<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 26, 1996
SECURITIES ACT FILE NO. 33-42681
INVESTMENT COMPANY ACT FILE NO. 811-5603
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [_]
[X]
POST-EFFECTIVE AMENDMENT NO. 6
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
[X]
AMENDMENT NO. 7
(Check appropriate box or boxes)
----------------
MERRILL LYNCH WORLD INCOME FUND, INC.
(Exact name of registrant as specified in charter)
800 SCUDDERS MILL ROAD 08536
(Zip Code)
PLAINSBORO, NEW JERSEY
(Address of Principal Executive
Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH WORLD INCOME FUND, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(Name and address of agent for service)
----------------
COPIES TO:
COUNSEL FOR THE FUND: PHILIP L. KIRSTEIN, ESQ.
BROWN & WOOD FUND ASSET MANAGEMENT
ONE WORLD TRADE CENTER P.O. BOX 9011
NEW YORK, NEW YORK 10048-0557 PRINCETON, NEW JERSEY 08543-9011
ATTENTION: THOMAS R. SMITH, JR., ESQ.
BRIAN M. KAPLOWITZ, ESQ.
----------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX):
[X]immediately upon filing pursuant to [_]on (date) pursuant to paragraph
paragraph (b) (a)(1)
[_]on (date) pursuant to paragraph (b) [_]75 days after filing pursuant to
paragraph (a)(2)
[_]60 days after filing pursuant to [_]on (date) pursuant to paragraph
paragraph (a)(1) (a)(2) of rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[_this]post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS SHARES OF COMMON
STOCK UNDER THE SECURITIES ACT OF 1933 PURSUANT TO RULE 24f-2 UNDER THE
INVESTMENT COMPANY ACT OF 1940. THE NOTICE REQUIRED BY SUCH RULE FOR THE
REGISTRANT'S MOST RECENT FISCAL YEAR WAS FILED ON FEBRUARY 20, 1996.
----------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
AMOUNT OF MAXIMUM AGGREGATE AMOUNT OF
TITLE OF SECURITIES SHARES BEING OFFERING PRICE OFFERING REGISTRATION
BEING REGISTERED REGISTERED PER UNIT PRICE* FEE
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Common Stock
(par value $0.10 per
share)................... 65,882,840 $8.92 $289,998 $100
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
*(1) The calculation of the maximum aggregate offering price is made pursuant
to Rule 24e-2 under the Investment Company Act of 1940.
(2) The total amount of securities redeemed or repurchased during
Registrant's previous fiscal year was 65,850,329 Shares of Common Stock.
(3) None of the Shares described in (2) above have been used for reduction
pursuant to Rule 24e-2(a) or Rule 24f-2(c) under the Investment Company
Act of 1940 in previous filings during Registrant's current fiscal year.
(4) 65,850,329 of the Shares redeemed during Registrant's previous fiscal
year are being used for the reduction of the registration fee in this
amendment to the Registration Statement.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH WORLD INCOME FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A
ITEM NO. LOCATION
-------- --------
<C> <S> <C>
PART A
Item 1. Cover Page............... Cover Page
Item 2. Synopsis................. Fee Table
Condensed Financial
Item 3. Information.............. Financial Highlights
Item 4. General Description of Investment Objective and Policies;
Registrant............... Additional Information
Item 5. Management of the Fund... Fee Table; Management of the Fund;
Inside Back Cover Page
Item 5A. Management's Discussion
of Fund Performance..... Not Applicable
Item 6. Capital Stock and Other Cover Page; Additional Information
Securities...............
Item 7. Purchase of Securities Cover Page; Fee Table; Merrill Lynch
Being Offered............ Select Pricing SM System; Purchase of
Shares; Shareholder Services;
Additional Information; Inside Back
Cover Page
Item 8. Redemption or Repurchase. Fee Table; Merrill Lynch Select
Pricing SM System; Purchase of Shares;
Redemption of Shares
Item 9. Pending Legal Not Applicable
Proceedings..............
PART B
Item 10. Cover Page............... Cover Page
Item 11. Table of Contents........ Back Cover Page
Item 12. General Information and General Information
History..................
Item 13. Investment Objective and Investment Objective and Policies
Policies.................
Item 14. Management of the Fund... Management of the Fund
Item 15. Control Persons and
Principal Holders of Management of the Fund; Additional
Securities.............. Information
Item 16. Investment Advisory and Management of the Fund; Purchase of
Other Services........... Shares; General Information
Item 17. Brokerage Allocation and Portfolio Transactions
Other Practices..........
Item 18. Capital Stock and Other General Information
Securities...............
Item 19. Purchase, Redemption and
Pricing of Securities Purchase of Shares; Redemption of
Being Offered........... Shares; Determination of Net Asset
Value; Shareholder Services
Item 20. Tax Status............... Dividends, Distributions and Taxes
Item 21. Underwriters............. Purchase of Shares
Item 22. Calculation of Performance Data
Performance Data.........
Item 23. Financial Statements..... Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
PROSPECTUS
APRIL 26, 1996
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 Pricing SM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances. See
"Merrill Lynch Select Pricing SM System" on page 4.
----------------
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081 [(609)
282-2800], or from securities dealers 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 26, 1996 (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 TRANSAC-
TION 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 4.0% during the first
is lower)........... None(d) year, 1.0% for None(d)
decreasing 1.0% annually one year
thereafter to 0.0% after
the
fourth year
Exchange Fee......... None None None None
ANNUAL FUND OPERATING
EXPENSES (AS A PER-
CENTAGE OF AVERAGE
NET ASSETS):
Investment Advisory
Fees(e)............. 0.60% 0.60% 0.60% 0.60%
12b-1 Fees(f):
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(g)............ 0.11% 0.12% 0.16% 0.10%
Other................ 0.06% 0.06% 0.06% 0.06%
----- ----- ----- -----
Total Other Ex- 0.20% 0.21% 0.25% 0.19%
penses............. ----- ----- ----- -----
Total Fund Operating 0.80% 1.56% 1.65% 1.04%
Expenses............ ===== ===== ===== =====
</TABLE>
- --------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and investment programs.
See "Purchase of Shares--Initial Sales Charge Alternatives--Class A and
Class D Shares"--page 29.
(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 31.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of
Class A shares by certain retirement plans in connection with certain
investment programs. Class A and 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 29.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more 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) See "Management of the Fund--Management and Advisory Arrangements"--page
24.
(f) See "Purchase of Shares--Distribution Plans"--page 34.
(g) See "Management of the Fund--Transfer Agency Services"--page 25.
2
<PAGE>
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID
FOR THE PERIOD OF:
-------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses
on a $1,000 investment including the maximum
$40 initial sales charge (Class A and Class D
shares only) and assuming (1) the Total Fund
Operating Expenses for each class set forth
above, (2) a 5% annual return throughout the
periods and (3) redemption at the end of the
period:
Class A..................................... $48 $65 $83 $135
Class B..................................... $56 $69 $85 $186
Class C..................................... $27 $52 $90 $195
Class D..................................... $50 $72 $95 $162
An investor would pay the following expenses
on the same $1,000 investment assuming no re-
demption at the end of the period:
Class A..................................... $48 $65 $83 $135
Class B..................................... $16 $49 $85 $186
Class C..................................... $17 $52 $90 $195
Class D..................................... $50 $72 $95 $162
</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 PRICING SM SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing SM System. The shares of each class may be purchased at a price equal
to the next determined net asset value per share subject to the sales charges
and ongoing fee arrangements described below. Shares of Class A and Class D
are sold to investors choosing the initial sales charge alternatives, and
shares of Class B and Class C are sold to investors choosing the deferred
sales charge alternatives. The Merrill Lynch Select Pricing SM System is used
by more than 50 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 Pricing SM System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select Pricing SM System that the investor
believes is most beneficial under his particular circumstances. More detailed
information as to each class of shares is set forth under "Purchase of
Shares".
4
<PAGE>
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(/1/) FEE FEE CONVERSION FEATURE
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 4.00% initial No No No
sales charge(/2/)(/3/)
- ------------------------------------------------------------------------------------
B CDSC for a period of 4 years, 0.25% 0.50% B shares convert to
at a rate of 4.0% during the D shares automatically
first year, decreasing 1.0% after approximately
annually to 0.0% ten years(/4/)
- ------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.55% No
- ------------------------------------------------------------------------------------
D Maximum 4.00% initial 0.25% No No
sales charge(/3/)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. 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, and waived for purchases of
Class A shares by certain retirement plans in connection with certain
investment programs. Class A and Class D share purchases of $1,000,000 or
more may not be subject to an initial sales charge but instead will be
subject to a 1.0% CDSC if redeemed within one year. See "Class A" and
"Class D" below.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans was modified. Also, Class B shares of certain other MLAM-
advised mutual funds into which exchanges may be made have 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, and waived for purchases
of Class A shares by certain retirement plans in connection with
certain investment programs. Purchases of $1,000,000 or more may not
be subject to an initial sales charge but if the initial sales charge
is waived, such purchases may be subject to a 1.0% CDSC if the shares
are redeemed within one year after purchase. 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
5
<PAGE>
assets attributable to the Class B shares, as well as a CDSC if they are
redeemed within four years of purchase. Approximately ten years after
issuance, Class B shares will convert automatically into Class D shares
of the Fund, which are subject to an account maintenance fee but no
distribution fee; Class B shares of certain other MLAM-advised mutual
funds into which exchanges may be made convert into Class D shares
automatically after approximately eight years. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual
fund, the conversion period applicable to the Class B shares acquired in
the exchange will apply, 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 the conversion and holding periods for certain
retirement plans, is modified as described under "Purchase of Shares--
Deferred Sales Charge Alternatives--Class B and Class C Shares--
Conversion of Class B Shares to Class D Shares".
Class C: Class C shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.55% 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 may 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, except that there is no waiver
for purchases by retirement plans in connection with certain
investment programs. Class D shares also will be issued upon
conversion of Class D shares as described above under "Class B". See
"Purchase of Shares--Initial Sales Charge Alternatives--Class A and
Class D Shares".
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing SM System that the investor believes is most beneficial under his
particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class
A shares rather than Class D shares
6
<PAGE>
because there is an account maintenance fee imposed on Class D shares.
Investors qualifying for significantly reduced initial sales charges may find
the initial sales charge alternative particularly attractive because similar
sales charge reductions are not available with respect to the 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. Audited financial statements for the year
ended December 31, 1995 and the independent auditors' report thereon are
included in the Statement of Additional Information. Further information about
the performance of the Fund is contained in the Fund's most recent annual
report to shareholders which may be obtained, without charge, by calling or by
writing the Fund at the telephone number or address on the front cover of this
Prospectus.
The following per share data and ratios have been derived from information
provided in the Fund's audited Financial Statements.
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------------
FOR THE FOR THE
PERIOD PERIOD
FOR THE YEAR ENDED SEPTEMBER 1, FOR THE YEAR ENDED SEPTEMBER 29,
DECEMBER 31, 1992 TO AUGUST 31, 1988+ TO
----------------------------- DECEMBER 31, ---------------------------- AUGUST 31,
1995 1994## 1993 1992 1992 1991* 1990* 1989*
-------- -------- -------- ------------ -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset
Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of pe-
riod............................. $ 8.20 $ 9.28 $ 8.85 $ 9.34 $ 9.07 $ 9.48 $ 9.32 $ 9.35
-------- -------- -------- -------- -------- -------- -------- --------
Investment income--net.......... .72 .72 .75 .29 .99 1.12 1.23 1.03
Realized and unrealized gain
(loss) on investments and for-
eign currency transactions--net. .49 (1.09) .46 (.41) .40 (.16) .15 (.12)
-------- -------- -------- -------- -------- -------- -------- --------
Total from investment operations. 1.21 (.37) 1.21 (.12) 1.39 .96 1.38 .91
-------- -------- -------- -------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net.......... (.56) (.45) (.58) (.35) (1.12) (1.37) (1.17) (.94)
Realized gain on investments--
net............................. -- -- (.03) (.02) -- -- (.05) --
Return of capital--net.......... (.16) (.26) (.17) -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total dividends and distribu-
tions............................ (.72) (.71) (.78) (.37) (1.12) (1.37) (1.22) (.94)
-------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of period... $ 8.69 $ 8.20 $ 9.28 $ 8.85 $ 9.34 $ 9.07 $ 9.48 $ 9.32
======== ======== ======== ======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN:++
Based on net asset value per
share........................... 15.35% (4.05%) 14.12% (1.26%)# 16.09% 11.50% 16.48% 9.86%#
======== ======== ======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses........................ .80% .77% .78% .76%** .88% .85% .86% .81%**
======== ======== ======== ======== ======== ======== ======== ========
Investment income--net.......... 8.54% 8.17% 8.22% 8.09%** 11.16% 12.38% 16.27% 10.87%**
======== ======== ======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)...................... $260,806 $311,181 $467,625 $455,672 $526,631 $292,709 $299,700 $296,247
======== ======== ======== ======== ======== ======== ======== ========
Portfolio turnover.............. 116.00% 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 (CONCLUDED)
<TABLE>
<CAPTION>
CLASS B CLASS C
---------------------------------------------------------------- ---------------------
FOR THE FOR THE FOR THE
PERIOD PERIOD FOR THE PERIOD
FOR THE YEAR ENDED SEPTEMBER 1, NOVEMBER 18, YEAR OCTOBER 21,
DECEMBER 31, 1992 TO 1991+ TO ENDED 1994+ TO
----------------------------------- DECEMBER 31, AUGUST 31, DEC. 31, DECEMBER 31,
1995 1994## 1993 1992 1992 1995 1994##
---------- ---------- ---------- ------------ ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET
VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value,
beginning of pe-
riod............. $ 8.19 $ 9.28 $ 8.85 $ 9.33 $ 9.26 $ 8.19 $ 8.42
---------- ---------- ---------- ---------- ---------- ------ ------
Investment in-
come--net....... .65 .65 .70 .27 .77 .64 .10
Realized and
unrealized gain
(loss) on in-
vestments and
foreign currency
transactions--
net............. .50 (1.10) .44 (.40) -- .49 (.20)
---------- ---------- ---------- ---------- ---------- ------ ------
Total from in-
vestment opera-
tions............ 1.15 (.45) 1.14 (.13) .77 1.13 (.10)
---------- ---------- ---------- ---------- ---------- ------ ------
Less dividends
and distribu-
tions:
Investment in-
come--net....... (.51) (.40) (.53) (.33) (.70) (.50) (.08)
Realized gain on
investments--
net............. -- -- (.03) (.02) -- -- --
Return of capi-
tal--net........ (.14) (.24) (.15) -- -- (.14) (.05)
---------- ---------- ---------- ---------- ---------- ------ ------
Total dividends
and distribu-
tions............ (.65) (.64) (.71) (.35) (.70) (.64) (.13)
---------- ---------- ---------- ---------- ---------- ------ ------
Net asset value,
end of period.... $ 8.69 $ 8.19 $ 9.28 $ 8.85 $ 9.33 $ 8.68 $ 8.19
========== ========== ========== ========== ========== ====== ======
TOTAL INVESTMENT
RETURN:++
Based on net as-
set value per
share........... 14.61% (4.90%) 13.27% (1.42%)# 8.61%# 14.38% (1.20%)#
========== ========== ========== ========== ========== ====== ======
RATIOS TO AVERAGE
NET ASSETS:
Expenses, ex-
cluding account
maintenance and
distribution
fees............ .81% .79% .80% .78%** .88%** .85% .84%**
========== ========== ========== ========== ========== ====== ======
Expenses........ 1.56% 1.54% 1.55% 1.53%** 1.63%** 1.65% 1.64%**
========== ========== ========== ========== ========== ====== ======
Investment in-
come--net....... 7.77% 7.41% 7.42% 7.08%** 8.02%** 7.65% 8.00%**
========== ========== ========== ========== ========== ====== ======
SUPPLEMENTAL DA-
TA:
Net assets, end
of period
(in thousands).. $1,241,896 $1,490,507 $2,106,120 $1,582,270 $1,514,406 $5,406 $1,204
========== ========== ========== ========== ========== ====== ======
Portfolio turn-
over............ 116.00% 115.95% 182.88% 68.42% 76.18% 116.00% 115.95%
========== ========== ========== ========== ========== ====== ======
<CAPTION>
CLASS D
---------------------
FOR THE
FOR THE PERIOD
YEAR OCTOBER 21,
ENDED 1994+ TO
DEC. 31, DECEMBER 31,
1995 1994##
-------- ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSET
VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value,
beginning of pe-
riod............. $ 8.20 $ 8.43
-------- ------------
Investment in-
come--net....... .70 .11
Realized and
unrealized gain
(loss) on in-
vestments and
foreign currency
transactions--
net............. .49 (.20)
-------- ------------
Total from in-
vestment opera-
tions............ 1.19 (.09)
-------- ------------
Less dividends
and distribu-
tions:
Investment in-
come--net....... (.55) (.09)
Realized gain on
investments--
net............. -- --
Return of capi-
tal--net........ (.15) (.05)
-------- ------------
Total dividends
and distribu-
tions............ (.70) (.14)
-------- ------------
Net asset value,
end of period.... $ 8.69 $ 8.20
======== ============
TOTAL INVESTMENT
RETURN:++
Based on net as-
set value per
share........... 15.06% (1.09%)#
======== ============
RATIOS TO AVERAGE
NET ASSETS:
Expenses, ex-
cluding account
maintenance and
distribution
fees............ .79% .79%**
======== ============
Expenses........ 1.04% 1.04%**
======== ============
Investment in-
come--net....... 8.23% 8.60%**
======== ============
SUPPLEMENTAL DA-
TA:
Net assets, end
of period
(in thousands).. $6,320 $1,410
======== ============
Portfolio turn-
over............ 116.00% 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 government supervision and regulation of exchanges,
financial institutions and corporate issuers in foreign countries than there
is in the United States.
10
<PAGE>
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
Ratings Group ("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 investments 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. The Fund's investments
will be limited, however, in order to qualify for the special tax treatment
afforded regulated investment companies under the Internal Revenue Code of
1986, as amended (the "Code"). 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. 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.
12
<PAGE>
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.
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
13
<PAGE>
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/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
14
<PAGE>
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 table below shows the average monthly dollar-weighted market value, by
Moody's rating category, of all bonds held by the Fund during the fiscal year
ended December 31, 1995:
<TABLE>
<CAPTION>
% NET
RATING ASSETS
------ ------
<S> <C>
Aaa................................................................ 0.24
Aa................................................................. 0.14
A.................................................................. 0.65
Baa................................................................ 2.54
Ba................................................................. 11.26
B.................................................................. 26.68
Caa................................................................ 0.86
C.................................................................. 0.10
Not Rated*......................................................... 4.72
-----
47.19%
=====
</TABLE>
- --------
* Bonds which are not rated by Moody's. Such securities may be rated by
nationally recognized statistical rating organizations other than Moody's,
or may not be rated by any of such organizations. With respect to the
percentage of the Fund's assets invested in such securities, the Fund's
Investment Adviser believes that 0.30% are of comparable quality to
obligations rated A, 1.59% are of comparable quality to obligations rated
Baa, 0.68% are of comparable quality to obligations rated Ba, 2.06% are of
comparable quality to obligations rated B, and 0.09% are of comparable
quality to obligations rated C. This determination is based on the
Investment Adviser's own internal evaluation and does not necessarily
reflect how such securities would be rated by Moody's if it were to rate the
securities.
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 for the fiscal year ended
December 31, 1995; 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. The total
return on the security
16
<PAGE>
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.
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
17
<PAGE>
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.
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
18
<PAGE>
payables of the Fund accruing in connection with the purchase and sale of its
portfolio securities, the sale and redemption of shares of the Fund or the
payment of dividends and distributions by the Fund. Position hedging is the
purchase or sale of one forward foreign currency for another currency with
respect to portfolio security positions denominated or quoted in such foreign
currency to offset the effect of an anticipated substantial appreciation or
depreciation, respectively, in the value of such currency relative to the U.S.
dollar. In this situation, the Fund also may, for example, enter into a
forward contract to sell or purchase a different foreign currency for a fixed
U.S. dollar amount where it is believed that the U.S. dollar value of the
currency to be sold or bought pursuant to the forward contract will fall or
rise, as the case may be, whenever there is a decline or increase,
respectively, in the U.S. dollar value of the currency in which portfolio
securities of the Fund are denominated (this practice being referred to as a
"cross-hedge").
The Fund will not speculate in forward foreign exchange. Hedging against a
decline in the value of a currency does not eliminate fluctuations in the
prices of portfolio securities or prevent losses if the prices of such
securities decline. Such transactions also preclude the opportunity for gain
if the value of the hedged currency should rise. Moreover, it may not be
possible for the Fund to hedge against a devaluation that is so generally
anticipated that the Fund is not able to contract to sell the currency at a
price above the devaluation level it anticipates.
The Fund also is authorized to purchase or sell listed or OTC foreign
currency options, foreign currency futures and related options on foreign
currency futures as a short or long hedge against possible variations in
foreign exchange rates. Such transactions may be effected with respect to
hedges on non-U.S. dollar denominated securities (including securities
denominated in the ECU) owned by the Fund, sold by the Fund but not yet
delivered, or committed or anticipated to be purchased by the Fund. As an
illustration, the Fund may use such techniques to hedge the stated value in
United States dollars of an investment in a Japanese yen-denominated security.
In such circumstances, for example, the Fund may purchase a foreign currency
put option enabling it to sell a specified amount of yen for dollars at a
specified price by a future date. To the extent the hedge is successful, a
loss in the value of the dollar relative to the yen will tend to be offset by
an increase in the value of the put option. To offset, in whole or in part,
the cost of acquiring such a put option, the Fund also may sell a call option
which, if exercised, requires it to sell a specified amount of yen for dollars
at a specified price by a future date (a technique called a "straddle"). By
selling such call option in this illustration, the Fund gives up on the
opportunity to profit without limit from increases in the relative value of
the yen to the dollar.
Certain differences exist between these foreign currency hedging
instruments. Foreign currency options provide the holder thereof the right to
buy or to sell a currency at a fixed price on a future date. Listed options
are third-party contracts (i.e., performance of the parties' obligations is
guaranteed by an exchange or clearing corporation) which are issued by a
clearing corporation, traded on an exchange and have standardized strike
prices and expiration dates. OTC options are two-party contracts and have
negotiated strike prices and 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
19
<PAGE>
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.
