<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 28, 1997
SECURITIES ACT FILE NO. 33-42681
INVESTMENT COMPANY ACT FILE NO. 811-5603
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 7 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 8 [X]
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
MERRILL LYNCH WORLD INCOME FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
<TABLE>
<S> <C>
800 SCUDDERS MILL ROAD 08536
PLAINSBORO, NEW JERSEY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
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:
<TABLE>
<S> <C>
COUNSEL FOR THE FUND: PHILIP L. KIRSTEIN, ESQ.
BROWN & WOOD LLP 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.
</TABLE>
------------------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE
BOX):
[X] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
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, 1997.
------------------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
===========================================================================================================
AMOUNT OF PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES SHARES BEING OFFERING PRICE AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED PER UNIT OFFERING PRICE* REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Common Stock (par value
$0.10 per share)............... 53,170,684 $8.97 $329,998 $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 53,133,895 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) All 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> 2
MERRILL LYNCH WORLD INCOME FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- ----------------------------------------------------- --------------------------------------
<S> <C> <C>
PART A
Item 1. Cover Page............................ Cover Page
Item 2. Synopsis.............................. Fee Table
Item 3. Condensed Financial Information....... Financial Highlights
Item 4. General Description of Registrant..... Investment Objective and Policies;
Additional Information
Item 5. Management of the Fund................ Fee Table; Management of the Fund;
Inside Back Cover Page
Item
5A. Management's Discussion of Fund
Performance......................... Not Applicable
Item 6. Capital Stock and Other Securities.... Cover Page; Additional Information
Item 7. Purchase of Securities Being
Offered............................. Cover Page; Fee Table; Merrill Lynch
Select 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 Proceedings............. Not Applicable
PART B
Item
10. Cover Page............................ Cover Page
Item
11. Table of Contents..................... Back Cover Page
Item
12. General Information and History....... General Information
Item
13. Investment Objective and Policies..... Investment Objective and Policies
Item
14. Management of the Fund................ Management of the Fund
Item
15. Control Persons and Principal Holders
of Securities....................... Management of the Fund; Additional
Information
Item
16. Investment Advisory and Other
Services............................ Management of the Fund; Purchase of
Shares; General Information
Item
17. Brokerage Allocation and Other
Practices........................... Portfolio Transactions
Item
18. Capital Stock and Other Securities.... General Information
Item
19. Purchase, Redemption and Pricing of
Securities Being Offered............ Purchase of Shares; Redemption of
Shares; Determination of Net Asset
Value; Shareholder Services
Item
20. Tax Status............................ Dividends, Distributions and Taxes
Item
21. Underwriters.......................... Purchase of Shares
Item
22. Calculation of Performance Data....... Performance Data
Item
23. Financial Statements.................. Financial Statements
PART C
</TABLE>
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> 3
PROSPECTUS
APRIL 28, 1997
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 that seeks 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 11. 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 repayment of 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 Pricing(SM) System, the Fund offers
four classes of shares, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(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 3.
------------------------
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081 [(609)
282-2800], or from securities dealers that have entered into selected dealer
agreements with the Distributor, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000, and the
minimum subsequent purchase is $50, except that for retirement plans the minimum
initial purchase is $100, and the minimum subsequent purchase is $1. Merrill
Lynch may charge its customers a processing fee (presently $4.85, but as of May
1, 1997, $5.35) for confirming purchases and repurchases. Purchases and
redemptions made 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 NOR HAS THE SECURITIES AND EXCHANGE 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 28, 1997 (the "Statement of Additional Information")
has
been filed with the Securities and Exchange Commission (the "Commission") and is
available, without charge, by calling or by writing the Fund at the above
telephone number or address. The Statement of Additional Information is hereby
incorporated by reference into this Prospectus.
------------------------
FUND ASSET MANAGEMENT -- INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
<PAGE> 4
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C CLASS D
---------- ---------------------------------- ------------ -------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)....... 4.00%(c) None None 4.00%(c)
Sales Charge Imposed on Dividend
Reinvestments............................. None None None None
Deferred Sales Charge (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)............. None(d) 4.0% during the first year, 1.0% for None(d)
decreasing 1.0% annually one year(f)
thereafter to 0.0% after the
fourth year(e)
Exchange Fee................................ None None None None
ANNUAL FUND OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS):
Investment Advisory Fees(g)................. 0.60% 0.60% 0.60% 0.60%
12b-1 Fees(h):
Account Maintenance Fees.................. None 0.25% 0.25% 0.25%
Distribution Fees......................... None 0.50% 0.55% None
(Class B shares convert to Class D
shares automatically after
approximately ten years and cease
being subject to distribution
fees)
OTHER EXPENSES:
Custodial Fees............................ 0.02% 0.02% 0.02% 0.02%
Shareholder Servicing Costs(i)............ 0.09% 0.11% 0.10% 0.08%
Other..................................... 0.04% 0.04% 0.04% 0.04%
----- --- --- ----
Total Other Expenses.................. 0.15% 0.17% 0.16% 0.14%
----- --- --- ----
TOTAL FUND OPERATING EXPENSES................. 0.75% 1.52% 1.56% 0.99%
===== === === ====
</TABLE>
- ---------------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and certain participants in
fee-based programs. See "Purchase of Shares -- Initial Sales Charge
Alternatives -- Class A and Class D Shares" -- page 28 and "Shareholder
Services -- Fee-Based Programs" -- page 39.
(b) Class B shares convert to Class D shares automatically approximately ten
years after initial purchase. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares" -- page 30.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of Class
A shares by certain retirement plans in connection with certain fee-based
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 28.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more that
are not subject to an initial sales charge may instead be subject to a CDSC
of 1.0% of amounts redeemed within the first year after purchase. Such CDSC
may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 39.
(e) The CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 39.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 39.
(g) See "Management of the Fund -- Management and Advisory Arrangements" -- page
24.
(h) See "Purchase of Shares -- Distribution Plans" -- page 33.
(i) See "Management of the Fund -- Transfer Agency Services" -- page 25.
2
<PAGE> 5
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 on page 2, (2) a 5% annual return throughout
the periods and (3) redemption at the end of the period
(including any applicable CDSC for Class B and Class C
shares):
Class A............................................. $ 47 $63 $80 $129
Class B............................................. $ 55 $68 $83 $181
Class C............................................. $ 26 $49 $85 $186
Class D............................................. $ 50 $70 $93 $156
An investor would pay the following expenses on the same
$1,000 investment assuming no redemption at the end of
the period:
Class A............................................. $ 47 $63 $80 $129
Class B............................................. $ 15 $48 $83 $181
Class C............................................. $ 16 $49 $85 $186
Class D............................................. $ 50 $70 $93 $156
</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
Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR ANNUAL
RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE
EXAMPLE. Class B and Class C shareholders who hold their shares for an extended
period of time may pay more in Rule 12b-1 distribution fees than the economic
equivalent of the maximum front-end sales charges permitted under the Conduct
Rules of the National Association of Securities Dealers, Inc. ("NASD"). Merrill
Lynch may charge its customers a processing fee (presently $4.85, but as of May
1, 1997, $5.35) for confirming purchases and repurchases. Purchases and
redemptions made directly through the Fund's Transfer Agent are not subject to
the processing fee. See "Purchase of Shares" and "Redemption of Shares."
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 registered investment companies advised by Fund Asset Management, L.P. ("FAM"
or the "Investment Adviser"), Merrill Lynch Asset Management, L.P. ("MLAM") or
an affiliate of MLAM. Funds
3
<PAGE> 6
advised by MLAM or FAM that utilize the Merrill Lynch Select Pricing(SM) System
are referred to herein as "MLAM-advised mutual funds."
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
CDSCs, distribution fees 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 and distribution fees with respect to the
Class B and Class C shares in that the sales charges and distribution fees
applicable to each class provide for the financing of the distribution of the
shares of the Fund. The distribution-related revenues paid with respect to a
class will not be used to finance the distribution expenditures of another
class. Sales personnel may receive different compensation for selling different
classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select Pricing(SM) System that the investor
believes is most beneficial under his particular circumstances. More detailed
information as to each class of shares is set forth under "Purchase of Shares."
<TABLE>
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES FEE FEE FEATURE
CHARGE(1)
- ------------------------------------------------------------------------
A Maximum No No No
4.00%
initial
sales
charge(2)(3)
- ------------------------------------------------------------------------
B CDSC 0.25% 0.50% B shares convert to D
for shares automatically after
a approximately ten years(5)
period
of
four
years,
at a
rate
of
4.0%
during
the
first
year,
decreasing
1.0%
annually
to
0.0%(4)
- ------------------------------------------------------------------------
C 1.0% 0.25% 0.55% No
CDSC
for
one
year(6)
- ------------------------------------------------------------------------
D Maximum 0.25% No No
4.00%
initial
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."
(Footnotes continue on next page)
4
<PAGE> 7
(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 fee-based
programs. Class A and Class D share purchases of $1,000,000 or more may not
be subject to an initial sales charge but instead may be subject to a 1.0%
CDSC if redeemed within one year. Such CDSC may be waived in connection with
certain fee-based programs. A 0.75% sales charge for 401(k) purchases over
$1,000,000 will apply. See "Class A" and "Class D" below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and the conversion
and holding periods for 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.
(6) The CDSC may be waived in connection with certain fee-based programs.
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares.
Investors who 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. Eligible investors also include certain
retirement plans and participants in certain fee-based programs. In
addition, Class A shares will be offered at net asset value to Merrill
Lynch & Co., Inc. ("ML & Co."), and its subsidiaries (the term
"subsidiaries," when used herein with respect to ML & Co. includes
MLAM, 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 by
certain retirement plans and participants in connection with certain
fee-based programs. Purchases of $1,000,000 or more may not be subject
to an initial sales charge but if the initial sales charge is waived,
such purchases may be subject to a 1.0% CDSC if the shares are
redeemed within one year after purchase. Such CDSC may be waived in
connection with certain fee-based programs. Sales charges also are
reduced under a right of accumulation which takes into account the
investor's holdings of all classes of all MLAM-advised mutual funds.
See "Purchase of Shares -- Initial Sales Charge Alternatives -- Class
A and Class D Shares."
Class B: Class B shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.50% of the Fund's average net
assets attributable to the Class B shares, as well as a CDSC if they
are redeemed within four years of purchase. Such CDSC may be modified
in connection with certain fee-based programs. Approximately 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
5
<PAGE> 8
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 1.0% CDSC if they are redeemed within one year of purchase. Such
CDSC may be waived in connection with certain fee-based programs.
Although Class C shares are subject to a CDSC for only one year (as
compared to four years for Class B), Class C shares have no conversion
feature and, accordingly, an investor who purchases Class C shares
will be subject to distribution fees that will be imposed on Class C
shares for an indefinite period subject to annual approval by the
Fund's Board of Directors and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. The maximum initial sales charge is 4.00%, which is
reduced for purchases of $25,000 or more. Purchases of $1,000,000 or
more may not be subject to an initial sales charge but, if the initial
sales charge is waived, such purchases may be subject to a 1.0% CDSC
if the shares are redeemed within one year after purchase. Such CDSC
may be waived in connection with certain fee-based programs. The
schedule of initial sales charges and reductions for Class D shares is
the same as the schedule for Class A shares, except that there is no
waiver for purchases in connection with certain fee-based programs.
Class D shares also will be issued upon conversion of Class B shares
as described above under "Class B." See "Purchase of Shares -- Initial
Sales Charge Alternatives -- Class A and Class D Shares."
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing(SM) System that the investor believes is most beneficial under his
particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because 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 who 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
6
<PAGE> 9
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> 10
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in conjunction
with the annual audits of the financial statements of the Fund by Deloitte &
Touche LLP, independent auditors. Financial statements for the fiscal year ended
December 31, 1996 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 YEAR
FOUR ENDED
FOR THE YEAR ENDED MONTHS AUGUST
DECEMBER 31, ENDED 31,
--------------------------------------------- DECEMBER 31, --------
1996 1995 1994## 1993 1992 1992
-------- -------- -------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................. $ 8.69 $ 8.20 $ 9.28 $ 8.85 $ 9.34 $ 9.07
-------- -------- -------- -------- -------- --------
Investment income -- net............................. .67 .72 .72 .75 .29 .99
Realized and unrealized gain (loss) on investments
and foreign currency transactions -- net........... .25 .49 (1.09) .46 (.41) .40
-------- -------- -------- -------- -------- --------
Total from investment operations...................... .92 1.21 (.37) 1.21 (.12) 1.39
-------- -------- -------- -------- -------- --------
Less dividends and distributions:
Investment income -- net............................. (.67) (.56) (.45) (.58) (.35) (1.12)
Realized gain on investments -- net.................. -- -- -- (.03) (.02) --
Return of capital -- net............................. -- (.16) (.26) (.17) -- --
-------- -------- -------- -------- -------- --------
Total dividends and distributions..................... (.67) (.72) (.71) (.78) (.37) (1.12)
-------- -------- -------- -------- -------- --------
Net asset value, end of period........................ $ 8.94 $ 8.69 $ 8.20 $ 9.28 $ 8.85 $ 9.34
======== ======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN:++
Based on net asset value per share................... 11.09% 15.35% (4.05)% 14.12% (1.26)%# 16.09%
======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................. .75% .80% .77% .78% .76%** .88%
======== ======== ======== ======== ======== ========
Investment income -- net............................. 7.71% 8.54% 8.17% 8.22% 8.09%** 11.16%
======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............. $212,085 $260,806 $311,181 $467,625 $455,672 $526,631
======== ======== ======== ======== ======== ========
Portfolio turnover................................... 208.53% 116.00% 115.95% 182.88% 68.42% 76.18%
======== ======== ======== ======== ======== ========
<CAPTION>
FOR THE
PERIOD
SEPTEMBER 29,
1988+ TO
AUGUST 31,
1991* 1990* 1989*
-------- -------- -------------
<S> <C><C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................. $ 9.48 $ 9.32 $ 9.35
-------- -------- --------
Investment income -- net............................. 1.12 1.23 1.03
Realized and unrealized gain (loss) on investments
and foreign currency transactions -- net........... (.16) .15 (.12)
-------- -------- --------
Total from investment operations...................... .96 1.38 .91
-------- -------- --------
Less dividends and distributions:
Investment income -- net............................. (1.37) (1.17) (.94)
Realized gain on investments -- net.................. -- (.05) --
Return of capital -- net............................. -- -- --
-------- -------- --------
Total dividends and distributions..................... (1.37) (1.22) (.94)
-------- -------- --------
Net asset value, end of period........................ $ 9.07 $ 9.48 $ 9.32
======== ======== ========
TOTAL INVESTMENT RETURN:++
Based on net asset value per share................... 11.50% 16.48% 9.86%#
======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................. .85% .86% .81%**
======== ======== ========
Investment income -- net............................. 12.38% 16.27% 10.87%**
======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............. $292,709 $299,700 $ 296,247
======== ======== ========
Portfolio turnover................................... 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> 11
FINANCIAL HIGHLIGHTS (CONCLUDED)
<TABLE>
<CAPTION>
CLASS B CLASS C
------------------------------------------------------------------------------- -----------------
FOR THE FOR THE
FOUR PERIOD FOR THE YEAR
MONTHS NOVEMBER 18, ENDED DECEMBER
FOR THE YEAR ENDED DECEMBER 31, ENDED 1991+ TO 31,
------------------------------------------------ DECEMBER 31, AUGUST 31, -----------------
1996 1995 1994## 1993 1992 1992 1996 1995
-------- ---------- ---------- ---------- ------------ ------------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net
Asset Value:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period................ $ 8.69 $ 8.19 $ 9.28 $ 8.85 $ 9.33 $ 9.26 $ 8.68 $ 8.19
------- ---------- ---------- ---------- ---------- ---------- ------- -------
Investment
income -- net........... .61 .65 .65 .70 .27 .77 .60 .64
Realized and unrealized
gain (loss) on
investments and foreign
currency
transactions -- net..... .25 .50 (1.10) .44 (.40) -- .25 .49
------- ---------- ---------- ---------- ---------- ---------- ------- -------
Total from investment
operations............... .86 1.15 (.45) 1.14 (.13) .77 .85 1.13
------- ---------- ---------- ---------- ---------- ---------- ------- -------
Less dividends and
distributions:
Investment
income -- net........... (.61) (.51) (.40) (.53) (.33) (.70) (.60) (.50)
Realized gain on
investments -- net...... -- -- -- (.03) (.02) -- -- --
Return of
capital -- net........... -- (.14) (.24) (.15) -- -- -- (.14)
------- ---------- ---------- ---------- ---------- ---------- ------- -------
Total dividends and
distributions............ (.61) (.65) (.64) (.71) (.35) (.70) (.60) (.64)
------- ---------- ---------- ---------- ---------- ---------- ------- -------
Net asset value, end of
period................... $ 8.94 $ 8.69 $ 8.19 $ 9.28 $ 8.85 $ 9.33 $ 8.93 $ 8.68
======= ========== ========== ========== ========== ========== ======= =======
TOTAL INVESTMENT RETURN:++
Based on net asset value
per share............... 10.25% 14.61% (4.90)% 13.27% (1.42)%# 8.61%# 10.19% 14.38%
======= ========== ========== ========== ========== ========== ======= =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses................. 1.52% 1.56% 1.54% 1.55% 1.53%** 1.63%** 1.56% 1.65%
======= ========== ========== ========== ========== ========== ======= =======
Investment
income -- net........... 6.94% 7.77% 7.41% 7.42% 7.08%** 8.02%** 6.85% 7.65%
======= ========== ========== ========== ========== ========== ======= =======
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands).......... $988,209 $1,241,896 $1,490,507 $2,106,120 $1,582,270 $1,514,406 $10,251 $ 5,406
======= ========== ========== ========== ========== ========== ======= =======
Portfolio turnover....... 208.53% 116.00% 115.95% 182.88% 68.42% 76.18% 208.53% 116.00%
======= ========== ========== ========== ========== ========== ======= =======
<CAPTION>
CLASS D
--------------------------------
FOR THE FOR THE
PERIOD FOR THE YEAR PERIOD
OCTOBER 21, ENDED DECEMBER OCTOBER 21,
1994+ TO 31, 1994+ TO
DECEMBER 31, ----------------- DECEMBER 31,
1994## 1996 1995 1994##
------------ ------- ------- ------------
<S> <<C> <C> <C> <C>
Increase (Decrease) in Net
Asset Value:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period................ $ 8.42 $ 8.69 $ 8.20 $ 8.43
------- ------- ------- -------
Investment
income -- net........... .10 .65 .70 .11
Realized and unrealized
gain (loss) on
investments and foreign
currency
transactions -- net..... (.20) .25 .49 (.20)
------- ------- ------- -------
Total from investment
operations............... (.10) .90 1.19 (.09)
------- ------- ------- -------
Less dividends and
distributions:
Investment
income -- net........... (.08) (.65) (.55) (.09)
Realized gain on
investments -- net...... -- -- -- --
Return of
capital -- net........... (.05) -- (.15) (.05)
------- ------- ------- -------
Total dividends and
distributions............ (.13) (.65) (.70) (.14)
------- ------- ------- -------
Net asset value, end of
period................... $ 8.19 $ 8.94 $ 8.69 $ 8.20
======= ======= ======= =======
TOTAL INVESTMENT RETURN:++
Based on net asset value
per share............... (1.20)%# 10.82% 15.06% (1.09)%#
======= ======= ======= =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses................. 1.64%** 0.99% 1.04% 1.04%**
======= ======= ======= =======
Investment
income -- net........... 8.00%** 7.42% 8.23% 8.60%**
======= ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands).......... $ 1,204 $14,369 $ 6,320 $ 1,410
======= ======= ======= =======
Portfolio turnover....... 115.95% 208.53% 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> 12
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 that could affect investment in those
countries. There may be less publicly available information about a foreign
financial instrument than about a United States instrument, and foreign entities
may not be subject to accounting, auditing and financial reporting standards and
requirements comparable to those of United States entities. In addition, certain
foreign investments may be subject to foreign withholding taxes. See "Taxes."
