PROSPECTUS
- ----------
APRIL 27, 1995
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. For more information on the Fund's investment objective
and policies, please see "Investment Objective and Policies" on page 12. There
can be no assurance that the investment objective of the Fund will be realized.
Investment on an international basis and in lower rated or unrated
securities (commonly referred to as "junk bonds") involves special
considerations and certain risks, including risks of untimely payment of
interest and principal, default and price volatility. Investors should carefully
consider these risks before investing. See "Risk Factors and Special
Considerations".
Pursuant to the Merrill Lynch Select PricingSM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select PricingSM System permits an
investor to choose the method of purchasing shares that the investor believes is
most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances. See
"Merrill Lynch Select PricingSM System" on page 4.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.,
(the "Distributor"), P.O. Box 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 April 27, 1995 (the "Statement of Additional Information") has been
filed with the Securities and Exchange Commission and is available, without
charge, by calling or by writing the Fund at the above telephone number or
address. The Statement of Additional Information is hereby incorporated by
reference into this Prospectus.
-------------------
FUND ASSET MANAGEMENT--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE><CAPTION>
CLASS A(A) CLASS B(B) CLASS C CLASS D
------------ --------------------- ------------ ------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on
Purchases (as a percentage of
offering price)................... 4.00%(c) None None 4.00%(c)
Sales Charge Imposed on Dividend
Reinvestments........................ None None None None
Deferred Sales Charge (as a
percentage of original purchase
price or redemption proceeds,
whichever is lower).................. None(d) 4.0% during the 1.0% for one None(d)
first year, year
decreasing 1.0%
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)(E)
Investment Advisory Fees(f)....... 0.60% 0.60% 0.60% 0.60%
12b-1 Fees(g):
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.................... 0.03% 0.03% 0.03% 0.03%
Shareholder Servicing Costs(h).... 0.09% 0.11% 0.11% 0.09%
Other............................. 0.05% 0.05% 0.05% 0.05%
Total Other Expenses............ 0.17% 0.19% 0.19% 0.17%
TOTAL FUND OPERATING EXPENSES........ 0.77% 1.54% 1.59% 1.02%
</TABLE>
- ------------
<TABLE>
<C> <S>
(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 28.
(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 30.
(c) 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 28.
(d) 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.
(e) Information for Class A and Class B shares is stated for the fiscal year ended December
31, 1994. Information under "Other Expenses" for Class C and Class D shares is estimated
for the fiscal year ending December 31, 1995.
(f) See "Management of the Fund--Management and Advisory Arrangements"--page 24.
(g) See "Purchase of Shares--Distribution Plans"--page 34.
(h) See "Management of the Fund--Transfer Agency Services"--page 26.
</TABLE>
2
<PAGE>
EXAMPLE:
<TABLE><CAPTION>
CUMULATIVE EXPENSES PAID
FOR THE PERIOD OF:
----------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
An investor would pay the following expenses on a $1,000
investment including the maximum $40 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:
<S> <C> <C> <C> <C>
Class A................................................... $ 48 $64 $81 $132
Class B................................................... $ 56 $69 $84 $183
Class C................................................... $ 26 $50 $87 $189
Class D................................................... $ 50 $71 $94 $160
<CAPTION>
An investor would pay the following expenses on the same
$1,000 investment assuming no redemption at the end of the
period:
<S> <C> <C> <C> <C>
Class A................................................... $ 48 $64 $81 $132
Class B................................................... $ 16 $49 $84 $183
Class C................................................... $ 16 $50 $87 $189
Class D................................................... $ 50 $71 $94 $160
</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 RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. Class B and Class C
shareholders who hold their shares for an extended period of time may pay more
in Rule 12b-1 distribution fees than the economic equivalent of the maximum
front end sales charges permitted under the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. ("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>
MERRILL LYNCH SELECT PRICINGSM SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
PricingSM System. The shares of each class may be purchased at a price equal to
the next determined net asset value per share subject to the sales charges and
ongoing fee arrangements described below. Shares of Class A and Class D are sold
to investors choosing the initial sales charge alternatives, and shares of Class
B and Class C are sold to investors choosing the deferred sales charge
alternatives. The Merrill Lynch Select PricingSM System is used by more than 50
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, are imposed directly against those classes and not against
all assets of the Fund and, accordingly, such charges will not affect the net
asset value of any other class or have any impact on investors choosing another
sales charge option. Dividends paid by the Fund for each class of shares 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.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select PricingSM System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select PricingSM System that the investor
believes is most beneficial under his particular circumstances. More detailed
information as to each class of shares is set forth under "Purchase of Shares".
4
<PAGE>
<TABLE><CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
<C> <S> <C> <C> <C>
A Maximum 4.00% initial sales No No No
charge(2)(3)
B CDSC for a period of 4 years, at a rate 0.25% 0.50% B shares
of 4.0% during the first year, convert to D shares
decreasing 1.0% annually to 0.0% automatically
after approximately
ten years(4)
C 1.0% CDSC for one year 0.25% 0.55% No
D Maximum 4.00% initial sales charge(3) 0.25% No No
</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 of the Fund in a shareholder account are entitled
to purchase additional Class A shares of the Fund in that account. Other
eligible investors include certain retirement plans and participants in certain
investment programs. In addition, Class A shares will be offered to Merrill
Lynch & Co., Inc. ("ML & Co."), and its subsidiaries (the term "subsidiaries",
when used herein with respect to ML & Co. includes MLAM, the Investment Adviser
and certain other entities directly or indirectly wholly-owned and controlled by
ML & Co.), and their directors and employees, and to members of the Boards of
MLAM-advised mutual funds. The maximum initial sales charge 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 may be subject to a 1.0% CDSC if the shares are redeemed
within one year after purchase. Sales charges also are reduced under a right of
accumulation which takes into account the investor's holdings of all classes of
all MLAM-advised mutual funds. See "Purchase of Shares--Initial Sales Charge
Alternatives--Class A and Class D Shares".
Class B: Class B shares do not incur a sales charge when they are
purchased, but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.50% 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
5
<PAGE>
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, as will
the Class D account maintenance fee of the acquired fund upon conversion, 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
PricingSM System that the investor believes is most beneficial under his
particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because there is an account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative particularly
attractive because similar sales charge reductions are not available with
respect
6
<PAGE>
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>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in conjunction
with the annual audits of the financial statements of the Fund by Deloitte &
Touche LLP, independent auditors. Financial statements for the fiscal year ended
December 31, 1994, with respect to Class A and Class B shares, and for the
fiscal period October 21, 1994 to December 31, 1994 with respect to Class C and
Class D shares, and the independent auditors' report thereon, 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. No
financial information is presented for Class C and Class D shares prior to
October 21, 1994 since no shares of those classes were publicly issued prior to
October 21, 1994. Further information about the performance of the Fund is
contained in the Fund's most recent annual report to shareholders which may be
obtained, without charge, by calling or by writing the Fund at the telephone
number or address on the front cover of this Prospectus.
The following per share data and ratios have been derived from information
provided in the Financial Statements.
<TABLE><CAPTION>
CLASS A
-----------------------------------------------------------------------------
FOR THE FOR THE
PERIOD PERIOD
SEPTEMBER 1, SEPTEMBER 29,
INCREASE (DECREASE) IN NET FOR THE YEAR ENDED 1992 TO FOR THE YEAR ENDED AUGUST 1988+ TO
ASSET VALUE: DECEMBER 31, DECEMBER 31, 31, AUGUST 31,
PER SHARE OPERATING ----------------------- ------------ -------------------------- -------------
PERFORMANCE: 1994## 1993 1992 1992 1991* 1990* 1989*
---------- ------------ ------------ -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period................... $ 9.28 $ 8.85 $ 9.34 $ 9.07 $ 9.48 $ 9.32 $ 9.35
---------- ------------ ------------ -------- -------- -------- -------------
Investment income--net..... .72 .75 .29 .99 1.12 1.23 1.03
Realized and unrealized
gain (loss) on
investments and foreign
currency
transactions--net........... (1.09) .46 (.41) .40 (.16) .15 (.12)
---------- ------------ ------------ -------- -------- -------- -------------
Total from investment
operations.................. (.37) 1.21 (.12) 1.39 .96 1.38 .91
---------- ------------ ------------ -------- -------- -------- -------------
Less dividends and
distributions:
Investment income--net..... (.45) (.58) (.35) (1.12) (1.37) (1.17) (.94)
Realized gain on
investments--net............ -- (.03) (.02) -- -- (.05) --
Return of capital--net..... (.26) (.17) -- -- -- -- --
---------- ------------ ------------ -------- -------- -------- -------------
Total dividends and
distributions............... (.71) (.78) (.37) (1.12) (1.37) (1.22) (.94)
---------- ------------ ------------ -------- -------- -------- -------------
Net asset value, end of
period...................... $ 8.20 $ 9.28 $ 8.85 $ 9.34 $ 9.07 $ 9.48 $ 9.32
---------- ------------ ------------ -------- -------- -------- -------------
---------- ------------ ------------ -------- -------- -------- -------------
TOTAL INVESTMENT RETURN:++
Based on net asset value
per share................... (4.05%) 14.12% (1.26%)# 16.09% 11.50% 16.48% 9.86%#
---------- ------------ ------------ -------- -------- -------- -------------
---------- ------------ ------------ -------- -------- -------- -------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses, excluding
distribution fees........... .77% .78% .76%** .88% .85% .86% .81%**
---------- ------------ ------------ -------- -------- -------- -------------
---------- ------------ ------------ -------- -------- -------- -------------
Expenses................... .77% .78% .76%** .88% .85% .86% .81%**
---------- ------------ ------------ -------- -------- -------- -------------
---------- ------------ ------------ -------- -------- -------- -------------
Investment income--net..... 8.17% 8.22% 8.09%** 11.16% 12.38% 16.27% 10.87%**
---------- ------------ ------------ -------- -------- -------- -------------
---------- ------------ ------------ -------- -------- -------- -------------
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)........... $311,181 $467,625 $455,672 $526,631 $292,709 $299,700 $ 296,247
---------- ------------ ------------ -------- -------- -------- -------------
---------- ------------ ------------ -------- -------- -------- -------------
Portfolio turnover......... 115.95% 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.
## Based on average shares outstanding during the period.
8
<PAGE>
FINANCIAL HIGHLIGHTS--(CONTINUED)
<TABLE><CAPTION>
CLASS C CLASS D
CLASS B ------------ ------------
-------------------------------------------------
FOR THE FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD PERIOD
SEPTEMBER 1, NOVEMBER 18, OCTOBER 21, OCTOBER 21,
FOR THE YEAR ENDED 1992 TO 1991+ TO 1994+ TO 1994+ TO
INCREASE (DECREASE) IN NET ASSET DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31, DECEMBER 31,
VALUE: ----------------------- ------------ ------------ ------------ ------------
PER SHARE OPERATING PERFORMANCE: 1994## 1993 1992 1992 1994## 1994##
---------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period........................... $ 9.28 $ 8.85 $ 9.33 $ 9.26 $ 8.42 $ 8.43
---------- ---------- ---------- ---------- -------- --------
Investment income--net............ .65 .70 .27 .77 .10 .11
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions--net............... (1.10) .44 (.40) -- (.20) (.20)
---------- ---------- ---------- ---------- -------- --------
Total from investment operations... (.45) 1.14 (.13) .77 (.10) (.09)
---------- ---------- ---------- ---------- -------- --------
Less dividends and distributions:
Investment income--net............ (.40) (.53) (.33) (.70) (.08) (.09)
Realized gain on
investments--net................ -- (.03) (.02) -- -- --
Return of capital--net............ (.24) (.15) -- -- (.05) (.05)
---------- ---------- ---------- ---------- -------- --------
Total dividends and
distributions.................... (.64) (.71) (.35) (.70) (.13) (.14)
---------- ---------- ---------- ---------- -------- --------
Net asset value, end of period..... $ 8.19 $ 9.28 $ 8.85 $ 9.33 $ 8.19 $ 8.20
---------- ---------- ---------- ---------- -------- --------
---------- ---------- ---------- ---------- -------- --------
TOTAL INVESTMENT RETURN:++
Based on net asset value per
share........................... (4.90%) 13.27% (1.42%)# 8.61%# (1.20%)# (1.09%)#
---------- ---------- ---------- ---------- -------- --------
---------- ---------- ---------- ---------- -------- --------
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding distribution
fees............................ .79% .80% .78%** .88%** .84%** .79%**
---------- ---------- ---------- ---------- -------- --------
---------- ---------- ---------- ---------- -------- --------
Expenses.......................... 1.54% 1.55% 1.53%** 1.63%** 1.64%** 1.04%**
---------- ---------- ---------- ---------- -------- --------
---------- ---------- ---------- ---------- -------- --------
Investment income--net............ 7.41% 7.42% 7.08%** 8.02%** 8.00%** 8.60%**
---------- ---------- ---------- ---------- -------- --------
---------- ---------- ---------- ---------- -------- --------
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands).................. $1,490,507 $2,106,120 $1,582,270 $1,514,406 $ 1,204 $ 1,410
---------- ---------- ---------- ---------- -------- --------
---------- ---------- ---------- ---------- -------- --------
Portfolio turnover................ 115.95% 182.88% 68.42% 76.18% 115.95% 115.95%
---------- ---------- ---------- ---------- -------- --------
---------- ---------- ---------- ---------- -------- --------
</TABLE>
- ------------
** Annualized.
+ Commencement of operations.
++ Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
## Based on average shares outstanding during the period.
9
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investment in the Fund involves special considerations including the fact
that the Fund makes investments on an international basis and in high yield high
risk, lower rated or unrated securities.
International Investing. Investments in securities of foreign entities and
securities denominated in foreign currencies involve risks not typically
involved in domestic investment including fluctuations in foreign 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, economic, 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
10
<PAGE>
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".
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.
11
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek to provide shareholders with
high current income by investing in a global portfolio of fixed income
securities denominated in various currencies, including multi-national currency
units. The Fund may invest in United States and foreign government and corporate
fixed income securities, including high yield high risk, lower rated and unrated
securities. The Fund will, 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 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.
12
<PAGE>
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).
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.
13
<PAGE>
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, 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
14
<PAGE>
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.
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:
RATED BONDS* UNRATED BONDS**
- -------------------------------------- ---------------
Moody's
Aaa, 1.53%; Aa, 0.00%; A, .09%
Baa, 3.94%; Ba, 25.35%; B, 62.40%
Caa, 1.87%; Ca 0.00%; and C 0.00% 4.82%**
- ------------
* This data was 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. With respect to such securities, the
Fund's Investment Adviser believes that 1.04% are of comparable quality to
securities rated Baa or above by Moody's and 98.96% are of comparable
quality to securities rated below Baa.
For a description of the above referenced ratings, see the appendix to this
Prospectus. The Fund has established no rating criteria for the fixed income
securities in which it may invest and such securities may not be rated at all
for creditworthiness. The above percentages are as of its most recent fiscal
year; the rating composition of the portfolio will change over time .
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.
15
<PAGE>
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. When the Fund engages in transactions denominated in foreign
currencies, it will be subject to the risks of adverse changes in the exchange
rates between such foreign currencies and the U.S. dollar, the currency used to
value the Fund's assets. There can be no assurance that the Fund's hedging
transactions will be effective. Furthermore, the Fund may only engage in hedging
activities from time to time and may not necessarily be engaging in hedging
activities when movements in interest rates or currency exchange rates occur.
Reference is made to the Statement of Additional Information for further
information concerning these strategies.
Although certain risks are involved in options and futures transactions (as
discussed below in "Risk Factors in Options, Futures and Currency
Transactions"), the Investment Adviser believes that, because the Fund will only
engage in these transactions for hedging purposes, the options and futures
portfolio strategies 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.
16
<PAGE>
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".
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.
17
<PAGE>
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 15% (10% to the extent required by certain state laws) of the net assets
of the Fund, taken at market value, together with all other assets of the Fund
which are illiquid or are not otherwise readily marketable. However, if the OTC
option is sold by the Fund to a primary U.S. Government securities dealer
recognized by the Federal Reserve Bank of New York and the Fund has the
unconditional contractual right to repurchase such OTC option from the dealer at
a predetermined price, then the Fund will treat as illiquid such amount of the
underlying securities as is equal to the repurchase price less the amount by
which the option is "in-the-money" (i.e., current market value of the underlying
security minus the option's strike price). The repurchase price with the primary
dealers is typically a formula price which is generally based on a multiple of
the premium received for the option plus the amount by which the option is "in-
the-money". This policy as to OTC options is not a fundamental policy of the
Fund and may be amended by the Directors 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.
To trade futures contracts, the Fund is not required to deposit funds equal
to the value of the futures contract. The Fund need only make a deposit, called
an "initial margin deposit", equal to a percentage (typically 15% or less) of
the value of the futures contract. As a result, a relatively small adverse move
in the price of a futures contract may result in a substantial loss. For
example, if at the time of purchase 10% of the price of a futures contract is
deposited as margin, a 10% decrease in the price of that contract would, if the
contract were then closed out, result in a total loss of the initial margin
deposit before any deduction for brokerage commissions and other transaction
costs. A decrease of more than 10% would result in a loss of more than the total
initial margin deposit. Options on futures contracts are generally similarly or
even more highly leveraged. However, 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 minimizing the effect of leverage from such
futures contract.
18
<PAGE>
Hedging Foreign Currency Risks. The Fund is authorized to deal in forward
foreign exchange between currencies of the different countries in which it will
invest and multinational currency units as a hedge against possible variations
in the foreign exchange rate between these currencies. This is accomplished
through contractual agreements to purchase or sell one specified currency for
another currency at a specified future date (up to one year) and price at the
time of the contract. The Fund's dealings in forward foreign exchange will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is the purchase or sale of one forward foreign
currency for another currency with respect to specific receivables or payables
of the Fund accruing in connection with the purchase and sale of its portfolio
securities, the sale and redemption of shares of the Fund or the payment of
dividends and distributions by the Fund. Position hedging is the purchase or
sale of one forward foreign currency for another currency with respect to
portfolio security positions denominated or quoted in such foreign currency to
offset the effect of an anticipated substantial appreciation or depreciation,
respectively, in the value of such currency relative to the U.S. dollar. In this
situation, the Fund also may, for example, enter into a forward contract to sell
or purchase a different foreign currency for a fixed U.S. dollar amount where it
is believed that the U.S. dollar value of the currency to be sold or bought
pursuant to the forward contract will fall or rise, as the case may be, whenever
there is a decline or increase, respectively, in the U.S. dollar value of the
currency in which portfolio securities of the Fund are denominated (this
practice being referred to as a "cross-hedge").
