities
of sixty days or less are valued at amortized cost, which approxi-
mates market value. Securities and assets for which market quota-
tions 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.
<PAGE> 158
(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
recognized. Assets and liabilities denominated in foreign currencies
are valued at the exchange rate at the end of the period. Foreign
currency transactions are the result of settling (realized) or valuing
(unrealized) assets of liabilities expressed in foreign currencies into
US dollars. Realized and unrealized gains or losses from investments
include the effects of foreign exchange rates on investments.
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.
The Fund may also purchase or sell listed or over-the-counter
foreign currency options, foreign currency futures and related
options on foreign currency futures as a short or long hedge against
possible variations in foreign exchange rates. Such transactions
may be effected with respect to hedges on non-US dollar denominated
securities owned by the Fund, sold by the Fund but not yet
delivered, or committed or anticipated to be purchased by the Fund.
(d) Options--The Fund can write covered call options and purchase
put options. When the Fund writes an option, an amount equal to the
premium received by the Fund is reflected as an asset and an 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.
<PAGE> 159
(e) Income Taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its taxable income to
its shareholders. Therefore, no Federal income tax provision is
required. Under the applicable foreign tax law, a withholding tax may
be imposed on interest, dividends, and capital gains at various rates.
(f) Security Transactions and Investment Income--Security 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) Prepaid Registration Fees--Prepaid registration fees are charged
to expense as the related shares are issued.
(h) Dividends and Distributions--Dividends from net investment
income are declared daily and paid monthly. Distributions of capital
gains are recorded on the ex-dividend dates.
(i) Short Sales--When the Fund engages in a short sale, an amount
equal to the proceeds received by the Fund is reflected as an asset
and 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.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement
with Fund Asset Management, L.P. ("FAM"), a wholly-owned sub-
sidiary of Fund Asset Management, Inc. ("FAMI"), an indirect wholly-
owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co.") and a
Distribution Agreement with Merrill Lynch Funds Distributor, Inc.
("MLFD" or "Distributor"), a wholly-owned subsidiary of Merrill
Lynch Investment Management, Inc. ("MLIM").
FAM 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 expenses limitation requires that the Investment Adviser
reimburse the Fund to the extent the Fund's expenses (excluding
interest rates, 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 Fund's 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 FAM during any fiscal
year which will cause such expenses to exceed the most restrictive
expense limitation at the time of such payment.
<PAGE> 160
The Fund has adopted a Plan of Distribution (the "Plan") in accord-
ance with Rule 12b-1 under the Investment Company Act of 1940
pursuant to which MLFD receives from the Fund an account main-
tenance fee and a distribution fee for the sale of Class B Shares at
the end of each month at the annual rates of 0.25% and 0.50%,
respectively, 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 author-
ized 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 six
months ended June 30, 1994, MLFD earned $7,317,655 under the
Plan, all of which was paid to MLPF&S pursuant to the agreement.
For the six months ended June 30, 1994, MLFD earned underwriting
discounts of $18,327, and MLPF&S earned dealer concessions of
$187,789 on the sales of the Fund's Class A Shares. MLPF&S also
received contingent deferred sales charges of $3,212,095 relating to
Class B Share transactions during the year.
During the period June 20, 1994 to June 30, 1994, the Fund paid
Merrill Lynch Security Pricing Service, an affiliate of MLPF&S,
$52,098 for security price quotations to compute the net asset
value of the Fund.
Accounting services are provided to the Fund by FAM at cost.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., 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 ML & Co., Inc.
Merrill Lynch World Income Fund, Inc., June 30, 1994
NOTES TO FINANCIAL STATEMENTS (concluded)
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended June 30, 1994 were $1,142,465,321 and
$1,295,391,151, respectively.
<PAGE> 161
Net realized and unrealized gains (losses) as of June 30, 1994
were as follows:
Realized Unrealized
Gains Gains
(Losses) (Losses)
Investments:
Long-term $ 11,840,315 $(144,392,474)
Short-term $ (25,265) --
Short sales (3,391,309) 1,980,775
Options purchased -- --
Options written 62,500 --
------------- -------------
Total investments 8,486,241 (142,411,699)
------------- -------------
Currency Transactions:
Options written (963,044) (274,831)
Options purchased (230,395) (128,421)
Foreign currency transactions (28,406,484) 602,250
Forward foreign exchange contracts 7,528,450 (9,597,658)
------------- -------------
Total currency transactions (22,071,473) (9,398,660)
------------- -------------
Total $ (13,585,232) $(151,810,359)
============= =============
Transactions in call options written for the six months ended June 30,
1994 were as follows:
Par Value
Covered by Premiums
Call Options Written Written Options Received
Outstanding call options written at
beginning of period $ 29,510,000 $ 234,902
Options written 78,588,729 737,640
Options expired (40,068,729) (291,088)
Options exercised (29,510,000) (234,902)
------------- -------------
Outstanding call options written at
end of period $ 38,520,000 $ 446,552
============= =============
<PAGE> 162
Transactions in put options written for the six months ended June 30,
1994 were as follows:
Par Value
Covered by Premiums
Put Options Written Written Options Received
Outstanding put options written at
beginning of period -- --
Options written $ 44,266,896 $ 220,054
Options exercised (29,266,896) (87,826)
------------- -------------
Outstanding put options written at
end of period $ 15,000,000 $ 132,228
============= =============
As of June 30, 1994, net unrealized depreciation for Federal
income tax purposes aggregated $142,411,699, of which $10,397,464
related to appreciated securities and $152,809,163 related to depreci-
ated securities. The aggregate cost of investments, plus premiums
paid for options purchased, less premiums received for options
written, at June 30, 1994 for Federal income tax purposes was
$2,294,130,067.