Foreign financial markets, while growing in volume, have, for the most
part, substantially less volume than United States markets, and securities of
many foreign companies are less liquid and their prices more volatile than
securities of comparable domestic companies. Foreign markets also have different
clearance and settlement procedures, and in certain markets there have been
times when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when assets of the Fund
are uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause the Fund
to miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result either in losses to the Fund
due to subsequent declines in value of the portfolio security or, if the Fund
has entered into a contract to sell the security, could result in possible
liability to the purchaser. Since the securities in which the Fund invests are
traded primarily in the over-the-counter market, and therefore, portfolio
transactions will generally not be effected on foreign securities exchanges, the
Fund does not expect typically to incur these potential settlement delays. Costs
associated with transactions in foreign securities are generally higher than
with transactions in United States securities. There is generally less
government supervision and regulation of exchanges, financial institutions and
corporate issuers in foreign countries than there is in the United States.
The operating expense ratio of the Fund can be expected to be higher than
that of an investment company investing exclusively in United States securities
since the expenses of the Fund, such as custodial
10
<PAGE> 13
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
Services ("Standard & Poor's") and BBB or lower by IBCA, Ltd. or IBCA, Inc.
("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 may be appropriate only for investors who are able to bear such
higher risks. An investment in the Fund should not constitute a complete
investment program. 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.
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
11
<PAGE> 14
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 that
may not be changed without the approval 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 12 member states of the
European Community, a Western European economic cooperative association
including France, Germany, the Netherlands and the United Kingdom. The specific
amounts of currencies comprising the ECU may be adjusted by the Council of
Ministers of the European Community to reflect changes in relative values of the
underlying currencies. The Investment Adviser does not believe that such
adjustments will adversely affect holders of ECU-denominated obligations or the
marketability of such securities. European supranational entities (described
further below), in particular, issue ECU-denominated obligations. The Fund may
invest in securities denominated in the currency of one nation although issued
by a governmental entity, corporation or financial institution of another
nation. For example, the Fund may invest in a British pound sterling-denominated
obligation issued by a United States corporation. Such investments involve
credit risks associated with the issuer and currency risks associated with the
currency in which the obligation is denominated.
It is anticipated that under current conditions the Fund will invest
primarily in marketable securities denominated in the currencies of the United
States, Canada, Western European nations, New Zealand and Australia, as well as
in ECUs. Further, it is anticipated that such securities will be issued
primarily by entities located in such countries and by supranational entities.
Under normal conditions, the Fund's investments will be denominated in at least
three currencies or multinational currency units. Under certain adverse
conditions, the Fund may restrict the financial markets or currencies in which
its assets will be invested. The Fund presently intends to invest its assets
solely in the United States financial markets or United States dollar-
denominated obligations only for temporary defensive purposes.
United States Government securities include: (i) U.S. Treasury obligations
(bills, notes and bonds), which differ in their interest rates, maturities and
times of issuance, all of which are backed by the full faith and credit of the
United States; and (ii) obligations issued or guaranteed by U.S. Government
agencies or instrumentalities, including government guaranteed mortgage-related
or asset-backed securities, some of which are backed by the full faith and
credit of the U.S. Treasury (e.g., direct pass-through certificates of the
12
<PAGE> 15
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 as well as international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Steel and Coal Community, the Asian
Development Bank and the Inter-American Development Bank. The government
members, or "stockholders," usually make initial capital contributions to the
supranational entity and in many cases are committed to make additional capital
contributions if the supranational entity is unable to repay its borrowings.
ALLOCATION OF INVESTMENTS AND RISKS OF HIGH YIELD/HIGH RISK SECURITIES
In seeking high current income, the Fund will allocate its investments
among fixed income securities of various types, maturities and issuers in the
various global markets based upon the analysis of the Investment Adviser of
yield and price differentials, currency considerations and general market and
economic conditions. In making such allocations, the Investment Adviser will
assess the overall quality of the portfolio considering in particular the extent
to which the differences in yield justify investments in higher risk securities.
In its evaluations, the Investment Adviser will utilize its internal financial,
economic and credit analysis resources as well as information in this regard
obtained from other sources.
No Rating Criteria for Debt Securities. The Fund has established no rating
criteria for the fixed income securities in which it may invest, and a
substantial portion of the securities in the Fund's portfolio may be securities
rated in the medium to lower rating categories of nationally recognized
statistical rating organiza-
13
<PAGE> 16
tions 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 that
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 that may be adopted by the Directors, will carefully
consider the factors affecting the market for high yield/high risk, lower rated
securities in determining whether any particular security is liquid or illiquid
and whether market quotations are readily available for purposes of valuing
portfolio securities.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high
yield/high risk securities, particularly in a thinly traded market. Factors
adversely affecting the market value of high yield/high risk securities are
likely to affect adversely the
14
<PAGE> 17
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 market value, by Standard & Poor's rating
category, of all bonds held by the Fund at December 31, 1996:
<TABLE>
<CAPTION>
% NET
RATING ASSETS
--------------------------------------------------------------------- ------
<S> <C>
AAA.................................................................. 20.25
A.................................................................... 1.38
BBB.................................................................. 2.08
BB................................................................... 23.08
B.................................................................... 16.75
CCC.................................................................. 1.6
Not Rated*........................................................... 33.20
----
99.06
====
</TABLE>
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* Bonds that are not rated by Standard & Poor's or Moody's Investors Service
("Moody's"). Such securities may be rated by nationally recognized statistical
rating organizations other than Standard & Poor's or Moody's or may not be
rated by any such organization. With respect to the percentage of the Fund's
assets invested in unrated securities, the Fund's Investment Adviser believes
that the following percentages of assets are of comparable quality to
obligations with the specified Standard & Poor's rating: 0.25% - A;
0.79% - BBB; 0.94% - BB; 1.80% - B; and 0.02% - D. With respect to the
percentage of the Fund's assets invested in unrated securities, the Fund's
Investment Adviser believes that the following percentages of assets are of
comparable quality to obligations with the specified Moody's rating:
4.78% - Aaa; 10.98% - Aa; 9.71% - A; 0.43% - Baa; and 2.98% - Ba. This
determination is based on the Investment Adviser's own internal evaluation and
does not necessarily reflect how such securities would be rated by Standard &
Poor's or Moody's if they 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, 1996; the rating composition of the portfolio may vary 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.
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
15
<PAGE> 18
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 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.
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<PAGE> 19
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 that 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 limitations 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 that 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 that 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 that the Fund intends
to purchase. Limitations on transactions in options on futures contracts are
described below.
The Fund may engage in options and futures transactions on exchanges and in
the over-the-counter ("OTC") markets. In general, exchange-traded contracts are
third-party contracts (i.e., performance of the parties' obligations is
guaranteed by an exchange or clearing corporation) with standardized strike
prices and expiration dates. OTC transactions are two-party contracts with price
and terms negotiated by the buyer and seller. The Fund will engage in OTC
options transactions only with member banks of the Federal Reserve System and
primary dealers in U.S. Government securities or with affiliates of such banks
or dealers that have capital of at least $50 million or whose obligations are
guaranteed by an entity having capital of at least $50 million.
The staff of the Commission has taken the position that purchased OTC
options and the assets used as cover for written OTC options are illiquid
securities. Therefore, the Fund has adopted an investment policy pursuant to
which it will not purchase or sell OTC options (including OTC options on futures
contracts) if, as a result of such transaction, the sum of the market value of
OTC options currently outstanding that are held by the Fund, the market value of
the underlying securities covered by OTC call options currently outstanding that
were sold by the Fund and margin deposits on the Fund's existing OTC options on
futures contracts exceed
17
<PAGE> 20
15% of the net assets of the Fund, taken at market value, together with all
other assets of the Fund that 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 that 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 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").
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<PAGE> 21
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) that 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 that have capital of at
least $50 million or whose obligations are guaranteed by an entity having
capital of at least $50 million. The Fund will acquire only those OTC options
for which management believes the Fund can receive on each business day at least
two independent bids or offers (one of which will be from an entity other than a
party to the option).
A futures contract on a foreign currency is an agreement between two
parties to buy and sell a specified amount of a currency for a set price on a
future date. Futures contracts and options on futures contracts are traded on
boards of trade or futures exchanges. The Fund will not speculate in foreign
currency options, futures or related options. Accordingly, the Fund will not
hedge a currency substantially in excess of the market value of the securities
denominated in such currency that it owns, the expected acquisition price of
securities that it has committed or anticipates to purchase that are denominated
in such currency, and, in the case of securities that 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
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<PAGE> 22
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 that are the subject of the hedge. If the price of the futures
contract moves more or less than the price of the security or currency, the Fund
will experience a gain or loss that will not be completely offset by movements
in the price of the debt securities that 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
20
<PAGE> 23
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) that may be written by a single investor, whether acting alone or in
concert with others (regardless of whether such options are written on the same
or different exchanges or are held or written on one or more accounts or through
one or more brokers). "Trading limits" are imposed on the maximum number of
contracts that any person may trade on a particular trading day. The 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 that 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 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
21
<PAGE> 24
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 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 for the
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<PAGE> 25
special tax treatment afforded "regulated investment companies" under 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.
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 the Investment Adviser and its affiliate,
MLAM; President and Director of Princeton Services, Inc. ("Princeton Services");
Executive Vice President of ML & Co.; and Director of the Distributor.
JAMES H. BODURTHA -- Director and Executive Vice President, The China
Business Group, Inc.
HERBERT I. LONDON -- John M. Olin Professor of Humanities, New York
University.
ROBERT R. MARTIN -- Former Chairman, Kinnard Investments, Inc.
JOSEPH L. MAY -- Attorney in private practice.
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ANDRE F. PEROLD -- Professor, Harvard Business School.
- ---------------
* Interested person, as defined by the Investment Company Act, of the Fund.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Investment Adviser, which is an affiliate of MLAM and is owned and
controlled by ML & Co., a financial services holding company, acts as the
Investment Adviser for the Fund and provides the Fund with investment management
services. The Investment Adviser or MLAM acts as the investment adviser to more
than 130 registered investment companies. MLAM also provides investment advisory
services to individuals and institutional accounts. As of March 31, 1997, the
Investment Adviser and MLAM had a total of approximately $247.2 billion in
investment company and other portfolio assets under management, including
accounts of certain affiliates of MLAM.
Subject to the direction of the Directors, the Investment Adviser is
responsible for the actual management of the Fund's portfolio and constantly
reviews the Fund's holdings in light of its own research analysis and that from
other relevant sources. The responsibilities for making decisions to buy, sell
or hold a particular security rest with the Investment Adviser. The Investment
Adviser performs certain of the other administrative services and provides all
the office space, facilities, equipment and necessary personnel for management
of the Fund.
Vincent T. Lathbury, III and Robert Parish are the Portfolio Managers for
the Fund. Vincent T. Lathbury, III has been Portfolio Manager and Vice President
of the Investment Adviser and MLAM since 1982. Robert Parish has been Portfolio
Manager and Vice President of the Investment Adviser since 1991 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,
1996, the total fee paid by the Fund to the Investment Adviser was $8,216,118
(based on average net assets of approximately $1.4 billion).
Also, the Investment Adviser has entered into a sub-advisory agreement (the
"Sub-Advisory Agreement") with Merrill Lynch Asset Management U.K. Limited
("MLAM U.K."), an indirect, wholly owned subsidiary of ML & Co. and an affiliate
of the Investment Adviser, pursuant to which the Investment Adviser pays MLAM
U.K. a fee for providing investment advisory services to the Investment Adviser
with respect to the Fund, in an amount to be determined from time to time by the
Investment Adviser and MLAM U.K. but in no event in excess of the amount the
Investment Adviser actually receives for providing services to the Fund pursuant
to the Investment Advisory Agreement. MLAM U.K. has offices at Milton Gate, 1
Moor Lane, London EC2Y 9HA, England.
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
24
<PAGE> 27
December 31, 1996, the Fund reimbursed the Investment Adviser $165,821 for
accounting services. For the fiscal year ended December 31, 1996, the ratio of
total expenses to average net assets was 0.75% for Class A shares, 1.52% for
Class B shares, 1.56% for Class C shares and 0.99% 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 that 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" that 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 subsidiary of ML & Co., acts as the Fund's Transfer Agent pursuant to a
Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement (the "Transfer Agency Agreement"). Pursuant to the Transfer Agency
Agreement, the Transfer Agent is responsible for the issuance, transfer and
redemption of shares and the opening and maintenance of shareholder accounts.
Pursuant to the Transfer Agency Agreement, the Transfer Agent receives a fee of
up to $11.00 per Class A or Class D account and up to $14.00 per Class B or
Class C account and is entitled to reimbursement for certain transaction charges
and out-of-pocket expenses incurred by it under the Transfer Agency Agreement.
The term "account" includes a shareholder account maintained directly by the
Transfer Agent and any other account representing the beneficial interest of a
person in the relevant share class on a recordkeeping system, provided the
recordkeeping system is maintained by a subsidiary of ML & Co. For the fiscal
year ended December 31, 1996, the total fee paid by the Fund to the Transfer
Agent was $1,407,988.
PURCHASE OF SHARES
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 and the minimum subsequent
purchase is $50, except for retirement plans, for which the minimum initial
purchase is $100 and the minimum subsequent purchase is $1.
25
<PAGE> 28
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 that are
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 ("NYSE") (generally 4:00 p.m., New York time), which includes
orders received after the close of business on the previous day, the applicable
offering price will be based on the net asset value determined as of 15 minutes
after the close of business on the NYSE on that day, provided the Distributor in
turn receives the order from the securities dealer prior to 30 minutes after the
close of business on the NYSE on that day. If the purchase orders are not
received by the Distributor prior to 30 minutes after the close of business on
the NYSE, 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, but as of May 1, 1997, $5.35) to confirm a sale of shares to such
customers. Purchases directly through the Fund's Transfer Agent are not subject
to the processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(SM) System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the amount
of the purchase, the length of time the investor expects to hold the shares and
other relevant circumstances. Shares of Class A and Class D are sold to
investors choosing the initial sales charge alternatives and shares of Class B
and Class C are sold to investors choosing the deferred sales charge
alternatives. Investors should determine whether under their particular
circumstances it is more advantageous to incur an initial sales charge or to
have the entire initial purchase price invested in the Fund with the investment
thereafter being subject to a 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 3.
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, distribution fees 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 (except that Class B shareholders may vote upon any
material changes to expenses
26
<PAGE> 29
charged under the Class D Distribution Plan). See "Distribution Plans" below.