The Fund will not speculate in forward foreign exchange. Hedging against a
decline in the value of a currency does not eliminate fluctuations in the prices
of portfolio securities or prevent losses if the prices of such securities
decline. Such transactions also preclude the opportunity for gain if the value
of the hedged currency should rise. Moreover, it may not be possible for the
Fund to hedge against a devaluation that is so generally anticipated that the
Fund is not able to contract to sell the currency at a price above the
devaluation level it anticipates.
The Fund also is authorized to purchase or sell listed or OTC foreign
currency options, foreign currency futures and related options on foreign
currency futures as a short or long hedge against possible variations in foreign
exchange rates. Such transactions may be effected with respect to hedges on
non-U.S. dollar denominated securities (including securities denominated in the
ECU) owned by the Fund, sold by the Fund but not yet delivered, or committed or
anticipated to be purchased by the Fund. As an illustration, the Fund may use
such techniques to hedge the stated value in United States dollars of an
investment in a Japanese yen-denominated security. In such circumstances, for
example, the Fund may purchase a foreign currency put option enabling it to sell
a specified amount of yen for dollars at a specified price by a future date. To
the extent the hedge is successful, a loss in the value of the dollar relative
to the yen will tend to be offset by an increase in the value of the put option.
To offset, in whole or in part, the cost of acquiring such a put option, the
Fund also may sell a call option which, if exercised, requires it to sell a
specified amount of yen for dollars at a specified price by a future date (a
technique called a "straddle"). By selling such call option in this
illustration, the Fund gives up on the opportunity to profit without limit from
increases in the relative value of the yen to the dollar.
Certain differences exist between these foreign currency hedging
instruments. Foreign currency options provide the holder thereof the right to
buy or to sell a currency at a fixed price on a future date. Listed options are
third-party contracts (i.e., performance of the parties' obligations is
guaranteed by an exchange or clearing corporation) which are issued by a
clearing corporation, traded on an exchange and have standardized strike prices
and expiration dates. OTC options are two-party contracts and have
19
<PAGE>
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 33 1/3% of its total assets from foreign currency options, futures,
related options and forward currency transactions.
In connection with its trading in forward foreign currency contracts, the
Fund will contract with a foreign or domestic bank, or foreign or domestic
securities dealer, to make or take future delivery of a specified amount of a
particular currency. There are no limitations on daily price moves in such
forward contracts, and banks and dealers are not required to continue to make
markets in such contracts. There have been periods during which certain banks
and dealers have refused to quote prices for such forward contracts or have
quoted prices with an unusually wide spread between the price at which the bank
or dealer is prepared to buy and that at which it is prepared to sell.
Governmental imposition of credit controls might limit any such forward contract
trading. With respect to its trading of forward contracts, if any, the Fund will
be subject to the risk of bank or dealer failure and the inability of, or
refusal by, a bank or dealer to perform with respect to such contracts. Any such
default would deprive the Fund of any profit potential or force the Fund to
cover its commitments for resale, if any, at the then-market price and could
result in a loss to the Fund.
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 liquidation 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.
20
<PAGE>
When the Fund purchases a futures contract or writes a put option or
purchases a call option thereon, it will maintain an amount of cash, cash
equivalents (e.g., high grade commercial paper and daily tender adjustable
notes) or short-term high grade fixed income securities 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.
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
21
<PAGE>
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. See
"Investment Objective and Policies--Investment Restrictions" in the Statement of
Additional Information.
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 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.
Indexed and Inverse Securities. The Fund may invest in securities whose
potential investment return is based on the change in particular measurements of
value and or rate (an "index"). As an illustration, the Fund may invest in a
security that pays interest and returns principal based on the
22
<PAGE>
change in an index of interest rates or of the value of a precious or industrial
metal. Interest and principal payable on a security may also be based on
relative changes among particular indices. In addition, the Fund may invest in
securities whose potential investment return is inversely based on the change in
particular indices. For example, the Fund may invest in securities that pay a
higher rate of interest and principal when a particular index decreases and pay
a lower rate of interest and principal when the value of the index increases. To
the extent that the Fund invests in such types of securities, it will be subject
to the risks associated with changes in the particular indices, which may
include reduced or eliminated interest payments and losses of invested
principal.
Certain indexed securities, including certain inverse securities, may have
the effect of providing a degree of investment leverage, because they may
increase or decrease in value at a rate that is a multiple of the changes in
applicable indices. As a result, the market value of such securities will
generally be more volatile than the market values of fixed-rate securities. The
Fund believes that indexed securities, including inverse securities, represent
flexible portfolio management instruments that may allow the Fund to seek
potential investment rewards, hedge other portfolio positions, or vary the
degree of portfolio leverage relatively efficiently under different market
conditions.
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.
23
<PAGE>
INVESTMENT RESTRICTIONS
The Fund has adopted a number of 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, as defined in the Investment Company Act.
Among the more significant restrictions, the Fund may not borrow amounts in
excess of 33 1/3% of its total assets taken at market value (including the
amount borrowed), and an additional 5% of its total assets for temporary
purposes. As a non-fundamental restriction, the Fund is further limited and may
not borrow amounts in excess of 33 1/3% of its total assets taken at market
value (including the amount borrowed), and then only from banks as a temporary
measure for extraordinary or emergency purposes.
Investors are referred to the Statement of Additional Information for a
complete description of such restrictions and policies.
MANAGEMENT OF THE FUND
DIRECTORS
The Directors of the Fund consist of five individuals, four 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 of FAM 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.
HERBERT I. LONDON--John M. Olin Professor of Humanities, Gallatin
Division of New York University.
ROBERT R. MARTIN--Director, WTC Industries, Inc.
JOSEPH L. MAY--Attorney in private practice.
ANDRE F. PEROLD--Professor, Harvard Business School.
- ------------
* Interested person, as defined by the Investment Company Act, of the Fund.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Fund's investment adviser is Fund Asset Management, L.P. (the
"Investment Adviser" or "FAM"), which is an affiliate of MLAM and is owned and
controlled by 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 130 other registered investment companies. MLAM also provides
investment advisory services to individuals and institutional accounts. As of
March 31, 1995, the Investment Adviser and MLAM had a total of approximately
$170.3 billion in investment company and other portfolio assets under
management, including accounts of certain affiliates of MLAM.
24
<PAGE>
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 and was
Portfolio Manager of Templeton International from 1986 to 1991.
Pursuant to the management agreement between the Investment Adviser and the
Fund (the "Investment Advisory Agreement"), the Investment Adviser is entitled
to receive from the Fund a monthly fee based upon the average daily net assets
of the Fund at an annual rate of 0.60%. For the fiscal year ended December 31,
1994, the total fee paid by the Fund to the Investment Adviser was $13,289,517
(based on average net assets of approximately $2.2 billion). At March 31, 1995,
the net assets of the Fund aggregated approximately $1.7 billion. At this asset
level, the annual management fee would aggregate approximately $10.1 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, 1994, the Fund reimbursed the Investment Adviser
$315,069 for accounting services. For the fiscal year ended December 31, 1994,
the ratio of total expenses, net of distribution fees, to average net assets was
0.77% for the Class A shares and 0.79% for the Class B shares. For the fiscal
period October 21, 1994 (commencement of operations for Class C and Class D
shares) to December 31, 1994, the ratio of total expenses, net of distribution
fees, to average net assets was 0.84% (annualized) and 0.79% (annualized) for
Class C and Class D shares, respectively.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-l of the Investment Company Act which incorporates the Code of Ethics of the
Investment Adviser (together, the "Codes"). The Codes significantly restrict the
personal investing activities of all employees of the Investment Adviser and, as
described below, impose additional, more onerous, restrictions on fund
investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions such as governmental
securities). The preclearance requirement and associated procedures are designed
to identify any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Investment Adviser include a ban on acquiring any securities in a "hot" initial
public offering and a prohibition
25
<PAGE>
from profiting on short-term trading in securities. In addition, no employee may
purchase or sell any security which at the time is being purchased or sold (as
the case may be), or to the knowledge of the employee is being considered for
purchase or sale, by any fund advised by the Investment Adviser. Furthermore,
the Codes provide for trading "blackout periods" which prohibit trading by
investment personnel of the Fund within periods of trading by the Fund in the
same (or equivalent) security (15 or 30 days depending upon the transaction).
TRANSFER AGENCY SERVICES
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, 1994, the Fund paid
the Transfer Agent a total fee of $2,407,287 pursuant to the Transfer Agency
Agreement for providing Transfer Agency services. At March 31, 1995, the Fund
had 25,716 Class A shareholder accounts, 91,271 Class B shareholder accounts,
683 Class C shareholder accounts and 223 Class D shareholder accounts. At this
level of accounts, the annual fee payable to the Transfer Agent would aggregate
approximately $1.6 million plus miscellaneous and 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 PricingSM
System, as described below. The applicable offering price for purchase orders is
based upon the net asset value of the Fund next determined after receipt of the
purchase orders by the Distributor. As to purchase orders received by securities
dealers prior to the close of business on the New York Stock Exchange (generally
4:00 p.m., New York time), which includes orders received after the the close of
business on the previous day, the applicable offering price will be based on the
net asset value determined as of 15 minutes after the close of business on the
New Stock Exchange on that day, provided the Distributor in turn receives the
order from the securities dealer prior to 30 minutes after the close of business
on the New York Stock Exchange on that day. If the purchase orders are not
received by the Distributor prior to 30 minutes after the close of business on
the New York Stock
26
<PAGE>
Exchange, such orders shall be deemed received on the next business day. The
Fund or the Distributor may suspend the continuous offering of the Fund's shares
of any class at any time in response to conditions in the securities markets or
otherwise and may thereafter resume such offering from time to time. Any order
may be rejected by the Distributor or the Fund. Neither the Distributor nor the
dealers are permitted to withhold placing orders to benefit themselves by a
price change. Merrill Lynch may charge its customers a processing fee (presently
$4.85) to confirm a sale of shares to such customers. Purchases directly through
the Fund's Transfer Agent are not subject to the processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
PricingSM System, which permits each investor to choose the method of purchasing
shares that the investor believes is most beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares and other
relevant circumstances. Shares of Class A and Class D are sold to investors
choosing the initial sales charge alternatives and shares of Class B and Class C
are sold to investors choosing the deferred sales charge alternatives. Investors
should determine whether under their particular circumstances it is more
advantageous to incur an initial sales charge or to have the entire initial
purchase price invested in the Fund with the investment thereafter being subject
to a 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 PricingSM System is
set forth under "Merrill Lynch Select PricingSM System" on page 4.
Each Class A, Class B, Class C and Class D share of the Fund represents
identical interests in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
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.
27
<PAGE>
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select PricingSM System.
<TABLE><CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
<S> <C> <C> <C> <C>
A Maximum 4.00% initial sales charge(2)(3) No No No
B CDSC for a period of 4 years, at a rate 0.25% 0.50% B shares convert to
of 4.0% during the first year, D shares
decreasing 1.0% annually to 0.0% automatically after
approximately ten
years(4)
C 1.0% CDSC for one year 0.25% 0.55% No
D Maximum 4.00% initial sales charge(3) 0.25% No No
</TABLE>
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(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 may be subject to a 1.0% CDSC if redeemed within 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.
28
<PAGE>
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>
SALES CHARGE AS DISCOUNT TO
SALES CHARGE AS PERCENTAGE* SELECTED DEALERS
PERCENTAGE OF OF THE NET AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED THE OFFERING 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.
** Class A and Class D purchases of $1,000,000 or more made on or after October
21, 1994 (the date Class D shares were initially offered to the public) will
be subject to a CDSC of 1.0% if the shares are redeemed within one year after
purchase. Class A purchases made prior to October 21, 1994 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 Employer Sponsored Retirement
or Savings Plans.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act of 1933,
as amended (the "Securities Act"). For the fiscal year ended December 31, 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 of the Fund in a
shareholder account are entitled to purchase additional Class A shares of the
Fund in that account. Certain employer sponsored retirement or savings plans,
including eligible 401(k) plans, may purchase Class A shares at net asset value
provided such plans meet the required minimum number of eligible employees or
required amount of assets advised by MLAM or any of its affiliates. Class A
shares are available at net asset value to corporate warranty insurance reserve
fund programs provided that the program has $3 million or more initially
invested in MLAM-advised mutual funds. Also eligible to purchase Class A shares
at net asset value are participants in certain investment programs including
TMASM 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 are offered at net
asset value to ML & Co. and its subsidiaries and their directors and employees
and to members of the Boards of MLAM-advised investment companies, including the
Fund. Certain persons who acquired shares of certain MLAM-advised closed-end
funds who wish to reinvest the net proceeds from a sale of their closed-end fund
29
<PAGE>
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 ten 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".
30
<PAGE>
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 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, 1994,
the Distributor received CDSCs of $6,980,132 with respect to redemptions of
Class B shares, all of which was paid to Merrill Lynch.
31
<PAGE>
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 redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to a CDSC because of dividend reinvestment. With respect to
the remaining 40 shares, the 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
32
<PAGE>
increases in net asset value above the initial purchase price. In addition, no
Class C CDSC will be assessed on shares derived from reinvestment of dividends
or capital gains distributions. For the period October 21, 1994 (commencement of
the public offering of Class C shares) to December 31, 1994, the Distributor
received CDSCs of $64 with respect to Class C shares, all of which was paid to
Merrill Lynch.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over one year or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the one-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.
Conversion of Class B Shares to Class D Shares. After approximately 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 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.
33
<PAGE>
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.
For the fiscal year ended December 31, 1994, the Fund paid the Distributor
$4,564,843 for the account maintenance fee and $9,129,686 for the distribution
fee pursuant to the Class B Distribution Plan. From October 21, 1994
(commencement of the public offering of Class C and Class D shares) to December
31, 1994, the Fund paid the Distributor account maintenance fees of $242 and
distribution fees of $531 under the Class C Distribution Plan. For the same
period, the Fund paid the Distributor account maintenance fees of $320 under the
Class D Distribution Plan. At March 31, 1995, the net assets of the Fund subject
to the Class B Distribution Plan aggregated approximately $1.4 billion. At
34
<PAGE>
this asset level, the annual fee payable pursuant to the Class B Distribution
Plan would aggregate approximately $10.4 million. At March 31, 1995, the net
assets of the Fund subject to the Class C Distribution Plan aggregated
approximately $2.7 million. At this asset level, the annual fee payable pursuant
to the Class C Distribution Plan would aggregate approximately $21,493. At March
31, 1995, the net assets of the Fund subject to the Class D Distribution Plan
aggregated approximately $1.8 million. At this asset level, the annual fee
payable pursuant to the Class D Distribution Plan would aggregate approximately
$4,592.
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, 1994, 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 $28,007,000 (1.88% of Class B net assets at that date). As of
December 31, 1994, direct cash expenses for the period since the commencement of
operations as an open-end investment company exceeded direct cash revenues by
$14,208,466 (0.95% of Class B net assets at that date). Similar fully allocated
accrual data is not yet available with respect to Class C shares which the Fund
commenced offering to the public on October 21, 1994. As of December 31, 1994,
for Class C shares, direct cash expenses for the period since October 21, 1994
(commencement of public offering) exceeded direct cash revenues by $3,731 (0.31%
of Class C net assets at that date).
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Directors of the Fund will approve the continuance of the Distribution
Plans 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
35
<PAGE>
Class B shares into Class D shares as set forth under "Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class B Shares to Class
D Shares".
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the NASD
imposes a limitation on certain asset-based sales charges such as the
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 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
36
<PAGE>
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 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 (generally 4:00 P.M., New York
time) and is received by the Fund from such dealer not later than 30 minutes
after the close of business on the New York Stock Exchange on the same day.
Dealers have the responsibility of submitting such repurchase requests to the
Fund not later than 30 minutes after the close of business on the New York Stock
Exchange in order to obtain that day's closing price.
The repurchase arrangements are for the convenience of shareholders and do
not involve a charge by the Fund (other than any applicable CDSC). However,
securities firms which do not have selected dealer agreements with the
Distributor, 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.
37
<PAGE>
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:
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
38
<PAGE>
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 PricingSM System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund in
his account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second MLAM-advised
mutual fund, and the shareholder does not hold Class A shares of the second fund
in his account at the time of the exchange and is not otherwise eligible to
acquire Class A shares of the second fund, the shareholder will receive Class D
shares of the second fund as a result of the exchange. Class D shares also may
be exchanged for Class A shares of a second MLAM-advised mutual fund at any time
as long as, at the time of the exchange, the shareholder holds Class A shares of
the second fund in the account in which the exchange is made or is otherwise
eligible to purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the same
class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC are exchangeable on the basis
of relative net asset value per share without the payment of any CDSC that might
otherwise be due upon redemption of the shares of the Fund. For purposes of
computing the CDSC that may be payable upon a disposition of the shares acquired
in the exchange, the holding period for the previously owned shares of the Fund
is "tacked" to the holding period of the newly acquired shares of the other
Fund.
Class A, Class B, Class C and Class D shares also are exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for reduction of any CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
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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(R), CBA(R) or Retirement Account may elect to
have shares redeemed on a monthly, bimonthly, quarterly, semiannual or annual
basis through the CMA(R)/CBA(R) Systematic Redemption Program, subject to
certain conditions.
Automatic Investment Plans. Regular additions of Class A, Class B, Class C
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(R) or CBA(R) accounts may arrange to have periodic investments made in the
Fund in their CMA(R) or CBA(R) account or in certain related accounts in amounts
of $100 or more through the CMA(R)/CBA(R) Automated Investment Program.
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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 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
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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.
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Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on U.S. Government obligations. State law varies
as to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
yield for various specified time periods in advertisements or information
furnished to present or prospective shareholders. Average annual total return
and yield are computed separately for Class A, 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
all shares, to the extent any dividends are paid, will be calculated in the same
manner at the same time on the same day and will be in the same amount, except
that account maintenance 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
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amount of expenses is deducted. See "Purchase of Shares". The Fund's total
return may be expressed either as a percentage or as a dollar amount in order to
illustrate such total return on a hypothetical $1,000 investment in the Fund at
the beginning of each specified period.
Yield quotations will be computed based on a 30-day period by dividing (a)
net income based on the yield of each security earned during the period by (b)
the average daily number of shares outstanding during that period that were
entitled to receive dividends multiplied by the maximum offering price per share
on the last day of the period. The yield for the 30-day period ended March 31,
1995 was 9.40% for Class A shares, 9.01% for Class B shares, 8.91% for Class C
shares and 9.16% for Class D 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 indicative 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
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expect typically to incur potential settlement delays which may occur on certain
of such exchanges. Where possible, the Fund will deal directly with the dealers
who make a market in the securities involved except in those circumstances where
better prices and execution are available elsewhere. Such dealers usually are
acting as principal for their own account. On occasion, securities may be
purchased directly from the issuer. Such portfolio securities are generally
traded on a net basis and do not normally involve either brokerage commissions
or transfer taxes. Securities firms may receive brokerage commissions on certain
portfolio transactions, including options, futures and options on futures
transactions and the purchase and sale of underlying securities upon exercise of
options. Under the Investment Company Act, persons affiliated with the Fund,
including Merrill Lynch, are prohibited from dealing with the Fund as a
principal in the purchase and sale of securities unless a permissive order
allowing such transactions is obtained from the Commission. Affiliated persons
of the Fund may serve as its broker in transactions conducted on an exchange and
in over-the-counter transactions conducted on an agency basis. Costs associated
with transactions in foreign securities are generally higher than with
transactions in United States securities, although, as noted above, the Fund
will endeavor to achieve the best net results in effecting such transactions.