4. Capital Share Transactions:
Net increase (decrease) in net assets derived from capital share
transactions was $(173,300,153) and $430,150,076 for the six months
ended June 30, 1994 and for the year ended December 31, 1993,
respectively.
Transactions in shares of capital for Class A and Class B Shares were
as follows:
Class A Shares for the Six Months Dollar
Ended June 30, 1994 Shares Amount
Shares sold 1,598,618 $ 14,536,392
Shares issued to shareholders in
reinvestment of dividends
to shareholders 482,676 4,298,675
------------- -------------
Total issued 2,081,294 18,835,067
Shares redeemed (7,718,882 (69,117,362)
------------- -------------
Net decrease (5,637,588) $ (50,282,295)
============= =============
<PAGE> 163
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 to shareholders 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 B Shares for the Six Months Dollar
Ended June 30, 1994 Shares Amount
Shares sold 15,430,003 $ 139,690,248
Shares issued to shareholders in
reinvestment of dividends
to shareholders 3,398,635 30,232,676
------------- -------------
Total issued 18,828,638 169,922,924
Shares redeemed (32,866,642 (292,940,782)
------------- -------------
Net decrease (14,038,004) $(123,017,858)
============= =============
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 to shareholders 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
============= =============
<PAGE> 164
5. Commitments:
At June 30, 1994, the Fund entered into forward exchange contracts
under which it had agreed to buy and sell foreign currencies with
values of approximately $31,400,000 and $28,729,000, respectively.
<PAGE> 165
<TABLE>
<CAPTION>
<S> <C>
====================================================== ======================================================
TABLE OF CONTENTS (LOGO)
Page
----
<S> <C> Merrill Lynch
Investment Objective and Policies........... 2 World Income
Hedging Techniques........................ 2 Fund, Inc.
Risk Factors in Options and Futures
Transactions............................ 4
Forward Foreign Exchange Transactions..... 5
Other Investment Policies and Practices... 6
Current Investment Restrictions........... 7
Management of the Fund...................... 11
Directors and Officers.................... 11
Management and Advisory Arrangements...... 13
Purchase of Shares.......................... 14
Initial Sales Charge Alternatives -
Class A and Class D Shares............... 15 ART
Reduced Initial Sales Charges............. 16
Distribution Plans........................ 18
Limitations on the Payment of Deferred
Sales Charges........................... 19
Redemption of Shares........................ 20
Deferred Sales Charge - Class B Shares..... 20
Portfolio Transactions...................... 21
Determination of Net Asset Value............ 23
Shareholder Services........................ 24
Investment Account........................ 24
Automatic Investment Plans................ 24 STATEMENT OF
Automatic Reinvestment of Dividends and ADDITIONAL
Capital Gains Distributions............. 25 INFORMATION
Systematic Withdrawal Plans - Class A and
Class D Shares.......................... 25
Retirement Plans.......................... 26
Exchange Privilege........................ 26
Dividends, Distributions and Taxes.......... 38
Dividends and Distributions............... 38 OCTOBER 21, 1994
Taxes..................................... 39
Tax Treatment of Options, Futures and DISTRIBUTOR:
Forward Foreign Exchange Transactions... 40 MERRILL LYNCH
Special Rules for Certain Foreign Currency FUNDS DISTRIBUTOR, INC.
Transactions............................ 41
Performance Data............................ 42
General Information......................... 44
Description of Shares..................... 44
Computation of Offering Price Per Share... 44
Independent Auditors...................... 45
Custodian................................. 45
Transfer Agent............................ 45
Legal Counsel............................. 45
Reports to Shareholders................... 45
Additional Information.................... 46
Independent Auditors' Report................ 47
Financial Statements (audited).............. 48
Financial Statements (unaudited)............ 68
Code #16103-1094
====================================================== ======================================================
</TABLE>
<PAGE> 166
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents fair
and accurate narrative descriptions of graphic and image material omitted from
this EDGAR submission file due to ASCII-incompatibility and cross-references
this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