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
20
<PAGE>
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 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
21
<PAGE>
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 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
22
<PAGE>
period of this loan, the Fund receives the income on the loaned securities and
either receives the income on the collateral or other compensation (i.e.,
negotiated loan premium or fee) for entering into the loan and thereby
increases its yield. In the event that the borrower defaults on its obligation
to return borrowed securities, because of insolvency or otherwise, the Fund
could experience delays and costs in gaining access to the collateral and
could suffer a loss to the extent that the value of the collateral falls below
the market value of the borrowed securities.
Non-Diversified Status. The Fund is classified as non-diversified within the
meaning of the Investment Company Act, which means that the Fund is not
limited by such Act in the proportion of its assets that it may invest in
securities of a single issuer. However, the Fund's investments will be limited
so as to qualify as a "regulated investment company" for purposes of the Code.
See "Taxes". To qualify, among other requirements, the Fund will limit its
investments so that, at the close of each quarter of the taxable year, (i) not
more than 25% of the market value of the Fund's total assets will be invested
in the securities of a single issuer (other than U.S. Government securities),
and (ii) with respect to 50% of the market value of its total assets, not more
than 5% of the market value of its total assets will be invested in the
securities of a single issuer (other than U.S. Government securities), and the
Fund will not own more than 10% of the outstanding voting securities of a
single issuer. A fund which elects to be classified as "diversified" under the
Investment Company Act must satisfy the foregoing 5% and 10% requirements with
respect to 75% of its total assets. To the extent that the Fund assumes large
positions in the securities of a small number of issuers, the Fund's yield may
fluctuate to a greater extent than that of a diversified company as a result
of changes in the financial condition or in the market's assessment of the
issuers.
INVESTMENT RESTRICTIONS
The Fund has adopted a number of restrictions and policies relating to the
investment of its assets and its activities, 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.
23
<PAGE>
MANAGEMENT OF THE FUND
DIRECTORS
The Directors of the Fund consist of six individuals, five of whom are not
"interested persons" of the Fund as defined in the Investment Company Act. The
Directors are responsible for the overall supervision of the operations of the
Fund and perform the various duties imposed on the directors of investment
companies by the Investment Company Act.
The Directors are:
Arthur Zeikel*--President of FAM and MLAM; President and Director of
Princeton Services, Inc.; Executive Vice President of Merrill Lynch & Co.,
Inc. ("ML & Co."); and Director of the Distributor.
James H. Bodurtha--Chairman and Chief Executive Officer, China Enterprise
Management Corporation.
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, 1996, the Investment Adviser and MLAM had a total of approximately
$207.7 billion in investment company and other portfolio assets under
management, including accounts of certain affiliates of MLAM.
Subject to the direction of the Directors, the Investment Adviser is
responsible for the actual management of the Fund's portfolio and constantly
reviews the Fund's holdings in light of its own research analysis and that
from other relevant sources. The responsibilities for making decisions to buy,
sell or hold a particular security rest with the Investment Adviser. The
Investment Adviser performs certain of the other administrative services and
provides all the office space, facilities, equipment and necessary personnel
for management of the Fund.
Vincent T. Lathbury, III and Robert Parish are the Portfolio Managers for
the Fund. Vincent T. Lathbury, III has been Portfolio Manager and Vice
President of the Investment Adviser and MLAM since 1982.
24
<PAGE>
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,
1995, the total fee paid by the Fund to the Investment Adviser was $9,774,596
(based on average net assets of approximately $1.6 billion). At March 31,
1996, the net assets of the Fund aggregated approximately $1.4 billion. At
this asset level, the annual management fee would aggregate approximately $8.7
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, 1995, the Fund reimbursed the
Investment Adviser $150,832 for accounting services. For the fiscal year ended
December 31, 1995, the ratio of total expenses, net of account maintenance and
distribution fees, to average net assets was 0.80% for the Class A shares,
1.56% for the Class B shares, 1.65% for Class C shares and 1.04% for Class D
shares.
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 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
Merrill Lynch 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
25
<PAGE>
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, 1995, the Fund paid the Transfer Agent a total fee of
$2,053,764 pursuant to the Transfer Agency Agreement for providing Transfer
Agency services. At March 31, 1996, the Fund had 20,270 Class A shareholder
accounts, 70,282 Class B shareholder accounts, 537 Class C shareholder
accounts and 504 Class D shareholder accounts. At this level of accounts, the
annual fee payable to the Transfer Agent would aggregate approximately $1.2
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 Pricing SM
System, as described below. The applicable offering price for purchase orders
is based upon the net asset value of the Fund next determined after receipt of
the purchase orders by the Distributor. As to purchase orders received by
securities dealers prior to the close of business on the New York Stock
Exchange (generally 4:00 p.m., New York time), which includes orders received
after the close of business on the previous day, the applicable offering price
will be based on the net asset value determined as of 15 minutes after the
close of business on the 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 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
Pricing SM System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. Shares of Class A and Class D are
sold to investors choosing the initial sales charge alternatives and shares of
Class B and Class C are sold to investors choosing the deferred sales charge
alternatives. Investors should
26
<PAGE>
determine whether under their particular circumstances it is more advantageous
to incur an initial sales charge or to have the entire initial purchase price
invested in the Fund with the investment thereafter being subject to a CDSC
and ongoing distribution fees. A discussion of the factors that investors
should consider in determining the method of purchasing shares under the
Merrill Lynch Select Pricing SM System is set forth under "Merrill Lynch
Select Pricing SM System" on page 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 Pricing SM System.
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(/1/) FEE FEE FEATURE
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 4.00% initial sales No No No
charge(/2/)(/3/)
- -----------------------------------------------------------------------------------
B CDSC for a period of 4 years, 0.25% 0.50% B shares convert to D
at a rate of 4.0% during the shares automatically
first year, decreasing 1.0% after approximately
annually to 0.0% ten years(/4/)
- -----------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.55% No
- -----------------------------------------------------------------------------------
D Maximum 4.00% initial 0.25% No No
sales charge(/3/)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs are imposed if the redemption occurs within
the applicable CDSC time period. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed.
(2) Offered only to eligible investors. See "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 was 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.
28
<PAGE>
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible to
purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternative is the next determined net asset
value plus varying sales charges (i.e., sales loads), as set forth below.
<TABLE>
<CAPTION>
DISCOUNT TO
SALES CHARGE AS SELECTED DEALERS
SALES CHARGE AS PERCENTAGE* AS PERCENTAGE OF
PERCENTAGE OF OF THE NET THE OFFERING
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED PRICE
------------------ --------------- --------------- ----------------
<S> <C> <C> <C>
Less than $25,000............. 4.00% 4.17% 3.75%
$25,000 but less than $50,000. 3.75 3.90 3.50
$50,000 but less than
$100,000..................... 3.25 3.36 3.00
$100,000 but less than
$250,000..................... 2.50 2.56 2.25
$250,000 but less than
$1,000,000................... 1.50 1.52 1.25
$1,000,000 and over**......... .00 .00 .00
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more made on or after October 21, 1994 (the date Class D
shares were initially offered to the public), and on Class A purchases by
certain retirement plan investors in connection with certain investment
programs. If the sales charge is waived in connection with a purchase of
$1,000,000 or more, such purchases 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 year ended December 31,
1995, the Fund sold 1,983,935 Class A shares for aggregate net proceeds of
$16,765,904. The gross sales charges for the sale of Class A shares of the
Fund for the period were $48,702, of which $5,727 and $42,975 were received by
the Distributor and Merrill Lynch, respectively. For the fiscal year ended
December 31, 1995, 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. For the year ended December 31, 1995, the
Fund sold 768,363 Class D shares for aggregate net proceeds of $6,548,248. The
gross sales charges for the sale of Class D shares of the Fund for the period
were $78,194, of which $8,054 and $70,140 were received by the Distributor and
Merrill Lynch, respectively. For the year ended December 31, 1995, the
Distributor received no CDSCs with respect to redemptions within one year
after purchase of Class D shares purchased subject to front-end sales charge
waivers.
29
<PAGE>
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 TMASSM 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 in their initial
offerings who wish to reinvest the net proceeds from a sale of their closed-
end fund shares of common stock in shares of the Fund also may purchase Class
A shares of the Fund if certain conditions set forth in the Statement of
Additional Information are met. In addition, Class A shares of the Fund and
certain other MLAM-advised mutual funds are offered at net asset value to
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain
conditions set forth in the Statement of Additional Information are met, to
shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch
High Income Municipal Bond Fund, Inc., who wish to reinvest the net proceeds
from a sale of certain of their shares of common stock pursuant to a tender
offer conducted by such funds in shares of the Fund and certain other MLAM-
advised mutual funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges
also may be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under "Eligible Class A Investors".
Class A and Class D shares are offered at net asset value to certain
employer sponsored retirement or savings plans and to Employee Access
AccountsSM available through employers which provide such plans.
Class A and Class D shares are offered at net asset value to shareholders of
Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income
Municipal Bond Fund, Inc. who wish to reinvest in shares of the Fund the net
proceeds from a sale of certain of their shares of common stock pursuant to
tender offers conducted by those funds.
Class D shares are offered at net asset value, without 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.
30
<PAGE>
DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four year CDSC,
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".
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
31
<PAGE>
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, 1995, the Distributor received CDSCs of $3,902,431
with respect to redemptions of Class B shares, all of which was paid to
Merrill Lynch.
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B
CDSC AS A
PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT
PAYMENT MADE (SUBJECT TO CHANGE)
------------------- -------------------
<S> <C>
0-1...................................................... 4.0%
1-2...................................................... 3.0%
2-3...................................................... 2.0%
3-4...................................................... 1.0%
4 and thereafter......................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be determined in the manner that results in the lowest applicable rate
being charged. Therefore, it will be assumed that the redemption is first of
shares held until such time as the CDSC is no longer applicable or shares
acquired pursuant to reinvestment of dividends or distributions and then of
shares held longest during the four-year period. The charge will not be
applied to dollar amounts representing an increase in the net asset value
since the time of purchase. A transfer of shares from a shareholder's account
to another account will be assumed to be made in the same order as a
redemption.
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net
asset value per share is $12 and, during such time, the investor has acquired
10 additional shares through dividend reinvestment. If at such time the
investor makes his or her first 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).
In the event that Class B shares are exchanged by certain retirement plans
for Class A shares in connection with a transfer to the Merrill Lynch Mutual
Fund Adviser ("MFA") program, the time period that such Class A shares are
held in the MFA program will be included in determining the holding period of
Class B shares reacquired upon termination of participation in the MFA program
(see "Shareholder Services--Exchange Privilege").
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
32
<PAGE>
over into a Merrill Lynch or Merrill Lynch Trust Company custodied IRA and
held in such account at the time of redemption. The Class B CDSC also is
waived for any Class B shares which are purchased by a Merrill Lynch rollover
IRA that was funded by a rollover from a terminated 401(k) plan managed by the
MLAM Private Portfolio Group and held in such account at the time of
redemption. Additional information concerning the waiver of the Class B CDSC
is set forth in the Statement of Additional Information.
Contingent Deferred Sales Charges--Class C Shares. Class C shares which are
redeemed within one year after purchase may be subject to a 1.0% CDSC charged
as a percentage of the dollar amount subject thereto. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C CDSC will be
imposed on increases in net asset value above the initial purchase price. In
addition, no Class C CDSC will be assessed on shares derived from reinvestment
of dividends or capital gains distributions. For the year ended December 31,
1995, the Distributor received CDSCs of $4,150 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
33
<PAGE>
exchanges Class B shares with an eight-year Conversion Period for Class B
shares with a ten-year Conversion Period, or vice versa, the Conversion Period
applicable to the Class B shares acquired in the exchange will apply, and the
holding period for the shares exchanged will be tacked onto the holding period
for the shares acquired.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the
CDSC normally imposed on purchases of Class B shares ("Class B Retirement
Plans"). When the first share of any MLAM-advised mutual fund purchased by a
Class B Retirement Plan has been held for ten years (i.e., ten years from the
date the relationship between MLAM-advised mutual funds and the Class B
Retirement Plan was established), all Class B shares of all MLAM-advised
mutual funds held in that Class B Retirement Plan will be converted into Class
D shares of the appropriate funds. Subsequent to such conversion, that Class B
Retirement Plan will be sold Class D shares of the appropriate funds at net
asset value.
The Conversion Period also is modified for retirement plan investors which
participate in the MFA program. While participating in the MFA program, such
investors will hold Class A shares. If these Class A shares were acquired
though exchange of Class B shares (see "Shareholder Services--Exchange
Privilege"), then the holding period for such Class A shares will be "tacked"
to the holding period of the Class B shares originally held for purposes of
calculating the Conversion Period on Class B shares acquired upon termination
of participation in the MFA program.
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, 1995, the Fund paid the Distributor
$3,348,109 for the account maintenance fees and $6,696,218 for the
distribution fees pursuant to the Class B Distribution Plan. For the fiscal
34
<PAGE>
year ended December 31, 1995, the Fund paid the Distributor account
maintenance fees of $8,513 and distribution fees of $18,729 under the Class C
Distribution Plan. For the fiscal year ended December 31, 1995, the Fund paid
the Distributor account maintenance fees of $6,975 under the Class D
Distribution Plan. At March 31, 1996, the net assets of the Fund subject to
the Class B Distribution Plan aggregated approximately $1.2 billion. At this
asset level, the annual fee payable pursuant to the Class B Distribution Plan
would aggregate approximately $8.9 million. At March 31, 1996, the net assets
of the Fund subject to the Class C Distribution Plan aggregated approximately
$6.7 million. At this asset level, the annual fee payable pursuant to the
Class C Distribution Plan would aggregate $53,368. At March 31, 1996, the net
assets of the Fund subject to the Class D Distribution Plan aggregated
approximately $9.3 million. At this asset level, the annual fee payable
pursuant to the Class D Distribution Plan would aggregate $23,302.
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, 1995, 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 $18,822,000 (1.52%
of Class B net assets at that date). As of January 31, 1996, direct cash
revenues for the period since the commencement of operations as an open-end
investment company exceeded direct cash expenses by $27,192,372 (2.21% of
Class B net assets at that date). As of January 31, 1996, for Class C shares,
direct cash revenues for the period since October 21, 1994 (commencement of
public offering) exceeded direct cash expenses by $5,496 (0.09% 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 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".
35
<PAGE>
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, Merrill Lynch Financial Data Services,
Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289. Proper notice of
redemption in the case of shares deposited with the Transfer Agent may be
accomplished by a written letter requesting redemption. Proper notice of
redemption in the case of shares for which certificates have been issued may
be accomplished by a written letter as noted above accompanied by certificates
for the shares to be redeemed. Redemption requests delivered other than by
mail should be delivered to Merrill Lynch Financial Data Services, Inc., 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
36
<PAGE>
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 (generally 4:00 P.M., New York time)
on the day received 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.
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.
Alternatively, the reinstatement privilege may be exercised through the
investor's Merrill Lynch Financial Consultant within 30 days after the date
the request for redemption was accepted by the Transfer Agent or 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.
37
<PAGE>
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below which are designed to facilitate investment in shares of the
Fund. Full details as to each of such services, copies of the various plans
described below and instructions as to how to participate in the various
services or plans, or to change options with respect thereto, can be obtained
from the Fund by calling the telephone number on the cover page hereof or from
the Distributor or Merrill Lynch. Included in such services are the following:
Investment Account. Each shareholder whose account (an "Investment Account")
is maintained at the Transfer Agent will receive 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
automatically at the Transfer Agent. Shareholders considering transferring
their Class A or Class D shares from Merrill Lynch to another brokerage firm
or financial institution should be aware that, if the firm to which the Class
A or Class D shares are to be transferred will not take delivery of shares of
the Fund, a shareholder either must redeem the Class A or Class D shares
(paying any applicable CDSC) so that the cash proceeds can be transferred to
the account at the new firm or such shareholder must continue to maintain an
Investment Account at the Transfer Agent for those Class A or Class D shares.
Shareholders interested in transferring their Class B or Class C shares from
Merrill Lynch and who do not wish to have an Investment Account maintained for
such shares at the Transfer Agent may request their new brokerage firm to
maintain such shares in an account registered in the name of the brokerage
firm for the benefit of the shareholder at the Transfer Agent. Shareholders
considering transferring a tax deferred retirement account such as an
Individual Retirement Account from Merrill Lynch to another brokerage firm or
financial institution should be aware that, if the firm to which the
retirement account is to be transferred will not take delivery of shares of
the Fund, a shareholder must either redeem the shares (paying any applicable
CDSC) so that the cash proceeds can be transferred to the account at the new
firm, or such shareholder must continue to maintain a retirement account at
Merrill Lynch for those shares.
Exchange Privilege. Shareholders of each class of shares of the Fund have an
exchange privilege with certain other MLAM-advised mutual funds. There is
currently no limitation on the number of times a shareholder may exercise the
exchange privilege. The exchange privilege may be modified or terminated in
accordance with the rules of the Commission.
Under the Merrill Lynch Select Pricing SM System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-
advised mutual fund if the shareholder holds any Class A shares of the second
fund in his account in which the exchange is made at the time of the exchange
or is otherwise eligible to purchase Class A shares of the second fund. If the
Class A shareholder wants to exchange Class A shares for shares of a second
MLAM-advised mutual fund, and the shareholder does not hold Class A shares of
the second fund in his account at the time of the exchange and is not
otherwise eligible to acquire Class A shares of the second fund, the
shareholder will receive Class D shares of the second fund as a result of the
exchange.
38
<PAGE>
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
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 exchange privilege is modified with respect to certain retirement plans
which participate in the MFA program. Such retirement plans may exchange Class
B, Class C or Class D shares that have been held for at least one year for
Class A shares of the same Fund on the basis of relative net asset values in
connection with the commencement of participation in the MFA program, i.e., no
CDSC will apply. The one year holding period does not apply to shares
reacquired through reinvestment of dividends. Upon termination of
participation in the MFA program, Class A shares will be reexchanged for the
class of shares originally held. For purposes of computing any CDSC that may
be payable upon redemption of Class B or Class C shares so reacquired, or the
Conversion Period for Class B shares so acquired, the holding period for Class
A shares will be "tacked" to the holding period for the Class B or Class C
shares originally held. The Fund's exchange privilege is also modified with
respect to purchases of Class A and Class D shares by non-retirement plan
investors under the 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.
39
<PAGE>
Automatic Reinvestment of Dividends and Capital Gains Distributions. All
dividends and capital gains distributions are reinvested automatically in full
and fractional shares of the Fund, without 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.
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 or from an excess of net
short-term capital gains over net long-term capital losses (together referred
to hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from an excess of net long-term capital
gains over net short-term capital losses (including gains or losses from
certain transactions in futures and options) ("capital gain dividends") are
taxable to shareholders as long-term capital gains, regardless of the length
of time the shareholder has owned Fund shares. Any loss upon the sale or
exchange of Fund shares held for six months or less, however, will be treated
as long-term capital loss to the extent of any capital gain dividends received
by the shareholder. Distributions in excess of the Fund's earnings and profits
will first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. 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,
40
<PAGE>
then such dividend will be treated for tax purposes as being paid by the Fund
and received by its shareholders on December 31 of the year in which such
dividend was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult
their own tax advisers concerning the applicability of the United States
withholding tax.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
Shareholders may be able to claim United States foreign tax credits with
respect to such taxes, subject to certain conditions and limitations contained
in the Code. For example, certain retirement accounts cannot claim foreign tax
credits on investments in foreign securities held in the Fund. If more than
50% in value of the Fund's total assets at the close of its taxable year
consists of securities of foreign corporations, the Fund will be eligible, and
intends, to file an election with the Internal Revenue Service pursuant to
which shareholders of the Fund will be required to include their proportionate
shares of such withholding taxes in their United States income tax returns as
gross income, treat such proportionate shares as taxes paid by them, and
deduct such proportionate shares in computing their taxable incomes or,
alternatively, use them as foreign tax credits against their United States
income taxes. No deductions for foreign taxes, however, may be claimed by
noncorporate shareholders who do not itemize deductions. A shareholder that is
a nonresident alien individual or a foreign corporation may be subject to
United States withholding tax on the income resulting from the Fund's election
described in this paragraph but may not be able to claim a credit or deduction
against such United States tax for the foreign taxes treated as having been
paid by such shareholder. The Fund will report annually to its shareholders
the amount per share of such withholding taxes.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have
furnished an incorrect number. When establishing an account, an investor must
certify under penalty of perjury that such number is correct and that such
investor is not otherwise subject to backup withholding.
Under Code Section 988, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that are
not "regulated futures contracts" and from unlisted options will generally be
treated as ordinary income or loss. Such Code Section 988 gains or losses will
generally increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company
taxable income during a taxable year, the Fund would not be able to make any
ordinary income dividend distributions, and all or a portion of distributions
made before the losses were realized but in the same taxable year would be
recharacterized as a return of capital to shareholders, thereby reducing the
basis of each shareholder's Fund shares and resulting in a capital gain for
any shareholder who received a distribution greater than such shareholder's
basis in Fund shares (assuming the shares were held as a capital asset).
41
<PAGE>
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, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on U.S. Government obligations. State law
varies as to whether dividend income attributable to U.S. Government
obligations is exempt from state income tax.
Shareholders are urged to consult their tax 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
42
<PAGE>
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 or Class C shares (such as investors in certain retirement plans) or
to reduced sales charges in the case of Class A and Class D shares, the
performance data may take into account the reduced, and not the maximum, sales
charges or may not take into account the CDSC and therefore may reflect
greater total return since, due to the reduced sales charges or waiver of the
CDSC, a lower amount of expenses is deducted. See "Purchase of Shares". The
Fund's total return may be expressed either as a percentage or as a dollar
amount in order to illustrate such total return on a hypothetical $1,000
investment in the Fund at the beginning of each specified period.
Yield quotations will be computed based on a 30-day period by dividing (a)
net income based on the yield of each security earned during the period by (b)
the average daily number of shares outstanding during that period that were
entitled to receive dividends multiplied by the maximum offering price per
share on the last day of the period. The yield for the 30-day period ended
December 31, 1995 was 8.07% for Class A shares, 7.63% for Class B shares,
7.59% for Class C shares and 7.85% 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.