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of United States national securities exchanges from executing
exchange transactions for their affiliates and institutional accounts which they
manage unless the member (i) has obtained prior express authorization from the
account to effect such transactions, (ii) at least annually furnished the
account with the aggregate compensation received by the member in effecting such
transactions, and (iii) complies with any rules the Commission has prescribed
with respect to the requirements of clauses (i) and (ii). To the extent Section
11(a) would apply to Merrill Lynch acting as a broker for the Fund in any of its
portfolio transactions executed on any such securities exchange of which it is a
member, appropriate consents have been obtained from the Fund and annual
statements as to aggregate compensation will be provided to the Fund.
PORTFOLIO TURNOVER
Generally, the Fund does not purchase securities for short-term trading
profits. However, the Fund may dispose of securities without regard to the time
they have been held when such actions, for defensive or other reasons, appear
advisable to the Investment Adviser. While it is not possible to predict
turnover rates with any certainty, at present it is anticipated that the Fund's
annual portfolio turnover rate, under normal circumstances, will be less than
200%. (The portfolio turnover rate is calculated by dividing the lesser of
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, 1994, the portfolio turnover rate was 115.95%.
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ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute all its net investment income. Dividends from
such net investment income will be declared daily prior to the determination of
net asset value on that day and paid monthly. Shares will accrue dividends as
long as they are issued and outstanding. Shares are issued and outstanding from
the settlement date of a purchase order to the settlement date of a redemption
order. All net realized long-term and short-term capital gains, if any, will be
distributed to the Fund's shareholders at least annually.
Certain gains or losses attributable to foreign currency transactions may
increase or decrease the amount of the Fund's income available for distribution
to shareholders. If such losses exceed other income during a taxable year, (a)
the Fund would not be able to make any ordinary dividend distributions, and (b)
distributions made before the losses were realized would be recharacterized as a
return of capital to shareholders, rather than as an ordinary dividend, reducing
each shareholder's tax basis in the Fund shares for Federal income tax purposes.
For a detailed discussion of the Federal tax considerations relevant to foreign
currency transactions, see "Taxes". If in any fiscal year, the Fund has net
income from certain foreign currency transactions, such income will be
distributed annually.
The per share dividends and distributions on 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 15 minutes after the close of business on the New York Stock Exchange
(generally, 4:00 P.M., New York time), 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
paid $3,006 to MLSPS for pricing services during the Fund's most recently
completed fiscal year.
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
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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 (although not necessarily meet)
immediately after the payment of dividends or distributions, which will differ
by approximately the amount of the expense accrual differentials between the
classes.
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 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.
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SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts, the shareholder should notify in writing:
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
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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 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
50
<PAGE>
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 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
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<PAGE>
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 RATINGS GROUP'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.
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.
<TABLE>
<S> <C>
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.
</TABLE>
52
<PAGE>
<TABLE>
<S> <C>
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.
C The rating C is typically applied to debt subordinated to senior debt which is
assigned an actual or implied CCC- debt rating. The C rating may be used to cover a
situation where a bankruptcy petition has been filed but debt service payments are
continued.
CI The rating CI is reserved for income bonds on which no interest is being paid.
D Debt rated D is in default. The D rating category is also used when interest
payments or principal payments are not made on the date due even if the applicable
grace period has not expired, unless Standard & Poor's believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
</TABLE>
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.
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<PAGE>
<TABLE>
<S> <C>
L The letter "L" indicates that the rating pertains to the principal amount of those
bonds to the extent that the underlying deposit collateral is insured by the
Federal Savings & Loan Insurance Corp. or the Federal Deposit Insurance Corp. and
interest is adequately collateralized.
* Continuance of the rating is contingent upon Standard & Poor's receipt of an
executed copy of the escrow agreement or closing documentation confirming
investments and cash flows.
NR Indicates that no rating has been requested, that there is insufficient information
on which to base a rating or that Standard & Poor's does not rate a particular type
of obligation as a matter of policy.
</TABLE>
Debt Obligations of Issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank regulations
issued by the Comptroller of the Currency, Bonds rated in the top four
categories ("AAA", "AA", "A", "BBB", commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments may impose certain rating
or other standards for obligations eligible for investment by savings banks,
trust companies, insurance companies and fiduciaries generally.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into several categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
<TABLE>
<S> <C>
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 Standard & Poor's believes that such payments
will be made during such grace period.
</TABLE>
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<PAGE>
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.
<TABLE>
<S> <C>
AAA This is the highest rating that may be assigned by Standard & Poor's to a preferred
stock issue and indicates an extremely strong capacity to pay the preferred stock
obligations.
AA A preferred stock issue rated "AA" also qualifies as a high-quality fixed income
security. The capacity to pay preferred stock obligations is very strong, although
not as overwhelming as for issues rated "AAA".
A An issue rated "A" is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB An issue rated "BBB" is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity to make payments for a preferred stock in this
category than for issues in the "A" category.
BB Preferred stock rated "BB", "B", and "CCC" are regarded, on balance, as
B predominately speculative with respect to the issuer's capacity to pay preferred
CCC stock obligations. "BB" indicates the lowest degree of speculation and "CCC" the
highest degree of speculation. While such issues will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
CC The rating "CC" is reserved for a preferred stock issue in arrears on dividends or
sinking fund payments but that is currently paying.
C A preferred stock rated "C" is a non-paying issue.
</TABLE>
55
<PAGE>
<TABLE>
<S> <C>
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 Standard & Poor's does not rate a particular
type of obligation as a matter of policy.
</TABLE>
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
<TABLE>
<S> <C>
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.
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 favorable business, economic,
or financial conditions.
CC Obligations which are highly speculative or which have a high risk of default.
C Obligations which are currently in default.
</TABLE>
NOTE: "+" or "-" may be appended to a rating to denote relative status
within major rating categories. Ratings of BB and below are assigned where it is
considered that speculative characteristics are present.
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<PAGE>
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.........................................................................
.....................................
(Zip Code) Date....................................
Occupation...........................
Name and Address of Employer.............
.....................................
.......................................
Signature of Owner
Signature of Co-Owner (if any)
(In the case of co-ownership, a joint-tenancy with right of survivorship will be
presumed unless otherwise specified.)
- --------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
Ordinary Income Dividends Long-term Capital Gains
Select / / 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, Inc. Authorization Form.
SPECIFY TYPE OF ACCOUNT (CHECK ONE): / / checking / / savings
Name on your account............................................................
Bank Name.......................................................................
Bank Number .......................... Account Number .........................
Bank Address....................................................................
I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE WRITTEN
NOTIFICATION TO 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.
57
<PAGE>
MERRILL LYNCH WORLD INCOME FUND, INC.--AUTHORIZATION FORM (PART 1)--(CONTINUED)
- --------------------------------------------------------------------------------
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is my
correct Social Security Number or Taxpayer Identification Number and (2) that I
am not subject to backup withholding (as discussed in the Prospectus under
"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)
Dear Sir/Madam:
.................. , 19 .....
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 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,
Inc. 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
Branch Office, Address, Stamp
We hereby authorize Merrill
Lynch Funds Distributor, Inc.
to act as our agent in
connection with transactions
under this authorization form
and agree to notify the
Distributor of any purchases
made under a Letter of
Intention or Systematic
Withdrawal Plan. We
guarantee the shareholder's
signature.
...........................
Dealer Name and Address
By .........................
Authorized Signature of
Dealer
<TABLE>
<S> <C>
This form, when completed, should be mailed to: / / / / / / / / ....................
Merrill Lynch World Income Fund, Inc Branch Code F/C No. F/C Last Name.
c/o Financial Data Services, Inc.
Transfer Agency Mutual Fund Operations / / / / / / / /
P.O. Box 45289 Dealer's Customer Account No.
Jacksonville, FL 32232-5289
</TABLE>
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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...................................................................
Social Security Number
or Taxpayer Identification Number
Name of Co-Owner (if any).......................................................
Account Number.....................
Address.........................................................................
(if existing account)
......................................
(Code)
- --------------------------------------------------------------------------------
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 AGREE 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 SHALL ACCOMPANY THIS APPLICATION.
59
<PAGE>
MERRILL LYNCH WORLD INCOME FUND, INC.--AUTHORIZATION FORM (PART 2)--
(CONTINUED)
- --------------------------------------------------------------------------------
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 Americas 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.
You are hereby authorized to draw an ACH debit each month on my bank
account for investment in Merrill Lynch World Income Fund, Inc. as
indicated below:
Amount of each ACH debit $........................
Account Number....................................
Please date and invest ACH debits on the 20th of each month
beginning .................. or as soon thereafter as possible.
(month)
I agree that you are preparing these ACH debits voluntarily at my request and
that you shall not be liable for any loss arising from any delay in preparing
or failure to prepare any such debit. If I change banks or desire to terminate
or suspend this program, I agree to notify you promptly in writing. I hereby
authorize you to take any action to correct erroneous ACH debits of my bank
account or purchases of fund shares including liquidating shares of the Fund
and credit my bank account. I further agree that if a check or debit 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)
AUTHORIZATION TO HONOR ACH DEBITS
DRAWN BY FINANCIAL DATA SERVICES, INC.
To................................. Bank
(Investor's Bank)
Bank Address ...........................
City ........ State ...... Zip..........
As a convenience to me, I hereby request and authorize you to pay and
charge to my account ACH debits drawn on my account by and payable to
Financial Data Services, Inc. I agree that your rights in respect to each such
debit shall be the same as if it were a check drawn on you and signed
personally by me. This authority is to remain in effect until revoked by
me in writing. Until you receive such notice, you shall be fully protected in
honoring any such debit. I further agree that if any such debit be dishonored,
whether with or without cause and whether intentionally or inadvertently, you
shall be under no liability.
............................... ..................................
Date Signature of Depositor
............................... ..................................
Bank Account Number 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.
60
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61
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62
<PAGE>
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 08540-6400
COUNSEL
Brown & Wood
One World Trade Center
New York, New York 10048-0557
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
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 LAWFULLY BE
MADE.
-------------------
TABLE OF CONTENTS
PAGE
----
Fee Table............................. 2
Merrill Lynch Select PricingSM
System................................ 4
Financial Highlights.................. 8
Risk Factors and Special
Considerations........................ 10
Investment Objective and Policies..... 12
International Investing............. 12
Allocation of Investments and Risks
of High Yield High Risk
Securities............................ 14
Hedging Techniques.................. 16
Other Investment Policies and
Practices............................. 21
Investment Restrictions............. 24
Management of the Fund................ 24
Directors........................... 24
Management and Advisory
Arrangements...................... 24
Code of Ethics...................... 25
Transfer Agency Services............ 26
Purchase of Shares.................... 26
Initial Sales Charge Alternatives--
Class A and Class D Shares........ 28
Deferred Sales Charge Alternatives--
Class B and Class C Shares............ 30
Distribution Plans.................. 34
Limitations on the Payment of
Deferred Sales Charges............ 36
Redemption of Shares.................. 36
Redemption.......................... 36
Repurchase.......................... 37
Reinstatement Privilege--Class A and
Class D Shares........................ 38
Shareholder Services.................. 38
Taxes................................. 41
Performance Data...................... 43
Portfolio Transactions................ 44
Portfolio Turnover.................. 45
Additional Information................ 46
Dividends and Distributions......... 46
Determination of Net Asset Value.... 46
Organization of the Fund............ 47
Shareholder Inquiries............... 47
Shareholder Reports................. 48
Appendix--Ratings of Debt
Securities............................ 49
Authorization Form.................... 57
Code #16102-0495
(PASTE-UP ART)
Merrill Lynch
World Income
Fund, Inc.
PROSPECTUS
April 27, 1995
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH WORLD INCOME FUND, INC.
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. For more information on the Fund's investment objective
and policies, please see "Investment Objective and Policies" on page 2. There
can be no assurance that the investment objective of the Fund will be realized.
Investment on an international basis and in lower rated or unrated
securities (commonly referred to as "junk bonds") involves special
considerations and certain risks, including risks of untimely payment of
interest and principal, default, and price volatility. Investors should
carefully consider these risks before investing.
Pursuant to the Merrill Lynch Select PricingSM System, the Fund offers four
classes of shares each with a different combination of sales charges, ongoing
fees and other features. The 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 April 27,
1995 (the "Prospectus"), which has been filed with the Securities and Exchange
Commission and can be obtained, without charge, by calling or by writing the
Fund at the above telephone number or address. This Statement of Additional
Information has been incorporated by reference into the Prospectus. Capitalized
terms used but not defined herein have the same meanings as in the Prospectus.
-------------------
FUND ASSET MANAGEMENT--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
-------------------
The date of this Statement of Additional Information is April 27, 1995.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek to provide shareholders with
high current income by investing in a global portfolio of fixed income
securities denominated in various currencies, including multi-national currency
units. The Fund may invest in United States and foreign government and corporate
fixed income securities, including high yield high risk, lower rated and unrated
securities. The Fund will invest at least 90% of its total assets in such fixed
income securities. In pursuing its investment objective, the Fund will, under
normal circumstances, allocate its investments among different types of fixed
income securities denominated in various currencies based upon management's
analysis of the yield, maturity and currency considerations affecting such
securities. Reference is made to "Investment Objective and Policies" in the
Prospectus for a discussion of the investment objective and policies of the
Fund.
HEDGING TECHNIQUES
Reference is made to the discussion concerning hedging techniques under the
caption "Hedging Techniques" in the Prospectus.
The Fund may engage in various portfolio strategies to hedge its portfolio
against interest rate and currency risks. These strategies include use of
options on its portfolio securities, financial and currency futures and options
on such futures and forward foreign currency transactions. While the Fund's use
of hedging strategies is intended to reduce the volatility of the net asset
value of Fund shares, the Fund's net asset value will fluctuate.
Although certain risks are involved in options and futures transactions (as
discussed below in "Risk Factors in Options and Futures Transactions"), the
Investment Adviser believes that, because the Fund will engage in these
transactions only for hedging purposes, the options and futures portfolio
strategies of the Fund will not subject the Fund to the risks frequently
associated with the speculative use of options and futures transactions.
The following information relates to the hedging instruments the Fund may
utilize with respect to interest rate and currency risks.
The Fund may purchase and write (i.e., sell) call options and put options on
securities, enter into closing purchase transactions with respect to such
options and engage in transactions in financial futures as described below. The
Fund writes only covered options, which means that so long as the Fund is
obligated as the writer of a call option, it will own the underlying securities
subject to the option and, in the case of put options, that the Fund, through
its custodian, has deposited and maintained cash, cash equivalent, U.S.
Government securities or other high grade liquid debt securities denominated in
U.S. dollars or non-U.S. currencies with a securities depository with a value
equal to or greater than the exercise price of the underlying securities.
Writing Options. The Fund will receive a premium from writing an option,
which increases the Fund's return on the underlying security in the event the
option expires unexercised or is closed out at a profit. The amount of the
premium will reflect, among other factors, the current market price of the
2
<PAGE>
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 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 15% (10% to the extent required by certain state laws)
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.
3
<PAGE>
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.
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
4
<PAGE>
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.
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
5
<PAGE>
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.
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
6
<PAGE>
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 the investment restrictions
stated 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. Such collateral will be maintained at all times in
an amount equal to at least 100% of the current market value of the loaned
securities. The purpose of such loans is to permit the borrower to use such
securities for delivery to purchasers when such borrower has sold short. If cash
collateral is received by the Fund, it is invested in short-term money market
securities, and a portion of the yield received in respect of such investment is
retained by the Fund. Alternatively, if securities are delivered to the Fund as
collateral, the Fund and the borrower negotiate a rate for the loan premium to
be received by the Fund for lending its portfolio securities. In either event,
the total yield on the Fund's portfolio is increased by loans of its portfolio
securities. The Fund will have the right to retain record ownership of loaned
securities to exercise beneficial rights such as voting rights, subscription
rights and rights to dividends, interest or other distributions. Such loans are
terminable at any time. The Fund may pay reasonable finder's, administrative and
custodial fees in connection with such loans.
INVESTMENT RESTRICTIONS
The Fund has adopted a number of fundamental and non-fundamental
restrictions and policies relating to the investment of its assets and its
activities. The fundamental policies set forth below may not be changed without
the approval of the holders of a majority of the Fund's outstanding voting
securities (which for this purpose and under the Investment Company Act of 1940,
as amended (the "Investment Company Act"), means the lesser of (i) 67% of the
Fund's shares represented at a meeting at which more than 50% of the outstanding
shares of the Fund are represented or (ii) more than 50% of the Fund's
outstanding shares). Under the fundamental investment restrictions, the Fund may
not:
7
<PAGE>
1. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
2. Make investments for the purpose of exercising control or management.
3. Purchase or sell real estate, except that, to the extent permitted by
applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
4. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time to
time.
5. Issue senior securities to the extent such issuance would violate
applicable law.
6. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its total
assets (including the amount borrowed), (ii) the Fund may borrow up to an
additional 5% of its total assets for temporary purposes, (iii) the Fund may
obtain such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities and (iv) the Fund may purchase
securities on margin to the extent permitted by applicable law. The Fund may
not pledge its assets other than to secure such borrowings or, to the extent
permitted by the Fund's investment policies as set forth in its Prospectus
and Statement of Additional Information, as they may be amended from time to
time, in connection with hedging transactions, short sales, when-issued and
forward commitment transactions and similar investment strategies.
7. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the "Securities Act"), in selling portfolio securities.
8. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and the
Fund's Prospectus and Statement of Additional Information, as they may be
amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
Under the non-fundamental investment restrictions, the Fund may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law.
b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. The Fund currently does not
intend to engage in short sales, except short sales "against the box".
8
<PAGE>
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 50% of its total assets in securities of
issuers that are restricted as to disposition, including Rule 144A
securities, or in securities of issuers having a record, together with
predecessors, of less than three years of continuous operation.
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.
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.