Each class has different exchange privileges. See "Shareholder
Services -- Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges and distribution fees with respect to Class B and
Class C shares in that the sales charges and distribution fees applicable to
each class provide for the financing of the distribution of the shares of the
Fund. The distribution-related revenues paid with respect to a class will not be
used to finance the distribution expenditures of another class. Sales personnel
may receive different compensation for selling different classes of shares.
Investors are advised that only Class A and Class D shares may be available for
purchase through securities dealers, other than Merrill Lynch, which are
eligible to sell 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.
<TABLE>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
- -------------------------------------------------------------------------------------------------
A Maximum 4.00% initial sales No No No
charge(2)(3)
- -------------------------------------------------------------------------------------------------
B CDSC for a period of four 0.25% 0.50% B shares convert to D shares
years, at a rate of 4.0% automatically after
during the first year, approximately ten years(5)
decreasing 1.0% annually to
0.0%(4)
- -------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(6) 0.25% 0.55% No
- -------------------------------------------------------------------------------------------------
D Maximum 4.00% initial sales 0.25% No No
charge(3)
- -------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs 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 and waived for purchases of Class A
shares by certain retirement plans in connection with certain fee-based
programs. Class A and Class D share purchases of $1,000,000 or more may not
be subject to an initial sales charge but, if the initial sales charge is
waived, may be subject to a 1.0% CDSC for one year. A 0.75% sales charge for
401(k) purchases over $1,000,000 will apply.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans are 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.
(6) The CDSC may be waived in connection with certain fee-based programs.
27
<PAGE> 30
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**.......................... None None None
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more and on Class A share purchases in connection with certain
fee-based programs. If the sales charge is waived in connection with a
purchase of $1,000,000 or more, such purchases may be subject to a CDSC of
1.0% if the shares are redeemed within one year after purchase. Such CDSC may
be waived in connection with certain fee-based programs. 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").The proceeds from the account maintenance fees
are used to compensate Merrill Lynch for providing continuing account
maintenance activities.
For the fiscal year ended December 31, 1996, the Fund sold 387,712 Class A
shares for aggregate net proceeds of $3,388,308. The gross sales charges for the
sale of Class A shares of the Fund for the fiscal year ended December 31, 1996
were $33,553, of which $3,597 and $29,956 were received by the Distributor and
Merrill Lynch, respectively. For the fiscal year ended December 31, 1996, the
Distributor received no CDSCs with respect to redemptions within one year after
purchase of Class A shares purchased subject to a front-end sales charge waiver.
For the fiscal year ended December 31, 1996, the Fund sold 790,966 Class D
shares for aggregate net proceeds of $6,912,547. The gross sales charges for the
sale of Class D shares of the Fund for the year were $55,055, of which $4,675
and $50,380 were received by the Distributor and Merrill Lynch, respectively.
For the fiscal year ended December 31, 1996, the Distributor received no CDSCs
with respect to redemptions within one year after purchase of Class D shares
purchased subject to a front-end sales charge waiver.
28
<PAGE> 31
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. Certain employer sponsored retirement or savings
plans, including eligible 401(k) plans, may purchase Class A shares at net asset
value provided such plans meet the required minimum number of eligible employees
or required amount of assets advised by MLAM or any of its affiliates. Class A
shares are available at net asset value to corporate warranty insurance reserve
fund programs provided that the program has $3 million or more initially
invested in MLAM-advised mutual funds. Also eligible to purchase Class A shares
at net asset value are participants in certain investment programs including
TMA(SM) Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services, collective investment trusts for which Merrill
Lynch Trust Company serves as trustee and purchases made in connection with
certain fee-based programs. In addition, Class A shares are offered at net asset
value to ML & Co. and its subsidiaries and their directors and employees and to
members of the Boards of MLAM-advised investment companies, including the Fund.
Certain persons who acquired shares of certain MLAM-advised closed-end funds in
their initial offerings who wish to reinvest the net proceeds from a sale of
their closed-end fund shares of common stock in shares of the Fund also may
purchase Class A shares of the Fund if certain conditions set forth in the
Statement of Additional Information are met (for closed-end funds that commenced
operations prior to October 21, 1994). In addition, Class A shares of the Fund
and certain other MLAM-advised mutual funds are offered at net asset value to
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain
conditions set forth in the Statement of Additional Information are met, to
shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch
High Income Municipal Bond Fund, Inc., who wish to reinvest the net proceeds
from a sale of certain of their shares of common stock pursuant to a tender
offer conducted by such funds in shares of the Fund and certain other
MLAM-advised mutual funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges also
may be reduced under a Right of Accumulation and a Letter of Intention. Class A
shares are offered at net asset value to certain eligible Class A investors as
set forth above under "Eligible Class A Investors." See "Shareholder
Services -- Fee-Based Programs."
Provided applicable threshold requirements are met, either Class A or Class
D shares are offered at net asset value to Employee Access(SM) Accounts
available through authorized employers. Subject to certain conditions, Class A
and Class D shares are offered at net asset value to shareholders of Merrill
Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond
Fund, Inc., and Class A shares are offered at net asset value to shareholders of
Merrill Lynch Senior Floating Rate 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 is
set forth in the Statement of Additional Information.
29
<PAGE> 32
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 distribution fees of 0.50%
and 0.55%, respectively, of net assets as discussed below under "Distribution
Plans." The proceeds from the account maintenance fees are used to compensate
Merrill Lynch for providing continuing account maintenance activities.
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of 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 that
are redeemed within four years of purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of the proceeds of
30
<PAGE> 33
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 fiscal year ended December 31,
1996, the Distributor received CDSCs of $1,827,822 with respect to redemptions
of Class B shares, $1,822,022 of which were 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 for over four years or shares acquired pursuant to
reinvestment of dividends or distributions and then of shares held longest
during the four-year period. The charge will not be applied to dollar amounts
representing an increase in the net asset value since the time of purchase. A
transfer of shares from a shareholder's account to another account will be
assumed to be made in the same order as a redemption.
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares through dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to a CDSC because of dividend reinvestment. With respect to
the remaining 40 shares, the charge is applied only to the original cost of $10
per share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the third year after purchase).
The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plans or following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended (the "Code")) of a
shareholder.
The Class B CDSC also is waived on redemptions of shares by certain
eligible 401(a) and eligible 401(k) plans. The CDSC also is waived for any Class
B shares that are purchased by eligible 401(a) or eligible 401(k) plans that are
rolled over into a Merrill Lynch or Merrill Lynch Trust Company custodied IRA
and held in such account at the time of redemption. Effective on or about May
12, 1997, the Class B CDSC also will be waived for any Class B shares purchased
within eligible Employee Access(SM) Accounts. The Class B CDSC also is waived
for any Class B shares that are purchased by a Merrill Lynch rollover IRA that
was funded by a rollover from a terminated 401(k) plan managed by the MLAM
Private Portfolio Group and held in such account at the time of redemption.
Additional information concerning the waiver of the Class B
31
<PAGE> 34
CDSC is set forth in the Statement of Additional Information. The terms of the
CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs."
Contingent Deferred Sales Charges -- Class C Shares. Class C shares that
are redeemed within one year after purchase may be subject to a 1.0% CDSC
charged as a percentage of the dollar amount subject thereto. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed
on increases in net asset value above the initial purchase price. In addition,
no Class C CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions. The Class C CDSC may be waived in
connection with certain fee-based programs. See "Shareholder
Services -- Fee-Based Programs."
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.
For the fiscal year ended December 31, 1996, the Distributor received CDSCs
of $6,306 with respect to redemptions of Class C shares, all of which were paid
to Merrill Lynch.
Conversion of Class B Shares to Class D Shares. After approximately ten
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
"Conversion Date") on the basis of the relative net asset values of the shares
of the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class D
shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert approximately
ten years after initial purchase. If, during the Conversion Period, a
shareholder exchanges Class B shares with an eight-year Conversion Period for
Class B shares with a ten-year
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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 that 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 may be modified for retirement plan investors
who participate in certain fee-based programs. See "Shareholder
Services -- Fee-Based Programs."
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or distribution
fees paid by the Fund to the Distributor with respect to such classes. The Class
B and Class C Distribution Plans provide for the payment of account maintenance
fees and distribution fees, and the Class D Distribution Plan provides for the
payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual rate
of 0.25% of the average daily net assets of the Fund attributable to shares of
the relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) in connection with account maintenance activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.50% 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, 1996, the Fund paid the Distributor
$8,379,565 pursuant to the Class B Distribution Plan (based on average net
assets subject to such Class B Distribution Plan of approximately $1.1 billion),
all of which was paid to Merrill Lynch for providing account maintenance and
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<PAGE> 36
distribution-related activities and services in connection with Class B shares.
For the fiscal year ended December 31, 1996, the Fund paid the Distributor
$62,235 pursuant to the Class C Distribution Plan (based on average net assets
subject to such Class C Distribution Plan of approximately $7.8 million), all of
which was paid to Merrill Lynch for providing account maintenance and
distribution-related activities and services in connection with Class C shares.
For the fiscal year ended December 31, 1996, the Fund paid the Distributor
$28,273 pursuant to the Class D Distribution Plan (based on average net assets
subject to such Class D Distribution Plan of approximately $11.3 million), all
of which was paid to Merrill Lynch for providing account maintenance activities
in connection with Class D shares.
The payments under the Distribution Plans are based 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, 1996, the last date for which fully allocated accrual
data is available, for Class B shares 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 $12,867,000 (1.30%
of Class B net assets at that date). As of December 31, 1996, the fully
allocated accrual expenses incurred by the Distributor and Merrill Lynch for the
period since the commencement of operations of Class C shares exceeded fully
allocated accrual revenues for such period by approximately $69,000 (.67% of
Class C net assets at that date). As of January 31, 1997, for Class B shares
direct cash revenues for the period since the commencement of operations as an
open-end investment company exceeded direct cash expenses by $35,575,423 (3.71%
of Class B net assets at that date). As of January 31, 1997, for Class C shares,
direct cash revenues for the period since the commencement of operations of
Class C shares exceeded direct cash expenses by $52,650 (.50% 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
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<PAGE> 37
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."
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the distribution fee and
the CDSC borne by the Class B and Class C shares but not the account maintenance
fee. The maximum sales charge rule is applied separately to each class. As
applicable to the Fund, the maximum sales charge rule limits the aggregate of
distribution fee payments and CDSCs payable by the Fund to (1) 6.25% of eligible
gross sales of Class B shares and Class C shares, computed separately (defined
to exclude shares issued pursuant to dividend reinvestments and exchanges), plus
(2) interest on the unpaid balance for the respective class, computed
separately, at the prime rate plus 1% (the unpaid balance being the maximum
amount payable minus amounts received from the payment of the distribution 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 that may be applicable, there will be no charge
for redemption if the redemption request is sent directly to the Transfer Agent.
Shareholders liquidating their holdings will receive 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 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
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<PAGE> 38
redemption request must be guaranteed by an "eligible guarantor institution" as
such is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, as
amended, the existence and validity of which may be verified by the Transfer
Agent through the use of industry publications. Notarized signatures are not
sufficient. In certain instances, the Transfer Agent may require additional
documents such as, but not limited to, trust instruments, death certificates,
appointments as executor or administrator, or certificates of corporate
authority. For shareholders redeeming directly with the Transfer Agent, payments
will be mailed within seven days of receipt of a proper notice of redemption.
At various times the Fund may be requested to redeem shares for which it
has not yet received good payment (e.g., cash, Federal funds or certified check
drawn on a United States bank). The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as it has assured itself that good
payment has been collected for the purchase of such Fund shares, which will not
exceed 10 days.
REPURCHASE
The Fund also will repurchase shares through a shareholder's listed
securities dealer. The Fund will normally accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the request for
repurchase is received by the dealer prior to the normal close of business on
the NYSE (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 NYSE on the same day. Dealers have the responsibility of
submitting such repurchase requests to the Fund not later than 30 minutes after
the close of business on the NYSE in order to obtain that day's closing price.
The 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, but as of May 1, 1997, $5.35) 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
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.
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SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below that are designed to facilitate investment in shares of the
Fund. Full details as to each such service, 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. If the new brokerage firm is willing to accommodate the
shareholder in this manner, the shareholder must request that he or she be
issued certificates for his or her shares, and then must turn the certificates
over to the firm for re-registration as described in the preceding sentence.
Shareholders considering transferring a tax deferred retirement account such as
an Individual Retirement Account from Merrill Lynch to another brokerage firm or
financial institution should be aware that, if the firm to which the retirement
account is to be transferred will not take delivery of shares of the Fund, a
shareholder must either redeem the shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm, or such
shareholder must continue to maintain a retirement account at Merrill Lynch for
those shares.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds. There is currently no
limitation on the number of times a shareholder may exercise the exchange
privilege. The exchange privilege may be modified or terminated in accordance
with the rules of the Commission.
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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
the account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second MLAM-advised
mutual fund, and the shareholder does not hold Class A shares of the second fund
in his account at the time of the exchange and is not otherwise eligible to
acquire Class A shares of the second fund, the shareholder will receive Class D
shares of the second fund as a result of the exchange. Class D shares also may
be exchanged for Class A shares of a second MLAM-advised mutual fund at any time
as long as, at the time of the exchange, the shareholder holds Class A shares of
the second fund in the account in which the exchange is made or is otherwise
eligible to purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the
same class of other MLAM-advised mutual funds.
Shares of the Fund that are subject to a CDSC are exchangeable on the basis
of relative net asset value per share without the payment of any CDSC that might
otherwise be due upon redemption of the shares of the Fund. For purposes of
computing the CDSC that may be payable upon a disposition of the shares acquired
in the exchange, the holding period for the previously owned shares of the Fund
is "tacked" to the holding period for the newly acquired shares of the other
fund.
Class A, Class B, Class C and Class D shares also are exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for reduction of any CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange privilege is treated as a sale of the exchanged
shares and a purchase of the acquired shares for Federal income tax purposes.
For further information, see "Shareholder Services -- Exchange Privilege" in the
Statement of Additional Information.
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
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<PAGE> 41
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) or 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 ($1 for
retirement accounts) through the CMA(R) or CBA(R) Automated Investment Program.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives
for securities transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares that will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of shares
held therein or the automatic exchange thereof to another class at net asset
value, which may be shares of a money market fund. In addition, upon termination
of participation in a Program, shares that have been held for less than
specified periods within such Program may be subject to a fee based upon the
current value of such shares. These Programs also generally prohibit such shares
from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance fees)
in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from Merrill Lynch Investor
Services at (800) MER-FUND (637-3863).
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TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended (the "Code"). As long as it so qualifies, the Fund (but not
its shareholders) will not be subject to Federal income tax on the part of its
net ordinary income and net realized capital gains that 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, 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
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<PAGE> 43
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).
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.
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Certain states exempt from state income taxation dividends paid by RICs
that are derived from interest on U.S. Government obligations. State law varies
as to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
yield for various specified time periods in advertisements or information
furnished to present or prospective shareholders. Average annual total return
and yield are computed separately for Class A, Class B, Class C and Class D
shares in accordance with formulas specified by the Commission.
Average annual total return quotations for the specified period will be
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including any CDSC that would be applicable to a
complete redemption of the investment at the end of the specified period such as
in the case of Class B and Class C shares and the maximum sales charge in the
case of Class A and Class D shares. Dividends paid by the Fund with respect to
all shares, to the extent any dividends are paid, will be calculated in the same
manner at the same time on the same day and will be in the same amount, except
that account maintenance fees and distribution charges and any incremental
transfer agency costs relating to each class of shares will be borne exclusively
by that class. The Fund will include performance data for all classes of shares
of the Fund in any advertisement or information including performance data of
the Fund.
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return calculated
will not be average annual rates, but rather, actual annual, annualized or
aggregate rates of return and (2) the maximum applicable sales charges will not
be included with respect to annual or annualized rates of return calculations.
Aside from the effect on the performance data calculations of including or
excluding the maximum applicable sales charges, actual annual or annualized
total return data generally will be lower than average annual total return data
since the average annual rates of return reflect compounding; aggregate total
return data generally will be higher than average annual total return data since
the aggregate rates of return reflect compounding over a longer period of time.
In advertisements distributed to investors whose purchases are subject to waiver
of the CDSC in the case of Class B or Class C shares (such as investors in
certain retirement plans) or to reduced sales loads 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, a
lower amount of expenses is deducted. See "Purchase of Shares." The Fund's total
return may be expressed either as a percentage or as a dollar amount in order to
illustrate such total return on a hypothetical $1,000 investment in the Fund at
the beginning of each specified period.
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Yield quotations for each class 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, 1996 was 6.64% for Class A shares, 6.14% for Class B shares, 6.08%
for Class C shares and 6.39% 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, Fortune Magazine or other industry
publications. From time to time, the Fund may include the Fund's Morningstar
risk-adjusted performance ratings in advertisements or supplemental sales
literature. As with other performance data, performance comparisons should not
be considered indicative of the Fund's relative performance for any future
period.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors of the Fund, the
Investment Adviser is primarily responsible for the execution of the Fund's
portfolio transactions. In executing such transactions, the Investment Adviser
seeks to obtain the best results for the Fund, taking into account such factors
as price (including the applicable brokerage commission or dealer spread), size
of order, difficulty of execution and operational facilities of the firm
involved and the firm's risk in positioning a block of securities. While the
Investment Adviser generally seeks reasonably competitive commission rates or
spreads, the Fund does not necessarily pay the lowest commission or spread
available.