43
<PAGE>
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors of the Fund, the
Investment Adviser is primarily responsible for the execution of the Fund's
portfolio transactions. In executing such transactions, the Investment Adviser
seeks to obtain the best results for the Fund, taking into account such
factors as price (including the applicable brokerage commission or dealer
spread), size of order, difficulty of execution and operational facilities of
the firm involved and the firm's risk in positioning a block of securities.
While the Investment Adviser generally seeks reasonably competitive commission
rates or spreads, the Fund does not necessarily pay the lowest commission or
spread available.
The Fund has no obligation to deal with any broker or dealer in execution of
transactions in portfolio securities. Subject to obtaining the best price and
execution, securities firms which provided supplemental investment research to
the Investment Adviser, including Merrill Lynch, may receive orders for
transactions by the Fund. Information so received will be in addition to and
not in lieu of the services required to be performed by the Investment Adviser
under the Investment Advisory Agreement, and the expenses of the Investment
Adviser will not necessarily be reduced as a result of the receipt of such
supplemental information.
The securities in which the Fund invests are traded primarily in the over-
the-counter market. Since portfolio transactions will generally not be
effected on foreign securities exchanges, the Fund does not expect typically
to incur potential settlement delays which may occur on certain of such
exchanges. Where possible, the Fund will deal directly with the dealers who
make a market in the securities involved except in those circumstances where
better prices and execution are available elsewhere. Such dealers usually are
acting as principal for their own account. On occasion, securities may be
purchased directly from the issuer. Such portfolio securities are generally
traded on a net basis and do not normally involve either brokerage commissions
or transfer taxes. Securities firms may receive brokerage commissions on
certain portfolio transactions, including options, futures and options on
futures transactions and the purchase and sale of underlying securities upon
exercise of options. Under the Investment Company Act, persons affiliated with
the Fund, including Merrill Lynch, are prohibited from 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.
44
<PAGE>
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, 1995, the portfolio turnover rate was 116.0%.
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
45
<PAGE>
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 $5,414 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 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.
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. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Trustees as
the primary market. Securities traded in the OTC market are valued at the last
available bid price in the OTC market prior to the time of valuation.
Securities which are traded both in the OTC market and on a stock exchange
will be valued according to the broadest and most representative market. 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 OTC market, the last
asked price. Options purchased by the Fund are valued at their last sale price
in the case of exchange-traded options or in the case of options traded in the
OTC market, the last bid price. Other investments, including futures contracts
and related options, are stated at market value. Securities and assets for
which market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Directors.
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
46
<PAGE>
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.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts, the shareholder should notify in writing:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, 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 Merrill Lynch Financial
Data Services, Inc. at 800-637-3863.
47
<PAGE>
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
48
<PAGE>
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 enforceability of any support arrangement. You are cautioned
to review with your counsel any questions regarding particular support
arrangements.
49
<PAGE>
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS
Because of the fundamental differences between preferred stocks and bonds, a
variation of the bond rating symbols is 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 a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
50
<PAGE>
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.
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small
degree.
A Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher
rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt
in higher rated categories.
Debt rated BB, B, CCC, CC and C is regarded, on balance, as having
predominantly speculative characteristics with respect to capacity to
pay interest and repay principal in accordance with the terms of the
obligation. BB indicates the lowest degree of speculation and C the
highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
BB Debt rated BB has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties
or exposure to adverse business, financial or economic conditions
which could lead to inadequate capacity to meet timely interest and
principal payments. The BB rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BBB-
rating.
51
<PAGE>
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.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing with the major
ratings categories.
Provisional ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on
the likelihood or risk of default upon failure of such completion. The
investor should exercise judgment with respect to such likelihood and risk.
L The letter "L" indicates that the rating pertains to the principal
amount of those bonds to the extent that the underlying deposit
collateral is insured by the Federal Savings & Loan Insurance Corp. or
the Federal Deposit Insurance Corp. and interest is adequately
collateralized.
* Continuance of the rating is contingent upon Standard & Poor's receipt
of an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
NR Indicates that no rating has been requested, that there is
insufficient information on which to base a rating or that Standard &
Poor's does not rate a particular type of obligation as a matter of
policy.
Debt Obligations of Issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into
account currency exchange and related uncertainties.
52
<PAGE>
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:
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.
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.
53
<PAGE>
DESCRIPTION OF STANDARD & POOR'S PREFERRED STOCK RATINGS
A Standard & Poor's preferred stock rating is an assessment of the capacity
and willingness of an issuer to pay preferred stock dividends and any
applicable sinking fund obligations. A preferred stock rating differs from a
bond rating inasmuch as it is assigned to an equity issue, which issue is
intrinsically different from, and subordinated to, a debt issue. Therefore, to
reflect this difference, the preferred stock rating symbol will normally not
be higher than the bond rating symbol assigned to, or that would be assigned
to, the senior debt of the same issuer.
The preferred stock ratings are based on the following considerations:
I. Likelihood of payment--capacity and willingness of the issuer to meet
the timely payment of preferred stock dividends and any applicable sinking
fund requirements in accordance with the terms of the obligation.
II. Nature of, and provisions of, the issue.
III. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangements affecting creditors' rights.
AAA This is the highest rating that may be assigned by Standard & Poor's
to a preferred stock issue and indicates an extremely strong capacity
to pay the preferred stock obligations.
AA A preferred stock issue rated "AA" also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations
is very strong, although not as overwhelming as for issues rated
"AAA".
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 predominately
B speculative with respect to the issuer's capacity to pay preferred
stock obligations. "BB"
CCC indicates the lowest degree of speculation and "CCC" the highest
degree of speculation. While such issues will likely have some quality
and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
CC The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C A preferred stock rated "C" is a non-paying issue.
D A preferred stock rated "D" is a non-paying issue with the issuer in
default on debt instruments.
NR Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard &
Poor's does not rate a particular type of obligation as a matter of
policy.
54
<PAGE>
Plus (+) or Minus (-): To provide more detailed indications of preferred
stock quality, the ratings from "AA" to "CCC" may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
The preferred stock ratings are not a recommendation to purchase or sell a
security, inasmuch as market price is not considered in arriving at the
rating. Preferred stock ratings are wholly unrelated to Standard & Poor's
earnings and dividend rankings for common stocks.
The ratings are based on current information furnished to Standard & Poor's
by the issuer, and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of such information.
DESCRIPTION OF IBCA'S LONG TERM RATINGS
AAA Obligations for which there is the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic, or
financial conditions are unlikely to increase investment risk
significantly.
AA Obligations for which there is a very low expectation of investment
risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic, or financial
conditions may increase investment risk albeit not very significantly.
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.
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.
55
<PAGE>
[This Page Intentionally Left Blank]
56
<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 Merrill Lynch Financial
Data Services, Inc. as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price next to
be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of
paper if necessary.)
1. .................................... 4. ................................
2. .................................... 5. ................................
3. .................................... 6. ................................
Name...........................................................................
First Name Initial Last
Name
Name of Co-Owner (if any)......................................................
First Name Initial Last
Name
Address........................................................................
.................................................... Date......................
(Zip Code)
Occupation............................. Name and Address of Employer.......
...................................
...................................
....................................... ...................................
Signature of Owner Signature of Co-Owner (if any)
(In the case of co-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 ONE:
[_] Reinvest SELECT ONE:
[_] Reinvest
[_] Cash [_] 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 MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Signature of Depositor.........................................................
Signature of Depositor .................................. Date.................
(If joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED
CHECK MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD
ACCOMPANY THIS APPLICATION.
- -------------------------------------------------------------------------------
57
<PAGE>
MERRILL LYNCH WORLD INCOME FUND -- 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)
................., 19......
Dear Sir/Madam: Date of Initial Purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch World Income Fund, Inc. or any other investment company with an initial
sales charge or deferred sales charge for which 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 names,
both must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name............................... (2) Name...........................
Account Number......................... Account Number.....................
- -------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp We hereby authorize Merrill Lynch
Funds Distributor, Inc. to act as
our agent in connection with
transactions under this
authorization form and agree to
notify the Distributor of any
purchases made under a Letter of
Intention or Systematic Withdrawal
Plan. We guarantee the
shareholder's signature.
This form when completed, should be ...................................
mailed to: Dealer Name and Address
Merrill Lynch World Income Fund, Inc. By: ...............................
c/o Merrill Lynch Financial Data Authorized Signature of Dealer
Services, Inc.
P.O. Box 45289 ........
Jacksonville, FL 32232-5289 F/C Last
[_][_][_] [_][_][_][_]
Branch Code F/C No.
[_][_][_] [_][_][_][_][_]
Dealer's Customer A/C No.
58
<PAGE>
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
(Please Print)
Name of Owner........................ Social Security Number or
First Name Initial Last Name Taxpayer Identification
Number
Name of Co-Owner (if any)............
First Name Initial Last Name
Address.............................. Account Number ..................
(if existing account)
.....................................
(Zip 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 ___________________, or as soon as possible thereafter.
(month)
SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE): [_]
$ or [_] % of the current value of [_] Class A or [_] Class D shares
in the account.
SPECIFY WITHDRAWAL METHOD: [_] check or [_] direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(A)I HEREBY AUTHORIZE PAYMENT BY CHECK
[_] as indicated in Item 1.
[_] to the order of..........................................................
Mail to (check one)
[_] the address indicated in Item 1.
[_] Name (please print)......................................................
Address .......................................................................
..........................................................................
Signature of Owner........................................ Date...............
Signature of Co-Owner (if any).................................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING
OR TERMINATING THIS SERVICE.
Specify type of account (check one): [_] checking [_] savings
Name on your Account...........................................................
Bank Name......................................................................
Bank Number.......................... Account Number...........................
Bank Address...................................................................
.......................................................................
Signature of Depositor.................................... Date...............
Signature of Depositor.........................................................
(If joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID"
OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHALL ACCOMPANY THIS APPLICATION.
59
<PAGE>
MERRILL LYNCH WORLD INCOME FUND, INC.--AUTHORIZATION FORM (PART 2)--
(CONTINUED)
- -------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account as described
below each month to purchase: (choose one)
[_] Class A shares [_] Class B shares [_] Class C shares
[_] Class D shares
of Merrill Lynch World Income Fund, Inc. subject to the terms set forth below.
In the event that I am not eligible to purchase Class A shares, I understand
that Class D shares will be purchased.
<TABLE>
<S> <C>
MERRILL LYNCH FINANCIAL DATA AUTHORIZATION TO HONOR ACH DEBITS
SERVICES, INC. DRAWN BY MERRILL LYNCH FINANCIAL
DATA SERVICES, INC.
You are hereby authorized to draw an
ACH debit each month on my bank
account for investment in Merrill To...............................Bank
Lynch World Income Fund, Inc. as (Investor's Bank)
indicated below:
Bank Address.........................
Amount of each ACH debit $.......
City...... State...... Zip Code......
Account No. ......................
Please date and invest ACH debits on
the 20th of each month beginning As a convenience to me, I hereby
..........or as soon thereafter as request and authorize you to pay and
(month) charge to my account ACH debits
possible. drawn on my account by and payable
to Merrill Lynch Financial Data
I agree that you are drawing these Services, Inc. I agree that your
ACH debits voluntarily at my request rights in respect to each such debit
and that you shall not be liable for shall be the same as if it were a
any loss arising from any delay in check drawn on you and signed
preparing or failure to prepare any personally by me. This authority is
such debit. If I change banks or to remain in effect until revoked
desire to terminate or suspend this personally by me in writing. Until
program, I agree to notify you you receive such notice, you shall
promptly in writing. I hereby be fully protected in honoring any
authorize you to take any action to such debit. I further agree that if
correct erroneous ACH debits of my any such debit be dishonored,
bank account or purchases of Fund whether with or without cause and
shares including liquidating shares whether intentionally or
of the Fund and credit my bank inadvertently, you shall be under no
account. I further agree that if a liability.
check or debit is not honored upon
presentation, Merrill Lynch Financial
Data Services, Inc. is authorized to
discontinue immediately the Automatic
Investment Plan and to liquidate
sufficient shares held in my account
to offset the purchase made with the
dishonored debit.
............ ..................... ............ .....................
Date Signature of Date Signature of
Depositor Depositor
...................... ............ .....................
Signature of Depositor Bank Signature of Depositor
(If joint account, Account (If joint account,
both must sign) Number both must sign)
</TABLE>
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" SHOULD ACCOMPANY THIS APPLICATION.
60
<PAGE>
[This Page Intentionally Left Blank]
61
<PAGE>
[This Page Intentionally Left Blank]
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 9081
Princeton, New Jersey 08543-9081
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 351
Boston, Massachusetts 02101
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
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 REPRESEN-
TATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE
OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMA-
TION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
FUND, THE INVESTMENT ADVISER OR DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTI-
TUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table.................................................................. 2
Merrill Lynch Select Pricing SM 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... 13
Hedging Techniques........................................................ 16
Other Investment Policies and Practices................................... 21
Investment Restrictions................................................... 23
Management of the Fund..................................................... 24
Directors................................................................. 24
Management and Advisory Arrangements...................................... 24
Code of Ethics............................................................ 25
Transfer Agency Services.................................................. 25
Purchase of Shares......................................................... 26
Initial Sales Charge Alternatives--Class A and Class D Shares............. 29
Deferred Sales Charge Alternatives--Class B and Class C Shares............ 31
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................................................................... 37
Shareholder Services....................................................... 38
Taxes...................................................................... 40
Performance Data........................................................... 42
Portfolio Transactions..................................................... 44
Portfolio Turnover........................................................ 45
Additional Information..................................................... 45
Dividends and Distributions............................................... 45
Determination of Net Asset Value.......................................... 45
Organization of the Fund.................................................. 46
Shareholder Inquiries..................................................... 47
Shareholder Reports....................................................... 47
Appendix--Ratings of Debt Securities....................................... 48
Authorization Form......................................................... 57
</TABLE>
Code #16102-0496
[LOGO] MERRILL LYNCH
MERRILL LYNCH
WORLD INCOME FUND, INC.
[ART]
PROSPECTUS
April 26, 1996
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 26,
1996 (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 26, 1996.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek to provide shareholders with
high current income by investing in a global portfolio of fixed income
securities denominated in various currencies, including multi-national
currency units. The Fund may invest in United States and foreign government
and corporate fixed income securities, including high yield high risk, lower
rated and unrated securities. The Fund will invest at least 90% of its total
assets in such fixed income securities. In pursuing its investment objective,
the Fund will, under normal circumstances, allocate its investments among
different types of fixed income securities denominated in various currencies
based upon management's analysis of the yield, maturity and currency
considerations affecting such securities. Reference is made to "Investment
Objective and Policies" in the Prospectus for a discussion of the investment
objective and policies of the Fund.
HEDGING TECHNIQUES
Reference is made to the discussion concerning hedging techniques under the
caption "Hedging Techniques" in the Prospectus.
The Fund may engage in various portfolio strategies to hedge its portfolio
against interest rate and currency risks. These strategies include use of
options on its portfolio securities, financial and currency futures and
options on such futures and forward foreign currency transactions. While the
Fund's use of hedging strategies is intended to reduce the volatility of the
net asset value of Fund shares, the Fund's net asset value will fluctuate.
Although certain risks are involved in options and futures transactions (as
discussed below in "Risk Factors in Options and Futures Transactions"), the
Investment Adviser believes that, because the Fund will engage in these
transactions only for hedging purposes, the options and futures portfolio
strategies of the Fund will not subject the Fund to the risks frequently
associated with the speculative use of options and futures transactions.
The following information relates to the hedging instruments the Fund may
utilize with respect to interest rate and currency risks.
The Fund may purchase and write (i.e., sell) call options and put options on
securities, enter into closing purchase transactions with respect to such
options and engage in transactions in financial futures as described below.
The Fund writes only covered options, which means that so long as the Fund is
obligated as the writer of a call option, it will own the underlying
securities subject to the option and, in the case of put options, that the
Fund, through its custodian, has deposited and maintained cash, cash
equivalent, U.S. Government securities or other high grade liquid debt
securities denominated in U.S. dollars or non-U.S. currencies with a
securities depository with a value equal to or greater than the exercise price
of the underlying securities.
Writing Options. The Fund will receive a premium from writing an option,
which increases the Fund's return on the underlying security in the event the
option expires unexercised or is closed out at a profit. The amount of the
premium will reflect, among other factors, the current market price of the
underlying security, the relationship of the exercise price to the market
price, interest rates and the time period until the expiration of the option.
By writing a call, the Fund limits its opportunity to profit from an
increase in the market value of the underlying security above the exercise
price of the option for as long as the Fund's obligation as a writer
2
<PAGE>
continues. Thus, in some periods the Fund will receive less total return and
in other periods greater total return from its hedged positions than it would
have received from underlying securities unhedged. By writing a put option,
the Fund will be obligated to purchase the underlying security at a price that
may be higher than the market value of that security at the time of exercise
for as long as the option is outstanding. To facilitate closing transactions,
as described below, the Fund will ordinarily write only options for which a
secondary market exists.
The Fund may engage in closing transactions in order to terminate
outstanding exchange-traded options that it has written. To effect a closing
transaction, the Fund purchases, prior to the exercise of an outstanding
option that it has written, an option of the same series as that on which it
desires to terminate its obligation. Profit or loss from a closing purchase
transaction will depend on whether the cost of such transaction is more or
less than the premium received on the sale of the option plus the related
transaction costs.
Purchase of Options. The Fund may purchase put and call options in
connection with its hedging activities. By buying a put, the Fund has the
right to sell the underlying securities at the exercise price, thus limiting
the Fund's risk of loss through a decline in the market value of the security
until the put expires. The Fund may also purchase call options on securities
which it intends to purchase. By purchasing a call, the Fund has the right to
purchase the underlying securities at the option price.
The Fund may enter into both exchange-traded and over-the-counter ("OTC")
put and call option transactions. OTC option transactions are two party
contracts with price and terms negotiated between the buyer and seller. The
Fund will enter into OTC option transactions only with respect to portfolio
securities for which the Investment Adviser believes there is regularly
available a price quotation from a dealer in such options. The Fund will
engage in OTC options only with member banks of the Federal Reserve System and
primary dealers in U.S. Government securities or with affiliates of such banks
or dealers which have capital of at least $50 million or whose obligations are
guaranteed by an entity having capital of at least $50 million. The staff of
the Securities and Exchange Commission (the "Commission") has taken the
position that purchased OTC options and the assets used as cover for written
OTC options are illiquid securities. For so long as the Commission staff is of
that view, the Fund will not purchase or sell OTC options (including OTC
options on futures contracts) if, as a result of such transactions, the sum of
the market value of OTC options currently outstanding which are held by the
Fund, the market value of the underlying securities covered by OTC options
currently outstanding which were sold by the Fund and margin deposits on the
Fund's existing OTC options on futures contracts exceed 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.
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
3
<PAGE>
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 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,
4
<PAGE>
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 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.
5
<PAGE>
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise.
Moreover, it may not be possible for the Fund to hedge against a devaluation
that is so generally anticipated that the Fund is not able to contract to sell
the currency at a price above the devaluation level it anticipates. The cost
to the Fund of engaging in foreign currency transactions varies with such
factors as the currency involved, the length of the contract period and the
market conditions then prevailing. Since transactions in foreign currency
exchange are usually conducted on a principal basis, no fees or commissions
are involved.
OTHER INVESTMENT POLICIES AND PRACTICES
Convertible Securities. The convertible securities to be held by the Fund
include any corporate debt security or preferred stock which may be converted
into underlying shares of common stock. Convertible securities entitle the
holder to receive interest payments paid on corporate debt securities or the
dividend preference on a preferred stock until such time as the convertible
security matures or is redeemed or until the holder elects to exercise the
conversion privilege. Although the Fund generally expects that it will sell
convertible securities rather than convert such securities into common stock,
the Fund may, at various times, exercise conversion rights on convertible
securities called for redemption to establish holding periods for tax purposes
or for other reasons. The Fund may not invest more than 10% of its total
assets in such common stock.
Repurchase Agreements and Purchase and Sale Contracts. The Fund may invest
in securities pursuant to repurchase agreements and purchase and sale
contracts. Foreign currency-denominated agreements will be limited to purchase
and sale contracts entered into with financial institutions that have at least
$50 million in capital or whose obligations are guaranteed by an entity having
at least $50 million in capital. U.S. dollar-denominated repurchase agreements
and purchase and sale contracts may be entered into only with a member bank of
the Federal Reserve System or a primary dealer in U.S. Government securities
or an affiliate thereof. Under such agreements, the bank or primary dealer or
an affiliate thereof agrees, upon entering into the contract, to repurchase
the security at a mutually agreed upon time and price, thereby determining the
yield during the term of the agreement. This results in a fixed rate of return
insulated from market fluctuations during such period. In the case of
repurchase agreements, the prices at which the trades are conducted do not
reflect accrued interest on the underlying obligations; whereas, in the case
of purchase and sale contracts, the prices take into account accrued interest.
Such agreements usually cover short periods, such as under one week.
Repurchase agreements may be construed to be collateralized loans by the
purchaser to the seller secured by the securities transferred to the
purchaser. In the case of a repurchase agreement, the Fund will require the
seller to provide additional collateral if the market value of the securities
falls below the repurchase price at any time during the term of the repurchase
agreement; the Fund does not have the right to seek additional collateral in
the case of purchase and sale contracts. In the event of default by the seller
under a repurchase agreement construed to be a collateralized loan, the
underlying securities are not owned by the Fund but only constitute collateral
for the seller's obligation to pay the repurchase price. Therefore, the Fund
may suffer time delays and incur costs or possible losses in connection with
the disposition of the collateral. A purchase and sale contract differs from a
repurchase agreement in that the contract arrangements stipulate that the
securities are owned by the Fund. In the event of a default under such a
repurchase agreement or a purchase and sale contract, instead of the
contractual fixed rate of return, the rate of return to the Fund shall be
dependent upon intervening fluctuations of the market value of such security
and the accrued interest on the security. In such event, the Fund would have
rights against the
6
<PAGE>
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:
1. Invest more than 25% of its assets, taken at market value at the time
of each investment, in the securities of issuers in any particular industry
(excluding the U.S. Government and its agencies and instrumentalities).
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
7
<PAGE>
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".
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 50% 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).
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.
8
<PAGE>
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.