9
<PAGE>
i. Notwithstanding fundamental investment restriction (6) above, borrow
amounts 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 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.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Fund, the Fund is prohibited from
engaging in certain transactions involving such firm or its affiliates except
for brokerage transactions permitted under the Investment Company Act involving
only usual and customary commissions or transactions pursuant to an exemptive
order under the Investment Company Act. See "Portfolio Transactions". Without
such an exemptive order, the Fund would be prohibited from engaging in portfolio
transactions with Merrill Lynch or its affiliates acting as principal and from
purchasing securities in public offerings which are not registered under the
Securities Act or are not municipal securities as defined in the Securities
Exchange Act of 1934 in which such firm or any of its affiliates participate as
an underwriter or dealer.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Directors and executive officers of the Fund and their ages and
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 (62)--President and Director(1)(2)--President 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; 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").
HERBERT I. LONDON (56)--Director(2)--New York University--Gallatin
Division, 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; John M. Olin Professor of Humanities, New York University since 1993 and
Professor thereof since 1980; 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 (68)--Director(2)--513 Grand Hill, St. Paul, Minnesota
55102. Director, WTC Industries, Inc. since 1995 and Chairman thereof from 1994
to 1995; 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; Trustee, Northland College since 1992.
10
<PAGE>
JOSEPH L. MAY (65)--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 (43)--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 (54)--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 (60)--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 since 1980; Senior Vice President of Princeton
Services since 1993.
VINCENT T. LATHBURY, III (54)--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 (34)--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 (40)--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 (45)--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 (48)--Secretary(1)(2)--Vice President of the Investment
Adviser and MLAM since 1985.
- ------------
(1) Interested person, as defined in the Investment Company Act of 1940, of the
Fund.
(2) Such Director or officer is a director, trustee or officer of certain other
investment companies for which the Investment Adviser or MLAM acts as
investment adviser or manager.
At March 31, 1995, the officers and Directors of the Fund as a group (12
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.
11
<PAGE>
COMPENSATION OF DIRECTORS
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, 1994, fees and expenses paid
to the non-affiliated Directors aggregated $49,247.
The following table sets forth for the year ended December 31, 1994,
compensation paid by the Fund to the non-affiliated Directors and for the year
ended December 31, 1994, the aggregate compensation paid by all investment
companies advised by MLAM and its affiliate, FAM ("MLAM/FAM Advised Funds"), to
the non-affiliated Directors.
<TABLE><CAPTION>
TOTAL
COMPENSATION
PENSION OR FROM FUND AND
AGGREGATE RETIREMENT BENEFITS MLAM/FAM ADVISED
NAME OF COMPENSATION ACCRUED AS PART FUNDS PAID TO
DIRECTOR FROM FUND OF FUND EXPENSE DIRECTORS(1)
- -------------------------------------------- ------------ -------------------- ----------------
<S> <C> <C> <C>
Herbert I. London $9,750 None $168,250
Robert R. Martin 9,750 None 168,250
Joseph L. May 9,750 None 168,250
Andre F. Perold 9,750 None 168,250
</TABLE>
- ------------
(1) In addition to the Fund, the Directors serve on the boards of other MLAM/FAM
Advised Funds as follows: Mr. London (22 boards); Mr. Martin (22 boards);
Mr. May (22 boards); and Mr. Perold (22 boards).
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, the Fund as
well as 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
12
<PAGE>
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, the
year ended December 31, 1993, and the year ended December 31, 1994 the total
fees paid by the Fund to the Investment Adviser aggregated $4,182,579,
$13,902,958 and $13,289,517, 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, the year ended December 31, 1993 and the year ended
December 31, 1994, 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 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, for the year
ended December 31, 1993 and the year ended December 31, 1994, the Fund
reimbursed the Investment Adviser $48,000, $169,845 and $315,069, 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. and Princeton Services.
13
<PAGE>
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
PricingSM 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 PricingSM 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.
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
14
<PAGE>
$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.
During the fiscal year ended December 31, 1994, the Fund sold 2,498,395 Class A
shares for aggregate net proceeds of $22,105,372. The gross sales charges for
the sale of Class A shares for the year ended December 31, 1994 were $269,609,
of which the Distributor received $24,292 and Merrill Lynch received $245,317.
During the period October 21, 1994 to December 31, 1994, the Fund sold 177,383
Class D shares for aggregate net proceeds of $1,470,555. The gross sales charges
for the sale of Class D shares for the period October 21, 1994 to December 31,
1994 were $7,622, of which the Distributor received $902 and Merrill Lynch
received $6,720.
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 (the date Merrill Lynch Select PricingSM System commenced operations) 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 purchased such shares
on or after October 21, 1994 and wish to reinvest the net proceeds from a sale
of their closed-end fund shares are offered Class A shares (if eligible to buy
Class A shares) or Class D shares of the Fund and other MLAM-advised mutual
funds ("Eligible Class D shares"), if the following conditions are met. First,
the sale of 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, Inc. (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
15
<PAGE>
Fund and reinvest the proceeds immediately in the Fund. This investment option
is available only with respect to the proceeds of Senior Floating Rate Fund
shares as to which no Early Withdrawal Charge as defined in the Senior Floating
Rate Fund prospectus is applicable. Purchase orders from Senior Floating Rate
Fund shareholders wishing to exercise this investment option will be accepted
only on the day that the related Senior Floating Rate Fund tender offer
terminates and will be effected at the net asset value of the Fund at such day.
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
16
<PAGE>
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.
TMASM Managed Trusts. Class A shares are offered to TMASM Managed Trusts to
which Merrill Lynch Trust Company provides discretionary trustee services at net
asset value.
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 meaning of Section
401(a) of the Internal Revenue Code of 1986, as amended (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 BlueprintSM
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 or Class D shares at net asset value has the option of (i) purchasing
Class D shares at the initial sales charge schedule disclosed in the Prospectus
for purchases of up to $1,000,000 and at .75% for purchased of $1,000,000 or
more, (ii) 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 (iii) if the Employer Sponsored Retirement or Savings Plan does
not qualify to purchase Class B shares with a waiver upon redemption, purchasing
Class B or Class C shares at their respective CDSC schedule disclosed in the
Prospectus. Certain Employer Sponsored Retirement or Savings Plans, which were
permitted prior to October 21, 1994 to purchase Class A shares at the initial
sales charge schedule in the then current prospectus for purchases up to
$1,000,000 and at .75% of purchases of $1,000,000 or more, may purchase Class A
shares at the initial sales charge schedule disclosed in the Prospectus for
purchases of up to $1,000,000 and at .75% for purchases of $1,000,000 or more.
The minimum initial and subsequent purchase requirements are waived in
connection with all the above-referenced Employer Sponsored Retirement or
Savings Plans.
17
<PAGE>
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 are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor if the following
conditions are satisfied. First, the investor must advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from a redemption of a
mutual fund that was sponsored by the financial consultant's previous firm and
was subject to a sales charge either at the time of purchase or on a deferred
basis. Second, the investor also must establish that such redemption had been
made within 60 days prior to the investment in the Fund, and the proceeds from
the redemption had been maintained in the interim in cash or a money market
fund.
Class D shares of the Fund are also offered at net asset value, without a
sales charge, to an investor who has a business relationship with a Merrill
Lynch financial consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice"), if the following conditions are
satisfied: First, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and the shares of
such other fund were subject to a sales charge either at the time of purchase or
on a deferred basis; and second, such purchase of Class D shares must be made
within 90 days after such notice.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a Merrill Lynch
financial consultant and who has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer if the following conditions are
satisfied: First, the investor must advise Merrill Lynch that it will purchase
Class D shares of the Fund with proceeds from the redemption of such shares of
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
18
<PAGE>
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 Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan") with respect to the account
maintenance and/or distribution fees paid by the Fund to the Distributor with
respect to such classes.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act. Among
other things, each Distribution Plan provides that the Distributor shall provide
and the Directors shall review quarterly reports of the disbursement of the
account maintenance fees and/or distribution fees paid to the Distributor. In
their consideration of each Distribution Plan, the Directors must consider all
factors they deem relevant, including information as to the benefits of the
Distribution Plan to the Fund and its related class of shareholders. Each
Distribution Plan further provides that so long as the Distribution Plan remains
in effect, the selection and nomination of Directors who are not "interested
persons" of the Fund, as defined in the Investment Company Act (the "Independent
Directors"), shall be committed to the discretion of the Independent Directors
then in office. In approving each Distribution Plan in accordance with Rule
12b-1, the Independent Directors concluded that there is a reasonable likelihood
that such Distribution Plan will benefit the Fund and its related class of
shareholders. Each Distribution Plan can be terminated at any time, without
penalty, by the vote of a majority of the Independent Directors or by the vote
of the holders of a majority of the outstanding related class of voting
securities of the Fund. A Distribution Plan cannot be amended to increase
materially the amount to be spent by the Fund without the approval of the
related class of shareholders, and all material amendments are required to be
approved by the vote of 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.
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<PAGE>
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.
The following table sets forth comparative information as of December 31,
1994 with respect to the Class B shares and Class C 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
December 31, 1994 for Class B shares and for the period October 21, 1994
(commencement of the public offering of Class C shares) to December 31, 1994 for
Class C shares.
DATA CALCULATED AS OF DECEMBER 31, 1994
<TABLE><CAPTION>
ANNUAL
DISTRIBUTION
ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
CLASS B SHARES SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
- ------------------------------ ---------- --------- ---------- -------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Under NASD Rule as Adopted.... $2,070,846 $ 129,428 $ 19,168 $148,596 $ 34,796 $ 113,800 $7,453
Under Distributor's Voluntary
Waiver....................... $2,070,846 $ 129,428 $ 10,354 $139,782 $ 34,796 $ 104,986 $7,453
<CAPTION>
CLASS C SHARES (NOT IN THOUSANDS)
- ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as Adopted.... $1,062,018 $ 66,376 $ 504 $ 66,880 $ 596 $ 66,284 $6,624
</TABLE>
(Footnotes on following page)
20
<PAGE>
(Footnotes for preceding page)
- ------------
(1) Purchase price of all eligible Class B shares sold since November 18, 1991
(commencement of the public offering of Class B shares) and all eligible
Class C shares sold since October 21, 1994 (commencement of the pubic
offering of Class C 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 with respect to Class B shares made prior to July
6, 1993 under the distribution plan in effect at that time 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.
(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 AND CLASS C SHARES
As discussed in the Prospectus under "Purchase of Shares--Deferred Sales
Charge Alternatives-- Class B and Class C Shares", while Class B shares redeemed
within four years of purchase are subject to a CDSC under most circumstances,
the charge is waived on redemptions of Class B shares in connection with certain
post-retirement withdrawals from an Individual Retirement Account ("IRA") or
other retirement plan or following the death or disability of a Class B
shareholder. Redemptions for which the waiver applies are: (a) any partial or
complete redemption in connection with a distribution following retirement under
a tax-deferred retirement plan or attaining age 59 1/2 in the case of an IRA or
other retirement plan, or 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 CDSCs of $156,203, all of which was paid to Merrill
Lynch. For the period September 1, 1992 to
21
<PAGE>
December 31, 1992, the Fund's current fiscal year end, the
Distributor received CDSCs 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. For the fiscal year
ended December 31, 1994, the Distributor received CDSCs of $6,980,132 with
respect to Class B shares, all of which was paid to Merrill Lynch. For the
period October 21, 1994 (commencement of the public offering of Class C shares)
to December 31, 1994, the Distributor received CDSCs of $64 with respect to
Class C shares, 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.
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
22
<PAGE>
services required to be performed by the Investment Adviser under the Investment
Advisory Agreement, and the expenses of the Investment Adviser will not
necessarily be reduced as a result of the receipt of such supplemental
information.
The securities in which the Fund invests are traded primarily in the
over-the-counter market. Since portfolio transactions will generally not be
effected on foreign securities exchanges, the Fund does not expect typically to
incur potential settlement delays which may occur on certain of such exchanges.
Where possible, the Fund will deal directly with the dealers who make a market
in the securities involved except in those circumstances where better prices and
execution are available elsewhere. Such dealers usually are acting as principal
for their own account. On occasion, securities may be purchased directly from
the issuer. Such portfolio securities are generally traded on a net basis and do
not normally involve either brokerage commissions or transfer taxes. Securities
firms may receive brokerage commissions on certain portfolio transactions,
including options, futures and options on futures transactions and the purchase
and sale of underlying securities upon exercise of options. Under the Investment
Company Act, persons affiliated with the Fund, including Merrill Lynch, are
prohibited from dealing with the Fund as a principal in the purchase and sale of
securities unless a permissive order allowing such transactions is obtained from
the Commission. Affiliated persons of the Fund may serve as its broker in
transactions conducted on an exchange and in over-the-counter transactions
conducted on an agency basis. Costs associated with transactions in foreign
securities are generally higher than with transactions in United States
securities, although, as noted above, the Fund will endeavor to achieve the best
net results in effecting such transactions.
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. For the fiscal year
ended December 31, 1994, the Fund paid total brokerage commissions of $108,495,
of which $59,092 or 54.5% was paid to Merrill Lynch for effecting 62.1% 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.
23
<PAGE>
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 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, 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%. For the fiscal year ended December 31,
1994, the Fund's portfolio turnover rate was 115.95%. 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 all classes of the Fund is determined
once daily, Monday through Friday 15 minutes after the close of business on the
New York Stock Exchange (generally, 4:00 P.M. New York time), 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 (although not necessarily meet) immediately
after the payment of dividends, which will differ by approximately the amount of
the expense accrual differentials between the classes.
24
<PAGE>
Securities traded in the over-the-counter market are valued at the last
available bid price in the over-the-counter market prior to the time of
valuation. When the Fund writes a call option, the amount of the premium
received is recorded on the books of the Fund as an asset and an equivalent
liability. The amount of the liability is subsequently valued to reflect the
current market value of the option written, based upon the last sale price in
the case of exchange-traded options or, in the case of options traded in the
over-the-counter market, the last asked price. Options purchased by the Fund are
valued at their last sale price in the case of exchange-traded options or in the
case of options traded in the over-the-counter market, the last bid price.
Portfolio securities which are traded on stock exchanges are valued at the last
sale price (regular way) on the exchange on which such securities are traded, as
of the close of business on the day the securities are being valued or, lacking
any sales, at the last available bid price. 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
25
<PAGE>
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 Transfer Agent, acting as agent for such
securities dealer. Voluntary accumulation also can be made through a service
known as the Fund's Automatic Investment Plan whereby the Fund is authorized
through pre-authorized checks or automated clearing house debits of $50 or more
to charge the regular bank account of the shareholder on a regular basis to
provide systematic additions to the Investment Account of such shareholder.
Alternatively, investors who maintain CMA(R) or CBA(R) accounts may arrange to
have periodic investments made in the Fund, in their CMA(R) or CBA(R) accounts
or in certain related accounts in the amount of $100 or more ($1 for retirement
accounts) through the CMA(R)/CBA(R) 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.
26
<PAGE>
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 15 minutes
after the close of business on the New York Stock Exchange (generally, 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 purchase orders for Class A or Class D shares of the Fund from
investors who maintain a systematic withdrawal plan unless such purchase is
equal to at least one year's scheduled withdrawals or $1,200, whichever is
greater. Periodic investments may not be made into an Investment Account in
which the shareholder has elected to make systematic withdrawals.
Alternatively, a Class A or Class D shareholder whose shares are held within
a CMA(R), CBA(R) or Retirement Account may elect to have shares redeemed on a
monthly, bimonthly, quarterly, semiannual or annual basis through the
CMA(R)/CBA(R) Systematic Redemption Program. The minimum fixed dollar amount
redeemable is $25. The proceeds of systematic redemptions will be posted to the
shareholder's account five business days after the date the shares are redeemed.
Monthly systematic redemptions will be made at net asset value on the first
Monday of each month, bimonthly systematic redemptions will be made at net asset
value on the first Monday of every other month, and quarterly, semiannual or
annual redemptions are made at net asset value on the first Monday of months
selected at the shareholder's option. If the first Monday of the month is a
holiday, the redemption will be processed at net asset value on the next
business day. The CMA(R)/CBA(R) Systematic Redemption Program is not available
if Fund shares are being purchased within the account pursuant to the Automatic
Investment Program. For more information on the CMA(R)/CBA(R) Systematic
Redemption Program eligible shareholders should contact their 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
27
<PAGE>
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 PricingSM System, Class A shareholders may exchange Class A shares
of the Fund for Class A shares of a second MLAM-advised mutual fund if the
shareholder holds any Class A shares of the second fund in his account in which
the exchange is made at the time of the exchange or is otherwise eligible to
purchase Class A shares of the second fund. If the Class A shareholder wants to
exchange Class A shares for shares of a second MLAM-advised mutual fund, but
does not hold Class A shares of the second fund in his account at the time of
the exchange and is not otherwise eligible to acquire Class A shares of the
second fund, the shareholder will receive Class D shares of the second fund as a
result of the exchange. Class D shares also may be exchanged for Class A shares
of a second MLAM-advised mutual fund at any time as long as, at the time of the
exchange, the shareholder holds Class A shares of the second fund in the account
in which the exchange is made or is otherwise eligible to purchase Class A
shares of the second fund. Class B, Class C and Class D shares are exchangeable
with shares of the same class of other MLAM-advised mutual funds. For purposes
of computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares of
the Fund is "tacked" to the holding period 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 are exchangeable for shares of certain MLAM-advised money market
funds specifically designated below as available for exchange by holders of
Class A, Class B, Class C or Class D shares. Shares with a net asset value of at
least $100 are required to qualify for the exchange privilege, and any shares
utilized in an exchange must have been held by the shareholder for 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
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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, of another
MLAM-advised mutual fund ("new Class B or Class C shares") on the basis of
relative net asset value per Class B or Class C share without the payment of any
CDSC that might otherwise be due on redemption of the outstanding shares. Class
B shareholders of the Fund exercising the exchange privilege will continue to be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the new Class B shares acquired through use of the exchange
privilege. In addition, Class B shares of the Fund acquired through use of the
exchange privilege will be subject to the Fund's CDSC schedule if such schedule
is higher than the CDSC schedule relating to the Class B or Class C 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 or Class C shares of the Fund for
those of Merrill Lynch Special Value Fund, Inc. ("Special Value Fund") after
having held the Fund's Class B shares for two and a half years. The 2% CDSC that
generally would apply to a redemption would not apply to the exchange. Three
years later the investor may decide to redeem the Class B shares of Special
Value Fund and receive cash. There will be no CDSC due on this redemption since
by "tacking" the two and a half year holding period of 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 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.
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<PAGE>
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:
<TABLE>
<S> <C>
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.
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.
</TABLE>
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<TABLE>
<S> <C>
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, INC. .. 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 Municipal Series Trust, a series fund, whose
objective is to provide as high a level of income
exempt from Federal and California income taxes as
is consistent with prudent investment management
through investment in a portfolio primarily of
intermediate-term investment grade California
Municipal Bonds.
</TABLE>
31
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<TABLE>
<S> <C>
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.