The Fund has no obligation to deal with any broker or dealer in execution
of transactions in portfolio securities. Subject to obtaining the best price and
execution, securities firms which provided supplemental investment research to
the Investment Adviser, including Merrill Lynch, may receive orders for
transactions by the Fund. Information so received will be in addition to and not
in lieu of the services required to be performed by the Investment Adviser under
the Investment Advisory Agreement, and the expenses of the Investment Adviser
will not necessarily be reduced as a result of the receipt of such supplemental
information.
The securities in which the Fund invests are traded primarily in the
over-the-counter market. Since portfolio transactions will generally not be
effected on foreign securities exchanges, the Fund does not 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
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<PAGE> 46
Fund, including Merrill Lynch, are prohibited from dealing with the Fund as a
principal in the purchase and sale of securities unless a permissive order
allowing such transactions is obtained from the Commission. Affiliated persons
of the Fund may serve as its broker in transactions conducted on an exchange and
in over-the-counter transactions conducted on an agency basis. Costs associated
with transactions in foreign securities are generally higher than with
transactions in United States securities, although, as noted above, the Fund
will endeavor to achieve the best net results in effecting such transactions.
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of United States national securities exchanges from executing
exchange transactions for their affiliates and institutional accounts which they
manage unless the member (i) has obtained prior express authorization from the
account to effect such transactions, (ii) at least annually furnished the
account with the aggregate compensation received by the member in effecting such
transactions, and (iii) complies with any rules the Commission has prescribed
with respect to the requirements of clauses (i) and (ii). To the extent Section
11(a) would apply to Merrill Lynch acting as a broker for the Fund in any of its
portfolio transactions executed on any such securities exchange of which it is a
member, appropriate consents have been obtained from the Fund and annual
statements as to aggregate compensation will be provided to the Fund.
PORTFOLIO TURNOVER
Generally, the Fund does not purchase securities for short-term trading
profits. However, the Fund may dispose of securities without regard to the time
they have been held when such actions, for defensive or other reasons, appear
advisable to the Investment Adviser. (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 years ended December 31, 1995 and 1996, the portfolio turnover
rates were 116.00% and 208.53%, respectively. The increased portfolio turnover
rate for the fiscal year ended December 31, 1996 resulted from the Fund's
efforts to take advantage of higher volatility in the bond and currency markets,
especially during the second and third quarters.
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention 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.
Gains or losses attributable to certain foreign currency transactions may
increase or decrease the amount of the Fund's income available for distribution
to shareholders. If such losses exceed other income during a taxable year, (a)
the Fund would not be able to make any ordinary income dividend distributions,
and (b) all or a portion of distributions made before the losses were realized
would be recharacterized as a return of capital to shareholders, rather than as
an ordinary income dividend, thereby reducing each shareholder's tax
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<PAGE> 47
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 NYSE (generally, 4:00
p.m., New York time), on each day during which the NYSE is open for trading. Any
assets or liabilities initially expressed in terms of non-U.S. dollar currencies
are translated into U.S. dollars at the prevailing market rates as quoted by one
or more banks or dealers on the day of valuation. The net asset value per share
is computed by dividing the value of the securities held by the Fund plus any
cash or other assets (including interest and dividends accrued but not yet
received) minus all liabilities (including accrued expenses) by the total number
of shares outstanding at such time, rounded to the nearest cent. Expenses,
including the fees payable to the Investment Adviser and any account maintenance
and/or distribution fees payable to the Distributor, are accrued daily. The Fund
employs Merrill Lynch Securities Pricing Service ("MLSPS"), an affiliate of the
Investment Adviser, to provide certain securities prices for the Fund. The Fund
paid $7,799 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 that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. 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. Portfolio
securities that are traded both in the OTC market and on a stock exchange are
valued according to the broadest and most representative market. When the Fund
writes an option, the amount of the premium received is recorded on the books of
the Fund as an asset and as equivalent liability. The amount of the liability is
subsequently valued to reflect the current market value of
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<PAGE> 48
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, shall be valued 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 Directors of
the Fund.
ORGANIZATION OF THE FUND
The Fund was incorporated under Maryland law on July 1, 1988 as a
closed-end investment company. On October 25, 1991, the shareholders of the Fund
voted to convert the Fund to an open-end investment company. Such conversion was
effected on November 15, 1991 and the Fund commenced operations as an open-end
investment company on November 18, 1991. See "General Information" in the
Statement of Additional Information. The Fund has an authorized capital of
4,000,000,000 shares of common stock, par value $0.10 per share, divided into
four classes, designated Class A, Class B, Class C and Class D Common Stock,
each of which consists of 1,000,000,000 shares. Shares of Class A, Class B,
Class C and Class D Common Stock represent interests in the same assets of the
Fund and are identical in all respects except that the Class B, Class C and
Class D shares bear certain expenses related to the account maintenance
associated with such shares, and Class B and Class C shares bear certain
expenses related to the distribution of such shares. Each class has exclusive
voting rights with respect to matters relating to account maintenance and
distribution expenditures, as applicable. See "Purchase of Shares." The
Directors of the Fund may classify and reclassify the shares of the Fund into
additional classes of common stock at a future date.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matter submitted to a shareholder vote. The Fund does not intend to
hold meetings of shareholders in any year in which the Investment Company Act
does not require shareholders to act upon any of the following matters: (i)
election of directors; (ii) approval of an investment advisory agreement; (iii)
approval of a distribution agreement; and (iv) ratification of selection of
independent accountants. Also, the by-laws of the Fund require that a special
meeting of stockholders be held upon the written request of shareholders of the
Fund as required by Maryland corporate law and the Investment Company Act.
Voting rights for Directors are not cumulative. Shares issued are fully paid and
nonassessable and have no preemptive rights. Shares have the conversion rights
described in this Prospectus. Each share of Common Stock is entitled to
participate equally in dividends and distributions declared by the Fund and in
the net assets of the Fund upon liquidation or dissolution after satisfaction of
outstanding liabilities except, as noted above, the Class B, Class C and Class D
shares bear certain additional expenses.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
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<PAGE> 49
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.
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APPENDIX
RATINGS OF DEBT SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") CORPORATE RATINGS
AAA Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
AA Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than
in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
BAA Bonds which are rated Baa are considered as medium grade obligations; i.e.,
they are neither highly protected nor poorly secured. Interest payment and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.
BA Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
CAA Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
CA Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
NOTE: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
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DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
The term "commercial paper" as used by Moody's means promissory obligations
not having an original maturity in excess of nine months. Moody's makes no
representations as to whether such commercial paper is by any other definition
"commercial paper" or is exempt from registration under the Securities Act of
1933, as amended.
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations are
exempt from registration under the Securities Act of 1933, nor does it represent
that any specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers.
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries;
high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earnings coverage of fixed financial charges and high internal
cash generation; and well established access to a range of financial
markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes
in the level of debt protection measurements and the requirement for
relatively high financial leverage. Adequate alternate liquidity is
maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
If an issuer represents to Moody's that its Commercial Paper obligations
are supported by the credit of another entity or entities, then the name or
names of such supporting entity or entities are listed within parentheses
beneath the name of the issuer, or there is a footnote referring the reader to
another page for the name or names of the supporting entity or entities. In
assigning ratings to such issuers, Moody's evaluates the financial strength of
the indicated affiliated corporations, commercial banks, insurance companies,
foreign governments or other entities, but only as one factor in the total
rating assessment. Moody's makes no representation and gives no opinion on the
legal validity or enforceability of any support arrangement. You are cautioned
to review with your counsel any questions regarding particular support
arrangements.
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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.
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DESCRIPTION OF STANDARD & POOR'S RATINGS SERVICES ("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
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principal payments. The BB rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BBB-
rating.
B Debt rated B has a greater vulnerability to default but presently has
the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions would likely
impair capacity or willingness to pay interest and repay principal.
The B rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied BB or BB- rating.
CCC Debt rated CCC has a current identifiable vulnerability to default, and
is dependent upon favorable business, financial and economic conditions
to meet timely payments of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The
CCC rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied B or B- rating.
CC The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating
may be used to cover a situation where a bankruptcy petition has been
filed but debt service payments are continued.
CI The rating CI is reserved for income bonds on which no interest is
being paid.
D Debt rated D is in default. The D rating category is also used when
interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless Standard
& Poor's believes that such payments will be made during such grace
period. The D rating also will be used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
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.
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NR Indicates that no rating has been requested, that there is
insufficient information on which to base a rating or that Standard &
Poor's does not rate a particular type of obligation as a matter of
policy.
Debt Obligations of Issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank
regulations issued by the Comptroller of the Currency, Bonds rated in the top
four categories ("AAA", "AA", "A", "BBB", commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments may impose certain rating
or other standards for obligations eligible for investment by savings banks,
trust companies, insurance companies and fiduciaries generally.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into several categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
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.
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
53
<PAGE> 56
a bond rating inasmuch as it is assigned to an equity issue, which issue is
intrinsically different from, and subordinated to, a debt issue. Therefore, to
reflect this difference, the preferred stock rating symbol will normally not be
higher than the bond rating symbol assigned to, or that would be assigned to,
the senior debt of the same issuer.
The preferred stock ratings are based on the following considerations:
<TABLE>
<S> <C>
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, B, CCC Preferred stock rated "BB", "B", and "CCC" are regarded, on balance, as
predominately speculative with respect to the issuer's capacity to pay
preferred stock obligations. "BB" indicates the lowest degree of
speculation and "CCC" the highest degree of speculation. While such issues
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.
CC The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C A preferred stock rated "C" is a non-paying issue.
D A preferred stock rated "D" is a non-paying issue with the issuer in
default on debt instruments.
NR Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not
rate a particular type of obligation as a matter of policy.
</TABLE>
Plus (+) or Minus (-): To provide more detailed indications of preferred
stock quality, the ratings from "AA" to "CCC" may be modified by the addition of
a plus or minus sign to show relative standing within the major rating
categories.
54
<PAGE> 57
The preferred stock ratings are not a recommendation to purchase or sell a
security, inasmuch as market price is not considered in arriving at the rating.
Preferred stock ratings are wholly unrelated to Standard & Poor's earnings and
dividend rankings for common stocks.
The ratings are based on current information furnished to Standard & Poor's
by the issuer, and obtained by Standard & Poor's from other sources it considers
reliable. The ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of such information.
DESCRIPTION OF IBCA's LONG TERM RATINGS
<TABLE>
<S> <C>
AAA Obligations for which there is the lowest expectation of investment risk.
Capacity for timely repayment of principal and interest is substantial such
that adverse changes in business, economic, or financial conditions are
unlikely to increase investment risk significantly.
AA Obligations for which there is a very low expectation of investment risk.
Capacity for timely repayment of principal and interest is substantial.
Adverse changes in business, economic, or financial conditions may increase
investment risk albeit not very significantly.
A Obligations for which there is a low expectation of investment risk. Capacity
for timely repayment of principal and interest is strong, although adverse
changes in business, economic, or financial conditions may lead to increased
investment risk.
BBB Obligations for which there is a low expectation of investment risk. Capacity
for timely repayment of principal and interest is adequate, although adverse
changes in business, economic, or financial conditions are more likely to lead
to increased investment risk than for obligations in higher categories.
BB Obligations for which there is a possibility of investment risk developing.
Capacity for timely repayment of principal and interest exists, but is
susceptible over time to adverse changes in business, economic, or financial
conditions.
B Obligations for which investment risk exists. Timely repayment of principal
and interest is not sufficiently protected against adverse changes in
business, economic, or financial conditions.
CCC Obligations for which there is a current perceived possibility of default.
Timely repayment of principal and interest is dependent on favorable business,
economic, or financial conditions.
CC Obligations which are highly speculative or which have a high risk of default.
C Obligations which are currently in default.
</TABLE>
Note: "+" or "-" may be appended to a rating to denote relative status
within major rating categories. Ratings of BB and below are assigned where it is
considered that speculative characteristics are present.
55
<PAGE> 58
[This Page Intentionally Left Blank]
56
<PAGE> 59
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)
<TABLE>
<S> <C>
Occupation .........................................
.....................................................
Signature of Owner
<CAPTION>
Occupation ......................................... Name and Address of Employer.................................................
<S> <C>
.............................................................................
.............................................................................
..................................................... .............................................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
(In the case of co-owner, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- --------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
<TABLE>
<S> <C> <C> <C> <C> <C>
Ordinary Income Dividends Long-Term Capital Gains
--------------------------------- ---------------------------------
SELECT [ ] Reinvest SELECT [ ] Reinvest
ONE: [ ] Cash ONE: [ ] Cash
--------------------------------- ---------------------------------
</TABLE>
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> 60
MERRILL LYNCH WORLD INCOME FUND, INC. --
AUTHORIZATION FORM (PART 1) -- (CONTINUED)
- --------------------------------------------------------------------------------
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is my
correct Social Security Number or Taxpayer Identification Number and (2) that I
am not subject to backup withholding (as discussed in the Prospectus under
"Taxes") either because I have not been notified that I am subject thereto as a
result of a failure to report all interest or dividends, or the Internal Revenue
Service ("IRS") has notified me that I am no longer subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDERREPORTING AND IF
YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO
OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
<TABLE>
<S> <C>
............................................................. ............................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
- --------------------------------------------------------------------------------
4. LETTER OF INTENTION -- CLASS A AND D SHARES ONLY (See terms and conditions in
the Statement of Additional Information)
<TABLE>
<S> <C>
......................,
19 . . . .
Dear Sir/Madam: Date of initial purchase
</TABLE>
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch World Income Fund, Inc. or any other investment company with an initial
sales charge or deferred sales charge for which the Merrill Lynch Funds
Distributor, Inc. acts as distributor over the next 13-month period which will
equal or exceed:
[ ] $25,000 [ ] $50,000 [ ] $100,000 [ ] $250,000 [ ]
$1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch World Income Fund,
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.
<TABLE>
<S> <C>
By:.............................................................. ...............................................................
Signature of Owner Signature of Co-Owner
(If registered in joint parties, both must sign)
</TABLE>
In making purchases under this letter, the following are the related accounts
on which reduced offering prices are to apply:
<TABLE>
<S> <C>
(1) Name ................................................... (2) Name....................................................
Account Number ............................................. Account Number..............................................
</TABLE>
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
- --- Branch Office, Address, Stamp
- ---
=
=
===
This form when completed should be mailed to:
Merrill Lynch World Income Fund, Inc.
c/o Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289
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 or sales made under a Letter of Intention,
Automatic Investment Plan or Systematic Withdrawal Plan. We guarantee the
shareholder's signature.
...............................................................
Dealer Name and Address
By .............................................................................
Authorized Signature of Dealer
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- --------- ------------
..............................
- --------- ------------
Branch-Code F/C No. F/C Last Name
- --------- ---------------
- --------- ---------------
Dealer's Customer Account No.
</TABLE>
58
<PAGE> 61
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
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
(PLEASE PRINT) ------------------------------------
Name of Owner.......................................................................
------------------------------------
Social Security No.
First Name Initial Last Name or Taxpayer Identification No.
Name of Co-Owner (if any)...........................................................
First Name Initial Last Name
Address.............................................................................
.................................................................................... Account Number...........................
(Zip Code) (if existing account)
<CAPTION>
(PLEASE PRINT)
<S> <C> <C> <C>
Name of Owner.......................................................................
First Name Initial Last Name
Name of Co-Owner (if any)...........................................................
First Name Initial Last Name
Address.............................................................................
....................................................................................
(Zip Code)
</TABLE>
- --------------------------------------------------------------------------------
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> 62
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.
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 Lynch World Income Fund, Inc. as indicated below:
Amount of each check or ACH debit $..........................................
Account Number...............................................................
Please date and invest ACH debits on the 20th of each month
beginning________________ or as soon thereafter as possible.
(month)
I agree that you are drawing these ACH debits voluntarily at my request and
that you shall not be liable for any loss arising from any delay in preparing or
failure to prepare any such debit. If I change banks or desire to terminate or
suspend this program, I agree to notify you promptly in writing. I hereby
authorize you to take any action to correct erroneous ACH debits of my bank
account or purchases of Fund shares including liquidating shares of the Fund and
credit my bank account. I further agree that if a check or debit is not honored
upon presentation, 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 Depositor
.......................................
Signature of Depositor
(If joint account, both must sign)
AUTHORIZATION TO HONOR ACH DEBITS
DRAWN BY MERRILL LYNCH FINANCIAL DATA
SERVICES, INC.
To..........................................................................Bank
(Investor's Bank)
Bank Address....................................................................
City .......... State .......... Zip Code.......................................
As a convenience to me, I hereby request and authorize you to pay and charge to
my account ACH debits drawn on my account by and payable to Merrill Lynch
Financial Data Services, Inc. I agree that your rights in respect to each such
debit shall be the same as if it were a check drawn on you and signed personally
by me. This authority is to remain in effect until revoked personally by me in
writing. Until you receive such notice, you shall be fully protected in honoring
any such debit. I further agree that if any such debit be dishonored, whether
with or without cause and whether intentionally or inadvertently, you shall be
under no liability.
................. .......................................
Date Signature of Depositor
................. .......................................
Bank Account Signature of Depositor
Number (If joint account, both must sign)
NOTE: If AUTOMATIC INVESTMENT PLAN is elected, your blank, unsigned check marked
"VOID" should accompany this application.