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
Information about the Directors, executive officers and portfolio managers
of the Fund, including their ages and principal occupations for at least the
last five years, is set forth below. Unless otherwise noted, the address of
each executive officer and Director is P.O. Box 9011, Princeton, New Jersey
08543-9011.
Arthur Zeikel (63)--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; Director of Merrill Lynch
Funds Distributor, Inc. (the "Distributor").
James H. Bodurtha (51)--Director(2)--124 Long Pond Road, Plymouth,
Massachusetts 02360. Chairman and Chief Executive Officer, China Enterprise
Management Corporation since 1993; Chairman, Berkshire Corporation since 1980;
Partner, Squire, Sanders & Dempsey from 1980 to 1993.
9
<PAGE>
Herbert I. London (57)--Director(2)--113-115 University Place, New York, New
York 10003. Dean, Gallatin Division of New York University from 1978 to 1993;
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 1994 and Chairman thereof in 1994;
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.
Joseph L. May (66)--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 (44)--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 (55)--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; President of Princeton
Administrators, L.P. since 1988,
N. John Hewitt (61)--Senior Vice President(1)(2)--Senior Vice President of
MLAM and the Investment Adviser since 1980; 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 (55)--Vice President and Portfolio Manager(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 (35)--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 (41)--Vice President and Portfolio Manager(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 (46)--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.
10
<PAGE>
Mark B. Goldfus (49)--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, 1996, the officers and Directors of the Fund as a group (13
persons) owned an aggregate of less than 1% of the outstanding shares of
common stock of ML & Co. and owned an aggregate of less than 1% of the
outstanding shares of the Fund.
COMPENSATION OF DIRECTORS
Pursuant to the terms of the management agreement with the Fund, the Manager
pays all compensation of officers and employees of the Fund as well as the
fees of all Directors who are affiliated persons of ML & Co. or its
subsidiaries. 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,
1995, fees and expenses paid to the non-affiliated Directors aggregated
$41,697.
The following table sets forth for the year ended December 31, 1995,
compensation paid by the Fund to the non-affiliated Directors and for the year
ended December 31, 1995, the aggregate compensation paid by all investment
companies (including the Fund) advised by MLAM and its affiliate, FAM
("MLAM/FAM Advised Funds"), to the non-affiliated Directors.
<TABLE>
<CAPTION>
PENSION OR TOTAL COMPENSATION
RETIREMENT FROM FUND AND
AGGREGATE 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>
James H. Bodurtha............... $5,000 None $157,500*
Herbert I. London............... 9,000 None 157,500
Robert R. Martin................ 9,000 None 157,500
Joseph L. May................... 9,000 None 157,500
Andre F. Perold................. 9,000 None 157,500
</TABLE>
- --------
* $157,500 represents the amount Mr. Bodurtha would have received if he had
been a Director for the entire calendar year ended December 31, 1995. Mr.
Bodurtha was elected to the Fund's Board of Directors effective June 23,
1995.
(1) In addition to the Fund, the Directors serve on the boards of other
MLAM/FAM Advised Funds as follows: Mr. Bodurtha (46 funds and portfolios);
Mr. London (46 funds and portfolios); Mr. Martin (46 funds and
portfolios); Mr. May (46 funds and portfolios); and Mr. Perold (46 funds
and portfolios). For purposes of this table, each series of a series
investment company is treated as a separate fund.
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.
11
<PAGE>
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 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 years ended December 31, 1993, 1994 and 1995, the total fees
paid by the Fund to the Investment Adviser aggregated $13,902,958, $13,289,517
and $9,774,596, 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 years ended December 31, 1993, 1994 and 1995, 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 years ended
December 31, 1993, 1994 and 1995, the Fund reimbursed the Investment Adviser
$169,845, $315,069 and $150,832, respectively, for accounting services. The
Distributor will pay the promotional expenses of the Fund incurred in
connection with the offering of its shares. Certain expenses in connection
with the account maintenance and
12
<PAGE>
distribution of Class B and Class C shares will be financed by the Fund
pursuant to a distribution plan in compliance with Rule 12b-1 under the
Investment Company Act. See "Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares" and--Distribution Plans" in the
Prospectus.
ML & Co. and Princeton Services are "controlling persons" of the Manager as
defined under the 1940 Act because of their ownership of its voting securities
or their power to exercise a controlling influence over its management or
policies. The Investment Adviser is a limited partnership, the partners of
which are ML & Co. and Princeton Services.
Duration and Termination. Unless earlier terminated as described herein, the
Investment Advisory Agreement will remain in effect from year to year if
approved annually (a) by the Directors or by a majority of the outstanding
shares of the Fund and (b) by a majority of the Directors who are not parties
to such contract or interested persons (as defined in the Investment Company
Act) of any such party. Such contracts are not assignable and may be
terminated without penalty on 60 days' written notice at the option of either
party thereto or by the vote of the shareholders of the Fund.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
ALTERNATIVE SALES ARRANGEMENTS
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing SM System: Class A and Class D shares are sold to investors choosing
the initial sales charge alternatives, and Class B and Class C shares are sold
to investors choosing the deferred sales charge alternatives. Each Class A,
Class B, Class C and Class D share of the Fund represents an identical
interest in the investment portfolio of the Fund and has the same rights,
except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
Class B, Class C and Class D shares each have exclusive voting rights with
respect to the Rule 12b-1 distribution plan adopted with respect to such class
pursuant to which account maintenance and/or distribution fees are paid. Each
class has different exchange privileges. See "Shareholder Services--Exchange
Privilege".
The Merrill Lynch Select Pricing SM System is used by more than 50 mutual
funds advised by MLAM or its affiliate, the Investment Adviser. Funds advised
by MLAM or the Investment Adviser are referred to herein as "MLAM-advised
mutual funds".
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offering of each class of shares
of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the
offering of each class of shares of the Fund. After the prospectuses,
statements of additional information and periodic reports have been prepared,
set in type and mailed to shareholders, the Distributor pays for the printing
and distribution of copies thereof used in connection with the offering to
dealers and investors. The Distributor also pays for other
13
<PAGE>
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 year ended
December 31, 1994 were $269,609, of which the Distributor received $24,292 and
Merrill Lynch received $245,317. The gross sales charges for the sale of Class
A shares for the year ended December 31, 1995 were $48,702, of which the
Distributor received $5,727 and Merrill Lynch received $42,975. The gross
sales charges for the sale of Class D shares for the period October 21, 1994
(commencement of operations) to December 31, 1994 were $7,622, of which the
Distributor received $902 and Merrill Lynch received $6,720. The gross sales
charges for the sale of Class D shares for the year ended December 31, 1995
were $78,194, of which the Distributor received $8,054 and Merrill Lynch
received $70,140.
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 Pricing SM 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.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon
14
<PAGE>
exercise of this investment option, shareholders of Merrill Lynch Senior
Floating Rate Fund, Inc. will receive Class A shares of the Fund and
shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch
High Income Municipal Bond Fund, Inc. will receive Class D shares of the Fund,
except that shareholders already owning Class A shares of the Fund will be
eligible to purchase additional Class A shares pursuant to this option, if
such additional Class A shares will be held in the same account as the
existing Class A shares and the other requirements pertaining to the
reinvestment privilege are met. In order to exercise this investment option, a
shareholder of one of the above-referenced continuously offered closed-end
funds (an "eligible fund") must sell his or her shares of common stock of the
eligible fund (the "eligible shares") back to the fund in connection with a
tender offer conducted by the eligible fund and reinvest the proceeds
immediately in the designated class of shares of the Fund. This investment
option is available only with respect to eligible shares as to which no Early
Withdrawal Charge or CDSC (each as defined in the eligible fund's prospectus)
is applicable. Purchase orders from eligible fund shareholders wishing to
exercise this investment option will be accepted only on the day that the
related tender offer terminates and will be effected at the net asset value of
the designated class of the Fund on such day.
REDUCED INITIAL SALES CHARGES
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
15
<PAGE>
remaining registered in the name of the purchaser) for this purpose. The first
purchase under the Letter of Intention must be at least five percent of the
dollar amount of such Letter. If a purchase during the term of such Letter
would otherwise be subject to a further reduced sales charge based on the
right of accumulation, the purchaser will be entitled on that purchase and
subsequent purchases to that further reduced percentage sales charge but there
will be no retroactive reduction of the sales charges on any previous
purchase. The value of any shares redeemed or otherwise disposed of by the
purchaser prior to termination or completion of the Letter of Intention will
be deducted from the total purchases made under such Letter. An exchange from
a MLAM-advised money market fund into the Fund that creates a sales charge
will count toward completing a new or existing Letter of Intention from the
Fund.
Employee Access Accounts SM. Class A or Class D shares are offered at net
asset value to Employee Access Accounts available through employers that
provide Employer-Sponsored Retirement or Savings Plans that are eligible to
purchase such shares at net asset value. The initial minimum for such accounts
is $500, except that the initial minimum for shares purchased for such
accounts pursuant to the Automatic Investment Program is $50.
TMA SM Managed Trusts. Class A shares are offered to TMA SM Managed Trusts
to which Merrill Lynch Trust Company provides discretionary trustee services
at net asset value.
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 60 days after such notice.
16
<PAGE>
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a 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 shares of such
other mutual fund and that such shares have been outstanding for a period of
no less than six months. Second, such purchase of Class D shares must be made
within 60 days after the redemption and the proceeds from the redemption must
be maintained in the interim in cash or a money market fund.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation
with a personal holding company or a public or private investment company. The
value of the assets or company acquired in a tax-free transaction may be
adjusted in appropriate cases to reduce possible adverse tax consequences to
the Fund which might result from an acquisition of assets having net
unrealized appreciation which is disproportionately higher at the time of
acquisition than the realized or unrealized appreciation of the Fund. The
issuance of Class D shares for consideration other than cash is limited to
bona fide reorganizations, statutory mergers or other acquisitions of
portfolio securities which (i) meet the investment objective and policies of
the Fund; (ii) are acquired for investment and not for resale (subject to the
understanding that the disposition of the Fund's portfolio securities shall at
all times remain within its control); and (iii) are liquid securities, the
value of which is readily ascertainable, which are not restricted as to
transfer either by law or liquidity of market (except that the Fund may
acquire through such transactions restricted or illiquid securities to the
extent the Fund does not exceed the applicable limits on acquisition of such
securities set forth under "Investment Objective and Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.
EMPLOYER-SPONSORED RETIREMENT OR SAVINGS PLANS AND CERTAIN OTHER ARRANGEMENTS
Certain employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class A or Class D shares at net asset value, based
on the number of employees or number of employees eligible to participate in
the plan, the aggregate amount invested by the plan in specified investments
and/or the services provided by Merrill Lynch to the plan. Certain other plans
may purchase Class B shares with a waiver of the CDSC upon redemption, based
on similar criteria. Such Class B shares will convert into Class D shares
approximately ten years after the plan purchases the first share of any MLAM-
advised mutual fund. Minimum purchase requirements may be waived or varied for
such plans. Additional information regarding purchases by employer-sponsored
retirement or savings plans and certain other arrangements is available toll-
free from Merrill Lynch Business Financial Services at (800) 237-7777.
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares--Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan") with respect to the
account maintenance and/or distribution fees paid by the Fund to the
Distributor with respect to such classes.
17
<PAGE>
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.
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.
18
<PAGE>
The following table sets forth comparative information as of December 31,
1995 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, with respect to the Class B shares, the
Distributor's voluntary maximum for the period November 18, 1991 (commencement
of operations) to December 31, 1995 for Class B shares.
DATA CALCULATED AS OF DECEMBER 31, 1995
<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
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
---------- --------- ---------- -------- -------------- --------- ------------
CLASS B SHARES (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as
Adopted................ $2,115,459 $132,216 $30,289 $162,505 $45,395 $117,110 $6,209
Under Distributor's Vol-
untary Waiver.......... $2,115,459 $132,216 $10,577 $142,793 $45,395 $ 97,398 $6,209
<CAPTION>
CLASS C SHARES
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as
Adopted................ $ 6,961 $ 435 $ 23 $ 458 $ 23 $ 435 $ 30
</TABLE>
- --------
(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 (with respect to
Class B shares) or the NASD maximum (with respect to Class B and Class C
shares).
19
<PAGE>
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended 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 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 fiscal year ended December 31,
1995, the Distributor received CDSCs of $3,902,431, all of which was paid to
Merrill Lynch. For the period October 21, 1994 (commencement of operations 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. For
the fiscal year ended December 31, 1995, the Distributor received CDSCs of
$4,150 with respect to Class C shares, all of which was paid to Merrill Lynch.
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
20
<PAGE>
Adviser seeks to obtain the best results for the Fund, taking into account
such factors as price (including the applicable brokerage commission or dealer
spread), size of order, difficulty of execution and operational facilities of
the firm involved and the firm's risk in positioning a block of securities.
While the Investment Adviser generally seeks reasonably competitive commission
rates or spreads, the Fund does not necessarily pay the lowest commission or
spread available.
The Fund has no obligation to deal with any broker or dealer in execution of
transactions in portfolio securities. Subject to obtaining the best price and
execution, securities firms which provided supplemental investment research to
the Investment Adviser, including Merrill Lynch, may receive orders for
transactions by the Fund. Information so received will be in addition to and
not in lieu of the services required to be performed by the Investment Adviser
under the Investment Advisory Agreement, and the expenses of the Investment
Adviser will not necessarily be reduced as a result of the receipt of such
supplemental information.
The securities in which the Fund invests are traded primarily in the over-
the-counter market. Since portfolio transactions will generally not be
effected on foreign securities exchanges, the Fund does not expect typically
to incur potential settlement delays which may occur on certain of such
exchanges. Where possible, the Fund will deal directly with the dealers who
make a market in the securities involved except in those circumstances where
better prices and execution are available elsewhere. Such dealers usually are
acting as principal for their own account. On occasion, securities may be
purchased directly from the issuer. Such portfolio securities are generally
traded on a net basis and do not normally involve either brokerage commissions
or transfer taxes. Securities firms may receive brokerage commissions on
certain portfolio transactions, including options, futures and options on
futures transactions and the purchase and sale of underlying securities upon
exercise of options. Under the Investment Company Act, persons affiliated with
the Fund, including Merrill Lynch, are prohibited from dealing with the Fund
as a principal in the purchase and sale of securities unless a permissive
order allowing such transactions is obtained from the Commission. Affiliated
persons of the Fund may serve as its broker in transactions conducted on an
exchange and in over-the-counter transactions conducted on an agency basis.
Costs associated with transactions in foreign securities are generally higher
than with transactions in United States securities, although, as noted above,
the Fund will endeavor to achieve the best net results in effecting such
transactions.
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. For the
fiscal year ended December 31, 1995, the Fund paid total brokerage commissions
of $123,866, of which $59,317 or 47.9% was paid to Merrill Lynch for effecting
50.2% 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
21
<PAGE>
11(a) would apply to Merrill Lynch acting as a broker for the Fund in any of
its portfolio transactions executed on any such securities exchange of which
it is a member, appropriate consents have been obtained from the Fund and
annual statements as to aggregate compensation will be provided to the Fund.
While the Fund generally does not expect to engage in trading for short-term
gains, it will effect portfolio transactions without regard to holding period
if, in the judgment of the Fund's Investment Adviser, such transactions are
advisable in light of a change in circumstances of a particular company or
within a particular industry or in general market, economic or financial
conditions. Accordingly, while the Fund anticipates that its annual turnover
rate should not exceed 200% under normal conditions, it is impossible to
predict portfolio turnover 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
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%.
For the fiscal year ended December 31, 1995, the portfolio turnover rate was
116.0%. 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 may have 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. It is expected, however, that the per share net asset
value of the four classes will tend to converge (although not necessarily
meet) immediately after the payment of dividends, which will differ by
approximately the amount of the expense accrual differentials between the
classes.
22
<PAGE>
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. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Trustees as
the primary market. Securities traded in the OTC market are valued at the last
available bid price in the OTC market prior to the time of valuation.
Securities which are traded both in the OTC market and on a stock exchange
will be valued according to the broadest and most representative market. 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 OTC market, the last
asked price. Options purchased by the Fund are valued at their last sale price
in the case of exchange-traded options or in the case of options traded in the
OTC market, the last bid price. Other investments, including futures contracts
and related options, are stated at market value. Securities and assets for
which market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Directors.
Securities and assets for which market quotations are not readily available
are valued at fair value as determined in good faith by or under the direction
of the Board of Directors of the Fund. Such valuations and procedures will be
reviewed periodically by the Board of Directors.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designed to facilitate investment in its shares. Full details as to each such
service and copies of the various plans described below can be obtained from
the Fund, the Distributor or Merrill Lynch.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gain distributions. The statements also will
show any other activity in the account since the preceding statement.
Shareholders will receive separate transaction confirmations for each purchase
or sale transaction other than the automatic investment purchase and the
reinvestment of taxable ordinary income dividends, and long-term capital gain
distributions. A shareholder may make additions to his Investment Account at
any time by mailing a check directly to the Transfer Agent.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by a
shareholder directly from the Transfer Agent. Shareholders considering
transferring their Class A or Class D shares from Merrill Lynch to another
brokerage firm or financial institution should be aware that, if the firm to
which the Class A or Class D shares are to be transferred will not take
delivery of shares of the Fund, a shareholder either must redeem the Class A
or Class D shares (paying any applicable CDSC) so that the cash proceeds can
be transferred to the account at the new firm or such shareholder must
continue to maintain an
23
<PAGE>
Investment Account at the Transfer Agent for those Class A or Class D shares.
Shareholders interested in transferring their Class B or Class C shares from
Merrill Lynch and who do not wish to have an Investment Account maintained for
such shares at the Transfer Agent may request their new brokerage firm to
maintain such shares in an account registered in the name of the brokerage
firm for the benefit of the shareholder at the Transfer Agent. If the new
brokerage firm is willing to accommodate the shareholder in this manner, the
shareholder must request that he be issued certificates for his shares, and
then must turn the certificates over to the new firm for re-registration as
described in the preceding sentence.
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.
The Fund's Automatic Investment Plan is not available to shareholders whose
shares are held in brokerage accounts with Merrill Lynch. 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 in the form of payments by check or through
automatic payment by direct deposit to such shareholder's bank account on
either a monthly or quarterly basis as provided below. Quarterly withdrawals
are available for shareholders who have acquired 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.
24
<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. 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.
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 CMA(R)/CBA(R) 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 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.
25
<PAGE>
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds. Under the Merrill Lynch Select
Pricing SM System, Class A shareholders may exchange Class A shares of the
Fund for Class A shares of a second MLAM-advised mutual fund if the
shareholder holds any Class A shares of the second fund in his 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 as follows:
Class A shares may be exchanged for shares of Merrill Lynch Ready Assets
Trust, Merrill Lynch Retirement Reserves Money Fund (available only for
exchanges within certain retirement plans), Merrill Lynch U.S.A. Government
Reserves and Merrill Lynch U.S. Treasury Money Fund; Class B, Class C and
Class D shares may be exchanged for shares of Merrill Lynch Government Fund,
Merrill Lynch Institutional Fund, Merrill Lynch Institutional Tax-Exempt Fund
and Merrill Lynch Treasury Fund. Shares with a net asset value of at least
$100 are required to qualify for the exchange privilege, and any shares
utilized in an exchange must have been held by the shareholder for 15 days. It
is contemplated that the exchange privilege may be applicable to other new
mutual funds whose shares may be distributed by the Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount
equal to the difference, if any, between the sales charge previously paid on
the outstanding Class A or Class D shares and the sales charge payable at the
time of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have
taken place, the "sales charge previously paid" shall include the aggregate of
the sales charges paid with respect to such Class A or Class D shares in the
initial purchase and any subsequent exchange. Class A or Class D shares issued
pursuant to dividend reinvestment are sold on a no-load basis in each of the
funds offering Class A or Class D shares. For purposes of the exchange
privilege, Class A and Class D shares acquired through dividend reinvestment
shall be deemed to have been sold with a sales charge equal to the sales
charge previously paid on the Class A or Class D shares on which the dividend
was paid. Based on this formula, Class A and Class D shares of the Fund
generally may be exchanged into the Class A or Class D shares of the other
funds or into shares of the Class A and Class D money market funds without a
sales charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively, of another MLAM-
advised mutual fund ("new Class B or Class C shares") on the basis of relative
net asset value per
26
<PAGE>
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.
The exchange privilege is modified with respect to certain retirement plans
which participate in the Merrill Lynch Mutual Fund Advisor ("MFA") program.
Such retirement plans may exchange Class B, Class C or Class D shares that
have been held for at least one year for Class A shares of the same fund on
the basis of relative net asset values in connection with the commencement of
participation in the MFA program, i.e., no CDSC will apply. The one year
holding period does not apply to shares acquired though reinvestment of
dividends. Upon termination of participation in the MFA program, Class A
shares will be re-exchanged for the class of shares originally held. For
purposes of computing any CDSC that may be payable upon redemption of Class B
or Class C shares so reacquired, or the conversion period for Class B shares
so reacquired, the holding period for the Class A shares to be "tacked" to the
holding period for the Class B or Class C shares originally held.
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.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
27
<PAGE>
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.
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 or from an excess of net
short-term capital gains over net long-term capital losses (together referred
to hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from an excess of net long-term capital
gains over net short-term capital losses (including gains or losses from
certain transactions in futures and options) ("capital gain dividends") are
taxable to shareholders as long-term capital gains, regardless of the length
of time the shareholder has owned Fund shares. Any loss upon the sale or
exchange of Fund shares held for six months or less, however, will be treated
as long-term capital loss to the extent of any capital gain dividends received
by the shareholder. Distributions in excess of the Fund's earnings and profits
will first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset).
28
<PAGE>
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 to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult
their own tax advisers concerning the applicability of the United States
withholding tax.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have
furnished an incorrect number. When establishing an account, an investor must
certify under penalty of perjury that such number is correct and that such
investor is not otherwise subject to backup withholding.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
Shareholders may be able to claim United States foreign tax credits with
respect to such taxes, subject to certain conditions and limitations contained
in the Code. For example, certain retirement accounts cannot claim foreign tax
credits on investments in foreign securities held in the Fund. If more than
50% in value of the Fund's total assets at the close of its taxable year
consists of securities of foreign corporations, the Fund will be eligible, and
intends, to file an election with the Internal Revenue Service pursuant to
which shareholders of the Fund will be required to include their proportionate
shares of such withholding taxes in their United States income tax 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 rule permitting the
issuance and sale of multiple classes of stock) that is based on the gross
income allocable to Class A, Class B, Class C and Class D shareholders during
the taxable year, or such other method as the Internal Revenue Service may
prescribe.