</TABLE>
32
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<TABLE>
<S> <C>
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 FUNDAMENTAL VALUE
PORTFOLIO (available only for
exchanges by certain individual
retirement accounts for which
Merrill Lynch acts as custodian).... A portfolio of Merrill Lynch Retirement Asset Builder
Program, Inc., a series fund, whose objective is to
provide capital appreciation and income by
investing in securities, with at least 65% of the
portfolio's assets being invested in equities.
</TABLE>
33
<PAGE>
<TABLE>
<S> <C>
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.
MERRILL LYNCH GLOBAL CONVERTIBLE
FUND, INC. ....................... High total return from investment primarily in an
internationally diversified portfolio of
convertible debt securities, convertible preferred
stock and "synthetic" convertible securities
consisting of a combination of debt securities or
preferred stock and warrants or options.
MERRILL LYNCH GLOBAL HOLDINGS, INC.
(residents of Arizona must meet
investor suitability
standards)........................ The highest total investment return consistent with
prudent risk through worldwide investment in an
internationally diversified portfolio of
securities.
MERRILL LYNCH GLOBAL OPPORTUNITY
PORTFOLIO (available only for
exchanges by certain individual
retirement accounts for which
Merrill Lynch acts as
custodian)........................ A portfolio of Merrill Lynch Retirement Asset Builder
Program, Inc., a series fund, whose objective is to
provide a high total investment return through an
investment policy utilizing United States and
foreign equity, debt and money market securities,
the combination of which will vary depending upon
changing market and economic trends.
MERRILL LYNCH GLOBAL RESOURCES
TRUST............................. Long-term growth and protection of capital from
investment in securities of domestic and foreign
countries that possess substantial natural resource
assets.
</TABLE>
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<TABLE>
<S> <C>
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
investor suitability
standards)........................ Capital appreciation through worldwide investment in
equity securities of companies that derive or are
expected to derive a substantial portion of their
sales from products and services in healthcare.
MERRILL LYNCH INTERNATIONAL
EQUITY FUND....................... Capital appreciation and, secondarily, income by
investing in a diversified portfolio of equity
securities of issuers located in countries other
than the United States.
MERRILL LYNCH LATIN AMERICA
FUND, INC. ....................... Capital appreciation by investing primarily in Latin
American equity and debt securities.
MERRILL LYNCH MARYLAND MUNICIPAL
BOND FUND......................... A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from
Federal and Maryland income taxes as is consistent
with prudent investment management.
</TABLE>
35
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<TABLE>
<S> <C>
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.
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.
</TABLE>
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<TABLE>
<S> <C>
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.
MERRILL LYNCH NEW YORK LIMITED
MATURITY MUNICIPAL BOND
FUND.............................. A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund, whose
objective is to provide as high a level of income
exempt from Federal, New York State and New York
City income taxes as is consistent with prudent
investment management through investment in a
portfolio primarily of intermediate-term investment
grade New York Municipal Bonds.
</TABLE>
37
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<TABLE>
<S> <C>
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.
</TABLE>
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<TABLE>
<S> <C>
MERRILL LYNCH PENNSYLVANIA MUNICIPAL
BOND FUND......................... A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from
Federal and Pennsylvania personal income taxes as
is consistent with prudent investment management.
MERRILL LYNCH PHOENIX FUND,
INC. ............................. Long-term growth of capital by investing in equity
and fixed income securities, including tax-exempt
securities, of issuers in weak financial condition
or experiencing poor operating results believed to
be undervalued relative to the current or
prospective condition of such issuer.
MERRILL LYNCH QUALITY BOND PORTFOLIO
(available only for exchanges by
certain individual retirement
accounts for which Merrill Lynch
acts as custodian).................. A portfolio of Merrill Lynch Retirement Asset Builder
Program, Inc., a series fund, whose objective is to
provide a high level of current income through
investment in a diversified portfolio of debt
obligations, such as corporate bonds and notes,
convertible securities, preferred stocks and
governmental obligations.
MERRILL LYNCH SHORT-TERM GLOBAL
INCOME FUND, INC. ................ As high a level of current income as is consistent
with prudent investment management from a global
portfolio of high quality debt securities
denominated in various currencies and
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.
</TABLE>
39
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<TABLE>
<S> <C>
MERRILL LYNCH TECHNOLOGY FUND,
INC. ............................. Capital appreciation through worldwide investment in
equity securities of companies that derive or are
expected to derive a substantial portion of their
sales from products and services in technology.
MERRILL LYNCH TEXAS MUNICIPAL BOND
FUND.............................. A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from
Federal income taxes as is consistent with prudent
investment management by investing primarily in a
portfolio of long-term, investment grade
obligations issued by the State of Texas, its
political subdivisions, agencies and
instrumentalities.
MERRILL LYNCH U.S. GOVERNMENT
SECURITIES PORTFOLIO (available
only for exchanges by certain
individual retirement accounts for
which Merrill Lynch acts as
custodian) ....................... A portfolio of Merrill Lynch Retirement Asset Builder
Program, Inc., a series fund, whose objective is to
provide a high current return through investments
in U.S. Government and government agency
securities, including GNMA mortgage-backed
certificates and other mortgage-backed government
securities.
MERRILL LYNCH 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.
</TABLE>
40
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<TABLE>
<S> <C>
MERRILL LYNCH RETIREMENT RESERVES
MONEY FUND (available only for
exchanges within certain
retirement plans)................. Currently the only portfolio of Merrill Lynch
Retirement Series Trust, a series fund, whose
objectives are current income, preservation of
capital and liquidity available from investing in a
diversified portfolio of short-term money market
securities.
MERRILL LYNCH U.S.A. GOVERNMENT
RESERVES.......................... Preservation of capital, current income and liquidity
available from investing in direct obligations of
the U.S. Government and repurchase agreements
relating to such securities.
MERRILL LYNCH U.S. TREASURY MONEY
FUND.............................. Preservation of capital, liquidity and current income
through investment exclusively in a diversified
portfolio of short-term marketable securities which
are direct obligations of the U.S. Treasury.
Class B, Class C and Class D Share Money Market Funds:
MERRILL LYNCH GOVERNMENT
FUND.............................. A portfolio of Merrill Lynch Funds for Institutions
Series, a series fund, whose objective is to provide
current income consistent with liquidity and
security of principal from investment in securities
issued or guaranteed by the U.S. Government, its
agencies and instrumentalities and in repurchase
agreements secured by such obligations.
MERRILL LYNCH INSTITUTIONAL
FUND.............................. A portfolio of Merrill Lynch Funds for Institutions
Series, a series fund, whose objective is to provide
maximum current income consistent with liquidity
and the maintenance of a high-quality portfolio of
money market securities.
MERRILL LYNCH INSTITUTIONAL TAX-
EXEMPT FUND....................... A portfolio of Merrill Lynch Funds for Institutions
Series, a series fund, whose objective is to provide
current income exempt from Federal income taxes,
preservation of capital and liquidity available
from investing in a diversified portfolio of
short-term, high quality municipal bonds.
</TABLE>
41
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<TABLE>
<S> <C>
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.
</TABLE>
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.
42
<PAGE>
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended (the "Code"). If it so qualifies, the Fund (but not its
shareholders) will not be subject to Federal income tax on the part of its net
ordinary income and net realized capital gains which it distributes to Class A,
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.
Any loss upon the sale or exchange of Fund shares held for six months or less,
however, will be treated as long-term capital loss to the extent of any capital
gain dividends received by the shareholder. Distributions in excess of the
Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. 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
43
<PAGE>
retirement accounts cannot claim foreign tax credits on investments in foreign
securities held in the Fund. If more than 50% in value of the Fund's total
assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible, and intends, to file an election with
the Internal Revenue Service pursuant to which shareholders of the Fund will be
required to include their proportionate shares of such withholding taxes in
their United States income tax returns as gross income, treat such proportionate
shares as taxes paid by them, and deduct such proportionate shares in computing
their taxable incomes or, alternatively, use them as foreign tax credits against
their United States income taxes. No deductions for foreign taxes, however, may
be claimed by noncorporate shareholders who do not itemize deductions. A
shareholder that is a nonresident alien individual or a foreign corporation may
be subject to United States withholding tax on the income resulting from the
Fund's election described in this paragraph but may not be able to claim a
credit or deduction against such United States tax for the foreign taxes treated
as having been paid by such shareholder. The Fund will report annually to its
shareholders the amount per share of such withholding taxes. 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.
44
<PAGE>
The Fund may invest in securities rated in the medium to lower rating
categories of nationally recognized rating organizations, and in unrated
securities ("high yield securities"), as described in the Prospectus. Some of
these high yield securities may be purchased at a discount and may therefore
cause the Fund to accrue income before amounts due under the obligations are
paid. In addition, a portion of the interest payments on such high yield
securities may be treated as dividends for Federal income tax purposes and may
be eligible for the dividends received deduction allowed to domestic
corporations under the Code.
TAX TREATMENT OF OPTIONS, FUTURES AND FORWARD FOREIGN EXCHANGE TRANSACTIONS
The Fund may write, purchase or sell options, futures or forward foreign
exchange contracts. Options and futures contracts that are "Section 1256
contracts" will be "marked to market" for Federal income tax purposes at the end
of each taxable year, i.e., each such option or futures contract will be treated
as sold for its fair market value on the last day of the taxable year. Unless
such contract is a forward foreign exchange contract or is a non-equity option
or a regulated futures contract for a non-U.S. currency for which the Fund
elects to have gain or loss treated as ordinary gain or loss under Code Section
988 (as described below), Section 1256 contracts will be 60% long-term and 40%
short-term capital gain or loss. The mark-to-market rules outlined above,
however, will not apply to certain transactions entered into by the Fund solely
to reduce the risk of changes in price or interest or currency exchange rates
with respect to its investments.
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under 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 option, 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.
45
<PAGE>
Under Code Section 988, special rules are provided for certain transactions
in a currency other than the taxpayer's functional currency (i.e., unless
certain special rules apply, currencies other than the 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.
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.
46
<PAGE>
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.
47
<PAGE>
Set forth in the tables below is total return and yield information for the
Class A, Class B, Class C and Class D shares of the Fund for the periods
indicated. Since the Fund did not begin to offer Class C and Class D shares
publicly until October 21, 1994, such information is provided as to those
classes for the period from October 21, 1994 to December 31, 1994.
<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 December 31,
1994..................... (7.89%) $ 921.10 (8.41%) $ 915.90
Five Years Ended December
31, 1994................. 8.61% $ 1,511.60
Inception (November 18,
1991) to December 31,
1994..................... 4.43% $ 1,144.80
Inception (September 29,
1988) to December 31,
1994..................... 9.05% $ 1,719.50
<CAPTION>
ANNUAL TOTAL RETURN
(excluding maximum applicable sales charges)
<S> <C> <C> <C> <C>
Year Ended December 31,
1994..................... (4.05%) $ 959.50 (4.90%) $ 951.00
1993..................... 14.12% $ 1,141.20 13.27% $ 1,132.70
1992..................... 6.15% $ 1,061.50 5.34% $ 1,053.40
1991..................... 23.12% $ 1,231.20
1990..................... 10.03% $ 1,100.30
1989..................... 6.82% $ 1,068.20
Inception (September 29,
1988) to December 31,
1988..................... 6.49% $ 1,064.90
Inception (November 18,
1991) to December 31,
1991..................... 1.64% $ 1,016.40
<CAPTION>
AGGREGATE TOTAL RETURN
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
Inception (November 18,
1991) to December 31,
1994..................... 14.48% $ 1,144.80
Inception (September 29,
1988) to December 31,
1994*.................... 71.95% $ 1,719.50
<CAPTION>
YIELD
<S> <C> <C> <C> <C>
30 Days Ended March 31,
1995..................... 9.40% 9.01%
</TABLE>
48
<PAGE>
<TABLE><CAPTION>
CLASS C SHARES** CLASS D SHARES**
---------------------------------------- ----------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
EXPRESSED AS OF A HYPOTHETICAL EXPRESSED AS OF A HYPOTHETICAL
A PERCENTAGE BASED $1,000 INVESTMENT A PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END OF THE ON A HYPOTHETICAL AT THE END OF THE
PERIOD $1,000 INVESTMENT PERIOD $1,000 INVESTMENT PERIOD
- --------------------------- ------------------ ------------------ ------------------ ------------------
AVERAGE ANNUAL TOTAL RETURN
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
Inception (October 21,
1994) to December 31,
1994..................... (10.70%) $ 978.20 (23.35%) $ 949.60
<CAPTION>
ANNUAL TOTAL RETURN
(excluding maximum applicable sales charges)
<S> <C> <C> <C> <C>
Inception (October 21,
1994) to December 31,
1994..................... (1.20%) $ 988.00 (1.09%) $ 989.10
<CAPTION>
AGGREGATE TOTAL RETURN
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
Inception (October 21,
1994) to December 31,
1994..................... (2.18%) $ 978.20 (5.04%) $ 949.60
<CAPTION>
YIELD
<S> <C> <C> <C> <C>
30 days ended
March 31, 1995........... 8.91% 9.16%
</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.
** Class C and Class D shares commenced operations on October 21, 1994.
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 waiver of 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.
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.
49
<PAGE>
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, Class C and Class D 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.
50
<PAGE>
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for each class of
shares of the Fund based on the Fund's net assets and number of shares
outstanding as of December 31, 1994 is calculated as set forth below.
<TABLE><CAPTION>
CLASS A CLASS B CLASS C*** CLASS D***
------------ -------------- ---------- ----------
<S> <C> <C> <C> <C>
Net Assets........................... $311,181,573 $1,490,506,743 $1,204,423 $1,409,595
------------ -------------- ---------- ----------
------------ -------------- ---------- ----------
Number of Shares Outstanding......... 37,961,421 181,949,101 147,121 171,952
------------ -------------- ---------- ----------
------------ -------------- ---------- ----------
Net Asset Value Per Share (net assets
divided by number of shares
outstanding)....................... $ 8.20 $ 8.19 $ 8.19 $ 8.20
Sales Charge (for Class A and Class D
shares: 4.00% of offering price
(4.17% of net asset value per
share))*........................... .34 ** ** .34
------------ -------------- ---------- ----------
Offering Price....................... $ 8.54 $ 8.19 $ 8.19 $ 8.54
------------ -------------- ---------- ----------
------------ -------------- ---------- ----------
</TABLE>
- ------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption of shares. See "Purchase of
Shares-Deferred Sales Charge Alternatives-Class B and Class C Shares" in the
Prospectus.
*** Class C and Class D shares commenced operations on October 21, 1994.
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.
51
<PAGE>
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.
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 April 1, 1995.
52
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch World Income Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch World Income Fund, Inc. as of
December 31, 1994, the related statements of operations for the year then ended
and changes in net assets for each of the years in the two-year period then
ended, and the financial highlights for 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, 1994 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, 1994, 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 3, 1995
53
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
Value Percent of
AFRICA Industries Face Amount Fixed-Income Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
South Foreign US$ 10,000,000 Republic of South Africa, 9.625%
Africa Government due 12/15/1999 $ 9,968,500 $ 9,700,000 0.5%
Obligations
Total Investments in Africa 9,968,500 9,700,000 0.5
LATIN AMERICA &
THE CARIBBEAN
Argentina Energy Transportadora de Gas del Sur:
2,000,000 7.75% due 12/23/1998 1,837,500 1,635,000 0.1
2,000,000 ++7.75% due 12/23/1998 2,042,500 1,652,500 0.1
------------- -------------- ------
3,880,000 3,287,500 0.2
Foreign Lit 5,000,000,000 Republic of Argentina,
Government 13.45% due 10/21/1997 3,089,063 3,042,083 0.2
Obligations
Telecommunications US$ 500,000 Telecom Argentina Stet-France Telecom
S.A., 8.375% due 10/18/2000 460,000 401,250 0.0
2,500,000 ++Telecom Argentina Stet-France
Telecom S.A., 8.375% due 10/18/2000 2,490,625 2,025,000 0.1
Telefonica de Argentina S.A.:
3,000,000 8.375% due 10/01/2000 3,033,750 2,445,000 0.1
10,000,000 11.875% due 11/01/2004 9,800,800 9,000,000 0.5
------------- -------------- ------
15,785,175 13,871,250 0.7
Total Fixed-Income Investments
in Argentina 22,754,238 20,200,833 1.1
Brazil Construction 5,000,000 ++Compania Brasileira de Projetos e
Obras, 12.50% due 12/22/1997 4,975,000 4,875,000 0.3
Total Fixed-Income Investments
in Brazil 4,975,000 4,875,000 0.3
Colombia Banking 3,000,000 Banco Ganadero S.A., 9.75%
due 8/26/1999 2,987,340 2,910,000 0.2
Total Fixed-Income Investments
in Colombia 2,987,340 2,910,000 0.2
Mexico Construction 5,000,000 Empresas ICA Sociedad Controladora,
S.A. de C.V., 9.75% due 2/11/1998 5,093,750 4,437,500 0.2
Food & Beverage 5,000,000 Fomento Economico Mexico, S.A. de C.V.