60
<PAGE> 63
[This Page Intentionally Left Blank]
<PAGE> 64
[This Page Intentionally Left Blank]
<PAGE> 65
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 08536
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 LLP
One World Trade Center
New York, New York 10048-0557
<PAGE> 66
- ------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND, THE INVESTMENT ADVISER, OR DISTRIBUTOR. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table.................................... 2
Merrill Lynch Select Pricing(SM) System...... 3
Financial Highlights......................... 8
Risk Factors and Special Considerations...... 10
Investment Objective and Policies............ 11
International Investing.................... 12
Allocation of Investments and Risks of High
Yield/High Risk Securities............... 13
Hedging Techniques......................... 15
Other Investment Policies and Practices.... 21
Investment Restrictions.................... 23
Management of the Fund....................... 23
Directors.................................. 23
Management and Advisory Arrangements....... 24
Code of Ethics............................. 25
Transfer Agency Services................... 25
Purchase of Shares........................... 25
Initial Sales Charge Alternatives -- Class
A and Class D Shares..................... 28
Deferred Sales Charge Alternatives -- Class
B and Class C Shares..................... 30
Distribution Plans......................... 33
Limitations on the Payment of Deferred
Sales Charges............................ 35
Redemption of Shares......................... 35
Redemption................................. 35
Repurchase................................. 36
Reinstatement Privilege -- Class A and
Class D Shares........................... 36
Shareholder Services......................... 37
Investment Account......................... 37
Exchange Privilege......................... 37
Automatic Reinvestment of Dividends and
Capital Gains Distributions.............. 38
Systematic Withdrawal...................... 39
Automatic Investment Plans................. 39
Fee-Based Programs......................... 39
Taxes........................................ 40
Performance Data............................. 42
Portfolio Transactions....................... 43
Portfolio Turnover......................... 44
Additional Information....................... 44
Dividends and Distributions................ 44
Determination of Net Asset Value........... 45
Organization of the Fund................... 46
Shareholder Inquiries...................... 46
Shareholder Reports........................ 47
Appendix -- Ratings of Debt Securities....... 48
Authorization Form........................... 57
Code # 16102-0497
</TABLE>
[MERRILL LYNCH LOGO]
MERRILL LYNCH
WORLD INCOME
FUND, INC.
PROSPECTUS [MLYNCH COMPASS]
April 28, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE> 67
STATEMENT OF ADDITIONAL INFORMATION
- -------------------------------------------------------
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 mutual fund that
seeks 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 Pricing(SM) System, the Fund offers
four classes of shares each with a different combination of sales charges,
ongoing fees and other features. The Select Pricing(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.
-------------------------
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
28, 1997 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling or by writing the Fund at the above telephone number or address. This
Statement of Additional Information has been incorporated by reference into the
Prospectus. 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 28, 1997.
<PAGE> 68
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
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<PAGE> 69
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
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% 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
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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 that 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 that 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
4
<PAGE> 71
adverse price movements, the Fund will continue to be required to make daily
cash payments of variation margin. In such situations, if the Fund has
insufficient cash, it may have to sell portfolio securities to meet daily
variation margin requirements at a time when it may be disadvantageous to do so.
In addition, the Fund may be required to take or make delivery of the
instruments or currency underlying futures contracts it holds. The inability to
close options and futures positions also could have an adverse impact on the
Fund's ability effectively to hedge its portfolio. There is also the risk of
loss by the Fund of margin deposits in the event of the bankruptcy of a broker
with whom the Fund has an option position in a futures contract or related
options.
The exchanges on which the Fund intends to conduct options transactions
generally have established limitations governing the maximum number of call or
put options on the same underlying security (whether or not covered) that may be
written by a single investor, whether acting alone or in concert with others
(regardless of whether such options are written on the same or different
exchanges or are held or written on one or more accounts or through one or more
brokers). "Trading Limits" are imposed on the maximum number of contracts that
any person may trade on a particular trading day. An exchange may order the
liquidation of positions found to be in violation of these limits, and it may
impose other sanctions or restrictions. The Investment Adviser does not believe
that these trading and position limits will have any adverse impact on the
portfolio strategies for hedging the Fund's portfolio.
FORWARD FOREIGN EXCHANGE TRANSACTIONS
Generally, the foreign exchange transactions of the Fund will be conducted
on a spot, i.e., cash, basis at the spot rate for purchasing or selling currency
prevailing in the foreign exchange market. This rate under normal market
conditions differs from the prevailing exchange rate in an amount generally less
than one-tenth of one percent due to the costs of converting from one currency
to another. However, the Fund has authority to deal in forward foreign exchange
between currencies of the different countries in whose securities it will invest
as a hedge against possible variations in the foreign exchange rates between
these currencies. This is accomplished through contractual agreements to
purchase or sell a specified currency at a specified future date and price set
at the time of the contract.
The Fund's dealings in forward foreign exchange will be limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of forward foreign currency with respect to
specific receivables or payables of the Fund accruing in connection with the
purchase and sale of its portfolio securities, the sale and redemption of shares
of the Fund or the payment of dividends and distributions by the Fund. Position
hedging is the sale of forward foreign currency with respect to portfolio
security positions denominated or quoted in such foreign currency.
The Fund will not speculate in forward foreign exchange. The Fund may not
position hedge with respect to the currency of a particular country to an extent
greater than the aggregate market value (at the time of making such sale) of the
securities held in its portfolio denominated or quoted in that particular
foreign currency. If the Fund enters into a position hedging transaction, it
will place with its custodian bank cash or liquid securities in a separate
account of the Fund in an amount equal to the value of the Fund's total assets
committed to the consummation of such forward contract. If the value of the
securities placed in the separate account declines, additional cash or
securities will be placed in the account so that the value of the account will
equal the amount of the Fund's commitment with respect to such contracts. The
Fund will not enter into a forward contract with a term of more than one year.
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<PAGE> 72
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 that 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
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<PAGE> 73
the security. In such event, the Fund would have rights against the seller for
breach of contract with respect to any losses arising from market fluctuations
following the failure of the seller to perform.
Lending of Portfolio Securities. Subject to the investment restrictions
stated below, the Fund may lend securities from its portfolio to approved
borrowers and receive collateral in cash or securities issued or guaranteed by
the United States Government. Such collateral will be maintained at all times in
an amount equal to at least 100% of the current market value of the loaned
securities. The purpose of such loans is to permit the borrower to use such
securities for delivery to purchasers when such borrower has sold short. If cash
collateral is received by the Fund, it is invested in short-term money market
securities, and a portion of the yield received in respect of such investment is
retained by the Fund. Alternatively, if securities are delivered to the Fund as
collateral, the Fund and the borrower negotiate a rate for the loan premium to
be received by the Fund for lending its portfolio securities. In either event,
the total yield on the Fund's portfolio is increased by loans of its portfolio
securities. The Fund will have the right to retain record ownership of loaned
securities to exercise beneficial rights such as voting rights, subscription
rights and rights to dividends, interest or other distributions. Such loans are
terminable at any time. The Fund may pay reasonable finder's, administrative and
custodial fees in connection with such loans.
INVESTMENT RESTRICTIONS
The Fund has adopted a number of fundamental and non-fundamental
restrictions and policies relating to the investment of its assets and its
activities. The fundamental policies set forth below may not be changed without
the approval of the holders of a majority of the Fund's outstanding voting
securities (which for this purpose and under the Investment Company Act of 1940,
as amended (the "Investment Company Act"), means the lesser of (i) 67% of the
Fund's shares represented at a meeting at which more than 50% of the outstanding
shares of the Fund are represented or (ii) more than 50% of the Fund's
outstanding shares). 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
this 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
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<PAGE> 74
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.
d. 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.
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<PAGE> 75
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 (64) -- President and Director (1)(2) -- President of
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. ("MLFD" or the
"Distributor").
JAMES H. BODURTHA(53) -- Director (2) -- 36 Popponesset Road, Cotuit,
Massachusetts 02635. Director and Executive Vice President, The China Business
Group, Inc. since 1996; Chairman and Chief Executive Officer, China Enterprise
Management Corporation from 1993 to 1996; Chairman, Berkshire Corporation since
1980; Partner, Squire, Sanders & Dempsey from 1980 to 1993.
HERBERT I. LONDON (57) -- Director (2) -- 113-115 University Place, New
York, New York 10003. John M. Olin Professor of Humanities, New York University
since 1993 and Professor thereof since 1980; Dean, Gallatin Division of New York
University from 1978 to 1993; Distinguished Fellow, Herman Kahn Chair, Hudson
Institute from 1984 to 1985; Trustee, Hudson Institute since 1980; Director,
Damon Corporation since 1991; Overseer, Center for Naval Analyses from 1983 to
1993; Limited Partner, Hypertech L.P. since 1996.
ROBERT R. MARTIN (69) -- Director (2) -- 513 Grand Hill, St. Paul,
Minnesota 55102. Chairman and Chief Executive Officer, Kinnard Investments, Inc.
from 1990 to 1993; Executive Vice President, Dain Bosworth from 1974 to 1989;
Director, Carnegie Capital Management from 1977 to 1985 and Chairman thereof in
1979; Director, Securities Industry Association from 1981 to 1982 and Public
Securities Association from 1979 to 1980; Chairman of the Board, WTC Industries
Inc. in 1994; Trustee, Northland College since 1992.
JOSEPH L. MAY (67) -- 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.
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<PAGE> 76
TERRY K. GLENN (56) -- 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.
JOSEPH T. MONAGLE, JR. (47) -- Senior Vice President (1)(2) -- Senior Vice
President of the Investment Adviser and MLAM since 1983; Vice President of the
Investment Adviser from 1978 to 1990; 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 (36) -- 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 (47) -- 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.
- ---------------
(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, 1997, 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
Investment Adviser 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 (each a "non-affiliated Director") 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 (the "Committee"),
which consists of the non-affiliated Directors, an annual fee of $1,000 plus
$250 for each Committee meeting attended. The Fund reimburses each non-
affiliated Director for his out-of-pocket expenses relating to attendance at
Board and Committee meetings. For the fiscal year ended December 31, 1996, fees
and expenses paid to the non-affiliated Directors aggregated $45,392.
The following table sets forth for the year ended December 31, 1996,
compensation paid by the Fund to the non-affiliated Directors and for the year
ended December 31, 1996, the aggregate compensation paid by all
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<PAGE> 77
registered investment companies (including the Fund) advised by MLAM and its
affiliate, FAM ("MLAM/FAM Advised Funds"), to the non-affiliated Directors.
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM FUND AND
BENEFITS MLAM/FAM ADVISED
COMPENSATION ACCRUED AS PART FUNDS PAID TO
NAME OF DIRECTOR FROM FUND OF FUND EXPENSE DIRECTORS(1)
- ------------------------------------------------- ------------ --------------- ----------------
<S> <C> <C> <C>
James H. Bodurtha................................ $ 9,000 None $148,500
Herbert I. London................................ 9,000 None 148,500
Robert R. Martin................................. 9,000 None 148,500
Joseph L. May.................................... 9,000 None 148,500
Andre F. Perold.................................. 9,000 None 148,500
</TABLE>
- ---------------
(1) The Directors serve on the boards of MLAM/FAM Advised Funds as follows: Mr.
Bodurtha (22 registered investment companies consisting of 46 portfolios);
Mr. London (22 registered investment companies consisting of 46 portfolios);
Mr. Martin (22 registered investment companies consisting of 46 portfolios);
Mr. May (22 registered investment companies consisting of 46 portfolios);
and Mr. Perold (22 registered investment companies consisting of 46
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.
Securities may be held by, or be appropriate investments for, the Fund as
well as other funds or investment advisory clients for which the Investment
Adviser or its affiliates act as an adviser. Because of different objectives or
other factors, a particular security may be bought for one or more clients when
one or more clients are selling the same security. If purchases or sales of
securities by the Investment Adviser for the Fund or other funds for which it
acts as investment adviser or for its advisory clients arise for consideration
at or about the same time, transactions in such securities will be made, insofar
as feasible, for the respective funds and clients in a manner deemed equitable
to all. To the extent that transactions on behalf of more than one client of the
Investment Adviser or its affiliates during the same period may increase the
demand for securities being purchased or the supply of securities being sold,
there may be an adverse effect on price.
The Fund has entered into a management agreement with the Investment
Adviser (the "Investment Advisory Agreement"). As discussed in the Prospectus,
the Investment Adviser receives for its services to the Fund monthly
compensation at the annual rate of 0.60% of the average daily net assets of the
Fund. For the fiscal years ended December 31, 1994, 1995 and 1996, the fees paid
by the Fund to the Investment Adviser aggregated $13,289,517, $9,774,596 and
$8,216,118, respectively.
As described in the Prospectus, the Investment Adviser entered into a
sub-advisory agreement with Merrill Lynch Asset Management U.K. Limited ("MLAM
U.K.") pursuant to which MLAM U.K. provides investment advisory services to the
Investment Adviser with respect to the Fund. MLAM U.K. has offices at Milton
Gate, 1 Moor Lane, London EC2Y 9HA, England.
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
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<PAGE> 78
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 fiscal years ended December 31, 1994,
1995 and 1996, the Fund reimbursed the Investment Adviser $315,069, $150,832 and
$165,821, 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
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."
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.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(SM) System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B and Class C are
sold to investors choosing the deferred sales charge alternatives. Each Class A,
Class B, Class C and Class D share of the Fund represents 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 (except that Class B shareholders
may vote upon any material changes to expenses charged under the Class D
12
<PAGE> 79
Distribution Plan). Each class has different exchange privileges. See
"Shareholder Services -- Exchange Privilege."
The Merrill Lynch Select Pricing(SM) System is used by more than 50
registered investment companies advised by MLAM or its affiliate, the Investment
Adviser. Funds advised by MLAM or the Investment Adviser that utilize the
Merrill Lynch Select Pricing(SM) System are referred to herein as "MLAM-advised
mutual funds."
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offering of each class of shares
of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the offering
of each class of shares of the Fund. After the prospectuses, statements of
additional information and periodic reports have been prepared, set in type and
mailed to shareholders, the Distributor pays for the printing and distribution
of copies thereof used in connection with the offering to dealers and
prospective investors. The Distributor also pays for other supplementary sales
literature and advertising costs. The Distribution Agreements are subject to the
same renewal requirements and termination provisions as the Investment Advisory
Agreement described above.
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
The gross sales charges for the sale of Class A shares for the fiscal 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 fiscal 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 A shares for the fiscal year ended
December 31, 1996 were $33,553, of which the Distributor received $3,597 and
Merrill Lynch received $29,956. 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
fiscal year ended December 31, 1995 were $78,194, of which the Distributor
received $8,054 and Merrill Lynch received $70,140. The gross sales charges for
the sale of Class D shares for the fiscal year ended December 31, 1996 were
$55,055, of which the Distributor received $4,675 and Merrill Lynch received
$50,380.
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 or her spouse and their children under
the age of 21 years purchasing shares for his or their own account and single
purchases by a trustee or other fiduciary purchasing shares for a single trust
estate or single fiduciary account (including a pension, profit-sharing or other
employee benefit trust created pursuant to a plan qualified under Section 401 of
the Internal Revenue Code, as amended (the "Code")) although more than one
beneficiary is involved. The term "purchase" also includes purchases by any
"company," as that term is defined in the Investment Company Act, but does not
include purchases by any such company 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
13
<PAGE> 80
bank or broker-dealer or clients of an investment adviser. The term "purchase"
also includes purchases by employers on behalf of employees, by means of a
payroll deduction plan or otherwise, of shares of the Fund. Purchases by such a
company or non-qualified employee benefit plan will qualify for the quantity
discounts discussed above only if the Fund and the Distributor are able to
realize economies of scale in sales effort and sales related expense by means of
the company, employer or plan making the Fund's Prospectus available to
individual investors or employees and forwarding investments by such persons to
the Fund and by any such employer or plan bearing the expense of any payroll
deduction plan.
Closed-End Fund Investment Option. Class A shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class A shares") are offered at net asset
value to shareholders of certain closed-end funds advised by the 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 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.
14
<PAGE> 81
REDUCED INITIAL SALES CHARGES
Rights of Accumulation. Reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
shares of the Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the shares then
being purchased plus (b) an amount equal to the then current net asset value or
cost, whichever is higher, of the purchaser's combined holdings of all classes
of shares of the Fund and of other MLAM-advised mutual funds. For any such right
of accumulation to be made available, the Distributor must be provided at the
time of purchase, by the purchaser or the purchaser's securities dealer, with
sufficient information to permit confirmation of qualification. Acceptance of
the purchase order is subject to such confirmation. The right of accumulation
may be amended or terminated at any time. Shares held in the name of a nominee
or custodian under pension, profit-sharing, or other employee benefit plans may
not be combined with other shares to qualify for the right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A or Class D shares of the Fund or of
any other MLAM-advised mutual funds made within a 13-month period starting with
the first purchase pursuant to the Letter of Intention in the form provided in
the Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at the Fund's transfer agent. The Letter of Intention is
not available to employee benefit plans for which Merrill Lynch provides plan
participant record-keeping services. The Letter of Intention is not a binding
obligation to purchase any amount of Class A or Class D shares; however, its
execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intention may be included under a subsequent Letter of Intention
executed within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of Class A and Class
D shares of the Fund and of other MLAM-advised mutual funds presently held, at
cost or maximum offering price (whichever is higher), on the date of the first
purchase under the Letter of Intention, may be included as a credit toward the
completion of such Letter, but the reduced sales charge applicable to the amount
covered by such Letter will be applied only to new purchases. If the total
amount of shares does not equal the amount stated in the Letter of Intention
(minimum of $25,000), the investor will be notified and must pay, within 20 days
of the expiration of such Letter, the difference between the sales charge on the
Class A or Class D shares purchased at the reduced rate and the sales charge
applicable to the shares actually purchased through the Letter. Class A or Class
D shares equal to at least five percent of the intended amount will be held in
escrow during the 13-month period (while remaining registered in the name of the
purchaser) for this purpose. The first purchase under the Letter of Intention
must be at least five percent of the dollar amount of such Letter. If a purchase
during the term of such Letter would otherwise be subject to a further reduced
sales charge based on the right of accumulation, the purchaser will be entitled
on that purchase and subsequent purchases to that further reduced percentage
sales charge but there will be no retroactive reduction of the sales charges on
any previous purchase. The value of any shares redeemed or otherwise disposed of
by the purchaser prior to termination or completion of the Letter of Intention
will be deducted from the total purchases made under such Letter. An exchange
from a MLAM-advised money market fund into the Fund that creates a sales charge
will count toward completing a new or existing Letter of Intention from the
Fund.