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
29
<PAGE>
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 minimize imposition of the 4%
excise tax, there can be no assurance that sufficient amounts of the Fund's
taxable income and capital gains will be distributed to avoid entirely the
imposition of the tax. In such event, the Fund will be liable for the tax only
on the amount by which it does not meet the foregoing distribution
requirements.
The Fund may invest in securities rated in the medium to lower rating
categories of nationally recognized rating organizations, and in unrated
securities ("high yield/high risk securities"), as described in the
Prospectus. Some of these high yield/high risk 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/high risk securities may be treated as dividends
for Federal income tax purposes; in such case, if the issuer of such high
yield/high risk securities is a domestic corporation, dividend payments by the
Fund will be eligible for the dividends received deduction to the extent of
the deemed dividend portion of such interest payments.
TAX TREATMENT OF OPTIONS, FUTURES AND FORWARD FOREIGN EXCHANGE TRANSACTIONS
The Fund may write, purchase or sell options, futures 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. Application of these rules to Section
1256 contracts held by the Fund may alter the timing and character of
distributions to shareholders. The mark-to-market rules outlined above,
however, will not apply to certain transactions entered into by the Fund
solely to reduce the risk of changes in price or interest or currency exchange
rates with respect to its investments.
30
<PAGE>
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The
Fund may, nonetheless, elect to treat the gain or loss from certain forward
foreign exchange contracts as capital. In this case, gain or loss realized in
connection with a forward foreign exchange contract that is a Section 1256
contract will be characterized as 60% long-term and 40% short-term capital
gain or loss.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's sales of securities and transactions in options,
futures and forward foreign exchange contracts. Under Section 1092, the Fund
may be required to postpone recognition for tax purposes of losses incurred in
certain sales of securities and certain closing transactions in 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.
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 all or a portion
of distributions made before the losses were realized but in the same taxable
year would be recharacterized as a return of capital to shareholders, thereby
reducing the basis of each shareholder's Fund shares, and resulting in a
capital gain for any shareholder who received a distribution greater than 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
31
<PAGE>
sections and the Treasury regulations promulgated thereunder. The Code and the
Treasury regulations are subject to change by legislative, judicial or
administrative action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on U.S. Government obligations. State law
varies as to whether dividend income attributable to U.S. Government
obligations is exempt from state income tax.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data, 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.
32
<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.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES** CLASS D SHARES**
------------------------------- -------------------------- -------------------------- --------------------------
REDEEMABLE REDEEMABLE REDEEMABLE REDEEMABLE
VALUE OF A EXPRESSED AS VALUE OF A EXPRESSED AS VALUE OF A EXPRESSED AS VALUE OF A
EXPRESSED AS HYPOTHETICAL A PERCENTAGE HYPOTHETICAL A PERCENTAGE HYPOTHETICAL A PERCENTAGE HYPOTHETICAL
A PERCENTAGE $1,000 BASED ON A $1,000 BASED ON A $1,000 BASED ON A $1,000
BASED ON A INVESTMENT HYPOTHETICAL INVESTMENT HYPOTHETICAL INVESTMENT HYPOTHETICAL INVESTMENT
HYPOTHETICAL AT THE END OF $1,000 AT THE END OF $1,000 AT THE END OF $1,000 AT THE END OF
$1,000 INVESTMENT THE PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD
----------------- ------------- ------------ ------------- ------------ ------------- ------------ -------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One Year Ended
December 31,
1995............. 10.73% $1,107.30 10.61% $1,106.10 13.38% $1,133.80 10.46% $1,104.60
Five Years Ended
December 31,
1995............. 9.64% $1,584.70
Inception
(November 18,
1991) to December
31, 1995......... 7.01% $1,321.80
Inception
(September 29,
1988) to December
31, 1995......... 9.90% $1,983.40
Inception
(October 21,
1994) to December
31, 1995......... 10.78% $1,130.00 7.70% $1,092.60
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended
December 31,
1995............ 15.35% $1,153.50 14.61% $1,146.10 14.38% $1,143.80 15.06% $1,150.60
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
Inception
(October 21,
1994) to December
31, 1995......... (1.20%) $ 988.00 (1.09%) $ 989.01
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Inception
(November 18,
1991) to December
31, 1995......... 32.18% $1,321.80
Inception
(September 29,
1988) to December
31, 1995*........ 98.34% $1,983.40
Inception
(October 21,
1994) to December
31, 1995......... 13.00% $1,130.00 9.26% $1,092.60
<CAPTION>
YIELD
<S> <C> <C> <C> <C> <C> <C> <C> <C>
30 Days Ended
December 31,
1995............. 8.07% 7.63% 7.59% 7.85%
</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.
** Information as to Class C and Class D shares is presented for the period
October 21, 1994 (commencement of operations) to December 31, 1995. Prior
to October 21, 1994, no Class C or Class D shares have been publicly
issued.
33
<PAGE>
In order to reflect the reduced sales charges in the case of Class A or
Class D shares or the waiver of the CDSC in the case of Class B shares
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. 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. At the date of this 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. 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 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.
34
<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 value of the Fund's net assets and number of
shares outstanding as of December 31, 1995 is calculated as set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------------ -------------- ---------- ----------
<S> <C> <C> <C> <C>
Net Assets................... $260,806,316 $1,241,895,723 $5,405,846 $6,319,840
============ ============== ========== ==========
Number of Shares Outstanding. 30,010,112 142,991,509 622,955 727,249
============ ============== ========== ==========
Net Asset Value Per Share
(net assets divided by num-
ber of shares outstanding).. $ 8.69 $ 8.69 $ 8.68 $ 8.69
Sales Charge (for Class A and
Class D shares: 4.00% of of-
fering price (4.17% of net
asset value per share))*.... .36 ** ** .36
------------ -------------- ---------- ----------
Offering Price............... $ 9.05 $ 8.69 $ 8.68 $ 9.05
============ ============== ========== ==========
</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.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, have
been selected as the independent auditors 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
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, acts as the Fund's transfer agent. The
Transfer Agent is responsible for the issuance, transfer and redemption of
shares and the opening, maintenance and servicing of shareholder accounts. See
"Management of the Fund--Transfer Agency Services" in the Prospectus.
LEGAL COUNSEL
Brown & Wood, 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.
35
<PAGE>
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, 1996.
36
<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, 1995, the related statements of operations for the
year then ended and changes in net assets for 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, 1995 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, 1995, 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 12, 1996
37
<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> <C> <C> <C> <C> <C> <C> <C>
South Foreign US$ 5,000,000 Republic of South Africa, 9.625%
Africa Government due 12/15/1999 $ 4,984,250 $ 5,400,000 0.3%
Obligations
Total Fixed-Income Investments
in South Africa 4,984,250 5,400,000 0.3
Convertible Bonds
South Metals & US$ 1,000,000 Samancor Ltd., 7% due 6/30/2004 965,000 965,000 0.1
Africa Mining
Total Investments in South African
Convertible Bonds 965,000 965,000 0.1
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Total Investments in
African Securities 5,949,250 6,365,000 0.4
LATIN AMERICA &
THE CARIBBEAN Fixed-Income Investments
Argentina Communications US$ 3,000,000 Telecom Argentina Stet--France Telecom
S.A., 8.375% due 10/18/2000 2,697,500 2,842,500 0.2
10,000,000 Telefonica de Argentina S.A., 11.875%
due 11/01/2004 9,800,800 10,350,000 0.7
---------- ---------- ------
12,498,300 13,192,500 0.9
Energy 5,000,000 Transportadora de Gas del Sur, 9.79%
due 11/01/2010 (e) 5,000,000 5,100,000 0.3
Foreign 2,000,000 Republic of Argentina, 8.375% due
Government 12/20/2003 1,692,000 1,692,000 0.1
Obligations
Total Fixed-Income Investments
in Argentina 19,190,300 19,984,500 1.3
Brazil Banking US$ 3,000,000 Banco Safra, 9.50% due 11/10/2003 (e) 2,992,500 2,985,000 0.2
3,000,000 Uniao de Brancos Brasileiros, 10.25%
due 6/12/1997 (e) 2,992,500 3,015,000 0.2
---------- ---------- ------
5,985,000 6,000,000 0.4
Construction 3,000,000 Compania Brasileira de Projetos e
Obras, 12.50% due 12/22/1997 (e) 2,985,000 2,951,250 0.2
Total Fixed-Income Investments
in Brazil 8,970,000 8,951,250 0.6
Colombia Banking & US$ 5,000,000 Banco Ganadero S.A., 9.75%
Finance due 8/26/1999 (e) 4,992,340 5,125,000 0.3
5,000,000 Financira Energetica Nacional,
9% due 11/08/1999 5,140,000 5,187,500 0.4
Total Fixed-Income Investments
in Colombia 10,132,340 10,312,500 0.7
Mexico Foreign Pound 10,000,000 United Mexican States, Government Bond,
Government
Sterling 12.25% due 12/03/1998 17,422,208 15,366,780 1.0
Obligations
Total Fixed-Income Investments
in Mexico 17,422,208 15,366,780 1.0
Trinidad & Foreign Republic of Trinidad & Tobago:
Tobago Government US$ 3,000,000 11.50% due 11/20/1997 3,123,750 3,165,000 0.2
Obligations 7,000,000 9.75% due 11/03/2000 (e) 6,987,850 7,210,000 0.5
---------- ---------- ------
10,111,600 10,375,000 0.7
Total Fixed-Income Investments in
Trinidad & Tobago 10,111,600 10,375,000 0.7
Total Investments in Latin
American & Caribbean Securities 65,826,448 64,990,030 4.3
NORTH
AMERICA
Canada Energy US$ 10,000,000 Gulf Canada Resources, Ltd., 9%
due 8/15/1999 9,158,438 10,550,000 0.7
Paper 5,000,000 Doman Industries Ltd., 8.75% due
3/15/2004 4,800,000 4,737,500 0.3
Total Fixed-Income Investments
in Canada 13,958,438 15,287,500 1.0
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
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 Airlines US$ 10,000,000 Delta Air Lines, Inc.,
States 10.50% due 4/30/2016 $ 10,287,500 $ 12,606,500 0.8%
7,100,000 United Air Pass-Through,
10.125% due 3/22/2015 7,684,046 8,521,065 0.6
15,000,000 USAir Inc., 10.375% due 3/01/2013 15,000,000 13,950,000 0.9
-------------- -------------- ------
32,971,546 35,077,565 2.3
Broadcasting/ 10,000,000 Lenfest Communications Inc., 8.375%
Cable due 11/01/2005 9,970,600 10,000,000 0.7
10,000,000 Videotron Group, Ltd. Co., 10.25%
due 10/15/2002 10,043,750 10,500,000 0.7
-------------- -------------- ------
20,014,350 20,500,000 1.4
Building 15,300,000 Pacific Lumber Co., 10.50% due
Materials 3/01/2003 15,462,750 14,496,750 1.0
11,035,000 USG Corp., 8.75% due 3/01/2017 9,717,469 10,979,825 0.7
-------------- -------------- ------
25,180,219 25,476,575 1.7
Chemicals 23,860,000 GI Holdings, Inc., 11.38%*
due 10/01/1998 17,603,845 18,491,500 1.2
10,000,000 Uniroyal Chemical Co., 9%
due 9/01/2000 10,000,000 10,000,000 0.7
-------------- -------------- ------
27,603,845 28,491,500 1.9
Conglomerates 10,000,000 ADT Operations, 9.25% due 8/01/2003 10,066,078 10,725,000 0.7
20,000,000 Coltec Industries Inc., 10.25%
due 4/01/2002 20,387,500 20,550,000 1.4
10,000,000 Sequa Corp., 9.375% due 12/15/2003 9,915,000 9,300,000 0.6
10,000,000 Sherritt Gordon, Ltd., 9.75% due
4/01/2003 10,048,250 10,650,000 0.7
-------------- -------------- ------
50,416,828 51,225,000 3.4
Consumer 15,000,000 Revlon Consumer Products Corp.,
Products 9.375% due 4/01/2001 13,237,328 15,187,500 1.0
Energy 10,000,000 Clark R & M Holdings, Inc., 10.43%*
due 2/15/2000 6,545,715 6,650,000 0.4
9,100,000 Maxus Energy Corp., 9.875% due
10/15/2002 9,086,800 9,145,500 0.6
5,000,000 Oleoducts Central S.A., 9.35%
due 9/01/2005 5,000,000 5,062,500 0.3
15,000,000 Rowan Companies, Inc., 11.875%
due 12/01/2001 15,590,000 16,275,000 1.1
15,000,000 Seagull Energy Corp., 8.625% due
8/01/2005 15,000,000 14,550,000 1.0
10,000,000 TransTexas Gas Corp., 11.50%
due 6/15/2002 (f) 9,999,250 10,325,000 0.7
-------------- -------------- ------
61,221,765 62,008,000 4.1
Entertainment Marvel Holdings Inc.:
1,125,000 9.125% due 2/15/1998 995,625 1,035,000 0.1
26,780,000 11.47%* due 4/15/1998 20,599,454 19,281,600 1.2
5,000,000 Spectravision Inc., 10.92%* due
10/01/2001 4,410,496 1,000,000 0.1
-------------- -------------- ------
26,005,575 21,316,600 1.4
Financial 17,375,000 Lomas Mortgage USA, Inc.,
Services 10.25%* due 10/01/2002 17,387,500 8,340,000 0.5
10,000,000 Penn Financial Corp., 9.25%
due 12/15/2003 10,000,000 10,150,000 0.7
10,000,000 Reliance Group Holdings, Inc.,
9% due 11/15/2000 10,000,000 10,287,500 0.7
-------------- -------------- ------
37,387,500 28,777,500 1.9
Food & Beverage 10,000,000 Canandaigua Wine Inc., 8.75% due
12/15/2003 10,000,000 10,050,000 0.7
10,000,000 Coca-Cola Bottling Co., 9% due
11/15/2003 10,005,000 10,000,000 0.6
20,000,000 Del Monte Corp., 10% due 5/01/2003 20,025,313 17,750,000 1.2
</TABLE>
40
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
10,000,000 Specialty Foods Corp., 10.25% due
8/15/2001 10,000,000 9,400,000 0.6
-------------- -------------- ------
50,030,313 47,200,000 3.1
Gaming 1,906,000 Goldriver Hotel & Casino Corp.,
13.375% due 8/31/1999 2,645,548 895,820 0.1
10,000,000 Greate Bay Properties, Inc.,
10.875% due 1/15/2004 9,996,250 8,775,000 0.6
7,500,000 Harrah's Jazz Co., 14.25% due
11/15/2001 5,178,125 2,062,500 0.1
10,000,000 Showboat, Inc., 9.25% due
5/01/2008 9,748,750 10,050,000 0.7
10,000,000 Trump Plaza Funding, Inc.,
10.875% due 6/15/2001 7,536,875 10,350,000 0.7
-------------- -------------- ------
35,105,548 32,133,320 2.2
Health Services 5,000,000 Tenet Healthcare Corp.,
8.625% due 12/01/2003 4,983,300 5,275,000 0.3
Home Builders Del E. Webb Corp.:
9,250,000 10.875% due 3/31/2000 9,376,875 9,435,000 0.6
3,500,000 9.75% due 3/01/2003 3,472,455 3,561,250 0.2
Kaufman & Broad Home, Inc.:
2,000,000 10.375% due 9/01/1999 2,020,000 2,040,000 0.1
5,250,000 9.375% due 5/01/2003 5,217,188 5,184,375 0.4
Ryland Group, Inc.:
9,000,000 10.50% due 7/15/2002 8,907,530 8,910,000 0.6
1,250,000 9.625% due 6/01/2004 1,178,125 1,206,250 0.1
-------------- -------------- ------
30,172,173 30,336,875 2.0
Packaging 20,000,000 Owens-Illinois, Inc., 11%
due 12/01/2003 21,906,563 22,600,000 1.5
Paper 10,000,000 Container Corp. of America,
9.75% due 4/01/2003 10,200,000 9,750,000 0.6
15,000,000 Fort Howard Corp., 9% due 2/01/2006 15,007,500 14,700,000 1.0
10,000,000 Riverwood International Corp.,
11.25% due 6/15/2002 10,385,750 10,850,000 0.7
Stone Container Corp.:
12,500,000 9.875% due 2/01/2001 11,667,085 12,156,250 0.8
7,500,000 10.75% due 10/01/2002 7,425,000 7,743,750 0.5
-------------- -------------- ------
54,685,335 55,200,000 3.6
Restaurants 15,000,000 Flagstar Corp., 11.375% due 9/15/2003 14,640,000 10,650,000 0.7
Supermarkets 15,435,000 Grand Union Co., 12% due 9/01/2004 (f) 15,399,431 13,351,275 0.9
15,000,000 Penn Traffic Co., 9.625% due 4/15/2005 15,334,540 11,700,000 0.8
15,000,000 Pueblo Xtra International Inc.,
9.50% due 8/01/2003 15,111,875 14,400,000 0.9
-------------- -------------- ------
45,845,846 39,451,275 2.6
Steel 3,500,000 WCI Steel Inc., 10.50% due 3/01/2002 3,320,000 3,403,750 0.2
Textiles 10,000,000 WestPoint Stevens Inc., 8.75%
due 12/15/2001 10,093,750 10,000,000 0.7
Transportation 10,000,000 Viking Star Shipping Co., 9.625%
due 7/15/2003 10,028,438 10,350,000 0.7
Utilities 9,848,000 Beaver Valley II Funding, 9% due
6/01/2017 7,262,900 8,306,591 0.5
4,000,000 CTC Mansfield Funding Corp.,
11.125% due 9/30/2016 4,301,250 4,258,400 0.3
Midland Cogeneration Venture
Limited Partnership:
8,681,888 10.33% due 7/23/2002 (b) 8,508,250 9,155,823 0.6
10,000,000 13.25% due 7/23/2006 11,183,750 10,503,300 0.7
9,100,000 Tucson Electric & Power Co., 10.732%
due 1/01/2013 (e) 8,713,250 9,157,785 0.6
-------------- -------------- ------
39,969,400 41,381,899 2.7
Total Fixed-Income Investments
in the United States 614,819,622 596,042,359 39.4
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
NORTH AMERICA Value Percent of
(continued) Industries Face Amount Convertible Bonds Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C> <C>
Canada Metals & US$ 500,000 Inco Ltd., 5.75% due 7/01/2004 $ 525,375 $ 649,375 0.0%
Mining
Paper 1,500,000 Repap Enterprises Inc., 8.50%
due 8/01/1997*** 1,589,399 1,490,625 0.1
Total Investments in
Canadian Convertible Bonds 2,114,774 2,140,000 0.1
United Airlines US$ 3,660,000 AMR Corp., 6.125% due 11/01/2024*** 3,126,770 3,797,250 0.3
States
Building & 800,000 Continental Homes Holding Corp., 6.875%
Construction due 11/01/2002 800,000 944,000 0.1
1,500,000 Toll Brothers Inc., 4.75% due 1/15/2004 1,500,000 1,560,000 0.1
1,000,000 US Home Corp., 4.875% due 11/01/2005 991,000 950,000 0.1
--------- --------- ------
3,291,000 3,454,000 0.3
Computers 2,500,000 Data General Corp., 7.75%
due 6/01/2001 2,479,375 2,443,750 0.2
1,000,000 Storage Technology Corp., 8% due
5/31/2015 1,132,500 970,000 0.1
--------- --------- ------
3,611,875 3,413,750 0.3
Conglomerates Polyphase Corp. (e):
500,000 12% due 12/01/1997 500,000 476,250 0.0
2,000,000 12% due 7/01/1999 2,000,000 1,615,000 0.1
2,000,000 Thermo Electron Corp., 4.25%
due 1/01/2003 (e) 2,000,000 2,165,000 0.2
--------- --------- ------
4,500,000 4,256,250 0.3
Electronics 1,000,000 Analog Devices Inc., 3.50%
due 12/01/2000 1,000,000 1,067,500 0.1
1,500,000 Thermaquest Corp., 5% due
8/15/2000 (e) 1,500,000 1,571,250 0.1
1,500,000 Thermo Optik Corp., 5% due
10/15/2000 (e) 1,500,000 1,571,250 0.1
--------- --------- ------
4,000,000 4,210,000 0.3
Entertainment 4,500,000 Time Warner Inc., 7.99%* due
12/17/2012 1,504,871 1,580,625 0.1
Food & Beverage 2,250,000 Boston Chicken Inc., 4.50%
due 2/01/2004 2,250,000 2,722,500 0.2
1,000,000 Starbucks Corp., 4.25% due 11/01/2002 1,000,000 1,060,000 0.1
--------- --------- ------
3,250,000 3,782,500 0.3
Healthcare 700,000 Pharmaceutical Marketing Services,
Inc., 6.25% due 2/01/2003*** (e) 536,700 633,500 0.0
Industrial 500,000 Mascotech, Inc., 4.50% due 12/15/2003 500,000 388,750 0.0
140,000 Recognition Equipment International,
Inc., 7.25% due 4/15/2011 103,600 123,200 0.0
------- ------- ------
603,600 511,950 0.0
Insurance 1,225,000 American Travelers Corp., 6.50%
due 10/01/2005*** 1,384,500 1,678,250 0.1
Machine-- 1,500,000 Cooper Industries, Inc., 7.05% due
Diversified 1/01/2015 (f) 1,474,999 1,545,000 0.1
Machinery 531,000 Raymond Corp., 6.50% due 12/15/2003*** 676,494 732,780 0.0
Machinery--Paper 750,000 Albany International Corp., 5.25%
due 3/15/2002 691,006 671,250 0.0
Mining 2,000,000 Coeur d'Alene Mines Corp., 6.375%
due 1/31/2004 1,916,550 1,845,000 0.1
Oil--Domestic 2,750,000 USX Corp., 7% due 6/15/2017 2,321,650 2,612,500 0.2
2,080,000 Wainoco Oil Corp., 7.75% due 6/01/2014 1,880,352 1,549,600 0.1
--------- --------- ------
</TABLE>
42
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
4,202,002 4,162,100 0.3
Paper 800,000 Sappi Ltd., 7.50% due 8/01/2002 (e) 800,000 748,000 0.0
Pharmaceuticals 2,600,000 Bindley Western Industries, Inc.,
6.50% due 10/01/2002 2,563,000 2,678,000 0.2
2,000,000 IVAX Corp., 6.50% due 11/15/2001 1,897,500 2,135,000 0.1
--------- --------- ------
4,460,500 4,813,000 0.3
Publishing/Printing 2,150,000 Graphic Industries, Inc., 7%
due 5/15/2006*** 1,899,375 1,967,250 0.1
Real Estate 1,720,000 Pacific Gulf Properties, Inc.,
Investment Trust 8.375% due 2/15/2001 1,513,263 1,591,000 0.1
Retail 200,000 Baby Superstores Inc., 4.875% due
10/01/2000 200,000 229,500 0.0
825,000 Baker (J.) Inc., 7% due 6/01/2002 824,527 565,125 0.0
1,000,000 Michaels Stores, Inc., 4.75% due
1/15/2003 1,016,000 805,000 0.1
--------- --------- ------
2,040,527 1,599,625 0.1
Telecommunications 3,420,000 Intelcom Group Inc., 7% due
10/30/1998 (a)(f) 3,365,137 2,873,688 0.2
Textiles 375,000 Fieldcrest Cannon, Inc., 6%
due 3/15/2012 285,000 255,000 0.0
Transportation 212,000 Alaska Air Group Inc., 7.75%
due 6/15/2010 193,450 192,920 0.0
2,500,000 UAL Corp., 6.375% due 2/01/2025*** 2,245,647 2,806,250 0.2
300,000 Varlen Corp., 6.50% due 6/01/2003 297,000 300,000 0.0
--------- --------- ------
2,736,097 3,299,170 0.2
Total Investments in United States
Convertible Bonds 51,870,266 53,420,938 3.5
Convertible Preferred Stocks,
Shares Held Common Stocks & Warrants
Canada Water Filtration 33,000 Laidlaw Inc. 701,250 853,875 0.1
Total Investments in Canadian
Convertible Preferred Stocks,
Common Stocks & Warrants 701,250 853,875 0.1
United Banking & Finance 25,000 Glendale Federal Savings Bank
States (Series E), Conv. Pfd.*** 1,074,625 1,131,250 0.1
38,300 Rochester Community Savings Bank,
$1.75 (Series B) 1,100,014 1,407,525 0.1
26,300 Southern National Corp., Pfd. $1.6875 843,178 1,019,125 0.1
50,200 Union Planters Corp., Pfd. $2.00 1,775,655 1,982,900 0.1
--------- --------- ------
4,793,472 5,540,800 0.4
Electronics 85,154 Rexel S.A. (f) 787,820 1,149,579 0.1
Entertainment 30,000 Time Warner Financial 930,000 937,500 0.1
Environmental 35,200 Allied Waste Industries, Inc.,
$90 Conv. Pfd.*** (e)(g) 3,520,401 5,033,600 0.3
Financial Services 35,000 U.S. West Communications, Inc.,
Conv. Pfd. 840,000 918,750 0.1
Food & Beverage 346,500 RJR Nabisco, Inc., Pfd.