(Femsa), 9.50% due 7/22/1997 5,099,375 4,500,000 0.3
3,000,000 Gruma S.A., de C.V., 9.75%
due 3/09/1998 2,987,500 2,726,250 0.2
7,500,000 Grupo Embotellador de Mexico, S.A. de
C.V. (GEMEX), 10.75% due 11/19/1997 7,967,500 7,137,225 0.4
------------- -------------- ------
16,054,375 14,363,475 0.9
Foreign Government & 3,000,000 Banco Nacional de Commerce Exterior,
Agency Obligations 8.00% due 8/05/2003 2,636,250 2,238,750 0.1
6,500,000 Nafinsa, 10.625% due 11/22/2001 7,034,375 5,963,750 0.3
5,000,000 United Mexican States, 8.50%
due 9/15/2002 4,768,750 3,925,000 0.2
10,000,000 United Mexican States, Government
Bond, 12.25% due 12/03/1998 17,422,208 16,239,420 0.9
------------- -------------- ------
31,861,583 28,366,920 1.5
54
<PAGE>
Industrial Services 3,000,000 Cemex, S.A., 10.00% due 11/05/1999 3,037,500 2,625,000 0.1
Retail Stores 3,000,000 Controladora Comercial Mexicana,
S.A. de C.V., 8.75% due 4/21/1998 2,970,000 2,535,000 0.1
Total Fixed-Income Investments
in Mexico 59,017,208 52,327,895 2.8
Trinidad Foreign Government
& Tobago Obligations Republic of Trinidad and Tobago:
3,000,000 11.50% due 11/20/1997 3,123,750 3,000,000 0.2
4,000,000 ++9.75% due 11/03/2000 3,991,600 3,660,000 0.2
------------- -------------- ------
7,115,350 6,660,000 0.4
Total Fixed-Income Investments in
Trinidad & Tobago 7,115,350 6,660,000 0.4
Total Investments in Latin American
& Caribbean Securities 96,849,136 86,973,728 4.8
NORTH AMERICA
Canada Foreign Government Canadian Government Bonds:
Obligations C$ 25,000,000 6.50% due 9/01/1998 19,219,059 16,480,108 0.9
22,000,000 7.75% due 9/01/1999 15,155,309 14,955,796 0.8
------------- -------------- ------
34,374,368 31,435,904 1.7
Total Fixed-Income Investments
in Canada 34,374,368 31,435,904 1.7
United Air Transport Delta Air Lines, Inc.:
States US$ 16,332,054 9.375% due 9/11/2007(b) 16,611,005 15,250,055 0.8
10,000,000 10.50% due 4/30/2016 10,287,500 9,815,100 0.5
7,100,000 United Air Pass-Through, 10.125%
due 3/22/2015 7,684,046 6,669,385 0.4
15,000,000 USAir Inc., 10.375% due 3/01/2013 15,000,000 12,225,000 0.7
------------- -------------- ------
49,582,551 43,959,540 2.4
Broadcasting & 10,190,000 Century Communications Corp., 11.875%
Publishing due 10/15/2003 10,701,550 10,623,075 0.6
10,000,000 Continental Cablevision, 9.50%
due 8/01/2013 10,000,000 9,150,000 0.5
13,000,000 Heritage Media Corp., 11.00%
due 6/15/2002 13,295,625 13,195,000 0.7
5,000,000 K-III Communications Corp., 10.625%
due 5/01/2002 5,090,000 4,850,000 0.3
10,000,000 Videotron Group, Ltd. Co., 10.25%
due 10/15/2002 10,043,750 9,800,000 0.5
------------- -------------- ------
49,130,925 47,618,075 2.6
Building Materials 15,300,000 Pacific Lumber Co., 10.50%
due 3/01/2003 15,462,750 14,229,000 0.8
11,035,000 USG Corp., 8.75% due 3/01/2017 9,717,469 9,379,750 0.5
------------- -------------- ------
25,180,219 23,608,750 1.3
Business Services 18,500,000 ADT Operations, 9.25% due 8/01/2003 18,573,188 17,112,500 0.9
8,000,000 Bell & Howell Co., Series B, 10.75%
due 10/01/2002 8,000,000 7,600,000 0.4
------------- -------------- ------
26,573,188 24,712,500 1.3
Chemicals 33,860,000 GI Holdings, Inc., 11.38%* due
10/01/1998 22,375,651 20,527,625 1.1
10,000,000 Uniroyal Chemical Co., 9.00%
due 9/01/2000 10,000,000 9,400,000 0.5
------------- -------------- ------
32,375,651 29,927,625 1.6
Conglomerates 20,000,000 Coltec Industries Inc., 10.25%
due 4/01/2002 20,387,500 19,600,000 1.1
10,000,000 Sequa Corp., 9.375% due 12/15/2003 9,915,000 8,800,000 0.5
10,100,000 Sherritt Gordon, Ltd., 9.75%
due 4/01/2003 10,148,750 9,696,000 0.5
10,000,000 Southern Pacific Rail Co., 9.375%
due 8/15/2005 10,000,000 9,200,000 0.5
------------- -------------- ------
50,451,250 47,296,000 2.6
55
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
NORTH
AMERICA Value Percent of
(continued) Industries Face Amount Fixed-Income Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
United Consumer Goods Liggett Group, Inc.:
States US$ 8,000,000 11.50% due 2/01/1999 $ 7,724,541 $ 5,600,000 0.3%
(concluded) 4,199,000 16.50% due 2/01/1999 4,199,000 3,611,140 0.2
------------- -------------- ------
11,923,541 9,211,140 0.5
Containers 20,000,000 Owens Illinois, 11.00% due 12/01/2003 21,906,563 20,750,000 1.2
6,100,000 Silgan Holdings Corp., 11.75%
due 6/15/2002 6,194,875 6,313,500 0.4
------------- -------------- ------
28,101,438 27,063,500 1.6
Cosmetics 20,000,000 Revlon Consumer Products Corp.,
9.375% due 4/01/2001 17,607,494 17,900,000 1.0
Energy Clark Oil Co.:
8,360,000 10.50% due 12/01/2001 8,827,300 8,569,000 0.5
500,000 9.50% due 9/15/2004 500,000 487,500 0.0
7,000,000 Clark R & M Holdings, Inc., 10.54%*
due 2/15/2000 4,120,703 3,990,000 0.2
Gulf Canada Resources, Ltd.:
10,000,000 9.00% due 8/15/1999 9,158,438 9,500,000 0.5
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 5,655,000 0.3
1,000,000 11.50% due 11/15/2015 1,051,250 920,000 0.1
15,000,000 Rowan Companies, Inc., 11.875%
due 12/01/2001 15,590,000 15,450,000 0.9
15,000,000 Seagull Energy Corp., 8.625%
due 8/01/2005 15,000,000 12,787,500 0.7
10,000,000 Trans Texas Gas Corp., 10.50%
due 9/01/2000 10,000,000 9,550,000 0.5
------------- -------------- ------
77,191,596 72,889,000 4.0
Entertainment Marvel Holdings, Inc.:
26,780,000 11.47%* due 4/15/1998 18,450,899 16,469,700 0.9
1,125,000 9.125% due 2/15/1998 995,625 978,750 0.1
5,000,000 Spectravision Inc., 10.92%*
due 10/01/2001 4,211,312 2,150,000 0.1
10,000,000 Trump Plaza Funding, Inc., 10.875%
due 6/15/2001 7,536,875 7,600,000 0.4
------------- -------------- ------
31,194,711 27,198,450 1.5
Financial Services 17,375,000 Lomas Mortgage USA, 10.25%
due 10/01/2002 17,387,500 14,421,250 0.8
10,000,000 Penn Financial Corp., 9.25%
due 12/15/2003 10,000,000 8,800,000 0.5
10,000,000 Reliance Group Holdings, 9.00%
due 11/15/2000 10,000,000 9,100,000 0.5
------------- -------------- ------
37,387,500 32,321,250 1.8
Food & Beverage 10,000,000 Canandaigua Wine Inc., 8.75%
due 12/15/2003 10,000,000 9,100,000 0.5
10,000,000 Coca-Cola Bottling Co., 9.00%
due 11/15/2003 10,005,000 8,775,000 0.5
20,000,000 Del Monte Corp., 10.00%
due 5/01/2003 20,025,313 13,600,000 0.8
25,000,000 Grand Union Co., 11.25%
due 7/15/2000 25,524,063 22,250,000 1.2
18,000,000 Penn Traffic Co., 9.625%
due 4/15/2005 18,308,350 15,660,000 0.9
20,000,000 Pueblo Xtra International Inc., 9.50%
due 8/01/2003 20,111,875 16,800,000 0.9
10,000,000 Specialty Foods Corp., 10.25%
due 8/15/2001 10,000,000 8,900,000 0.5
------------- -------------- ------
113,974,601 95,085,000 5.3
Furniture/Home 1,400,000 ++Zenith Electronics Corp., 8.50%
Appliance due 11/19/2000** 2,060,380 1,921,500 0.1
56
<PAGE>
Health Services 15,000,000 Continental Medical Systems, Inc.,
10.875% due 8/15/2002 15,029,062 12,075,000 0.7
2,500,000 MEDIQ, Inc., 11.125% due 7/01/1999 2,500,000 2,325,000 0.1
------------- -------------- ------
17,529,062 14,400,000 0.8
High Technology 15,000,000 Computervision Corp., 10.875%
due 8/15/1997 15,025,000 13,800,000 0.8
Home Building Del E. Webb Corp.:
9,250,000 10.875% due 3/31/2000 9,376,875 8,787,500 0.5
3,500,000 9.75% due 3/01/2003 3,472,455 2,905,000 0.2
Kaufman & Broad Home, Inc.:
3,000,000 10.375% due 9/01/1999 3,030,000 2,985,000 0.2
5,250,000 9.375% due 5/01/2003 5,217,187 4,567,500 0.3
Ryland Group, Inc.:
3,750,000 10.50% due 7/15/2002 3,733,850 3,356,250 0.2
12,250,000 9.625% due 6/01/2004 11,991,250 10,290,000 0.6
------------- -------------- ------
36,821,617 32,891,250 2.0
Hotels & Casinos 1,906,000 Goldriver Hotel & Casino Corp.,
13.375% due 8/31/1999 2,645,548 1,658,220 0.1
10,000,000 Greate Bay Properties, Inc., 10.875%
due 1/15/2004 9,996,250 8,100,000 0.5
15,000,000 Showboat, Inc., 9.25% due 5/01/2008 14,698,750 12,525,000 0.7
------------- -------------- ------
27,340,548 22,283,220 1.3
Leisure Time 5,925,000 AMC Entertainment, Inc., 12.625%
due 8/01/2002 6,017,020 6,265,688 0.3
Paper 10,000,000 Container Corp. of America, 9.75%
due 4/01/2003 10,200,000 9,475,000 0.5
15,000,000 Fort Howard Corp., 9.00% due 2/01/2006 15,007,500 12,900,000 0.7
10,000,000 Riverwood International Corp., 11.25%
due 6/15/2002 10,385,750 10,275,000 0.6
12,500,000 Stone Container Corp., 9.875%
due 2/01/2001 11,667,085 11,750,000 0.7
7,500,000 Stone Container Gorp., 10.75%
due 10/01/2002 7,425,000 7,462,500 0.4
------------- -------------- ------
54,685,335 51,862,500 2.9
Restaurants & 10,000,000 Family Restaurant Inc., 9.75%
Food Services due 2/01/2002 10,000,000 7,850,000 0.4
Flagstar Corp.:
2,000,000 10.875% due 12/01/2002 2,000,000 1,860,000 0.1
17,000,000 11.375% due 9/15/2003 16,640,000 14,110,000 0.8
20,000,000 Foodmaker, Inc., 9.75% due 6/01/2002 19,554,250 15,000,000 0.8
------------- -------------- ------
48,194,250 38,820,000 2.1
Retail Stores 10,000,000 Specialty Retailers, Inc., 10.00%
due 8/15/2000 10,112,500 9,000,000 0.5
Textiles 15,000,000 WestPoint Stevens Inc., 8.75%
due 12/15/2001 15,093,750 13,800,000 0.8
Transport Services 10,000,000 Viking Star Shipping Co., 9.625%
due 7/15/2003 10,028,437 9,100,000 0.5
US Government & Agency 9,000,000 Federal National Mortgage Association,
Obligations 8.55% due 12/10/2004 8,992,969 8,916,750 0.5
Utilities 9,848,000 Beaver Valley II Funding, 9.00%
due 6/01/2017 7,262,900 6,992,080 0.4
Utilities--Electric 4,000,000 CTC Mansfield Funding Corp., 11.125%
due 9/30/2016 4,301,250 3,706,280 0.2
Midland Cogeneration:
9,372,115 ++10.33% due 7/23/2002 (b) 9,184,673 8,856,649 0.5
10,000,000 13.25% due 7/23/2006 11,183,750 9,629,500 0.5
9,100,000 Tucson Electric Power Co., 10.732%
due 1/01/2013 8,713,250 8,326,500 0.5
------------- -------------- ------
33,382,923 30,518,929 1.7
Total Fixed-Income Investments in
the United States 843,221,356 759,362,747 42.2
57
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
NORTH
AMERICA Value Percent of
(concluded) Industries Face Amount Convertible Bonds Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
United Airlines US$ 3,000,000 AMR Corp., 6.125% due 11/01/2024 $ 2,441,875 $ 2,415,000 0.1%
States
Building & 1,500,000 Toll Brothers Inc., 4.75% due 1/15/2004 1,500,000 1,020,000 0.1
Construction 1,750,000 US Home Corp., 4.875% due 11/01/2005 1,741,000 1,124,375 0.1
------------- -------------- ------
3,241,000 2,144,375 0.2
Building Materials 3,000,000 Owens-Corning Fiberglass Corp.,
8.00% due 12/30/2005** 3,232,257 3,292,500 0.2
Computers 2,500,000 Data General Corp., 7.75%
due 6/01/2001 2,479,375 2,162,500 0.1
1,000,000 Storage Technology Corp., 8.00%
due 5/31/2015** 1,132,500 975,000 0.1
------------- -------------- ------
3,611,875 3,137,500 0.2
Electrical Equipment 2,000,000 Polyphase Corp., 12.00% due 7/01/1999 2,000,000 1,620,000 0.1
Electronics 3,000,000 Wilcox & Gibbs Inc., 7.00%
due 8/01/2014 2,955,000 2,490,000 0.1
Entertainment 4,500,000 Time Warner Inc., 7.99%*
due 12/17/2012 1,410,560 1,372,500 0.1
Environmental Control 900,000 Ray F. Weston, Inc., 7.00%
due 4/15/2002 756,900 756,000 0.0
Food & Beverage 3,000,000 Boston Chicken Inc., 4.50%
due 2/01/2004 3,000,000 2,205,000 0.1
3,000,000 Farm Fresh, Inc., 7.50%
due 3/01/2010 1,562,500 1,850,286 0.1
------------- -------------- ------
4,562,500 4,055,286 0.2
Healthcare 1,000,000 IVAX Corp., 6.50% due 11/15/2001 987,500 872,500 0.0
Pharmaceutical Marketing
Services, Inc.:
700,000 ++6.25% due 2/01/2003** 536,700 462,000 0.0
1,050,000 6.25% due 2/01/2003 813,250 672,000 0.0
------------- -------------- ------
2,337,450 2,006,500 0.0
Home Building 3,300,000 ++Engle Homes, Inc., 7.00%
due 3/01/2003 2,884,280 2,524,500 0.1
Industrial Services 3,500,000 ++Cemex, S.A., 4.25% due 11/01/1997 3,500,000 2,800,000 0.2
500,000 Mascotech, Inc., 4.50% due 12/15/2003 500,000 333,750 0.0
1,015,000 Sanifill Inc., 7.50% due 6/01/2006** 1,073,068 969,325 0.1
2,080,000 Wainoco Oil Corp., 7.75%
due 6/01/2014 1,880,352 1,788,800 0.1
------------- -------------- ------
6,953,420 5,891,875 0.4
Insurance 3,320,000 Statesman Group, Inc., 6.25%
due 5/01/2003 3,368,958 3,353,200 0.2
Machinery 2,000,000 Albany International Corp., 5.25%
due 3/15/2002 1,823,117 1,705,000 0.1
Medical 1,950,000 Sun Healthcare Group, Inc., 6.00%
due 3/01/2004** 2,269,500 2,447,250 0.1
Mining Coeur D'Alene Mines Corp.:
2,000,000 7.00% due 11/30/2002** 2,112,500 2,250,000 0.1
1,500,000 6.375% due 1/31/2004 1,500,000 1,248,750 0.1
------------- -------------- ------
3,612,500 3,498,750 0.2
Oil/Gas-Exploration 3,000,000 The Western Company of North America,
7.25% due 1/15/2015** 3,347,400 3,093,750 0.2
Pharmaceuticals 2,600,000 Bindley Western Industries, Inc., 6.50%
due 10/01/2002 2,563,000 2,463,500 0.1
Retail 2,250,000 Big B Inc., 6.50% due 3/15/2003** 2,663,775 2,587,500 0.1
Technology 1,570,000 Conner Peripherals Inc., 6.50%
due 3/01/2002** 1,409,546 1,091,150 0.1
58
<PAGE>
Telecommunications 3,210,000 Intelcom Group Inc., 7.00%
due 10/30/1998 (a) 3,199,631 2,575,979 0.1
Textiles 2,125,000 Interface, Inc., 8.00% due 9/15/2013 2,052,650 1,917,813 0.1
Transportation 511,000 Builders Transport & Trucking Co., 8.00%
due 8/15/2005** 514,832 449,680 0.0
Waste Management 1,000,000 Phillips Environmental, Inc., 6.00%
due 10/15/2000 1,000,000 1,015,000 0.1
1,950,000 USA Waste Services Inc., 8.50%
due 10/15/2002 2,273,000 2,349,750 0.1
------------- -------------- ------
3,273,000 3,364,750 0.2
Total Investments in United States
Convertible Bonds 66,485,026 60,254,358 3.2
Convertible Preferred Stocks,
Shares Held Common Stocks & Warrants
United Airlines 52,500 Delta Air Lines Inc., $3.50
States (Series C), Conv. Pfd. 2,756,900 2,296,875 0.1
25,000 ++United Airlines Corp., $6.25
(Series A), Conv. Pfd. 2,482,500 2,075,000 0.1
------------- -------------- ------
5,239,400 4,371,875 0.2
Banking & Finance 48,300 Rochester Community Savings Bank
(Series B) 1,387,224 1,279,950 0.1
36,300 Southern National Corp., Pfd. $1.6875 1,158,678 1,057,238 0.1
55,200 Union Planters Corp. 1,949,405 1,531,800 0.1
------------- -------------- ------
4,495,307 3,868,988 0.3
Cement 125,000 Southdown, Inc.** (e) 1,268,750 1,187,500 0.1
Computers 42,500 Storage Technology Corp.,
$3.50, Conv. Pfd. 2,355,987 2,805,000 0.2
Electronics 60,000 Cooper Industries, $8.00 1,536,750 1,230,000 0.1
Environmental 3,520,000 ++Allied Waste Industries, Inc.,
Conv. Pfd. 3,520,401 3,424,784 0.2
Financial--Banks 105,000 Citicorp, Pfd. "P" 2,066,925 2,008,125 0.1
Food & Beverage 18,676 Hudson Foods, Inc. (Class A) 413,555 469,235 0.0
231,500 RJR Nabisco, Inc. 1,534,269 1,389,000 0.1
------------- -------------- ------
1,947,824 1,858,235 0.1
High Technology 91,053 Anacomp, Inc. (Warrants) (c) 120,000 91,053 0.0
Hotels & Casinos 75,000 Goldriver Hotel & Casino Corp.
Liquidating Trust 75,000 53,438 0.0
30,000 Goldriver Hotel & Casino Corp.