Employee Access(SM) Accounts. Provided applicable threshold requirements
are met, either Class A or Class D shares are offered at net asset value to
Employee Access(SM) Accounts available through authorized
15
<PAGE> 82
employers. The initial minimum for such accounts is $500, except that the
initial minimum for shares purchased for such accounts pursuant to the Automatic
Investment Program is $50.
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, directors and employees
of 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.
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. First, the investor must advise Merrill Lynch that it will purchase
Class D shares of the Fund with proceeds from a redemption of a mutual fund that
was sponsored by the financial consultant's previous firm and was subject to a
sales charge either at the time of purchase or on a deferred basis. Second, the
investor also must establish that such redemption had been made within 60 days
prior to the investment in the Fund, and the proceeds from the redemption had
been maintained in the interim in cash or a money market fund.
Class D shares of the Fund are also offered at net asset value, without a
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice"), if the following conditions are
satisfied: First, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and the shares of
such other fund were subject to a sales charge either at the time of purchase or
on a deferred basis; and second, such purchase of Class D shares must be made
within 90 days after such notice.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a Merrill Lynch
Financial Consultant and who has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer if the following conditions are
satisfied: First, the investor must advise Merrill Lynch that it will purchase
Class D shares of the Fund with proceeds from the redemption of 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
16
<PAGE> 83
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 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 contingent deferred sales charge ("CDSC") upon
redemption, based on similar criteria. Such Class B shares will convert into
Class D shares approximately ten years after the plan purchases the first share
of any MLAM-advised mutual fund. Minimum purchase requirements may be waived or
varied for such plans. Additional information regarding purchases by
employer-sponsored retirement or savings plans and certain other arrangements is
available toll-free from Merrill Lynch Business Financial Services at (800)
237-7777.
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares -- Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan") with respect to the account
maintenance and/or distribution fees paid by the Fund to the Distributor with
respect to such classes.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act. Among
other things, each Distribution Plan provides that the Distributor shall provide
and the Directors shall review quarterly reports of the disbursement of the
account maintenance fees and/or distribution fees paid to the Distributor. In
their consideration of each Distribution Plan, the Directors must consider all
factors they deem relevant, including information as to the benefits of the
Distribution Plan to the Fund and its related class of shareholders. Each
Distribution Plan further provides that so long as the Distribution Plan remains
in effect, the selection and nomination of Directors who are not "interested
persons" of the Fund, as defined in the Investment Company Act (the "Independent
Directors"), shall be committed to the discretion of the Independent Directors
then in office. In approving each Distribution Plan in accordance with Rule
12b-1, the Independent Directors concluded that there is a reasonable likelihood
that such Distribution Plan will benefit the Fund and its related class of
shareholders. Each Distribution Plan can be terminated at any time, without
penalty, by the vote of a majority of the Independent Directors or by the vote
of the holders of a majority of the outstanding related class of voting
securities of the Fund. A Distribution Plan cannot be amended to increase
materially the amount to be spent by the Fund without the approval of the
related class of shareholders, and all material amendments are required to be
approved by the vote of 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
17
<PAGE> 84
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 Conduct Rules of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on certain
asset-based sales charges such as the distribution fee and the CDSC borne by the
Class B and Class C shares but not the account maintenance fee. The maximum
sales charge rule is applied separately to each class. As applicable to the
Fund, the maximum sales charge rule limits the aggregate of distribution fee
payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of
Class B shares and Class C shares, computed separately (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges), plus (2)
interest on the unpaid balance for the respective class, computed separately, at
the prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from the payment of the distribution fee and the CDSC).
In connection with the Class B shares, the Distributor has voluntarily agreed to
waive interest charges on the unpaid balance in excess of 0.50% of eligible
gross sales. Consequently, the maximum amount payable to the Distributor
(referred to as the "voluntary maximum") in connection with the Class B shares
is 6.75% of eligible gross sales. The Distributor retains the right to stop
waiving the interest charges at any time. To the extent payments would exceed
the voluntary maximum, the Fund will not make further payments of the
distribution fee with respect to Class B shares, and any CDSCs will be paid to
the Fund rather than to the Distributor; however, the Fund will continue to make
payments of the account maintenance fee. In certain circumstances the amount
payable pursuant to the voluntary maximum may exceed the amount payable under
the NASD formula. In such circumstances payment in excess of the amount payable
under the NASD formula will not be made.
The following table sets forth comparative information as of December 31,
1996 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 as indicated.
18
<PAGE> 85
<TABLE>
<CAPTION>
DATA CALCULATED AS OF DECEMBER 31, 1996
(IN THOUSANDS)
ANNUAL
DISTRIBUTION
ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
---------- --------- ---------- -------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES, FOR THE PERIOD
NOVEMBER 18, 1991
(COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1996:
Under NASD Rule as Adopted..... $2,164,951 $ 135,309 $ 41,411 $176,720 $ 52,803 $ 123,917 $4,941
Under Distributor's Voluntary
Waiver....................... $2,164,951 $ 135,309 $ 10,825 $146,134 $ 52,803 $ 93,331 $4,941
CLASS C SHARES, FOR THE PERIOD
OCTOBER 21, 1994
(COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1996:
Under NASD Rule as Adopted..... $ 13,662 $ 854 $ 84 $ 938 $ 72 $ 866 $ 56
</TABLE>
- ---------------
(1) Purchase price of all eligible Class B or Class C shares sold during the
periods indicated 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. See
"Purchase of Shares -- Distribution Plans" in the Prospectus.
(4) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any CDSC payments) is amortizing the unpaid
balance. No assurance can be given that payments of the distribution fee
will reach either the NASD maximum or, with respect to the Class B shares,
the voluntary maximum.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended only for periods during which trading on the New
York Stock Exchange ("NYSE") 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 certain
circumstances including in connection with certain post-retirement withdrawals
from an Individual Retire-
19
<PAGE> 86
ment Account ("IRA") or other retirement plan or following the death or
disability of a Class B shareholder. Redemptions for which the waiver applies
are: (a) any partial or complete redemption in connection with a distribution
following retirement under a tax-deferred retirement plan or attaining age 591/2
in the case of an IRA or other retirement plan, or part of a series of equal
periodic payments (not less frequently than annually) made for the life (or life
expectancy), or any redemption resulting from the tax-free return of an excess
contribution to an IRA; or (b) any partial or complete redemption following the
death or disability (as defined in the Code) of a Class B shareholder (including
one who owns the Class B shares as joint tenant with his or her spouse) provided
the redemption is requested within one year of the death or initial
determination of disability. For the fiscal year ended December 31, 1994, the
Distributor received CDSCs of $6,980,132 with respect to redemptions of Class B
shares, all of which were paid to Merrill Lynch. For the fiscal year ended
December 31, 1995, the Distributor received CDSCs of $3,902,431 with respect to
redemptions of Class B shares, all of which were paid to Merrill Lynch. For the
fiscal year ended December 31, 1996, the Distributor received CDSCs of
$1,827,822 with respect to redemptions of Class B shares, $1,822,022 of which
were paid to Merrill Lynch. For the period October 21, 1994 (commencement of
operations) to December 31, 1994, the Distributor received CDSCs of $64 with
respect to redemptions of Class C shares, all of which were paid to Merrill
Lynch. For the fiscal year ended December 31, 1995, the Distributor received
CDSCs of $4,214 with respect to Class C shares, all of which were paid to
Merrill Lynch. For the fiscal year ended December 31, 1996, the Distributor
received CDSCs of $6,036 with respect to redemptions of Class C shares, all of
which were 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 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 that 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 that 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
20
<PAGE> 87
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, 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. For the fiscal year
ended December 31, 1996, the Fund paid total brokerage commissions of $149,805,
of which $52,913 or 35.3% was paid to Merrill Lynch for effecting 44.8% of the
aggregate dollar amount of transactions on which the Fund paid brokerage
commissions.
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the United States national securities exchanges from
executing exchange transactions for their affiliates and institutional accounts
which they manage unless the member (i) has obtained prior express authorization
from the account to effect such transactions, (ii) at least annually furnishes
the account with a statement of the aggregate compensation received by the
member in effecting such transactions, and (iii) complies with any rules the
Commission has prescribed with respect to the requirements of clauses (i) and
(ii). To the extent Section 11(a) would apply to Merrill Lynch acting as a
broker for the Fund in any of its portfolio transactions executed on any such
securities exchange of which it is a member, appropriate consents have been
obtained from the Fund and annual statements as to aggregate compensation will
be provided to the Fund.
While the Fund generally does not expect to engage in trading for
short-term gains, it will effect portfolio transactions without regard to
holding period if, in the judgment of the Fund's Investment Adviser, such
transactions are advisable in light of a change in circumstances of a particular
company or within a particular industry or in general market, economic or
financial conditions.
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
NYSE (generally, 4:00 p.m. New York time), on each day during which the NYSE is
open for trading. The NYSE 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
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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 Class B, Class C and Class D shares may be lower than the per
share net asset value of Class A shares reflecting the higher 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 B and Class C shares
generally will be lower than the per share net asset value of Class D shares
reflecting the daily expense accruals of the distribution fees and higher
transfer agency fees applicable with respect to Class B and Class C shares of
the Fund. It is expected, however, that the per share net asset value of the
four classes will tend to converge (although not necessarily meet) immediately
after the payment of dividends, which will differ by approximately the amount of
the expense accrual differentials between the classes.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designed by or under the authority of the Board of Directors 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
an option, the amount of the premium received is recorded on the books of the
Fund as an asset and an equivalent liability. The amount of the liability is
subsequently valued to reflect the current market value of the option written,
based upon the last sale price in the case of exchange-traded options or, in the
case of options traded in the OTC market, the last asked price. Options
purchased by the Fund are valued at their last sale price in the case of
exchange-traded options or in the case of options traded in the OTC market, the
last bid price. Other investments, including futures contracts and related
options, are stated at market value. Securities and assets for which market
quotations are not readily available are valued at fair value as determined in
good faith by or under the direction of the Board of Directors. Such valuations
and procedures will be reviewed periodically by the Board of Directors.
Generally, trading in foreign securities, as well as U.S. Government
securities and money market instruments, is substantially completed each day at
various times prior to the close of business on the NYSE. The values of such
securities used in computing the net asset value of the Fund's shares are
determined as of such times. Foreign currency exchange rates are also generally
determined prior to the close of business on the NYSE. Occasionally, events
affecting the values of such securities and such exchange rates may occur
between the times at which they are determined and the close of business on the
NYSE, which will not be reflected in the computation of the Fund's net asset
value. If events materially affecting the value of such securities occur during
such period, then these securities will be valued at their fair value as
determined in good faith by the Directors.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below and in the
Prospectus under "Shareholder Services" which are designed to facilitate
investment in its shares. Full details as to each such service and copies of the
various plans described below and instructions as to how to participate in the
various
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<PAGE> 89
services or plans, or how to change options with respect thereto, 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 purchases and the reinvestment of taxable
ordinary income dividends.
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 so that the cash proceeds can be transferred to
the account at the new firm or such shareholder must continue to maintain an
Investment Account at the Transfer Agent for those Class A or Class D shares.
Shareholders interested in transferring their Class B or Class C shares from
Merrill Lynch and who do not wish to have an Investment Account maintained for
such shares at the Transfer Agent may request their new brokerage firm to
maintain such shares in an account registered in the name of the brokerage firm
for the benefit of the shareholder at the Transfer Agent. If the new brokerage
firm is willing to accommodate the shareholder in this manner, the shareholder
must request that he be issued certificates for his shares, and then must turn
the certificates over to the new firm for re-registration as described in the
preceding sentence. Shareholders considering transferring a tax-deferred
retirement account such as an individual retirement account from Merrill Lynch
to another brokerage firm or financial institution should be aware that, if the
firm to which the retirement account is to be transferred will not take delivery
of shares of the Fund, a shareholder must either redeem the shares (paying any
applicable 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. A shareholder may make additions to his or
her Investment Account at any time by mailing a check directly to the Transfer
Agent.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor as
described in the Prospectus) or Class B, Class C or Class D shares at the
applicable public offering price either through the shareholder's securities
dealer, or by mail directly to the Transfer Agent, acting as agent for such
securities dealer. Voluntary accumulation also can be made through a service
known as the Fund's Automatic Investment Plan whereby the Fund is authorized
through pre-authorized checks or automated clearing house debits of $50 or more
to charge the regular bank account of the shareholder on a regular basis to
provide systematic additions to the Investment Account of such shareholder. The
Fund's Automatic Investment Plan is not available to shareholders whose shares
are
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<PAGE> 90
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) or
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
automatically reinvested in additional shares of the Fund. Such reinvestment
will be at the net asset value of shares of the Fund as of the close of business
on the payment 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.
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 NYSE (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.
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Alternatively, a Class A or Class D shareholder whose shares are held
within a CMA(R), CBA(R) or Retirement Account may elect to have shares redeemed
on a monthly, bimonthly, quarterly, semiannual or annual basis through the
CMA(R)/CBA(R) Systematic Redemption Program. The minimum fixed dollar amount
redeemable is $25. The proceeds of systematic redemptions will be posted to the
shareholder's account five business days after the date the shares are redeemed.
Monthly systematic redemptions will be made at net asset value on the first
Monday of each month, bimonthly systematic redemptions will be made at net asset
value on the first Monday of every other month, and quarterly, semiannual or
annual redemptions are made at net asset value on the first Monday of months
selected at the shareholder's option. If the first Monday of the month is a
holiday, the redemption will be processed at net asset value on the next
business day. The Systematic Redemption Program is not available if Fund shares
are being purchased within the account pursuant to the Automatic Investment
Plan. For more information on the CMA(R) or CBA(R) Systematic Redemption
Program, eligible shareholders should contact their Merrill Lynch Financial
Consultant.
RETIREMENT PLANS
Self-directed IRAs and other retirement plans are available from Merrill
Lynch. Under these plans, investments may be made in the Fund and in certain of
the other mutual funds sponsored by Merrill Lynch as well as in other
securities. Merrill Lynch charges an initial establishment fee and an annual
custodial fee for each account. Information with respect to these plans is
available on request from Merrill Lynch. The minimum initial purchase to
establish any such plan is $100, and the minimum subsequent purchase is $1.
Capital gains and income received in each of the plans referred to above
are exempt from Federal taxation until distributed from the plans. Investors
considering participations in any such plan should review specific tax laws
relating thereto and should consult their attorneys or tax advisers with respect
to the establishment and maintenance of any such plan.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds. 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 the account in which the exchange is
made at the time of the exchange or is otherwise eligible to purchase Class A
shares of the second fund. If the Class A shareholder wants to exchange Class A
shares for shares of a second MLAM-advised mutual fund, 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
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<PAGE> 92
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 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.
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<PAGE> 93
Shareholders also may exchange shares of the Fund into shares of certain
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
the Fund may, in turn, be exchanged back into Class B or Class C shares,
respectively, of any fund offering such shares, in which event the holding
period for Class B or Class C shares of the newly acquired fund will be
aggregated with previous holding periods for purposes of reducing the CDSC.
Thus, for example, an investor may exchange Class B shares of the Fund for
shares of Merrill Lynch Institutional Fund ("Institutional Fund") after having
held the Fund Class B shares for two and a half years and three years later
decide to redeem the shares 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 would not incur a CDSC.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege a shareholder should contact his or her
Merrill Lynch Financial Consultant, who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other MLAM-advised mutual
funds with shares for which certificates have not been issued, may exercise the
exchange privilege by wire through their securities dealers. The Fund reserves
the right to require a properly completed Exchange Application. This exchange
privilege may be modified or terminated in accordance with the rules of the
Commission. The Fund reserves the right to limit the number of times an investor
may exercise the exchange 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. All net realized
long-term capital gains, if any, will be distributed to the Fund's shareholders
at least annually. From time to time, the Fund may declare a special
distribution at or about the end of the calendar year in order to comply with
Federal tax requirements that certain percentages of its ordinary income and
capital gains be distributed during the calendar year.
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. The per share dividends on each class of shares will
be reduced as a
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result of any account maintenance, distribution and transfer agency fees
applicable with respect to such class of shares. See "Determination of Net Asset
Value."