$.60 (Series C) 2,250,782 2,208,938 0.1
Forest Products & 44,800 James River Corp. of Virginia 1,969,537 2,077,600 0.1
Paper 15,000 James River Corp. of Virginia, $3.375
(Series K), Conv. Pfd. 668,330 686,250 0.0
--------- --------- ------
2,637,867 2,763,850 0.1
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
NORTH AMERICA Convertible Preferred Stocks, Value Percent of
(concluded) Industries Face Amount Common Stocks & Warrants Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
United Gaming 75,000 Goldriver Hotel & Casino Corp.,
States Liquidating Trust $ 75,000 $ 53,437 0.0%
(concluded) 30,000 Goldriver Hotel & Casino Corp.
(Series B)(d) 219,738 30,000 0.0
6,000 Trump Taj Mahal Funding, Inc.
(Class A) 3,000 108,000 0.0
------------ ------------ ------
297,738 191,437 0.0
High Technology 91,053 Anacomp, Inc. (Warrants)(c) 120,000 2,850 0.0
Hotels 1,608 Buckhead America Corp. 8,291 9,648 0.0
Industrial Services 20,000 Mascotech, Inc., Pfd $1.20 312,460 250,000 0.0
10,000 UGI Corp. (Warrants)(c) 43,750 1,500 0.0
------------ ------------ ------
356,210 251,500 0.0
Insurance 36,200 Kemper Corp., Pfd. $5.25
(Series E) (e) 1,674,974 1,900,500 0.1
1,500 Westbridge Capital Corp., Pfd. (e) 1,500,000 1,320,000 0.1
------------ ------------ ------
3,174,974 3,220,500 0.2
Oil & Gas 28,000 Callon Petroleum Co. 700,000 756,000 0.0
39,000 Enron Corp. 848,250 936,000 0.1
35,000 Lomak Petroleum Inc. (e) 875,000 988,750 0.1
43,000 Snyder Oil Corp., Pfd. $1.50
(Series A) 906,023 849,250 0.1
20,000 Western Gas Resources, Inc.,
Pfd. $2.62 1,000,000 700,000 0.0
------------ ------------ ------
4,329,273 4,230,000 0.3
Total Investments in United
States Convertible Preferred Stocks,
Common Stocks & Warrants 24,046,828 26,458,952 1.7
Total Investments in North American
Securities 707,511,178 694,203,624 45.8
PACIFIC
BASIN Face Amount Fixed-Income Investments
Australia Foreign Australian Government Bonds:
Government A$ 65,000,000 10% due 10/15/2002 53,972,473 53,344,302 3.5
Obligations 48,000,000 9.50% due 8/15/2003 36,936,368 38,559,289 2.6
------------ ------------ ------
90,908,841 91,903,591 6.1
Total Fixed-Income Investments
in Australia 90,908,841 91,903,591 6.1
India Chemicals US$ 3,000,000 Reliance Industries, Ltd.,
8.125% due 9/27/2005 (e) 2,994,900 3,015,000 0.2
Total Fixed-Income Investments
in India 2,994,900 3,015,000 0.2
New Zealand Foreign NZ$ 47,000,000 New Zealand Government Bonds, 10%
Government due 7/15/1997 31,760,291 31,548,485 2.1
Obligations
Total Fixed-Income Investments
in New Zealand 31,760,291 31,548,485 2.1
Philippines Industrial US$ 3,000,000 San Miguel Corp., 9% due 4/27/2000 (e) 2,981,000 3,165,000 0.2
Telecommunications 6,000,000 Philippine Long Distance Telephone Co.,
9.875% due 8/01/2005 5,999,220 6,367,500 0.4
</TABLE>
44
<PAGE>
<TABLE>
<S> <C> <C><C> <C> <C> <C> <C>
Total Fixed-Income Investments
in the Philippines 8,980,220 9,532,500 0.6
Total Investments in
Pacific Basin Securities 134,644,252 135,999,576 9.0
WESTERN
EUROPE
Denmark Foreign Denmark Government Bonds:
Government Dkr 47,500,000 8% due 5/15/2003 8,901,926 9,128,946 0.6
Obligations 38,270,000 8% due 3/15/2006 6,911,463 7,262,532 0.5
190,750,000 Denmark Kingdom, 9% due 11/15/2000 37,427,487 38,222,267 2.5
-------------- -------------- ------
53,240,876 54,613,745 3.6
Total Fixed-Income Investments
in Denmark 53,240,876 54,613,745 3.6
Germany Consumer US$ 10,000,000 Tarkett International, 9% due
Products 3/01/2002 10,000,000 10,637,500 0.7
Foreign DM 65,000,000 German Unity Fund, 8% due 1/21/2002 51,194,207 51,173,594 3.4
Government
Obligations
Total Fixed-Income Investments
in Germany 61,194,207 61,811,094 4.1
Ireland Dental US$ 500,000 Phoenix Shannon PLC, 9.50% due
Equipment & 11/01/2000 (e) 500,000 500,000 0.0
Supplies
Total Fixed-Income Investments
in Ireland 500,000 500,000 0.0
Italy Foreign Buoni Poliennali del Tesoro
Government (Italian Government Bonds):
Obligations Lit 114,250,000,000 10.50% due 4/01/2000 69,861,583 72,629,842 4.8
69,000,000,000 10.50% due 9/01/2005 39,988,905 43,154,385 2.8
-------------- -------------- ------
109,850,488 115,784,227 7.6
Total Fixed-Income Investments
in Italy 109,850,488 115,784,227 7.6
Spain Foreign Government of Spain:
Government Pta 9,299,000,000 12.25% due 3/25/2000 77,526,746 84,208,676 5.6
Obligations 6,810,000,000 10.50% due 10/30/2003 53,942,369 58,799,085 3.9
-------------- -------------- ------
131,469,115 143,007,761 9.5
Total Fixed-Income Investments
in Spain 131,469,115 143,007,761 9.5
Sweden Foreign Sek 160,000,000 Government of Sweden,
Government 11% due 1/21/1999 24,416,724 25,946,794 1.7
Obligations
Total Fixed-Income Investments
in Sweden 24,416,724 25,946,794 1.7
Turkey Foreign US$ 2,000,000 Republic of Turkey, 8.75%
Government due 10/05/1998 (e) 1,994,820 1,975,000 0.1
Obligations
Total Fixed-Income Investments
in Turkey 1,994,820 1,975,000 0.1
United Broadcasting US$ 15,000,000 Videotron Holdings PLC, 11%*
Kingdom /Cable due 8/15/2005 8,967,548 9,300,000 0.6
Communications 20,000,000 Telewest Communications PLC, 10.98%*
due 10/01/2007 12,028,180 12,075,000 0.8
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
WESTERN EUROPE Value Percent of
(concluded) Industries Face Amount Fixed-Income Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
United Foreign Pound United Kingdom Gilt:
Kingdom Government Sterling 37,350,000 9.75% due 8/27/2002 $ 63,735,056 $ 65,873,719 4.4%
(concluded) Obligations 17,350,000 8.50% due 12/07/2005 27,960,025 28,967,167 1.9
-------------- -------------- ------
91,695,081 94,840,886 6.3
Total Fixed-Income Investments
in the United Kingdom 112,690,809 116,215,886 7.7
Total Investments in
Western European Securities 495,357,039 519,854,507 34.3
SHORT-TERM
SECURITIES Issue
Commercial US$ 16,320,000 General Electric Capital Corp., 5.90%
Paper** due 1/02/1996 16,320,000 16,320,000 1.1
20,886,000 Matterhorn Capital Corp., 5.74%
due 1/23/1996 20,816,067 20,816,067 1.5
-------------- -------------- ------
37,136,067 37,136,067 2.6
US Government US Treasury Bills:
& Agency 2,000,000 5.335% due 2/15/1996 1,986,959 1,986,900 0.1
Obligations** 2,000,000 5.36% due 2/15/1996 1,986,898 1,986,900 0.1
9,000,000 5.375% due 2/15/1996 8,940,875 8,941,050 0.6
2,000,000 5.34% due 2/22/1996 1,984,870 1,985,700 0.1
2,000,000 5.345% due 2/22/1996 1,984,856 1,985,700 0.1
3,000,000 5.255% due 3/14/1996 2,968,470 2,969,490 0.2
-------------- -------------- ------
19,852,928 19,855,740 1.2
<CAPTION>
<S> <C> <C> <C> <C>
Total Investments in
Short-Term Securities 56,988,995 56,991,807 3.8
Total Investments 1,466,277,162 1,478,404,544 97.6
<CAPTION>
OPTIONS Number of Contracts/ Premiums
WRITTEN Face Amount Received
<S> <C> <C> <C> <C> <C>
Currency Put 40,000,000 German Deutschemark/Italian Lira,
Options Written expiring February 1996 at
DM/Lit 1,090 (230,028) (166,040) 0.0
Total Options Written (230,028) (166,040) 0.0
<CAPTION>
<S> <C> <C> <C>
Total Investments, Net of Options Written $1,466,047,134 1,478,238,504 97.6
==============
Short Sales (Proceeds--$7,738,513)*** (8,377,737) (0.6)
Unrealized Depreciation on Forward Foreign Exchange Contracts--Net++ (97,888) 0.0
Other Assets Less Liabilities 44,664,846 3.0
-------------- ------
Net Assets $1,514,427,725 100.0%
============== ======
</TABLE>
46
<PAGE>
[FN]
*Represents a zero coupon or step bond; the interest rate shown is
the effective yield at the time of purchase by the Fund.
**Commercial Paper and certain US Government & Agency Obligations
are traded on a discount basis; the interest rates shown are the
discount rates paid at the time of purchase by the Fund.
***Covered Short Sales entered into as of December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
Common Value
Shares Issue (Note 1i)
<S> <C> <C> <C>
27,800 AMR Corp. $(2,060,675)
196,370 Allied Waste Industries, Inc. (1,399,136)
43,100 American Travelers Corp. (1,212,188)
50,000 Glendale Federal Savings Bank (868,750)
12,000 Graphic Industries, Inc. (147,000)
26,200 Pharmaceutical Marketing Services,
Inc. (396,275)
25,200 Raymond Corp. (585,900)
72,200 Repap Enterprises Inc. (320,388)
7,800 UAL Corp. (1,387,425)
</TABLE>
Total (Proceeds--$7,738,513) $(8,377,737)
===========
++Forward foreign exchange contracts as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Unrealized
Appreciation
Expiration (Depreciation)
Date (Note 1c)
Foreign Currency Purchased
<S> <C> <C>
DM 38,000,000 January 1996 $ 183,457
Total (US$ Commitment--$26,383,392) $ 183,457
------------
Foreign Currency Sold
Lit 42,352,900,000 January 1996 $ (281,345)
Total (US$ Commitment--$26,383,392) $ (281,345)
------------
Total Unrealized Depreciation on Forward
Foreign Exchange Contracts--Net $ (97,888)
============
</TABLE>
(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)Restricted securities as to resale. The value of the Fund's
investment in restricted securities was approximately $62,222,000,
representing 4.1% of net assets.
<TABLE>
<CAPTION>
Acquisition Value
Issue Date(s) Cost (Note 1a)
<S> <C> <C> <C> <C>
Allied Waste Industries, Inc., 9/23/1993-
$90 Conv. Pfd. 10/6/1994 $ 3,520,401 $ 5,033,600
Banco Ganadero S.A., 8/10/1994-
9.75% due 8/26/1999 6/06/1995 4,992,340 5,125,000
Banco Safra, 9.50%
due 11/10/2003 11/02/1995 2,992,500 2,985,000
Compania Brasileira de
Projetos e Obras, 12.50%
due 12/22/1997 12/14/1994 2,985,000 2,951,250
Kemper Corp., Pfd.
$5.25 (Series E) 4/4/1995 1,674,974 1,900,500
Lomak Petroleum Inc. 1/15/1996 875,000 988,750
Pharmaceutical Marketing
Services, Inc., 6.25% 10/28/1994-
due 2/01/2003 11/01/1994 536,700 633,500
Phoenix Shannon PLC,
9.50% due 11/01/2000 11/21/1995 500,000 500,000
Polyphase Corp.,
12% due 12/01/1997 12/05/1995 500,000 476,250
Polyphase Corp.,
12% due 7/01/1999 7/05/1994 2,000,000 1,615,000
Reliance Industries, Ltd.,
8.125% due 9/27/2005 9/22/1995 2,994,900 3,015,000
Republic of Trinidad & Tobago, 10/15/1993-
9.75% due 11/03/2000 8/18/1995 6,987,850 7,210,000
Republic of Turkey,
8.75% due 10/05/1998 9/19/1995 1,994,820 1,975,000
San Miguel Corp., 9/26/1994-
9% due 4/27/2000 9/30/1994 2,981,000 3,165,000
Sappi Ltd., 7.50%
due 8/01/2002 7/19/1995 800,000 748,000
Thermaquest Corp.,
5% due 8/15/2000 7/20/1995 1,500,000 1,571,250
Thermo Electron Corp.,
4.25% due 1/01/2003 11/28/1995 2,000,000 2,165,000
Thermo Optik Corp.,
5% due 10/15/2000 9/28/1995 1,500,000 1,571,250
Transportadora de Gas del Sur,
9.79% due 11/01/2010 11/02/1995 5,000,000 5,100,000
Tucson Electric & Power Co.,
10.732% due 1/01/2013 8/03/1993 8,713,250 9,157,785
Uniao de Brancos Brasileiros, 5/24/1995-
10.25% due 6/12/1997 5/25/1995 2,992,500 3,015,000
Westbridge Capital Corp., Pfd. 4/12/1994 1,500,000 1,320,000
Total $59,541,235 $62,222,135
=========== ===========
</TABLE>
(f)Non-income producing security.
(g)Each unit consists of 10 shares.
See Notes to Financial Statements.
47
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
As of December 31, 1995
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$1,466,277,162) (Note 1a) $1,478,404,544
Cash 1,932,347
Foreign cash (Note 1d) 3,243,505
Receivables:
Interest $ 41,562,485
Short sales (Note 1i) 7,761,183
Capital shares sold 4,819,734
Securities sold 3,035,338
Dividends 143,631
Forward foreign exchange contracts (Note 1c) 55,302 57,377,673
--------------
Prepaid registration fees and other assets (Note 1g) 116,410
--------------
Total assets 1,541,074,479
--------------
Liabilities: Common stocks sold short, at market value
(proceeds--$7,738,513) (Note 1i) 8,377,737
Options written, at value (premiums received--$230,028)
(Notes 1a & 1c) 166,040
Unrealized depreciation on forward foreign exchange contracts
(Note 1c) 97,888
Payables:
Dividends to shareholders (Note 1h) 7,673,344
Capital shares redeemed 4,427,660
Securities purchased 3,835,549
Distributor (Note 2) 817,661
Investment adviser (Note 2) 793,729
Forward foreign exchange contracts (Note 1c) 11,249 17,559,192
--------------
Accrued expenses and other liabilities 445,897
--------------
Total liabilities 26,646,754
--------------
Net Assets: Net assets $1,514,427,725
==============
Net Assets Class A Shares of Common Stock, $0.10 par value,
Consist of: 1,000,000,000 shares authorized $ 3,001,011
Class B Shares of Common Stock, $0.10 par value,
1,000,000,000 shares authorized 14,299,151
Class C Shares of Common Stock, $0.10 par value,
1,000,000,000 shares authorized 62,296
Class D Shares of Common Stock, $0.10 par value,
1,000,000,000 shares authorized 72,725
Paid-in capital in excess of par 1,570,282,963
Accumulated realized capital losses on investments and
foreign currency transactions--net (Note 6) (85,047,460)
Unrealized appreciation on investments and foreign
currency transactions--net 11,757,039
--------------
Net assets $1,514,427,725
==============
Net Asset Class A--Based on net assets of $260,806,316 and 30,010,112
Value: shares outstanding $ 8.69
==============
Class B--Based on net assets of $1,241,895,723 and 142,991,509
shares outstanding $ 8.69
==============
Class C--Based on net assets of $5,405,846 and 622,955 shares
outstanding $ 8.68
==============
</TABLE>
48
<PAGE>
<TABLE>
<S> <C> <C>
Class D--Based on net assets of $6,319,840 and 727,249 shares
outstanding $ 8.69
==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
<S> <S> <C> <C>
Investment Interest and discount earned (net of $1,785,700 withholding tax) $ 149,652,318
Income Dividends 1,703,626
(Notes 1e & 1f): Other income 736,648
--------------
Total income 152,092,592
--------------
Expenses: Account maintenance and distribution fees--Class B (Note 2) $ 10,044,327
Investment advisory fees (Note 2) 9,774,596
Transfer agent fees--Class B (Note 2) 1,732,922
Custodian fees 507,288
Printing and shareholder reports 333,033
Transfer agent fees--Class A (Note 2) 312,274
Accounting services (Note 2) 150,832
Registration fees (Note 1g) 140,376
Professional fees 131,120
Directors' fees and expenses 41,697
Account maintenance and distribution fees--Class C (Note 2) 27,242
Short sale of dividends (Note 1i) 20,458
Pricing fees 10,061
Account maintenance fees--Class D (Note 2) 6,975
Transfer agent fees--Class C (Note 2) 5,552
Transfer agent fees--Class D (Note 2) 3,016
Other 54,106
--------------
Total expenses 23,295,875
--------------
Investment income--net 128,796,717
--------------
Realized & Realized loss from:
Unrealized Gain Investments--net (15,611,546)
(Loss) on Foreign currency transactions--net (33,903,295) (49,514,841)
Investments & --------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net 138,925,679
(Notes 1c, 1d, Foreign currency transactions--net 5,417,526 144,343,205
1f & 3): -------------- --------------
Net realized and unrealized gain on investments and
foreign currency transactions 94,828,364
--------------
Net Increase in Net Assets Resulting from Operations $ 223,625,081
==============
See Notes to Financial Statements.
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended December 31,
Increase (Decrease) in Net Assets: 1995 1994
<S> <C> <C> <C>
Operations: Investment income--net $ 128,796,717 $ 167,081,662
Realized loss on investments and foreign currency
transactions--net (49,514,841) (107,581,837)
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net 144,343,205 (173,922,162)
-------------- --------------
Net increase (decrease) in net assets resulting from operations 223,625,081 (114,422,337)
-------------- --------------
Dividends & Investment income--net:
Distributions to Class A (18,898,095) (19,926,079)
Shareholders Class B (81,220,841) (84,931,858)
(Note 1h): Class C (203,152) (4,853)
Class D (179,224) (6,907)
Return of capital:
Class A (5,320,682) (11,820,707)
Class B (22,867,399) (50,383,950)
Class C (57,196) (2,879)
Class D (50,460) (4,097)
-------------- --------------
Net decrease in net assets resulting from dividends
and distributions to shareholders (128,797,049) (167,081,330)
-------------- --------------
Capital Share Net decrease in net assets derived from capital
Transactions share transactions (384,702,641) (487,938,280)
(Note 4): -------------- --------------
Net Assets: Total decrease in net assets (289,874,609) (769,441,947)
Beginning of year 1,804,302,334 2,573,744,281
-------------- --------------
End of year $1,514,427,725 $1,804,302,334
============== ==============
<CAPTION>
FINANCIAL HIGHLIGHTS
The following per share data
and ratios have been derived
from information provided in Class A
the financial statements. For the Four
For the Year Ended Months Ended For the Year Ended
Increase (Decrease) December 31, Dec. 31, August 31,
in Net Asset Value: 1995 1994++++ 1993 1992 1992 1991
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning
Operating of period $ 8.20 $ 9.28 $ 8.85 $ 9.34 $ 9.07 $ 9.48
Performance: -------- -------- -------- -------- -------- --------
Investment income--net .72 .72 .75 .29 .99 1.12
Realized and unrealized gain
(loss) on investments and
foreign currency transactions
--net .49 (1.09) .46 (.41) .40 (.16)
-------- -------- -------- -------- -------- --------
Total from investment operations 1.21 (.37) 1.21 (.12) 1.39 .96
-------- -------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.56) (.45) (.58) (.35) (1.12) (1.37)
</TABLE>
See Notes to Financial Statements.