(Series B) (d) 219,738 84,375 0.0
6,000 Trump Taj Mahal Funding, Inc. (Class A) 3,000 48,000 0.0
------------- -------------- ------
297,738 185,813 0.0
Industrial 20,000 Mascotech, Inc. 312,460 275,000 0.0
58,800 Petrolane, Inc. 683,550 779,100 0.0
10,000 UGI Corp. (Warrants) (c) 43,750 8,125 0.0
------------- -------------- ------
1,039,760 1,062,225 0.0
Insurance 1,500 Westbridge Capital Corp. 1,500,000 1,522,500 0.1
Oil & Gas 113,600 Gerrity Oil & Gas Corp. 1,882,785 1,476,800 0.1
Diversified 20,000 Western Gas Resources, Inc. 1,000,000 635,000 0.0
------------- -------------- ------
2,882,785 2,111,800 0.1
Paper Products 50,000 James River Corp. of Virginia (Series P) 862,500 1,012,500 0.1
Total Investments in United States
Convertible Preferred Stocks,
Common Stocks & Warrants 29,134,127 26,740,398 1.6
Total Investments in
North American Securities 973,214,877 877,793,407 48.7
59
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
PACIFIC Value Percent of
BASIN Industries Face Amount Fixed-Income Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Australia Foreign Government Australian Government Bonds:
Obligations-- A$ 38,000,000 12.00% due 11/15/2001 $ 31,852,684 $ 32,229,855 1.8%
Regional & Agency 52,600,000 9.50% due 8/15/2003 38,699,872 39,494,353 2.2
41,500,000 Queensland Treasury Corp., Global
Notes, 8.00% due 5/14/2003 31,269,513 28,003,716 1.6
16,000,000 Victoria Financial Corp., 10.25%
due 9/15/1999 12,421,713 12,331,634 0.7
------------- -------------- ------
114,243,782 112,059,558 6.3
Total Fixed-Income Investments
in Australia 114,243,782 112,059,558 6.3
New Foreign Government New Zealand Government Bonds:
Zealand Obligations NZ$ 37,000,000 8.00% due 7/15/1998 21,664,910 22,908,212 1.3
14,200,000 10.00% due 3/15/2002 8,974,507 9,739,382 0.5
------------- -------------- ------
30,639,417 32,647,594 1.8
Total Fixed-Income Investments
in New Zealand 30,639,417 32,647,594 1.8
Philip- Industrial US$ 3,000,000 ++San Miguel Corp., 9.00% due 4/27/2000 2,981,000 2,866,875 0.2
pines
Total Fixed-Income Investments
in the Philippines 2,981,000 2,866,875 0.2
Total Fixed-Income Investments in
the Pacific Basin 147,864,199 147,574,027 8.3
Convertible Bonds
Hong Kong Engineering & HK$ 1,450,000 Paul Y-ITC Construction Holdings, Inc.,
Construction 5.00% due 2/03/2001 1,165,812 1,022,250 0.1
Total Investments in
Hong Kong Convertible Bonds 1,165,812 1,022,250 0.1
Japan Foreign Government Yen 85,000,000 Makita Electric Works Co., Ltd.,
Obligations 3.60% due 3/31/1999 938,422 879,900 0.0
Total Investments in
Japanese Convertible Bonds 938,422 879,900 0.0
Total Investments in Pacific Basin
Convertible Bonds 2,104,234 1,902,150 0.1
Total Investments in
Pacific Basin Securities 149,968,433 149,476,177 8.4
WESTERN
EUROPE Fixed-Income Investments
Denmark Foreign Dkr 200,000,000 Denmark Kingdom, 9.00% due 11/15/1998 32,728,737 33,185,258 1.8
Government
Obligations
Total Fixed-Income Investments
in Denmark 32,728,737 33,185,258 1.8
Germany Consumer Products US$ 10,000,000 Tarkett International, 9.00%
due 3/01/2002 10,000,000 9,125,000 0.5
Total Fixed-Income Investments
in Germany 10,000,000 9,125,000 0.5
60
<PAGE>
Italy Foreign Government Buoni Poliennali del Tesoro
Obligations (Italian Government Bonds):
Lit80,000,000,000 8.50% due 8/01/1997 48,051,282 45,785,511 2.5
55,000,000,000 12.00% due 9/18/1998 36,600,703 34,005,924 1.9
70,400,000,000 9.00% due 10/01/1998 42,566,872 39,992,595 2.2
53,000,000,000 8.50% due 1/01/1999 31,647,308 29,341,580 1.6
------------- -------------- ------
158,866,165 149,125,610 8.2
Total Fixed-Income Investments
in Italy 158,866,165 149,125,610 8.2
Portugal Supranational Esc 750,000,000 European Investment Bank, 15.50%
Entities due 7/12/1995 6,389,454 4,764,750 0.3
Total Fixed-Income Investments
in Portugal 6,389,454 4,764,750 0.3
Spain Foreign Government Government of Spain:
Obligations Pta 2,950,000,000 11.00% due 6/15/1997 22,951,273 22,279,171 1.2
15,092,000,000 10.25% due 11/30/1998 114,736,692 109,814,233 6.1
------------- -------------- ------
137,687,965 132,093,404 7.3
Total Fixed-Income Investments
in Spain 137,687,965 132,093,404 7.3
Sweden Foreign Government Government of Sweden:
Obligations Skr 190,000,000 11.00% due 1/21/1999 25,252,784 26,084,711 1.4
60,000,000 13.00% due 6/15/2001 8,705,625 8,948,461 0.5
------------- -------------- ------
33,958,409 35,033,172 1.9
Total Fixed-Income Investments
in Sweden 33,958,409 35,033,172 1.9
United Foreign Government United Kingdom Gilt:
Kingdom Obligations Pound 7,000,000 10.50% due 2/21/1997 11,631,933 11,424,459 0.6
Sterling 47,000,000 9.00% due 3/03/2000 74,903,779 74,545,026 4.1
46,000,000 7.00% due 11/06/2001 71,171,278 65,620,294 3.6
10,250,000 9.50% due 4/18/2005 17,203,187 16,823,978 0.9
------------- -------------- ------
174,910,177 168,413,757 9.2
Total Fixed-Income Investments in
the United Kingdom 174,910,177 168,413,757 9.2
Convertible Bonds
United 1,250,000 Hanson Trust PLC, 9.50% due 1/31/2006 2,074,884 2,016,225 0.1
Kingdom
Total Investments in United Kingdom
Convertible Bonds 2,074,884 2,016,225 0.1
Total Investments in Western European
Securities 556,615,791 533,757,176 29.3
61
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<CAPTION>
SHORT-TERM Face Value Percent of
SECURITIES Amount Issue Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
United Commercial US$ 40,000,000 Ciesco L.P., 5.85% due 2/03/1995 $ 39,798,500 $ 39,798,500 2.2%
States Paper*** 50,033,000 General Electric Capital Corp.,
5.80% due 1/03/1995 50,033,000 50,033,000 2.8
25,000,000 National Rural Utilities Cooperative
Finance Corp., 5.78% due 1/27/1995 24,904,667 24,904,667 1.4
10,000,000 Xerox Credit Corp., 5.85% due 2/06/1995 9,944,750 9,944,750 0.6
------------- -------------- ------
124,680,917 124,680,917 7.0
US Government US Treasury Bill:
Obligations*** 100,000 5.392% due 2/02/1995 99,560 99,560 0.0
1,100,000 5.425% due 2/02/1995 1,095,132 1,095,132 0.1
------------- -------------- ------
1,194,692 1,194,692 0.1
Total Investments in
Short-Term Securities 125,875,609 125,875,609 7.1
OPTIONS Premiums
PURCHASED Paid
Currency Put 20,587,500 Australian Dollar, expiring January
Options Purchased 1995, at A$.7625 111,996 49,410 0.0
79,000,000 British Pound, expiring January 1995,
at Pound Sterling 1.5450 450,300 418,700 0.0
50,000,000 Italian Lira, expiring January 1995,
at Lit1690 147,500 70,000 0.0
56,000,000 Spanish Peseta, expiring January 1995,
at Pta135.50 266,000 212,800 0.0
Total Options Purchased 975,796 750,910 0.0
Total Investments 1,913,468,142 1,784,327,007 98.8
OPTIONS Premiums
WRITTEN Received
Currency Call 21,195,000 Australian Dollar, expiring January 1995,
Options Written at A$.785 (111,994) (76,302) 0.0
79,000,000 British Pound, expiring January 1995,
at Pound Sterling 1.5820 (323,900) (355,500) 0.0
50,000,000 Italian Lira, expiring January 1995,
at Lit1590 (64,000) (125,000) 0.0
56,000,000 Spanish Peseta, expiring January 1995,
at Pta 129.5 (112,000) (140,000) 0.0
Total Options Written (611,894) (696,802) 0.0
Total Investments, Net of Currency Options Written $1,912,856,248 1,783,630,205 98.8
==============
Variation Margin on Stock Index Futures Contracts++ 23,437 0.0
Short Sales (Proceeds--$17,254,233)** (15,765,349) (0.8)
Unrealized Depreciation on Forward Foreign Exchange Contracts+++++ (4,835,455) (0.3)
Other Assets Less Liabilities 41,249,496 2.3
-------------- ------
Net Assets $1,804,302,334 100.0%
============== ======
<FN>
*Represents the yield to maturity on this zero coupon issue.
**Covered Short Sales entered into as of December 31, 1994 are as follows:
62
<PAGE>
<CAPTION>
Value
Shares Issue (Note 1h)
<C> <S> <C>
139,800 Big B Inc. $ (1,922,250)
6,800 Builders Transport & Trucking Co. (74,800)
109,900 Coeur D'Alene Mines Corp. (1,799,613)
31,400 Conner Peripherals Inc. (298,300)
68,900 Owens-Corning Fiberglass Corp. (2,204,800)
57,000 Pharmaceutical Marketing Services, Inc. (513,000)
17,800 Sanifill Inc. (445,000)
43,700 Southdown, Inc. (633,650)
102,900 Storage Technology Corp. (2,984,100)
71,098 Sun Healthcare Group, Inc. (1,804,112)
89,100 Western Company of North America (The) (1,503,562)
136,100 Zenith Electronics Corp. (1,582,162)
============
Total (proceeds--$17,254,233) $(15,765,349)
<FN>
***Commercial Paper and certain US Government Obligations are 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. The value of the Fund's investment in
restricted securities was approximately $37,144,000, representing 2.06%
of net assets.
<CAPTION>
Acquisition Value
Issue Date Cost (Note 1a)
<S> <C> <C> <C>
Allied Waste Industries, Inc., Conv. Pfd. 9/23/1993 $ 3,520,401 $ 3,424,784
Cemex, S.A., 4.25% due 11/01/1997 9/28/1994 3,500,000 2,800,000
Compania Brasileira de Projetos e
Obras, 12.50% due 12/22/1997 12/14/1994 4,975,000 4,875,000
Engle Homes, Inc., 7.00% due 3/01/2003 6/29/1994-
7/8/1994 2,884,280 2,524,500
Midland Cogeneration, 10.33% due 7/23/2002 7/13/1994 9,184,673 8,856,649
Pharmaceutical Marketing Services, Inc., 6.25% due 2/01/2003 10/02/2003 536,700 462,000
Republic of Trinidad and Tobago, 9.75% due 11/03/2000 10/15/1994 3,991,600 3,660,000
San Miguel Corp., 9.00% due 4/27/2000 9/26/1994-
9/30/1994 2,981,000 2,866,875
Telecom Argentina Stet-France Telecom,
S.A., 8.375% due 10/18/2000 10/04/1994 2,490,625 2,025,000
Transportadora de Gas del Sur, 7.75% due 12/23/1998 1/28/1994 2,042,500 1,652,500
United Airlines Corp., $6.25 (Series A), Conv. Pfd. 3/03/1993 2,482,500 2,075,000
Zenith Electronics Corp., 8.50% due 11/19/2000 10/25/1994-
10/26/1994 2,060,380 1,921,500
Total $40,649,659 $37,143,808
=========== ===========
<PAGE>
+++Financial futures contracts sold as of December 31, 1994 were as follows:
Number of Expiration Value
Contracts Issue Exchange Date (Note 1c)
75 US Treasury Bond OTC March 1995 $(7,436,719)
Total Futures Contracts Sold
(Total Contract Price--$7,426,563) $(7,436,719)
===========
The market value of pledged securities is $1,194,693.
+++++Forward foreign exchange contracts as of December 31, 1994 are as follows:
<CAPTION>
Unrealized
Expiration Appreciation
Date (Depreciation)
(Note 1c)
Foreign Currency Purchased
<S> <C> <S> <C>
A$ 32,139,180 January 1995 $ 458,787
C$ 44,076,139 January 1995 (372,857)
DM 77,012,625 January 1995 620,544
Lit 17,395,318,900 January 1995 (139,655)
Pta 1,314,735,000 January 1995 (11,393)
Skr 69,818,867 January 1995 (62,987)
Total (US$ Commitment--$135,732,700) $ 492,439
------------
Foreign Currency Sold
A$ 102,695,480 January 1995 $ (990,960)
DM 369,310,250 January 1995 (3,841,101)
Dkr 75,265,297 January 1995 (176,155)
Lit 26,000,000,000 January 1995 (213,437)
NZ$ 44,390,612 February 1995 135,391
Pta 4,378,887,944 January 1995 152,591
Skr 250,140,700 January 1995 (394,223)
Total (US$ Commitment--$436,711,222) $ (5,327,894)
------------
Total Unrealized Depreciation on Forward
Foreign Exchange Contracts--Net $ (4,835,455)
============
(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)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.
(d)Each share of Series B stock contains a right which entitles the holder
to purchase a predetermined number of shares of Preferred Stock.
(e)Non-income producing security.
See Notes to Financial Statements.
</TABLE>
63
<PAGE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of December 31, 1994
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$1,912,492,346) (Note 1a) $1,783,576,097
Put options purchased, at value (cost--$975,796) (Notes 1a & 1c) 750,910
Cash 679
Foreign cash (Note 1d) 255,026
Receivables:
Interest $ 45,480,021
Short sales (Note 1i) 17,260,136
Securities sold 1,998,100
Capital shares sold 1,053,330
Forward foreign exchange contracts (Note 1c) 213,061
Dividends 102,123
Variation margin (Note 1g) 23,437 66,130,208
------------
Prepaid registration fees and other assets (Note 1f) 116,115
--------------
Total assets 1,850,829,035
--------------
Liabilities: Common stocks sold short, at market value (proceeds--$17,254,233) (Note 1i) 15,765,349
Call options written, at value (premiums--$611,894) (Notes 1a & 1c) 696,802
Unrealized depreciation of forward foreign exchange contracts (Note 1c) 4,835,455
Payables:
Dividends to shareholders (Note 1h) 10,110,517
Capital shares redeemed 9,601,776
Distributor (Note 2) 1,029,572
Investment adviser (Note 2) 997,268
Forward foreign exchange contracts (Note 1c) 981,223
Securities purchased 181,225 22,901,581
------------
Accrued expenses and other liabilities 2,327,514
--------------
Total liabilities 46,526,701
--------------
Net Assets: Net assets $1,804,302,334
==============
Net Assets Class A Shares of Common Stock, $0.10 par value, 1,000,000,000 shares authorized $ 3,796,142
Consist of: Class B Shares of Common Stock, $0.10 par value, 1,000,000,000 shares authorized 18,194,910
Class C Shares of Common Stock, $0.10 par value, 1,000,000,000 shares authorized 14,712
Class D Shares of Common Stock, $0.10 par value, 1,000,000,000 shares authorized 17,195
Paid-in capital in excess of par 1,978,693,897
Accumulated realized capital losses on investments and foreign currency transactions--net (63,828,356)
Unrealized depreciation on investments and foreign currency transactions--net (132,586,166)
--------------
Net assets $1,804,302,334
==============
Net Asset Class A--Based on net assets of $311,181,573 and 37,961,421 shares outstanding $ 8.20
==============
Value: Class B--Based on net assets of $1,490,506,743 and 181,949,101 shares outstanding $ 8.19
==============
Class C--Based on net assets of $1,204,423 and 147,121 shares outstanding $ 8.19
==============
64
<PAGE>
Class D--Based on net assets of $1,409,595 and 171,952 shares outstanding $ 8.20
==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended December 31, 1994
<S> <S> <C> <C>
Investment Interest and discount earned (net of $1,103,072 foreign withholding tax) $ 195,018,063
Income Dividend 1,988,020
(Notes 1e & 1f): Other income 1,187,844
--------------
Total income 198,193,927
--------------
Expenses: Distribution fees--Class B (Note 2) 13,694,529
Investment advisory fees (Note 2) 13,289,517
Transfer agent fees--Class B (Note 2) 2,028,532
Custodian fees 701,719
Printing and shareholder reports 408,711
Transfer agent fees--Class A (Note 2) 378,471
Accounting services (Note 2) 315,069
Professional fees 118,268
Registration fees (Note 1g) 55,942
Directors' fees and expenses 49,247
Short sale of dividends (Note 1i) 35,171
Distribution fees--Class C (Note 2) 773
Account maintenance fees--Class D (Note 2) 320
Transfer agent fees--Class C (Note 2) 151
Transfer agent fees--Class D (Note 2) 133
Other 35,712
--------------
Total expenses 31,112,265
--------------
Investment income-net 167,081,662
--------------
Realized & Realized loss from:
Unrealized Loss Investments--net $(62,626,451)
on Investments & Foreign currency transactions-net (44,955,386) (107,581,837)
Foreign Currency ------------
Transactions--Net Change in unrealized appreciation/depreciation on:
(Notes 1c, 1d, Investments--net (169,594,564)
1f & 3): Foreign currency transactions--net (4,327,598) (173,922,162)
------------ --------------
Net realized and unrealized loss on investments and foreign
currency transactions (281,503,999)
--------------
Net Decrease in Net Assets Resulting from Operations $ (114,422,337)
==============
See Notes to Financial Statements.