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. As long as it
so qualifies, the Fund (but not its shareholders) will not be subject to Federal
income tax on the part of its net ordinary income and net realized capital gains
which it distributes to Class A, Class B, Class C and Class D shareholders
(together, the "shareholders"). The Fund intends to distribute substantially all
of such income.
Dividends paid by the Fund from its ordinary income or from an excess of
net short-term capital gains over net long-term capital losses (together
referred to hereafter as "ordinary income dividends") are taxable to
shareholders as ordinary income. Distributions made from an excess of net
long-term capital gains over net short-term capital losses (including gains or
losses from certain transactions in futures and options) ("capital gain
dividends") are taxable to shareholders as long-term capital gains, regardless
of the length of time the shareholder has owned Fund shares. Any loss upon the
sale or exchange of Fund shares held for six months or less, however, will be
treated as long-term capital loss to the extent of any capital gain dividends
received by the shareholder. Distributions in excess of the Fund's earnings and
profits will first reduce the adjusted tax basis of a holder's shares and, after
such adjusted tax basis is reduced to zero, will constitute capital gains to
such holder (assuming the shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. Distributions by the Fund, whether from ordinary income or capital
gains, generally will not be eligible for the dividends received deduction
allowed to corporations under the Code. If the Fund pays a dividend in January
which was declared in the previous October, November or December to shareholders
of record on a specified date in one of such months, then such dividend will be
treated for tax purposes as being paid by the Fund and received by its
shareholders on December 31 of the year in which such dividend was declared.
Ordinary income dividends paid 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
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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 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 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 considered by the Investment Adviser to be of comparable quality
("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 and distribute income
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<PAGE> 96
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.
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The Fund
may, nonetheless, elect to treat the gain or loss from certain forward foreign
exchange contracts as capital. In this case, gain or loss realized in connection
with a forward foreign exchange contract that is a Section 1256 contract will be
characterized as 60% long-term and 40% short-term capital gain or loss.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in options, futures
and forward foreign exchange contracts. Under Section 1092, the Fund may be
required to postpone recognition for tax purposes of losses incurred in certain
sales of securities and certain closing transactions in options, futures and
forward foreign exchange contracts.
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.
30
<PAGE> 97
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 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 and 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
31
<PAGE> 98
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) the rates of return calculated will not be average annual rates, but rather,
actual annual, annualized or aggregate rates 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> 99
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
---------------------------- ---------------------------- ---------------------------- ----------------------------
EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE
AS A VALUE OF A AS A VALUE OF A AS A VALUE OF A AS A VALUE OF A
PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL
BASED ON A $1,000 BASED ON A $1,000 BASED ON A $1,000 BASED ON A $1,000
HYPOTHETICAL INVESTMENT AT HYPOTHETICAL INVESTMENT AT HYPOTHETICAL INVESTMENT AT HYPOTHETICAL INVESTMENT AT
$1,000 THE END OF $1,000 THE END OF $1,000 THE END OF $1,000 THE END OF
INVESTMENT THE PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD
------------ ------------- ------------ ------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
One
Year
Ended
December
31,
1996... 6.65% $1,066.50 6.25% $1,062.50 9.19% $1,091.90 6.38% $1,063.80
Five
Years
Ended
December
31,
1996... 7.41% $1,429.80 7.47% $1,433.80 -- -- -- --
Inception
(November
18,
1991)
to
December
31,
1996... -- -- 7.64% $1,457.30 -- -- -- --
Inception
(September
29,
1988)
to
December
31,
1996... 10.05% $2,205.30 -- -- -- -- -- --
Inception
(October
21,
1994)
to
December
31,
1996... -- -- -- -- 10.51% $1,245.20 9.11% $1,210.80
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Year
Ended
December
31,
1996... 11.09% $1,110.90 10.25% $1,102.50 10.19% $1,101.90 10.82% $1,108.20
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... 6.91% $1,069.10 -- -- -- -- -- --
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)% $ 989.10
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Inception
(November
18,
1991)
to
December
31,
1996... -- -- 45.73% $1,457.30 -- -- -- --
Inception
(September
29,
1988)
to
December
31,
1996*... 120.53% $2,205.30 -- -- -- -- -- --
Inception
(October
21,
1994)
to
December
31,
1996... -- -- -- -- 24.52% $1,245.20 21.08% $1,210.80
YIELD
30 Days
Ended
December
31,
1996... 6.64% -- 6.14% -- 6.08% -- 6.39% --
</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.
33
<PAGE> 100
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> 101
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, 1996 is calculated as set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net Assets..................... $212,084,841 $988,208,896 $10,251,044 $14,369,388
=========== ============ ======== ========
Number of Shares Outstanding... 23,710,959 110,549,240 1,147,722 1,606,592
=========== ============ ======== ========
Net Asset Value Per Share (net
assets divided by number of
shares outstanding).......... $ 8.94 $ 8.94 $ 8.93 $ 8.94
Sales Charge (for Class A and
Class D shares: 4.00% of
offering price (4.17% of net
asset value per share))*..... .37 ** ** .37
----------- ------------ -------- --------
Offering Price................. $ 9.31 $ 8.94 $ 8.93 $ 9.31
=========== ============ ======== ========
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.
** Class B and Class C shares are not subject to an initial sales charge but may
be subject to a CDSC on redemption of shares. See "Purchase of
Shares-Deferred Sales Charge Alternatives-Class B and Class C Shares" in the
Prospectus and "Redemption of Shares -- Deferred Sales Charges -- Class B and
Class C Shares" herein.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, 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.
35
<PAGE> 102
LEGAL COUNSEL
Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on December 31 of each year. The Fund
sends to its shareholders at least semi-annually reports showing the Fund's
portfolio and other information. An annual report, containing financial
statements audited by Independent Auditors, is sent to shareholders each year.
After the end of each year, shareholders will receive Federal income tax
information regarding dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Commission, Washington,
D.C., under the Securities Act of 1933 and the Investment Company Act, to which
reference is hereby made.
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's shares on April 1, 1997.
36
<PAGE> 103
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, 1996, the related statements of operations for the year then ended
and changes in net assets for each of the years in the two-year period then
ended, and the financial highlights for the periods presented. These financial
statements and the financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1996 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, 1996, 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 7, 1997
37
<PAGE> 104
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
LATIN Value Percent of
AMERICA Industries Face Amount Fixed-Income Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C> <C>
Argentina Communications US$ 10,000,000 Telefonica de Argentina S.A.,
11.875% due 11/01/2004 $ 9,800,800 $ 11,075,000 0.9%
Foreign 2,000,000 Republic of Argentina, Brady Par
Government Bonds, 5.25% due 3/31/2023++ 1,111,636 1,257,600 0.1
Obligations 12,740,000 Republic of Argentina, Floating
Rate Brady Bonds, 6.625% due
3/31/2005++ 10,698,538 11,068,512 0.9
-------------- -------------- ------
11,810,174 12,326,112 1.0
Total Fixed-Income Investments
in Argentina 21,610,974 23,401,112 1.9
Brazil Broadcasting/Cable 7,000,000 Globo Comunicacoes e Participacoes
Ltd., 10.50% due 12/20/2006 (h) 6,985,140 7,043,750 0.6
Communications 5,000,000 Comtel Brasileira Ltd., 10.75% due
9/26/2004 (h) 5,000,000 5,137,500 0.4
Foreign Government Republic of Brazil:
Obligations 18,000,000 6.50% due 4/15/2006 15,692,359 15,660,000 1.3
2,000,000 5% due 4/15/2024 1,237,500 1,260,000 0.1
11,013,797 C Bonds, 7.05% due 4/15/2014++ 7,962,652 8,150,210 0.6
-------------- -------------- ------
24,892,511 25,070,210 2.0
Total Fixed-Income Investments
in Brazil 36,877,651 37,251,460 3.0
Colombia Energy 5,000,000 Oleoducts Central S.A., 9.35% due
9/01/2005 5,000,000 5,218,750 0.4
Utilities 10,000,000 Transgas de Occidente S.A., 9.79%
due 11/01/2010 10,137,500 10,350,000 0.9
Total Fixed-Income Investments in
Colombia 15,137,500 15,568,750 1.3
Mexico Broadcasting & 7,500,000 Grupo Televisa S.A., 11.375% due
Publishing 5/15/2003 7,678,125 8,053,125 0.7
Foreign Government United Mexican States, Floating
Obligations Rate Brady Bonds++:
2,000,000 Discount, Series A, 6.398% due
12/31/2019 1,562,500 1,722,500 0.1
4,000,000 Par, Series A, 6.25% due
12/31/2019 2,700,000 2,925,000 0.2
5,000,000 Par, Series B, 6.25% due
12/31/2019 3,408,558 3,656,250 0.3
United Mexican States, Government
Pound Bonds:
Sterling 10,000,000 12.25% due 12/03/1998 17,422,208 17,978,797 1.5
DM 22,000,000 8.125% due 9/10/2001 14,452,228 14,442,639 1.2
US$ 9,000,000 United Mexican States, Value
Recovery Rights (e) 0 9 0.0
-------------- -------------- ------
39,545,494 40,725,195 3.3
Total Fixed-Income Investments
in Mexico 47,223,619 48,778,320 4.0
Venezuela Foreign 21,000,000 Republic of Venezuela, Floating
Government Rate Brady Bonds, 6.565% due
Obligations 12/18/2007++ 16,341,875 18,506,250 1.5
Total Fixed-Income Investments
in Venezuela 16,341,875 18,506,250 1.5
Total Investments in Latin
American Securities 137,191,619 143,505,892 11.7
</TABLE>
38
<PAGE> 105
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
NORTH Value Percent of
AMERICA Industries Face Amount Fixed-Income Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C> <C>
Canada Broadcasting/ US$ 10,000,000 Videotron Group, Ltd. Co., 10.25%
Cable due 10/15/2002 $ 10,043,750 $ 10,625,000 0.9%
Paper 10,000,000 Doman Industries Ltd., 8.75% due
3/15/2004 9,300,000 9,350,000 0.7
Total Fixed-Income Investments
in Canada 19,343,750 19,975,000 1.6
United Airlines 12,500,000 USAir Inc., 10.375% due 3/01/2013 12,500,000 13,062,500 1.1
States
Broadcasting/Cable 10,000,000 Lenfest Communications, Inc.,
10.50% due 6/15/2006 9,922,100 10,550,000 0.9
Building Materials 10,000,000 Pacific Lumber Co., 10.50% due
3/01/2003 10,140,625 10,150,000 0.8
11,035,000 USG Corp., 8.75% due 3/01/2017 9,717,469 11,200,525 0.9
-------------- -------------- ------
19,858,094 21,350,525 1.7
Chemicals 10,340,000 ISP Holdings Inc., 9.75% due
2/15/2002 10,340,000 10,598,500 0.9
Conglomerates 10,000,000 Sequa Corp., 9.375% due 12/15/2003 9,915,000 10,200,000 0.8
Consumer 10,000,000 Revlon Consumer Products Corp.,
Products 9.375% due 4/01/2001 8,848,261 10,225,000 0.8
Energy 10,000,000 Clark R & M Holdings, Inc.,
10.43%* due 2/15/2000 7,249,284 7,175,000 0.6
9,100,000 Maxus Energy Corp., 9.875% due
10/15/2002 9,086,800 9,373,000 0.8
10,000,000 Rowan Companies, Inc., 11.875% due
12/01/2001 10,402,500 10,675,000 0.9
10,000,000 Seagull Energy Corp., 8.625% due
8/01/2005 10,000,000 10,150,000 0.8
10,000,000 TransTexas Gas Corp., 11.50% due
6/15/2002 9,996,125 10,800,000 0.9
-------------- -------------- ------
46,734,709 48,173,000 4.0
Financial 10,000,000 Penn Financial Corp., 9.25% due
Services 12/15/2003 10,000,000 10,400,000 0.9
10,000,000 Reliance Group Holdings, Inc.,
9% due 11/15/2000 10,000,000 10,300,000 0.8
-------------- -------------- ------
20,000,000 20,700,000 1.7
Food & Beverage 5,000,000 Coca-Cola Bottling Co., 9% due
11/15/2003 5,005,000 5,087,500 0.4
11,500,000 Del Monte Co., 10% due 5/01/2003 11,482,188 10,925,000 0.9
8,000,000 Specialty Foods Corp., 10.25% due
8/15/2001 8,000,000 7,400,000 0.6
-------------- -------------- ------
24,487,188 23,412,500 1.9
Gaming 10,000,000 Greate Bay Properties, Inc.,
10.875% due 1/15/2004 9,996,250 8,400,000 0.7
7,500,000 Harrah's Jazz Co., 14.25% due
11/15/2001 (i) 5,178,125 3,684,375 0.3
10,000,000 Showboat, Inc., 9.25% due 5/01/2008 9,748,750 9,825,000 0.8
10,000,000 Trump Atlantic City Associates,
11.25% due 5/01/2006 9,943,750 9,900,000 0.8
-------------- -------------- ------
34,866,875 31,809,375 2.6
Home Builders Del E. Webb Corp.:
9,250,000 10.875% due 3/31/2000 9,376,875 9,527,500 0.8
3,500,000 9.75% due 3/01/2003 3,472,455 3,570,000 0.3
1,000,000 Ryland Group, Inc., 10.50% due
7/15/2002 987,500 1,020,000 0.1
-------------- -------------- ------
13,836,830 14,117,500 1.2
Hotels 10,000,000 HMC Acquisition Properties, 9%
due 12/15/2007 9,346,250 10,150,000 0.8
Packaging 10,000,000 Owens-Illinois, Inc., 11% due
12/01/2003 11,401,563 11,125,000 0.9
</TABLE>
39
<PAGE> 106
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Paper 10,000,000 Container Corp. of America, 9.75%
due 4/01/2003 10,200,000 10,500,000 0.9
10,000,000 Fort Howard Corp., 9% due 2/01/2006 10,007,500 10,100,000 0.8
10,000,000 Stone Container Corp., 9.875% due
2/01/2001 9,317,650 10,100,000 0.8
-------------- -------------- ------
29,525,150 30,700,000 2.5
Restaurants 4,000,000 Flagstar Corp., 11.375% due
9/15/2003 3,640,000 1,660,000 0.1
Supermarkets 10,000,000 Pueblo Xtra International Inc.,
9.50% due 8/01/2003 10,116,875 9,375,000 0.8
Telecommunications 10,000,000 Century Communications Corp.,
9.50% due 3/01/2005 9,797,500 10,250,000 0.8
Textiles 10,000,000 WestPoint Stevens Inc., 8.75% due
12/15/2001 10,093,750 10,275,000 0.8
Transportation 10,000,000 Viking Star Shipping Co., 9.625%
due 7/15/2003 10,028,437 10,450,000 0.9
Utilities 9,848,000 Beaver Valley II Funding, 9% due
6/01/2017 7,262,900 9,404,742 0.8
4,000,000 CTC Mansfield Funding Corp., 11.125%
due 9/30/2016 4,301,250 4,220,000 0.3
Midland Cogeneration Venture
Limited Partnership:
7,680,600 10.33% due 7/23/2002 (b) 7,526,988 8,179,839 0.7
10,000,000 13.25% due 7/23/2006 11,183,750 11,553,300 0.9
10,000,000 Tucson Electric & Power Co.,
10.732% due 1/01/2013 (h) 9,607,625 9,799,900 0.8
-------------- -------------- ------
39,882,513 43,157,781 3.5
Total Fixed-Income Investments in 345,141,095 351,341,681 28.7
the United States
Convertible Bonds
Canada Metals & US$ 500,000 Inco Ltd., 5.75% due 7/01/2004 525,375 615,000 0.1
Mining
Total Investments in Canadian
Convertible Bonds 525,375 615,000 0.1
United Building & 800,000 Continental Homes Holding Corp.,
States Construction 6.875% due 11/01/2002 800,000 868,000 0.0
1,500,000 Toll Brothers Inc., 4.75% due
1/15/2004 1,500,000 1,522,500 0.1
1,000,000 US Home Corp., 4.875% due
11/01/2005 991,000 885,000 0.1
-------------- -------------- ------
3,291,000 3,275,500 0.2
Computers 5,000,000 Apple Computer, Inc., 6% due
6/01/2001 (h) 4,945,000 4,906,250 0.4
1,000,000 Data General Corp., 7.75% due
6/01/2001 994,375 1,020,000 0.1
-------------- -------------- ------
5,939,375 5,926,250 0.5
Conglomerates Polyphase Corp. (h):
500,000 12% due 12/01/1997 500,000 556,250 0.0
2,000,000 12% due 7/01/1999 2,000,000 2,070,000 0.2
2,000,000 Thermo Electron Corp., 4.25% due
1/01/2003 (h) 2,000,000 2,422,500 0.2
-------------- -------------- ------
4,500,000 5,048,750 0.4
Electronics 1,500,000 Park Electrochemical Corporation,
5.50% due 3/01/2006 1,487,750 1,312,500 0.1
1,550,000 Thermaquest Corp., 5% due
8/15/2000 (h) 1,551,500 1,581,000 0.1
1,585,000 Thermo Optik Corp., 5% due
10/15/2000 (h) 1,588,950 1,616,700 0.1
-------------- -------------- ------
4,628,200 4,510,200 0.3
</TABLE>
40
<PAGE> 107
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
NORTH
AMERICA Value Percent of
(concluded)Industries Face Amount Convertible Bonds Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C> <C>
United Environmental US$ 1,063,000 Thermo TerraTech, Inc., 4.625%
States due 5/01/2003 (h) $ 1,114,735 $ 967,330 0.1%
(concluded)
Financial 2,250,000 NAL Acceptance Corp., 10% due
Services 9/12/1998 (h) 2,250,000 2,812,500 0.2
Healthcare 1,500,000 Integrated Health Services Inc.,
5.75% due 1/01/2001 1,493,750 1,481,250 0.1
1,000,000 US Diagnostic Labs, Inc., 9% due
3/31/2003 (h) 1,000,000 1,235,000 0.1
-------------- -------------- ------
2,493,750 2,716,250 0.2
Industrial 1,300,000 Mascotech, Inc., 4.50% due
12/15/2003 1,126,000 1,049,750 0.1
140,000 Recognition Equipment International,
Inc., 7.25% due 4/15/2011 103,600 135,800 0.0
-------------- -------------- ------
1,229,600 1,185,550 0.1
Insurance 2,000,000 Statesman Group, Inc. (The), 6.25%
due 5/01/2003 2,060,000 2,105,000 0.2
Machine-- 1,500,000 Cooper Industries, Inc., 7.05% due
Diversified 1/01/2015 1,474,999 1,590,000 0.1
Office 1,000,000 US Office Products Co., 5.50% due
Equipment 5/15/2003 (h) 1,000,000 935,000 0.1
Oil--Domestic 4,825,000 Key Energy Group, Inc., 7.50% due
7/01/2003 (h) 5,475,000 5,886,500 0.5
4,750,000 USX Corp., 7% due 6/15/2017 4,184,150 4,714,375 0.4
2,080,000 Wainoco Oil Corp., 7.75% due
6/01/2014 1,880,352 1,664,000 0.1
-------------- -------------- ------
11,539,502 12,264,875 1.0
Pharmaceuticals 1,300,000 Bindley Western Industries, Inc.,
6.50% due 10/01/2002 1,293,875 1,404,000 0.1
Publishing/ 2,150,000 Graphic Industries, Inc., 7% due
Printing 5/15/2006 1,899,375 1,935,000 0.2
Retail 200,000 Baby Superstores Inc., 4.875% due
10/01/2000 200,000 198,000 0.0
825,000 Baker (J.) Inc., 7% due 6/01/2002 824,527 660,000 0.1
-------------- -------------- ------
1,024,527 858,000 0.1
Technology 1,250,000 Broadband Technologies, Inc., 5%
due 5/15/2001 (h) 1,246,250 954,688 0.1
Temporary Help 6,375,000 Quantum Health Resources, Inc.,
Services 4.75% due 10/01/2000 (f) 5,956,562 5,769,375 0.5
Textiles 1,025,000 Fieldcrest Cannon, Inc., 6% due
3/15/2012 763,625 776,437 0.1
Transportation 300,000 Varlen Corp., 6.50% due 6/01/2003 297,000 300,000 0.0
Products
Transportation 2,000,000 Offshore Logistics, Inc., 6% due
Services 12/15/2003 (h) 2,000,000 2,090,000 0.2
Total Investments in United
States Convertible Bonds 56,002,375 57,424,705 4.7
<CAPTION>
Convertible Preferred Stocks,
Preferred Stocks,
Shares Held Common Stocks & Warrants
<S> <C> <C> <C> <C> <C> <C>
United Banking & 59,843 RCSB Financial, Inc. 1,100,014 1,720,486 0.1
States Finance 50,200 Union Planters Corp., Conv. Pfd.