50
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Realized gain on investments
--net -- -- (.03) (.02) -- --
Return of capital--net (.16) (.26) (.17) -- -- --
-------- -------- -------- -------- -------- --------
Total dividends and distributions (.72) (.71) (.78) (.37) (1.12) (1.37)
======== ======== ======== ======== ======== ========
Net asset value, end of period $ 8.69 $ 8.20 $ 9.28 $ 8.85 $ 9.34 $ 9.07
======== ======== ======== ======== ======== ========
Total Investment Based on net asset value
Return:** per share 15.35% (4.05%) 14.12% (1.26%)+++ 16.09% 11.50%
======== ======== ======== ======== ======== ========
Ratios to Average Expenses .80% .77% .78% .76%* .88% .85%
Net Assets: ======== ======== ======== ======== ======== ========
Investment income--net 8.54% 8.17% 8.22% 8.09%* 11.16% 12.38%
======== ======== ======== ======== ======== ========
Supplemental Net assets, end of period
Data: (in thousands) $260,806 $311,181 $467,625 $455,672 $526,631 $292,709
======== ======== ======== ======== ======== ========
Portfolio turnover 116.00% 115.95% 182.88% 68.42% 76.18% 63.83%
======== ======== ======== ======== ======== ========
<CAPTION>
Class B
For the For the
The following per share data and ratios Four Period
have been derived from information Months Nov. 18,
provided in the financial statements. For the Year Ended Ended 1991++ to
December 31, Dec. 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1995 1994++++ 1993 1992 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 8.19 $ 9.28 $ 8.85 $ 9.33 $ 9.26
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income--net .65 .65 .70 .27 .77
Realized and unrealized gain (loss)
on investments and foreign
currency transactions--net .50 (1.10) .44 (.40) --
---------- ---------- ---------- ---------- ----------
Total from investment operations 1.15 (.45) 1.14 (.13) .77
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.51) (.40) (.53) (.33) (.70)
Realized gain on investments--net -- -- (.03) (.02) --
Return of capital--net (.14) (.24) (.15) -- --
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (.65) (.64) (.71) (.35) (.70)
========== ========== ========== ========== ==========
Net asset value, end of period $ 8.69 $ 8.19 $ 9.28 $ 8.85 $ 9.33
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share 14.61% (4.90%) 13.27% (1.42%)+++ 8.61%+++
Return:** ========== ========== ========== ========== ==========
Ratios to Average Expenses, excluding account
Net Assets: maintenance and distribution fees .81% .79% .80% .78%* .88%*
========== ========== ========== ========== ==========
Expenses 1.56% 1.54% 1.55% 1.53%* 1.63%*
========== ========== ========== ========== ==========
Investment income--net 7.77% 7.41% 7.42% 7.08%* 8.02%*
========== ========== ========== ========== ==========
Supplemental Net assets, end of period
Data: (in thousands) $1,241,896 $1,490,507 $2,106,120 $1,582,270 $1,514,406
========== ========== ========== ========== ==========
Portfolio turnover 116.00% 115.95% 182.88% 68.42% 76.18%
========== ========== ========== ========== ==========
</TABLE>
[FN]
++Commencement of Operations.
++++Based on average shares outstanding during the period.
+++Aggregate total investment return.
*Annualized.
**Total investment returns exclude the effects of sales loads.
See Notes to Financial Statements.
51
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (concluded)
Class C Class D
For the For the
The following per share data and ratios For the Period For the Period
have been derived from information Year Oct. 21, Year Oct. 21,
provided in the financial statements. Ended 1994++ to Ended 1994++ to
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
Increase (Decrease) in Net Asset Value: 1995 1994++++ 1995 1994++++
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 8.19 $ 8.42 $ 8.20 $ 8.43
Operating -------- -------- -------- --------
Performance: Investment income--net .64 .10 .70 .11
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net .49 (.20) .49 (.20)
-------- -------- -------- --------
Total from investment operations 1.13 (.10) 1.19 (.09)
-------- -------- -------- --------
Less dividends:
Investment income--net (.50) (.08) (.55) (.09)
Return of capital--net (.14) (.05) (.15) (.05)
-------- -------- -------- --------
Total dividends (.64) (.13) (.70) (.14)
======== ======== ======== ========
Net asset value, end of period $ 8.68 $ 8.19 $ 8.69 $ 8.20
======== ======== ======== ========
Total Investment Based on net asset value per share 14.38% (1.20%)+++ 15.06% (1.09%)+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses, excluding account maintenance
Net Assets: and distribution fees .85% .84%* .79% .79%*
======== ======== ======== ========
Expenses 1.65% 1.64%* 1.04% 1.04%*
======== ======== ======== ========
Investment income--net 7.65% 8.00%* 8.23% 8.60%*
======== ======== ======== ========
Supplemental Net assets, end of period
Data: (in thousands) $ 5,406 $ 1,204 $ 6,320 $ 1,410
======== ======== ======== ========
Portfolio turnover 116.00% 115.95% 116.00% 115.95%
======== ======== ======== ========
</TABLE>
[FN]
*Annualized.
**Total investment returns exclude the effects of sales loads.
+++Aggregate total investment return.
++Commencement of Operations.
++++Based on average shares outstanding during the period.
See Notes to Financial Statements.
52
<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 investments--Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on
the day the securities are being valued or, lacking any sales, at
the last available bid price. Securities traded in the over-the-
counter market are valued at the last available bid price prior to
the time of valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Directors as
the primary market. Securities which are traded both in the over-the-
counter market and on a stock exchange are valued according to the
broadest and most representative market. Options written are valued
at the last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last
asked price. Options purchased are valued at the last sale price in
the case of exchange-traded options or, in the case of options
traded in the over-the-counter market, the last bid price. Short-
term securities are valued at amortized cost, which approximates
market value. Other investments, including futures contracts and
related options, are stated at market value. Securities and assets
for which market quotations are not available are valued at fair
value as determined in good faith by or under the direction of the
Fund's Board of Directors.
(b) Repurchase agreements--The Fund invests in US Government
securities pursuant to repurchase agreements with a member bank of
the Federal Reserve System or a primary dealer in US Government
securities. Under such agreements, the bank or primary dealer agrees
to repurchase the security at a mutually agreed upon time and price.
The Fund takes possession of the underlying securities, marks to
market such securities and, if necessary, receives 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.
* Financial futures contracts--The Fund may purchase or sell interest
rate futures contracts and options on such futures contracts for the
purpose of hedging the market risk on existing securities or the
intended purchase of securities. Futures contracts are contracts for
delayed delivery of securities at a specific future date and at a
specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required
by the exchange on which the transaction is effected. Pursuant to
the contract, the Fund agrees to receive from or pay to the broker
an amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin
and are recorded by the Fund as unrealized gains or losses. When the
contract is closed, the Fund records a realized gain or loss equal
to the difference between the value of the contract at the time it
was opened and the value at the time it was closed.
* 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.
* 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.
* Options--The Fund is authorized to write covered call options and
purchase put options. When the Fund writes an option, an amount
equal to the premium received by the Fund is reflected as an asset
and an 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
53
<PAGE>
an exercise of an option, the related premium paid (or received) is
added to (or deducted from) the basis of the security acquired or
deducted from (or added to) the proceeds of the security sold. When
an option expires (or the Fund enters into a closing transaction),
the Fund realizes a gain or loss on the option to the extent of the
premiums received or paid (or gain or loss to the extent the cost of
the closing transaction exceeds the premium paid or received).
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
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income (including amortization of
discount) is recognized on the accrual basis. Realized gains and
losses on security transactions are determined on the identified
cost basis.
(g) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.
(h) Dividends and distributions--Dividends 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 years ended December 31, 1995 and 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 certain components of net assets be reclassified to
reflect permanent differences between financial reporting and tax
purposes. Accordingly, current year's permanent book/tax differences
of $28,295,737 have been reclassified from paid-in capital in excess
of par to accumulated net realized capital losses. These
reclassifications 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., Inc. ("ML & Co."), which is the
limited partner. The Fund has also entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
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 FAM 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
54
<PAGE>
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.,
also provides account maintenance and distribution services to the
Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services to
Class B, Class C and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C
shareholders.
For the year ended December 31, 1995, MLFD earned underwriting
discounts and commissions and MLPF&S earned dealer concessions on
sales of the Fund's Class A and Class D Shares as follows:
MLFD MLPF&S
Class A $5,727 $42,975
Class D $8,054 $70,140
For the year ended December 31, 1995, MLPF&S received contingent
deferred sales charges of $3,902,431 and $4,150 relating to
transactions in Class B and Class C Shares, respectively.
In addition, MLPF&S received $59,004 in commissions on the execution
of portfolio security transactions for the Fund for the year ended
December 31, 1995.
During the year ended December 31, 1995, the Fund paid Merrill Lynch
Security Pricing Service, an affiliate of MLPF&S, $5,414 for
security price quotations to compute the net asset value of the
Fund.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLPF&S, MLFD, FAM, PSI, MLFDS, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended December 31, 1995 were $1,711,198,428 and
$2,097,266,197, respectively.
Net realized and unrealized gains (losses) as of December 31, 1995
were as follows:
Realized Unrealized
Gains (Losses) Gains (Losses)
Investments:
Long-term $ (10,535,610) $ 12,124,570
Short-term -- 2,812
Short sales 2,810,789 (639,224)
Financial futures contracts (7,886,725) --
------------- -------------
Total investments (15,611,546) 11,488,158
------------- -------------
Currency transactions:
Options purchased (2,886,131) --
Options written (186,000) 63,988
Foreign currency transactions 12,030,834 302,781
Forward foreign exchange
contracts (42,861,998) (97,888)
------------- -------------
Total currency transactions (33,903,295) 268,881
------------- -------------
Total $ (49,514,841) $ 11,757,039
============= =============
Transactions in call options written for the year ended December 31,
1995 were as follows:
Nominal Value
Covered by Premiums
Call Options Written Written Options Received
Outstanding call options
written, beginning of year $ 206,195,000 $ 611,894
Options written 539,233,080 3,136,587
Options closed (278,596,300) (1,710,551)
Options expired (466,831,780) (2,037,930)
------------- -------------
Outstanding call options
written, end of year $ -- $ --
============= =============
55
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
Transactions in put options written for the year ended December 31,
1995 were as follows:
Nominal Value
Covered by Premiums
Put Options Written Written Options Received
Outstanding put options
written, beginning of year -- --
Options written 517,000,000 $ 3,595,692
Options closed (382,000,000) (2,536,299)
Options exercised (95,000,000) (829,365)
------------- -------------
Outstanding put options
written, end of year 40,000,000 $ 230,028
============= =============
As of December 31, 1995, net unrealized appreciation for Federal
income tax purposes aggregated $9,956,722, of which $54,325,787
related to appreciated securities and $44,369,065 related to
depreciated securities. The aggregate cost of investments at
December 31, 1995 for Federal income tax purposes was
$1,468,447,822.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions
was $(384,702,641) and $(487,938,280) for the years ended December
31, 1995 and December 31, 1994, respectively.
Transactions in shares of capital for each class were as follows:
Class A Shares for the Year Dollar
Ended December 31, 1995 Shares Amount
Shares sold 1,983,935 $ 16,765,904
Shares issued to shareholders
in reinvestment of dividends 896,095 7,557,191
------------- -------------
Total issued 2,880,030 24,323,095
Shares redeemed (10,831,339) (91,176,950)
------------- -------------
Net decrease (7,951,309) $ (66,853,855)
============= =============
Class A Shares for the Year Dollar
Ended December 31, 1994 Shares Amount
Shares sold 2,498,395 $ 22,105,372
Shares issued to shareholders
in reinvestment of dividends &
distributions 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 B Shares for the Year Dollar
Ended December 31, 1995 Shares Amount
Shares sold 9,982,719 $ 81,289,015
Shares issued to shareholders
in reinvestment of dividends 5,486,644 49,358,629
------------- -------------
Total issued 15,469,363 130,647,644
Automatic conversion of shares (44,833) (382,703)
Shares redeemed (54,382,122) (456,837,622)
------------- -------------
Net decrease (38,957,592) $(326,572,681)
============= =============
Class B Shares for the Year Dollar
Ended December 31, 1994 Shares Amount
Shares sold 22,383,630 $ 198,076,750
Shares issued to shareholders
in reinvestment of dividends &
distributions 7,257,720 62,563,579
------------- -------------
Total issued 29,641,350 260,640,329
Automatic conversion of shares (10,524) (87,484)
Shares redeemed (74,723,963) (644,026,143)
------------- -------------
Net decrease (45,093,137) $(383,473,298)
============= =============
56
<PAGE>
Class C Shares for the
Year Ended Dollar
December 31, 1995 Shares Amount
Shares sold 820,363 $ 6,919,696
Shares issued to shareholders
in reinvestment of dividends 19,627 165,998
------------- -------------
Total issued 839,990 7,085,694
Shares redeemed (364,156) (3,104,404)
------------- -------------
Net increase 475,834 $ 3,981,290
============= =============
Class C Shares for the
Period October 21, 1994++ to Dollar
December 31, 1994 Shares Amount
Shares sold 149,131 $ 1,233,348
Shares issued to shareholders
in reinvestment of dividends &
distributions 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
Year Ended Dollar
December 31, 1995 Shares Amount
Shares sold 768,363 $ 6,548,248
Automatic conversion of shares 44,790 382,703
Shares issued to shareholders
in reinvestment of dividends 14,856 125,926
------------- -------------
Total issued 828,009 7,056,877
Shares redeemed (272,712) (2,314,272)
------------- -------------
Net increase 555,297 $ 4,742,605
============= =============
Class D Shares for the
Period October 21, 1994++ to Dollar
December 31, 1994 Shares Amount
Shares sold 177,383 $ 1,470,555
Shares issued to shareholders
in reinvestment of dividends &
distributions 827 6,792
Automatic 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. Commitments:
At December 31, 1995, the Fund entered into foreign exchange
contracts, in addition to the contracts listed in the Schedule of
Investments, under which it had agreed to sell various foreign
currencies with a value of approximately $55,000.
6. Capital Loss Carryforward:
At December 31, 1995, the Fund had a net capital loss carryforward
of approximately $78,896,000, of which $53,153,000 expires in 2002
and $25,743,000 expires in 2003. This amount will be available to
offset like amounts of any future taxable gains.
57
<PAGE>
[This Page Intentionally Left Blank]
58
<PAGE>
[This Page Intentionally Left Blank]
59
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies......................................... 2
Hedging Techniques....................................................... 2
Risk Factors in Options and Futures Transactions......................... 4
Forward Foreign Exchange Transactions.................................... 5
Other Investment Policies and Practices.................................. 6
Investment Restrictions.................................................. 7
Management of the Fund.................................................... 9
Directors and Officers................................................... 9
Compensation of Directors................................................ 11
Management and Advisory Arrangements..................................... 11
Purchase of Shares........................................................ 13
Alternative Sales Arrangements........................................... 13
Initial Sales Charge Alternatives-- Class A and Class D Shares........... 14
Reduced Initial Sales Charges............................................ 15
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements............................................................ 17
Distribution Plans....................................................... 17
Limitations on the Payment of Deferred Sales Charges..................... 18
Redemption of Shares...................................................... 20
Deferred Sales Charge--Class B and Class C Shares........................ 20
Portfolio Transactions.................................................... 20
Determination of Net Asset Value.......................................... 22
Shareholder Services...................................................... 23
Investment Account....................................................... 23
Automatic Investment Plans............................................... 24
Automatic Reinvestment of Dividends and Capital Gains Distributions...... 24
Systematic Withdrawal Plans--Class A and Class D Shares.................. 24
Retirement Plans......................................................... 25
Exchange Privilege....................................................... 26
Dividends, Distributions and Taxes........................................ 28
Dividends and Distributions.............................................. 28
Taxes.................................................................... 28
Tax Treatment of Options, Futures and Forward Foreign Exchange
Transactions............................................................ 30
Special Rules for Certain Foreign Currency Transactions.................. 31
Performance Data.......................................................... 32
General Information....................................................... 34
Description of Shares.................................................... 34
Computation of Offering Price Per Share.................................. 35
Independent Auditors..................................................... 35
Custodian................................................................ 35
Transfer Agent........................................................... 35
Legal Counsel............................................................ 35
Reports to Shareholders.................................................. 35
Additional Information................................................... 36
Independent Auditors' Report.............................................. 37
Financial Statements...................................................... 38
</TABLE>
Code # 16103-0496
[LOGO] MERRILL LYNCH
MERRILL LYNCH
WORLD INCOME FUND, INC.
[ART]
STATEMENT OF
ADDITIONAL
INFORMATION
April 26,1996
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A)FINANCIAL STATEMENTS
Contained in Part A:
Financial Highlights for each of the periods in the three-year period
ended December 31, 1995, for the period September 1, 1992 to December
31, 1992, for each of the periods in the three-year period ended
August 31, 1992, and for the period September 29, 1988 (commencement
of operations) to August 31, 1989.
Contained in Part B:
Schedule of Investments as of December 31, 1995.
Statement of Assets and Liabilities as of December 31, 1995.
Statement of Operations for the year ended December 31, 1995.
Statement of Changes in Net Assets for the years ended December 31,
1994 and 1995.
Financial Highlights for each of the periods in the three-year period
ended December 31, 1995, for the four months ended December 31, 1992,
and for each of the periods in the two-year period ended August 31,
1992.
(B)EXHIBITS:
<TABLE>
<C> <S>
1(a) --Articles of Amendment and Restatement, dated November 8, 1991.(d)
(b) --Articles of Amendment to Articles of Incorporation, as filed on
October 19, 1994.(d)
(c) --Articles Supplementary to Articles of Incorporation, as filed on
October 21, 1994.(d)
2 --Revised By-Laws of Registrant.(d)
3 --None.
4 --Copies of instruments defining the rights of shareholders, including
the relevant portions of the Articles of Incorporation, as amended, and
By-Laws of Registrant.(a)
5(a) --Investment Advisory Agreement between Registrant and Fund Asset
Management, L.P.(d)
(b) --Supplement to Investment Advisory Agreement with Fund Asset
Management, L.P.(b)
6(a) --Revised Class A Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc.(c)
(b) --Class B Shares Distribution Agreement between Registrant and Merrill
Lynch Funds Distributor, Inc.(d)
(c) --Form of Class C Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc.(c)
(d) --Form of Class D Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc.(c)
(e) --Letter Agreement between the Fund and Merrill Lynch Funds Distributor,
Inc. dated September 15, 1993, in connection with the Merrill Lynch
Mutual Fund Adviser Program.(d)
7 --None.
8 --Custody Agreement between Registrant and State Street Bank and Trust
Company.(d)
9 --Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing
Agency Agreement between Registrant and Financial Data Services,
Inc.(d)
10 --Opinion of Brown & Wood, counsel for Registrant.
11 --Consent of Deloitte & Touche llp, independent auditors for Registrant.
12 --None.
13 --None.
14 --None.
15(a) --Amended and Restated Class B Distribution Plan of Registrant and
Distribution Plan Sub-Agreement.(d)
(b) --Form of Class C Shares Distribution Plan and Class C Shares
Distribution Plan Sub-Agreement of the Registrant.(c)
(c) --Form of Class D Shares Distribution Plan and Class D Shares
Distribution Plan Sub-Agreement of the Registrant.(c)
</TABLE>
C-1
<PAGE>
<TABLE>
<C> <S>
16(a) --Schedule of computation of performance quotations for Class A shares
provided in the Registration Statement in response to Item 22.(d)
(b) --Schedule of computation of performance quotations for Class B shares
provided in the Registration Statement in response to Item 22.(d)
(c) --Schedule of computation of performance quotations for Class C shares
provided in the Registration Statement in response to Item 22.(d)
(d) --Schedule of computation of performance quotations for Class D shares
provided in the Registration Statement in response to Item 22.(d)
17(a) --Financial Data Schedule for the Year Ended December 31, 1995 for Class
A Shares.
(b) --Financial Data Schedule for the Year Ended December 31, 1995 for Class
B Shares.
(c) --Financial Data Schedule for the Year Ended December 31, 1995 for Class
C Shares.
(d) --Financial Data Schedule for the Year Ended December 31, 1995 for Class
D Shares.
18 --Merrill Lynch Select Pricing SM System Plan Pursuant to Rule 18f-3(f)
</TABLE>
- --------
(a) Reference is made to Article III (Sections 3 and 4), Article V, Article VI
(Section 3), Article VII, Article VIII and Article X of the Registrant's
Articles of Amendment and Restatement, filed as Exhibit (1)(a) to the
Registration Statement; the Articles Supplementary filed as Exhibit (1)(b)
to the Registration Statement; the Articles of Amendment filed as Exhibit
(1)(c) to the Registration Statement; the Articles Supplementary filed as
Exhibit (1)(d) to the Registration Statement; and Article II, Article III
(Sections 1, 3, 5, 6 and 17), Article IV (Section 1), Article V (Section
7), Article VI, Article VII, Article XII, Article XIII, and Article XIV of
the Registrant's By-Laws filed as Exhibit (2) to the Registration
Statement.
(b) Previously filed with the Registrant's Post-Effective Amendment No. 3 to
the Registration Statement on Form N-1A (File Nos. 33-42681 and 811-5603)
as filed with the Securities and Exchange Commission on April 29, 1994.