65
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended December 31,
Increase (Decrease) in Net Assets: 1994 1993
<S> <S> <C> <C>
Operations: Investment income--net $ 167,081,662 $ 175,662,845
Realized gain (loss) on investments and foreign currency transactions--net (107,581,837) 15,185,945
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net (173,922,162) 98,246,283
-------------- --------------
Net increase (decrease) in net assets resulting from operations (114,422,337) 289,095,073
-------------- --------------
Dividends & Investment income--net:
Distributions to Class A (19,926,079) (29,629,878)
Shareholders Class B (84,931,858) (106,918,287)
(Note 1h): Class C (4,853) --
Class D (6,907) --
Realized gain on investments--net:
Class A -- (1,417,282)
Class B -- (6,362,072)
Return of capital:
Class A (11,820,707) (8,487,578)
Class B (50,383,950) (30,627,102)
Class C (2,879) --
Class D (4,097) --
-------------- --------------
Net decrease in net assets resulting from dividends and distributions
to shareholders (167,081,330) (183,442,199)
-------------- --------------
Capital Share Net increase (decrease) in net assets derived from capital share transactions (487,938,280) 430,150,076
Transactions -------------- --------------
(Note 4):
Net Assets: Total increase (decrease) in net assets (769,441,947) 535,802,950
Beginning of year 2,573,744,281 2,037,941,331
-------------- --------------
End of year* $1,804,302,334 $2,573,744,281
============== ==============
<FN>
*Undistributed investment income--net $ -- $ --
============== ==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS Class A
For the Four
Months
The following per share data and ratios For the Year Ended Ended
have been derived from information December 31, Dec. 31, For the Year Ended August 31,
provided in the financial statements. 1994++++ 1993 1992 1992 1991 1990
Increase (Decrease) in Net Asset Value:
<S> <S> <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 .72 .75 .29 .99 1.12 1.23
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net (1.09) .46 (.41) .40 (.16) .15
-------- -------- -------- -------- -------- --------
66
<PAGE>
Total from investment operations (.37) 1.21 (.12) 1.39 .96 1.38
-------- -------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.45) (.58) (.35) (1.12) (1.37) (1.17)
-------- -------- -------- -------- -------- --------
Realized gain on investments--net -- (.03) (.02) -- -- (.05)
-------- -------- -------- -------- -------- --------
Return of capital--net (.26) (.17) -- -- -- --
Total dividends and distributions (.71) (.78) (.37) (1.12) (1.37) (1.22)
-------- -------- -------- -------- -------- --------
Net asset value, end of period $ 8.20 $ 9.28 $ 8.85 $ 9.34 $ 9.07 $ 9.48
======== ======== ======== ======== ======== ========
Total Investment Based on net asset value per share (4.05%) 14.12% (1.26%)+++ 16.09% 11.50% 16.48%
Return:** ======== ======== ======== ======== ======== ========
Ratios to Average Expenses .77% .78% .76%* .88% .85% .86%
Net Assets: ======== ======== ======== ======== ======== ========
Investment income--net 8.17% 8.22% 8.09%* 11.16% 12.38% 16.27%
======== ======== ======== ======== ======== ========
Supplemental Net assets, end of period
Data: (in thousands) $311,181 $467,625 $455,672 $526,631 $292,709 $299,700
======== ======== ======== ======== ======== ========
Portfolio turnover 115.95% 182.88% 68.42% 76.18% 63.83% 99.86%
======== ======== ======== ======== ======== ========
<CAPTION>
Class B
For the Four For the
Months Period
The following per share data and ratios For the Year Ended Ended Nov. 18, 1991++
have been derived from information December 31, Dec. 31, to Aug. 31
provided in the financial statements. 1994++++ 1993 1992 1992
Increase (Decrease) in Net Asset Value:
<S> <S> <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 .65 .70 .27 .77
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net (1.10) .44 (.40) --
---------- ---------- ---------- ----------
Total from investment operations (.45) 1.14 (.13) .77
---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.40) (.53) (.33) (.70)
Realized gain on investments--net -- (.03) (.02) --
Return of capital--net (.24) (.15) -- --
---------- ---------- ---------- ----------
Total dividends and distributions (.64) (.71) (.35) (.70)
---------- ---------- ---------- ----------
Net asset value, end of period $ 8.19 $ 9.28 $ 8.85 $ 9.33
========== ========== ========== ==========
Total Investment Based on net asset value per share (4.90%) 13.27% (1.42%)+++ 8.61%+++
Return:** ========== ========== ========== ==========
Ratios to Average Expenses, excluding distribution fees .79% .80% .78% .88%*
Net Assets: ========== ========== ========== ==========
Expenses 1.54% 1.55% 1.53% 1.63%*
========== ========== ========== ==========
Investment income--net 7.41% 7.42% 7.08% 8.02%*
========== ========== ========== ==========
Supplemental Net assets, end of period (in thousands) $1,490,507 $2,106,120 $1,582,270 $1,514,406
Data: ========== ========== ========== ==========
Portfolio turnover 115.95% 182.88% 68.42% 76.18%
========== ========== ========== ==========
<FN>
*Annualized.
**Total investment returns exclude the effect of sales loads.
++Commencement of Operations.
++++Based on average shares outstanding during the period.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
67
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS (concluded)
The following per share data and ratios have been derived For the Period
from information provided in the financial statements. October 21, 1994++ to
December 31, 1994++++
Increase (Decrease) in Net Asset Value: Class C Class D
<S> <S>
Per Share Net asset value, beginning of period $ 8.42 $ 8.43
Operating ------- -------
Performance: Investment income--net .10 .11
Realized and unrealized loss on investments and
foreign currency transactions--net (.20) (.20)
------- -------
Total from investment operations (.10) (.09)
------- -------
Less dividends and distributions:
Investment income--net (.08) (.09)
Return of capital--net (.05) (.05)
------- -------
Total dividends (.13) (.14)
------- -------
Net asset value, end of period $ 8.19 $ 8.20
======= =======
Total Investment Based on net asset value per share (1.20%)+++ (1.09%)+++
Return:** ======= =======
Ratios to Average Expenses, excluding account maintenance and distribution fees .84%* .79%*
Net Assets: ======= =======
Expenses 1.64%* 1.04%*
======= =======
Investment income--net 8.00%* 8.60%*
======= =======
Supplemental Net assets, end of period (in thousands) $ 1,204 $ 1,410
Data: ======= =======
Portfolio turnover 115.95% 115.95%
======= =======
<FN>
*Annualized.
**Total investment returns exclude the effect of sales loads.
++Commencement of Operations.
++++Based on average shares outstanding during the period.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
68
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch World Income Fund, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 as a non-diversified,
open-end management investment company. The Fund offers four
classes of shares under the Merrill Lynch Select Pricing SM System.
Shares of Class A and Class D are sold with a front-end sales charge.
Shares of Class B and Class C may be subject to a contingent deferred
sales charge. All classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions,
except that Class B, Class C and Class D Shares bear certain expenses related
to the account maintenance of such shares, and Class B and Class C Shares
also bear certain expenses related to the distribution of such shares.
Each class has exclusive voting rights with respect to matters relating
to its account maintenance and distribution expenditures. The
following is a summary of significant accounting policies followed
by the Fund.
(a) Valuation of 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 the 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. 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.
Short-term securities with remaining maturities of sixty days or less
are valued at amortized cost, which approximates market value.
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) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the equity, debt and currency
markets. Losses may arise due to changes in the value of the contract
or if the counterparty does not perform under the contract.
*Forward foreign exchange contracts--The Fund is authorized to
enter into forward foreign exchange contracts as a hedge against
either specific transactions or portfolio positions. Such contracts are
not entered on the Fund's records. However, the effect on operations
is recorded from the date the Fund enters into such contracts.
Premium or discount is amortized over the life of the contracts.
*Foreign currency options and futures--The Fund may also purchase
or sell listed or over-the-counter foreign currency options, foreign
currency futures and related options on foreign currency futures as a
short or long hedge against possible variations in foreign exchange
rates. Such transactions may be effected with respect to hedges on
non-US dollar denominated securities owned by the Fund, sold by
the Fund but not yet delivered, or committed or anticipated to be
purchased by the Fund.
*Options--The Fund is authorized to write and purchase call and
put options. When the Fund sells an option, an amount equal to
the premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written.
When a security is purchased or 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.
69
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
Written and purchased options are non-income producing investments.
(d) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing when
recognized. Assets and liabilities denominated in foreign currencies
are valued at the exchange rate at the end of the period. Foreign
currency transactions are the result of settling (realized) or valuing
(unrealized) assets or liabilities expressed in foreign currencies into
US dollars. Realized and unrealized gains or losses from investments
include the effects of foreign exchange rates on investments.
(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, excluding transaction gains/losses, are declared daily and
paid monthly. Distributions of capital gains are recorded on the
ex-dividend dates. A portion of the net investment income paid by
the Fund during the fiscal year ended December 31, 1994 is
characterized as a return of capital.
(i) Short sales--When the Fund engages in a short sale, an amount
equal to the proceeds received by the Fund is reflected as an asset
and equivalent liability. The amount of the liability is subsequently
marked to market to reflect the market value of the short sale. The
Fund maintains a segregated account of securities as collateral for
the short sales. The Fund is exposed to market risk based on the
amount, if any, that the market value of the stock exceeds the
market value of the securities in the segregated account.
(j) Reclassification--Generally accepted accounting principles
require that differences between accumulated net realized capital
losses for financial reporting and tax purposes, if permanent, be
reclassified to paid-in capital. These classifications have no effect
on net assets or net asset values per share.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement
with Fund Asset Management, L.P. ("FAM"). The general partner
of FAM is Princeton Services, Inc. ("PSI"), an indirect wholly-
owned subsidiary of Merrill Lynch & Co. ("ML & Co."), which is the
limited partner. The Fund has entered into a Distribution Agree-
ment and Distribution Plans with Merrill Lynch Funds Distributor,
Inc. ("MLFD" or "Distributor"), a wholly-owned subsidiary of
ML Group, Inc.
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 expense 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.
Pursuant to the distribution plans ("the Distribution Plans") adopted
by the Fund in accordance with Rule 12b-1 under the Investment
Company Act of 1940, the Fund pays the Distributor ongoing account
maintenance and distribution fees. The fees are accrued daily and
paid monthly at annual rates based upon the average daily net assets
of the shares as follows:
Account Maintenance Fee Distribution Fee
Class B 0.25% 0.50%
Class C 0.25% 0.55%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
70
<PAGE>
also provides account maintenance and distribution services to the
Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services
to Class B, Class C and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing share-
holder and distribution-related services to Class B and Class C
shareholders.
For the year ended December 31, 1994, MLFD earned underwriting
discounts and MLPF&S earned dealer concessions on sales of the
Fund's Class A and Class D Shares as follows:
MLFD MLPF&S
Class A $ 24,292 $ 245,317
Class D $ 902 $ 6,720
MLPF&S received contingent deferred sales charges of $6,980,132
relating to transactions in Class B Shares of beneficial interest,
$64 relating to transactions in Class C Shares of beneficial interest,
and $59,092 in commissions on the execution of portfolio security
transactions for the Fund for the year ended December 31, 1994.
During the period June 20, 1994 to December 31, 1994, the Merrill
Lynch Security Pricing Service, an affiliate of MLPF&S, provided
security price quotations to the Fund.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLPF&S, MLFD, FAM, PSI, FDS, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended December 31, 1994 were $2,313,190,156 and
$2,707,710,251, respectively.
Net realized and unrealized gains (losses) as of December 31, 1994
were as follows:
Realized Unrealized
Gains Gains
(Losses) (Losses)
Investments:
Long-term $ (59,712,620) $(128,916,249)
Short-term (3,984) --
Short sales (3,089,687) 1,488,884
Financial futures contracts 68,316 (10,156)
Options purchased (125,276) --
Options written 236,800 --
------------- -------------
Total investments (62,626,451) (127,437,521)
------------- -------------
Currency Transactions:
Options written 357,733 (84,908)
Options purchased (691,934) (224,886)
Foreign currency transactions (2,044,831) (3,396)
Financial futures contracts (23,525) --
Forward foreign exchange contracts (46,642,491) (4,835,455)
------------- -------------
Total currency transactions (44,955,386) (5,148,645)
------------- -------------
Total $(107,581,837) $(132,586,166)
============= =============
Transactions in call options written for the year ended December 31,
1994 were as follows:
Nominal Value
Covered by Premiums
Call Options Written Written Options Received
Outstanding call options written,
beginning of year $ 29,510,000 $ 234,902
Options written 355,858,807 2,495,368
Options repurchased (23,520,000) (358,400)
Options expired (128,143,807) (1,525,074)
Options exercised (29,510,000) (234,902)
------------- -------------
Outstanding call options written,
end of year $ 206,195,000 $ 611,894
============= =============
Transactions in put options written for the year ended December 31,
1994 were as follows:
Nominal Value
Covered by Premiums
Put Options Written Written Options Received
Outstanding put options written,
beginning of year -- --
Options written $ 57,266,896 $ 311,209
Options repurchased (13,000,000) (91,155)
Options exercised (44,266,896) (220,054)
------------- -------------
Outstanding put options written,
end of year $ -- $ --
============= =============
As of December 31, 1994, net unrealized depreciation for Federal
income tax purposes aggregated $129,918,478, of which $7,025,871
related to appreciated securities and $136,944,349 related to depreci-
ated securities. The aggregate cost of investments at December 31,
1994 for Federal income tax purposes was $1,913,494,575.
71
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
4. Capital Share Transactions:
Net increase (decrease) in net assets derived from capital share
transactions was $(487,938,280) and $430,150,076 for the years
ended December 31, 1994 and December 31, 1993, respectively.
Transactions in shares of capital for each class were as follows:
Class A Shares for the Year Ended Dollar
December 31, 1994 Shares Amount
Shares sold 2,498,395 $ 22,105,372
Shares issued to shareholders in
reinvestment of dividends 1,047,864 9,035,061
------------- -------------
Total issued 3,546,259 31,140,433
Shares redeemed (15,962,356) (138,247,016)
------------- -------------
Net decrease (12,416,097) $(107,106,583)
============= =============
Class A Shares for the Year Ended Dollar
December 31, 1994 Shares Amount
Shares sold 9,678,184 $ 88,499,395
Shares issued to shareholders in
reinvestment of dividends &
distributions 1,510,091 13,811,988
------------- -------------
Total issued 11,188,275 102,311,383
Shares redeemed (12,293,992) (112,364,468)
------------- -------------
Net decrease (1,105,717) $ (10,053,085)
============= =============
Class B Shares for the Year Ended Dollar
December 31, 1994 Shares Amount
Shares sold 22,383,630 $ 198,076,750
Shares issued to shareholders in
reinvestment of dividends 7,257,720 62,563,579
------------- -------------
Total issued 29,641,350 260,640,329
Conversion of shares (10,524) (87,484)
Shares redeemed (74,723,963) (644,026,143)
------------- -------------
Net decrease (45,093,137) $(383,473,298)
============= =============
Class B Shares for the Year Ended Dollar
December 31, 1993 Shares Amount
Shares sold 72,899,782 $ 666,438,413
Shares issued to shareholders in
reinvestment of dividends &
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 C Shares for the Period Dollar
October 21, 1994++ to December 31, 1994 Shares Amount
Shares sold 149,131 $ 1,233,348
Shares issued to shareholders in
reinvestment of dividends 710 5,824
------------- -------------
Total issued 149,841 1,239,172
Shares redeemed (2,720) (22,392)
------------- -------------
Net increase 147,121 $ 1,216,780
============= =============
[FN]
++Commencement of Operations.
Class D Shares for the Period Dollar
October 21, 1994++ to December 31, 1994 Shares Amount
Shares sold 177,383 $ 1,470,555
Shares issued to shareholders in
reinvestment of dividends 827 6,792
Conversion of shares 10,511 87,484
------------- -------------
Total issued 188,721 1,564,831
Shares redeemed (16,769) (140,010)
------------- -------------
Net increase 171,952 $ 1,424,821
============= =============
[FN]
++Commencement of Operations.
5. Capital Loss Carryforward:
At December 31, 1994, the Fund had a net capital loss carryforward
of approximately $53,153,000, all of which expires in 2002.
This amount will be available to offset like amounts of any
future taxable gains.
72
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75
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TABLE OF CONTENTS
PAGE
----
Investment Objective and Policies..... 2
Hedging Techniques.................. 2
Risk Factors in Options and Futures
Transactions.......................... 4
Forward Foreign Exchange
Transactions.......................... 5
Other Investment Policies and
Practices............................. 6
Investment Restrictions............. 7
Management of the Fund................ 10
Directors and Officers.............. 10
Compensation of Directors........... 12
Management and Advisory
Arrangements...................... 12
Purchase of Shares.................... 14
Initial Sales Charge Alternatives--
Class A and Class D Shares........ 14
Reduced Initial Sales Charges....... 16
Distribution Plans.................. 19
Limitations on the Payment of
Deferred Sales Charges............ 20
Redemption of Shares.................. 21
Deferred Sales Charge--Class B and
Class C Shares........................ 21
Portfolio Transactions................ 22
Determination of Net Asset Value...... 24
Shareholder Services.................. 25
Investment Account.................. 25
Automatic Investment Plans.......... 26
Automatic Reinvestment of Dividends
and Capital Gains Distributions....... 26
Systematic Withdrawal Plans--Class A
and Class D Shares.................... 26
Retirement Plans.................... 27
Exchange Privilege.................. 28
Dividends, Distributions and Taxes.... 42
Dividends and Distributions......... 42
Taxes............................... 43
Tax Treatment of Options, Futures
and Forward Foreign Exchange
Transactions...................... 45
Special Rules for Certain Foreign
Currency Transactions............. 45
Performance Data...................... 47
General Information................... 49
Description of Shares............... 49
Computation of Offering Price Per
Share............................... 51
Independent Auditors................ 51
Custodian........................... 51
Transfer Agent...................... 51
Legal Counsel....................... 52
Reports to Shareholders............. 52
Additional Information.............. 52
Independent Auditors' Report.......... 53
Financial Statements.................. 54
Code #16103-0495
[LOGO]
Merrill Lynch
World Income
Fund, Inc.
ART
STATEMENT OF
ADDITIONAL
INFORMATION
April 27, 1995
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
MERRILL LYNCH WORLD INCOME FUND, INC.
SUPPLEMENT DATED APRIL 27, 1995 TO
PROSPECTUS DATED APRIL 27, 1995
(FOR USE IN THE STATE OF WASHINGTON)
THIS FUND IS CONSIDERED TO BE
HIGHLY SPECULATIVE.
The Fund may invest primarily in lower rated bonds, commonly known as "junk
bonds." Investments of this type are subject to greater risk of loss of
principal and interest than are higher rated bonds. Purchasers should carefully
assess the risks associated with an investment in this Fund.
Code #16102-0495WA
<PAGE>
MERRILL LYNCH WORLD INCOME FUND, INC.
SUPPLEMENT DATED APRIL 27, 1995 TO
PROSPECTUS DATED APRIL 27, 1995
(FOR USE IN ARIZONA)
THE ARIZONA CORPORATION COMMISSION REQUESTED
THE FOLLOWING ADDITIONAL DISCLOSURE:
THESE ARE SPECULATIVE SECURITIES.
Code #16102-0495AZ
<PAGE>
MERRILL LYNCH WORLD INCOME FUND, INC.
SUPPLEMENT DATED APRIL 27, 1995 to
PROSPECTUS DATED APRIL 27, 1995
(FOR USE IN THE STATE OF OHIO)
Notwithstanding the fact that the Board may determine that a Rule 144A
security is liquid and not subject to the 15% restriction on illiquid
securities, the State of Ohio does not recognize Rule 144A securities as
securities which are free of restrictions as to sale. Consequently, to the
extent required by Ohio law, the Fund will not invest more than 50% of its
assets in securities of issuers which are restricted as to disposition,
including Rule 144A securities, or in securities of issuers having a record,
together with predecessors, of less than three years of continuous operation.
Code #16102-0495OH
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission File due to ASCII-incompatibility and cross-
references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graphic paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