(c) Previously filed with the Registrant's Post-Effective Amendment No. 4 to
the Registration Statement on Form N-1A (File Nos. 33-42681 and 811-5603)
as filed with the Securities and Exchange Commission on October 18, 1994.
(d) Previously filed with the Registrant's Post-Effective Amendment No. 5 to
the Registration Statement on Form N-1A (File Nos. 33-42681 and 811-5603)
as filed with the Securities and Exchange Commission on April 27, 1995.
(e) Incorporated by reference to Post-Effective Amendment No. 13 to the
Registration Statement on Form N-1A of Merrill Lynch New York Municipal
Bond Fund of Merrill Lynch Multi-State Municipal Series Trust filed on
January 25, 1996.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The Registrant is not controlled by or under common control with any person.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
TITLE OF CLASS MARCH 31, 1996
-------------- --------------
<S> <C>
Class A shares of Common Stock, par value $0.10 per
share................................................... 20,270
Class B shares of Common Stock, par value $0.10 per
share................................................... 70,282
Class C shares of Common Stock, par value $0.10 per
share................................................... 537
Class D shares of Common Stock, par value $0.10 per
share................................................... 504
</TABLE>
- --------
* The number of holders includes holders of record plus beneficial onwers,
whose shares are held of record by Merrill Lynch, Pierce, Fenner & Smith
Incorporated.
C-2
<PAGE>
ITEM 27. INDEMNIFICATION.
Reference is made to Article VI of Registrant's Articles of Incorporation,
Article VI of Registrant's By-Laws, Section 2-418 of the Maryland General
Corporation Law and Section 9 of the Class A, Class B, Class C and Class D
Distribution Agreements.
Insofar as the conditional advancing of indemnification moneys for actions
based on the Investment Company Act of 1940, as amended (the "Investment
Company Act"), may be concerned, such payments will be made only on the
following conditions: (i) the advances must be limited to amounts used, or to
be used, for the preparation or presentation of a defense to the action,
including costs connected with the preparation of a settlement; (ii) advances
may be made only on receipt of a written promise by, or on behalf of, the
recipient to repay that amount of the advance which exceeds the amount to
which it is ultimately determined that he is entitled to receive from the
Registrant by reason of indemnification; and (iii)(a) such promise must be
secured by a surety bond, other suitable insurance or an equivalent form of
security which assures that any repayments may be obtained by the Registrant
without delay or litigation, which bond, insurance or other form of security
must be provided by the recipient of the advance, or (b) a majority of a
quorum of the Registrant's disinterested, non-party Directors, or an
independent legal counsel in a written opinion, shall determine, based upon a
review of readily available facts that the recipient of the advance ultimately
will be found entitled to indemnification.
In Section 9 of the Class A, Class B, Class C and Class D Distribution
Agreements relating to the securities being offered hereby, the Registrant
agrees to indemnify the Distributor and each person, if any, who controls the
Distributor within the meaning of the Securities Act of 1933, as amended (the
"Securities Act"), against certain types of civil liabilities arising in
connection with the Registration Statement or Prospectus and Statement of
Additional Information.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to Directors, officers and controlling persons of the
Registrant and the principal underwriter pursuant to the foregoing provisions
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a Director,
officer, or controlling person of the Registrant and the principal underwriter
in connection with the successful defense of any action, suit or proceeding)
is asserted by such Director, officer or controlling person or the principal
underwriter in connection with the shares being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Merrill Lynch Asset Management, L.P. ("MLAM") acts as the investment adviser
for the following open-end companies: Merrill Lynch Adjustable Rate Securities
Fund, Inc., Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset
Builder Program, Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch
Asset Income Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch
Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc.,
Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill
Lynch Fund For Tomorrow, Inc., Merrill Lynch Global Allocation Fund, Inc.,
Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill Lynch
Global Convertible Fund, Inc., Merrill Lynch Global Holdings, Inc., Merrill
Lynch Global Resources Trust, Merrill Lynch Global SmallCap Fund, Inc.,
Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Growth Fund for
Investment and Retirement, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch
Institutional Intermediate Fund, Merrill Lynch International Equity Fund,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund,
Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund, Inc.,
Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Series Trust,
Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund,
Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund,
Inc., Merrill Lynch U.S.A. Government Reserves, Merrill Lynch U.S.
C-3
<PAGE>
Treasury Money Fund, Merrill Lynch Utility Income Fund, Inc., and Merrill
Lynch Variable Series Funds, Inc. and the following closed-end investment
companies: Convertible Holdings, Inc., Merrill Lynch High Income Municipal
Bond Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc.
Fund Asset Management, L.P. ("FAM"), an affiliate of MLAM, acts as the
investment adviser for the following open-end investment companies: CBA Money
Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State
Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate
Fund Accumulation Program, Inc., Financial Institutions Series Trust, Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Federal Securities
Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, Merrill Lynch Multi-State Municipal
Series Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix
Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch World Income
Fund, Inc. and The Municipal Fund Accumulation Program, Inc.; and the
following closed-end investment companies: Apex Municipal Fund, Inc.,
Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc., Emerging
Tigers Fund, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities
Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund, Inc., MuniAsset Fund,
Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc.,
MuniVest Fund II, Inc., MuniVest California Insured Fund, Inc., MuniVest
Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund,
Inc., MuniVest New York Insured Fund, Inc., MuniVest Pennsylvania Insured
Fund, MuniYield Arizona Fund, Inc., MuniYield California Fund, Inc., MuniYield
California Insured Fund, Inc., MuniYield California Insured Fund II, Inc.,
MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc.,
MuniYield Insured Fund, Inc., MuniYield Insured Fund II, Inc., MuniYield
Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New
Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New York
Insured Fund, Inc., MuniYield New York Insured Fund II, Inc., MuniYield New
York Insured Fund III, Inc., MuniYield Pennsylvania Fund, MuniYield Quality
Fund, Inc., MuniYield Quality Fund II, Inc., Senior High Income Portfolio,
Inc., Senior High Income Portfolio II, Inc., Senior Strategic Income Fund,
Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNew York Holdings, Inc.
and Worldwide DollarVest Fund, Inc.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series and Merrill Lynch Institutional Intermediate
Fund is One Financial Center, 15th Floor, Boston, Massachusetts 02111-2646.
The address of MLAM, FAM, Princeton Services, Inc. ("Princeton Services") and
Princeton Administrators, L.P. is also P.O. Box 9011, Princeton, New Jersey
08543-9011. The address of Merrill Lynch Funds Distributor, Inc. ("MLFD") is
P.O. Box 9081, Princeton, New Jersey 08543-9081. The address of Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Merrill Lynch & Co.,
Inc. ("ML & Co.") is World Financial Center, North Tower, 250 Vesey Street,
New York, New York 10281. The address of Financial Data Services, Inc. is 4800
Deerlake Drive East, Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or
employment of a substantial nature in which each such person has been engaged
since October 31, 1993, for its own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Zeikel is President, Mr. Glenn
is Executive Vice President and Mr. Richard is Treasurer of substantially all
the investment companies described in the preceding paragraph and Messrs.
Giordano, Harvey, Hewitt, Kirstein, and Monagle are directors or officers of
one or more of such companies.
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
---- ------------------ ----------------------------------
<C> <C> <S>
ML & Co................. Limited Partner Financial Services Holding Company
Princeton Services...... General Partner General Partner of MLAM
Arthur Zeikel........... President President of MLAM; President and
Director of Princeton Services;
Director of MLFD; Executive Vice
President of ML&Co.; Executive
Vice President of Merrill Lynch
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
---- ------------------ ----------------------------------
<C> <C> <S>
Terry K. Glenn.......... Executive Vice Executive Vice President of MLAM;
President Executive Vice President and
Director of Princeton Services;
President and Director of MLFD;
Director of MLFDS; President of
Princeton Administrators, L.P.
Vincent R. Giordano..... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Elizabeth Griffin....... Senior Vice President Senior Vice President of MLAM
Norman R. Harvey........ Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
N. John Hewitt.......... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Philip L. Kirstein...... Senior Vice Senior Vice President, General
President, General Counsel and Secretary of MLAM;
Counsel, and Senior Vice President, General
Secretary Counsel, Director and Secretary of
Princeton Services; Director of
MLFD
Ronald M. Kloss......... Senior Vice President Senior Vice President of MLAM;
and Controller Senior Vice President and
Controller of Princeton Services
Richard L. Reller....... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Joseph T. Monagle, Jr. . Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Gerald M. Richard....... Senior Vice President Senior Vice President and Treasurer
and Treasurer of MLAM; Senior Vice President and
Treasurer of Princeton Services;
Vice President and Treasurer of
MLFD
Ronald L. Welburn....... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Anthony Wiseman......... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant. MLFD acts as
the principal underwriter for each of the open-end investment companies
referred to in the first two paragraphs of Item 28 except CBA Money Fund, CMA
Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series
Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, Convertible Holdings, Inc., The
Corporate Fund Accumulation Program, Inc., MuniAssets Fund, Inc., and The
Municipal Fund Accumulation Program, Inc., and MLFD also acts as the principal
underwriter for the following closed-end investment companies: Merrill Lynch
High Income Municipal Bond Fund, Inc., Merrill Lynch Municipal Strategy Fund,
Inc. and Merrill Lynch Senior Floating Rate Fund, Inc.
C-5
<PAGE>
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Aldrich,
Brady, Breen, Crook, Fatseas, and Wasel is One Financial Center, Boston,
Massachusetts 02111-2665.
<TABLE>
<CAPTION>
(2) (3)
(1) POSITION(S) AND OFFICES WITH POSITION(S) AND OFFICES WITH
NAME MLFD REGISTRANT
---- ---------------------------- ----------------------------
<S> <C> <C>
Terry K. Glenn.......... President and Director Executive Vice President
Arthur Zeikel........... Director President and Director
Philip L. Kirstein...... Director None
William E. Aldrich...... Senior Vice President None
Robert W. Crook......... Senior Vice President None
Kevin P. Boman.......... Vice President None
Michael Brady........... Vice President None
William M. Breen........ Vice President None
Sharon Creveling........ Vice President and Assistant Treasurer None
Mark A. DeSario......... Vice President None
James T. Fatseas........ Vice President None
Debra W. Landsman-Yaros. Vice President None
Michelle T. Lau......... Vice President None
Gerald M. Richard....... Vice President and Treasurer Treasurer
Salvatore Venezia....... Vice President None
William Wasel........... Vice President None
Robert Harris........... Secretary None
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act and the rules thereunder will be
maintained at the offices of the Registrant, 800 Scudders Mill Road,
Plainsboro, New Jersey 08536, and Merrill Lynch Financial Data Services, Inc.,
4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the Fund-Management
and Advisory Arrangements" in the Prospectus constituting Part A of the
Registration Statement and under "Management of the Fund-Management and
Advisory Arrangements" in the Statement of Additional Information constituting
Part B of the Registration Statement, Registrant is not a party to any
management-related service contract.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish each person to whom a Prospectus is
delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
C-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT CERTIFIES THAT IT MEETS ALL THE
REQUIREMENTS FOR EFFECTIVENESS OF THIS POST-EFFECTIVE AMENDMENT TO THE
REGISTRATION STATEMENT PURSUANT TO RULE 485(b) UNDER THE SECURITIES ACT OF
1933 AND HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE TOWNSHIP OF
PLAINSBORO, AND THE STATE OF NEW JERSEY, ON THE 25TH DAY OF APRIL, 1996.
Merrill Lynch World Income Fund, Inc.
(Registrant)
/s/ Terry K. Glenn
By: _________________________________
(TERRY K. GLENN, EXECUTIVE VICE
PRESIDENT)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
President and
Arthur Zeikel* Director (Principal
- ------------------------------------- Executive Officer)
(ARTHUR ZEIKEL)
/s/ Gerald M. Richard Treasurer (Principal
- ------------------------------------- Financial and April 25, 1996
(GERALD M. RICHARD) Accounting Officer)
James H. Bodurtha* Director
- -------------------------------------
(JAMES H. BODURTHA)
Herbert I. London* Director
- -------------------------------------
(HERBERT I. LONDON)
Robert R. Martin* Director
- -------------------------------------
(ROBERT R. MARTIN)
Joseph L. May*
- ------------------------------------- Director
(JOSEPH L. MAY)
Andre F. Perold* Director
- -------------------------------------
(ANDRE F. PEROLD)
/s/ Terry K. Glenn April 25, 1996
*By __________________________________
(TERRY K. GLENN, ATTORNEY-IN-FACT)
C-7
<PAGE>
POWER OF ATTORNEY
The undersigned Director of Merrill Lynch World Income Fund, Inc. (the
"Fund") hereby authorizes Arthur Zeikel, Terry K. Glenn and Gerald M. Richard,
or any of them, as attorney-in-fact, to sign on his behalf, in the capacity
stated below, any amendments to the Registration Statement (including post-
effective amendments) on Form N-1A of the Fund and to file the same, with all
exhibits thereto, with the Securities and Exchange Commission.
SIGNATURE TITLE DATE
/s/ James H. Bodurtha
- ------------------------------------- Director April 19, 1996
(JAMES H. BODURTHA)
C-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NO. DESCRIPTION OF EXHIBIT NUMBER
------- ---------------------- ----------
<C> <S> <C>
10 --Opinion of Brown & Wood, counsel for Registrant.........
11 --Consent of Deloitte & Touche LLP, independent auditors
for Registrant...........................................
17(a) --Financial Data Schedule for the Year Ended December 31,
1995 for Class A Shares..................................
(b) --Financial Data Schedule for the Year Ended December 31,
1995 for Class B Shares..................................
(c) --Financial Data Schedule for the Year Ended December 31,
1995 for Class C Shares..................................
(d) --Financial Data Schedule for the Year Ended December 31,
1995 for Class D Shares..................................
</TABLE>
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents fair
and accurate narrative descriptions of graphic and image material omitted from
this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
<PAGE>
MERRILL LYNCH WORLD INCOME FUND, INC.
SUPPLEMENT DATED APRIL 26, 1996 TO
PROSPECTUS DATED APRIL 26, 1996
(FOR USE IN ARIZONA)
The Arizona Corporation Commission requested the following additional
disclosure:
THESE ARE SPECULATIVE SECURITIES.
CODE #16102-0496AZ
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NAME> MERRILL LYNCH WORLD INCOME FUND, INC. - CLASS A
<NUMBER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 1466047134
<INVESTMENTS-AT-VALUE> 1478238504
<RECEIVABLES> 57377673
<ASSETS-OTHER> 5292262
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1540908439
<PAYABLE-FOR-SECURITIES> 3835549
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 22645165
<TOTAL-LIABILITIES> 26480714
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1587718146
<SHARES-COMMON-STOCK> 30010112
<SHARES-COMMON-PRIOR> 37961421
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (85047460)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11757039
<NET-ASSETS> 260806316
<DIVIDEND-INCOME> 1703626
<INTEREST-INCOME> 149652318
<OTHER-INCOME> 736648
<EXPENSES-NET> 23295875
<NET-INVESTMENT-INCOME> 128796717
<REALIZED-GAINS-CURRENT> (49514841)
<APPREC-INCREASE-CURRENT> 144343205
<NET-CHANGE-FROM-OPS> 223625081
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 18898095
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 5320682
<NUMBER-OF-SHARES-SOLD> 1983935
<NUMBER-OF-SHARES-REDEEMED> 10831339
<SHARES-REINVESTED> 896095
<NET-CHANGE-IN-ASSETS> (289874609)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (63828356)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 9774596
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 23295875
<AVERAGE-NET-ASSETS> 284439627
<PER-SHARE-NAV-BEGIN> 8.20
<PER-SHARE-NII> .72
<PER-SHARE-GAIN-APPREC> .49
<PER-SHARE-DIVIDEND> .56
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> .16
<PER-SHARE-NAV-END> 8.69
<EXPENSE-RATIO> .80
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NAME> MERRILL LYNCH WORLD INCOME FUND, INC. - CLASS B
<NUMBER> 2
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 1466047134
<INVESTMENTS-AT-VALUE> 1478238504
<RECEIVABLES> 57377673
<ASSETS-OTHER> 5292262
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1540908439
<PAYABLE-FOR-SECURITIES> 3835549
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 22645165
<TOTAL-LIABILITIES> 26480714
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1587718146
<SHARES-COMMON-STOCK> 142991509
<SHARES-COMMON-PRIOR> 181949101
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (85047460)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11757039
<NET-ASSETS> 1241895723
<DIVIDEND-INCOME> 1703626
<INTEREST-INCOME> 149652318
<OTHER-INCOME> 736648
<EXPENSES-NET> 23295875
<NET-INVESTMENT-INCOME> 128796717
<REALIZED-GAINS-CURRENT> (49514841)
<APPREC-INCREASE-CURRENT> 144343205
<NET-CHANGE-FROM-OPS> 223625081
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 81220841
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 22867399
<NUMBER-OF-SHARES-SOLD> 9982719
<NUMBER-OF-SHARES-REDEEMED> 54426955
<SHARES-REINVESTED> 5486644
<NET-CHANGE-IN-ASSETS> (289874609)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (63828356)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 9774596
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 23295875
<AVERAGE-NET-ASSETS> 1342922809
<PER-SHARE-NAV-BEGIN> 8.19
<PER-SHARE-NII> .65
<PER-SHARE-GAIN-APPREC> .50
<PER-SHARE-DIVIDEND> .51
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> .14
<PER-SHARE-NAV-END> 8.69
<EXPENSE-RATIO> 1.56
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NAME> MERRILL LYNCH WORLD INCOME FUND, INC. - CLASS C
<NUMBER> 3
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 1466047134
<INVESTMENTS-AT-VALUE> 1478238504
<RECEIVABLES> 57377673
<ASSETS-OTHER> 5292262
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1540908439
<PAYABLE-FOR-SECURITIES> 3835549
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 22645165
<TOTAL-LIABILITIES> 26480714
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1587718146
<SHARES-COMMON-STOCK> 622955
<SHARES-COMMON-PRIOR> 147121
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (85047460)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11757039
<NET-ASSETS> 5405846
<DIVIDEND-INCOME> 1703626
<INTEREST-INCOME> 149652318
<OTHER-INCOME> 736648
<EXPENSES-NET> 23295875
<NET-INVESTMENT-INCOME> 128796717
<REALIZED-GAINS-CURRENT> (49514841)
<APPREC-INCREASE-CURRENT> 144343205
<NET-CHANGE-FROM-OPS> 223625081
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 203152
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 57196
<NUMBER-OF-SHARES-SOLD> 820363
<NUMBER-OF-SHARES-REDEEMED> 364156
<SHARES-REINVESTED> 19627
<NET-CHANGE-IN-ASSETS> (289874609)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (63828356)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 9774596
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 23295875
<AVERAGE-NET-ASSETS> 3414592
<PER-SHARE-NAV-BEGIN> 8.19
<PER-SHARE-NII> .64
<PER-SHARE-GAIN-APPREC> .49
<PER-SHARE-DIVIDEND> .50
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> .14
<PER-SHARE-NAV-END> 8.68
<EXPENSE-RATIO> 1.65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NAME> MERRILL LYNCH WORLD INCOME FUND, INC. - CLASS D
<NUMBER> 4
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 1466047134
<INVESTMENTS-AT-VALUE> 1478238504
<RECEIVABLES> 57377673
<ASSETS-OTHER> 5292262
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1540908439
<PAYABLE-FOR-SECURITIES> 3835549
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 22645165
<TOTAL-LIABILITIES> 26480714
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1587718146
<SHARES-COMMON-STOCK> 727249
<SHARES-COMMON-PRIOR> 171952
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (85047460)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11757039
<NET-ASSETS> 6319840
<DIVIDEND-INCOME> 1703626
<INTEREST-INCOME> 149652318
<OTHER-INCOME> 736648
<EXPENSES-NET> 23295875
<NET-INVESTMENT-INCOME> 128796717
<REALIZED-GAINS-CURRENT> (49514841)
<APPREC-INCREASE-CURRENT> 144343205
<NET-CHANGE-FROM-OPS> 223625081
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 179224
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 50460
<NUMBER-OF-SHARES-SOLD> 813153
<NUMBER-OF-SHARES-REDEEMED> 272712
<SHARES-REINVESTED> 14856
<NET-CHANGE-IN-ASSETS> (289874609)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (63828356)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 9774596
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 23295875
<AVERAGE-NET-ASSETS> 2797829
<PER-SHARE-NAV-BEGIN> 8.20
<PER-SHARE-NII> .70
<PER-SHARE-GAIN-APPREC> .49
<PER-SHARE-DIVIDEND> .55
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> .15
<PER-SHARE-NAV-END> 8.69
<EXPENSE-RATIO> 1.04
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
BROWN & WOOD
ONE WORLD TRADE CENTER
NEW YORK, NEW YORK 10048-0557
TELEPHONE: (212) 839-5300
FACSIMILE: (212) 839-5599
April 25, 1996
Merrill Lynch World Income Fund, Inc.
P.O. Box 9011
Princeton, New Jersey 08543-9011
Ladies and Gentlemen:
This opinion is furnished in connection with the registration by Merrill
Lynch World Income Fund, Inc., a Maryland corporation (the "Fund"), of shares of
common stock, par value $0.10 per share, of the Fund (the "Shares"), under the
Securities Act of 1933, as amended, pursuant to the Fund's registration
statement on Form N-1A (File No. 33-42681), as amended (the "Registration
Statement"), in the amount set forth under "Amount Being Registered" on the
facing page of the Registration Statement.
As counsel for the Fund, we are familiar with the proceedings taken by it
in connection with the authorization, issuance and sale of the Shares. In
addition, we have examined and are familiar with the Articles of Incorporation
of the Fund, as amended, the By-Laws of the Fund and such other documents as we
have deemed relevant to the matters referred to in this opinion.
<PAGE>
Based upon the foregoing, we are of the opinion that the Shares, upon
issuance and sale in the manner referred to in the Registration Statement for
consideration not less than the par value thereof, will be legally issued, fully
paid and non-assessable shares of common stock, except that shareholders of the
Fund may under certain circumstances be held personally liable for the Fund's
obligations.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Prospectus and
Statement of Additional Information constituting parts thereof.
Very truly yours,
/s/ Brown & Wood
2
<PAGE>
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch World Income Fund, Inc.:
We consent to the use in Post-Effective Amendment No. 6 to Registration
Statement No. 33-42681 of our report dated February 12, 1996 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
April 25, 1996