$2.00 1,775,655 2,459,800 0.2
-------------- -------------- ------
2,875,669 4,180,286 0.3
Broadcasting/ 137,257 On Command Corporation (i) 4,061,096 2,178,955 0.2
Cable
</TABLE>
41
<PAGE> 108
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
43,675 On Command Corporation
(Warrants) (c) 349,400 294,806 0.0
-------------- -------------- ------
4,410,496 2,473,761 0.2
Electronics 105,500 Rexel S.A. (i) 1,084,093 1,674,812 0.1
Distributor
Entertainment 10,751 Time Warner, Inc. (Series M),
Pfd. (a) 10,688,355 11,664,835 1.0
Environmental 738,028 Allied Waste Industries, Inc.
(i)*** 3,520,401 6,734,505 0.5
Financial 15,000 Morgan Stanley Group, Inc.,
Services Conv. Pfd. 997,500 993,750 0.1
28,125 NAL Acceptance Corp. (Warrants)
(c)(h) 0 168,750 0.0
23,300 SunAmerica Inc., Conv. Pfd. 873,750 984,425 0.1
-------------- -------------- ------
1,871,250 2,146,925 0.2
Food & Beverage 465,500 RJR Nabisco, Inc., Conv. Pfd.
$.60 (Series C) 3,021,638 3,142,125 0.3
Forest Products 65,000 James River Corp. of Virginia
& Paper (Series P), Conv. Pfd. 1,562,025 2,047,500 0.2
22,400 James River Corp. of Virginia,
$3.375 (Series K), Conv. Pfd. 1,007,686 1,150,800 0.1
38,400 James River Corp. of Virginia,
$3.50 (Series L), Conv. Pfd. 1,691,441 1,987,200 0.1
-------------- -------------- ------
4,261,152 5,185,500 0.4
Gaming 75,000 Goldriver Hotel & Casino Corp.,
Liquidating Trust (h)(i) 75,000 26,719 0.0
30,000 Goldriver Hotel & Casino Corp.
(Series B) (d)(i) 219,738 0 0.0
-------------- -------------- ------
294,738 26,719 0.0
Hotels 1,608 Buckhead America Corp. (i) 8,291 9,648 0.0
Industrial 118,500 Albany International Corp.
Services (Class A) 2,271,228 2,740,312 0.2
46,100 Mascotech, Inc., Conv. Pfd. $1.20 708,925 726,075 0.1
-------------- -------------- ------
2,980,153 3,466,387 0.3
Insurance 163,141 Kemper Corp., Conv. Pfd. $5.25
(Series E) (h) 8,349,078 8,483,332 0.7
1,500 Westbridge Capital Corp., Conv. Pfd. 1,500,000 1,758,000 0.1
-------------- -------------- ------
9,849,078 10,241,332 0.8
Mining 148,400 Coeur d'Alene Mines Corp.,
Conv. Pfd. 2,772,608 2,597,000 0.2
Oil & Gas 43,000 Snyder Oil Corp., Conv. Pfd.
$1.50 (Series A) 906,023 1,042,750 0.1
20,000 Western Gas Resources, Inc., Conv.
Pfd $2.62 1,000,000 780,000 0.1
-------------- -------------- ------
1,906,023 1,822,750 0.2
Pharmaceuticals 40,000 IVAX Corp. 628,776 410,000 0.0
Telecommunications 6,249 ICG Communications, Inc.*** 125,313 110,139 0.0
Transportation 19,000 Sea Containers Ltd., Conv. Pfd.
$4.00 875,463 864,500 0.1
Total Investments in United
States Convertible Preferred
Stocks, Preferred Stocks, Common
Stocks & Warrants 51,173,497 56,751,224 4.6
Total Investments in North
American Securities 472,186,092 486,107,610 39.7
</TABLE>
42
<PAGE> 109
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
PACIFIC Value Percent of
BASIN Industries Face Amount Fixed-Income Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C> <C>
Australia Foreign Australian Government Bonds:
Government A$ 56,000,000 9.75% due 3/15/2002 $ 50,786,387 $ 49,641,884 4.0%
Obligations 51,500,000 9% due 9/15/2004 45,364,048 44,910,036 3.7
Total Fixed-Income Investments
in Australia 96,150,435 94,551,920 7.7
Indonesia Paper US$ 5,000,000 P.T. Indah Kiat International
Finance, 12.50% due 6/15/2006 5,025,000 5,500,000 0.5
Total Fixed-Income Investments
in Indonesia 5,025,000 5,500,000 0.5
Total Investments in Pacific
Basin Securities 101,175,435 100,051,920 8.2
WESTERN
EUROPE
Denmark Foreign Dkr 100,000,000 Denmark Government Bonds, 7%
Government due 11/15/2007 16,967,679 17,270,952 1.4
Obligations
Total Fixed-Income Investments
in Denmark 16,967,679 17,270,952 1.4
Germany Foreign DM 66,000,000 German Unity Fund, 8% due 1/21/2002 49,733,112 48,784,660 4.0
Government
Obligations
Total Fixed-Income Investments in
Germany 49,733,112 48,784,660 4.0
Italy Foreign Buoni Poliennali del Tesoro
Government (Italian Government Bonds):
Obligations Lit 69,000,000,000 9.50% due 5/01/2001 49,253,670 50,246,271 4.1
22,500,000,000 8.25% due 7/01/2001 15,592,403 15,781,492 1.3
Total Fixed-Income Investments
in Italy 64,846,073 66,027,763 5.4
Poland Foreign US$ 4,000,000 Polish PDI Bonds, 4% due 10/27/2014 3,111,250 3,375,000 0.3
Government
Obligations
Total Fixed-Income Investments
in Poland 3,111,250 3,375,000 0.3
Spain Foreign Government of Spain:
Government Pta 2,500,000,000 9.40% due 4/30/1999 20,558,258 20,751,521 1.7
Obligations 1,850,000,000 10.10% due 2/28/2001 16,038,677 16,388,889 1.3
4,010,000,000 10.50% due 10/30/2003 37,067,225 37,521,768 3.1
Total Fixed-Income Investments
in Spain 73,664,160 74,662,178 6.1
Sweden Foreign Government of Sweden:
Government Skr 111,500,000 10.25% due 5/05/2000 18,520,562 18,875,322 1.5
Obligations 112,000,000 6% due 2/09/2005 15,798,826 15,933,089 1.3
154,200,000 8% due 8/15/2007 24,374,590 24,697,794 2.0
</TABLE>
43
<PAGE> 110
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Total Fixed-Income Investments
in Sweden 58,693,978 59,506,205 4.8
United Communications US$ 20,000,000 TeleWest Communications PLC,
Kingdom 11.41%* due 10/01/2000 13,389,615 13,950,000 1.1
Foreign Pound United Kingdom Gilt:
Government Sterling 24,000,000 8% due 12/07/2000 40,428,554 42,201,159 3.5
Obligations 8,900,000 8.50% due 12/07/2005 15,870,229 16,215,818 1.3
-------------- -------------- ------
56,298,783 58,416,977 4.8
Total Fixed-Income Investments
in the United Kingdom 69,688,398 72,366,977 5.9
Convertible Bonds
Ireland Dental US$ 500,000 Phoenix Shannon PLC, 9.50% due
Equipment & 11/01/2000 (h) 500,000 240,000 0.0
Supplies
Total Investments in Irish
Convertible Bonds 500,000 240,000 0.0
Total Investments in Western
European Securities 337,204,650 342,233,735 27.9
SHORT-TERM
SECURITIES Issue
Commercial US$ 20,000,000 Ciesco L.P., 5.28% due 1/10/1997 19,976,533 19,976,533 1.6
Paper** 17,090,000 Delaware Funding Corp., 5.68% due
1/17/1997 17,049,554 17,049,554 1.4
23,000,000 Eureka Securitization, Inc., 5.65%
due 1/24/1997 22,920,586 22,920,586 1.9
53,784,000 General Motors Acceptance Corp.,
7.50% due 1/02/1997 53,784,000 53,784,000 4.4
20,000,000 Lehman Brothers Holdings, Inc.,
5.70% due 1/29/1997 19,914,500 19,914,500 1.6
-------------- -------------- ------
133,645,173 133,645,173 10.9
US Government US Treasury Bills:
& Agency 2,000,000 5.02% due 2/06/1997 1,990,239 1,990,400 0.2
Obligations** 3,000,000 5.27% due 3/13/1997 (g) 2,969,258 2,971,020 0.2
-------------- -------------- ------
4,959,497 4,961,420 0.4
Total Investments in Short-Term
Securities 138,604,670 138,606,593 11.3
</TABLE>
44
<PAGE> 111
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<CAPTION>
OPTIONS Nominal Value Premiums Value Percent of
PURCHASED Covered by Options Issue Paid (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
Currency Put 21,935,483 German Deutschemark, expiring
Options Purchased February 1997 at DM1.55 $ 76,774 $ 204,000 0.0%
Total Options Purchased 76,774 204,000 0.0
Total Investments 1,186,439,240 1,210,709,750 98.8
OPTIONS Premiums
WRITTEN Received
Put Options Written 10,000,000 US Treasury Bill, expiring January
1997 at $96.797 (21,875) (9,380) 0.0
Total Options Written (21,875) (9,380) 0.0
Total Investments, Net of Options Written $1,186,417,365 1,210,700,370 98.8
==============
Short Sales (Proceeds--$4,980,614)*** (5,449,592) (0.4)
Variation Margin on Financial Futures Contracts**** 115,139 0.0
Unrealized Depreciation on Forward Foreign Exchange Contracts***** (2,972,119) (0.2)
Other Assets Less Liabilities 22,520,371 1.8
-------------- ------
Net Assets $1,224,914,169 100.0%
============== ======
</TABLE>
++Brady Bonds are securities which have been issued to refinance
commercial bank loans and other debt. The risk associated with these
instruments is the amount of any uncollateralized principal or
interest payments since there is a high default rate of commercial
bank loans by countries issuing these securities.
*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, 1996 were as
follows:
Value
Shares Issue (Note 1i)
581,270 Allied Waste Industries, Inc. $(5,376,748)
4,133 ICG Communications, Inc. (72,844)
Total (Proceeds--$4,980,614) $(5,449,592)
===========
****Financial futures contracts sold as of December 31, 1996 were as
follows:
Number of Expiration Value
Contracts Issue Exchange Date (Notes 1a & 1c)
130 Bonos MEFF-IBEX 35 March 1997 $11,291,291
189 Bundes LIFFE March 1997 30,954,355
48 Italian BTP LIFFE March 1997 8,182,052
250 US Treasury Notes CBOT March 1997 27,281,250
(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)The rights may be exercised until 2/06/2001.
(f)Quantum Health Resources, Inc. is convertible into Olsten Corp.
(g)Securities held as collateral in connection with open financial
futures contracts.
(h)Restricted securities as to resale. The value of the Fund's
investments in restricted securities was approximately $58,934,000,
representing 4.3% of net assets.
<TABLE>
<CAPTION>
Acquisition Value
Issue Date(s) Cost (Note 1a)
<S> <C> <C> <C>
Apple Computer, Inc., 6/04/1996-
6% due 6/01/2001 7/18/1996 $ 4,945,000 $ 4,906,250
Broadband Technologies, Inc., 5/30/1996-
5% due 5/15/2001 7/03/1996 1,246,250 954,688
Comtel Brasileira Ltd.,
10.75% due 9/26/2004 9/18/1996 5,000,000 5,137,500
Globo Comunicacoes e
Participacoes Ltd.,
10.50% due 12/20/2006 12/20/1996 6,985,140 7,043,750
</TABLE>
45
<PAGE> 112
Total Financial Futures Contracts Sold
(Total Contract Price--$77,639,094) $77,708,948
===========
*****Forward foreign exchange contracts as of December 31, 1996 were
as follows:
Unrealized
Foreign Appreciation
Currency Expiration (Depreciation)
Purchased Date (Note 1c)
Dkr 105,586,000 January 1997 $ (21,199)
Lit 19,172,625,000 January 1997 123,895
Skr 47,876,500 January 1997 26,660
Total (US$ Commitment--$37,456,803) $ 129,356
-----------
Foreign Currency Sold
A$ 71,000,000 January 1997 $ 65,746
Dkr 206,965,500 January 1997 (156,660)
DM 68,985,590 January 1997 (447,674)
Pound 35,797,279 January 1997 (2,236,901)
Sterling
Lit 38,284,750,000 January 1997 (207,955)
Pta 5,865,150,000 January 1997 (155,016)
Skr 136,019,000 January 1997 36,985
Total (US$ Commitment--$284,865,856) $(3,101,475)
-----------
Total Unrealized Depreciation on Forward
Foreign Exchange Contracts--Net $(2,972,119)
===========
(a)Represents a pay-in-kind security which may pay interest/dividends
in additional face/shares.
<TABLE>
<S> <C> <C> <C>
Goldriver Hotel & Casino 5/04/1989-
Corp., Liquidating Trust 10/07/1993 75,000 26,719
Kemper Corp., Pfd. $5.25 4/04/1995-
(Series E) 4/01/1996 8,349,078 8,483,332
Key Energy Group, Inc., 6/28/1996-
7.50% due 7/01/2003 11/06/1996 5,475,000 5,886,500
NAL Acceptance Corp.,
10% due 9/12/1998 9/12/1996 2,250,000 2,812,500
NAL Acceptance Corp.
(Warrants) 9/12/1996 -- 168,750
Offshore Logistics, Inc.,
6% due 12/15/2003 12/12/1996 2,000,000 2,090,000
Phoenix Shannon PLC,
9.50% due 11/01/2000 11/21/1995 500,000 240,000
Polyphase Corp.,
12% due 12/01/1997 12/05/1995 500,000 556,250
Polyphase Corp.,
12% due 7/01/1999 7/05/1994 2,000,000 2,070,000
Thermaquest Corp.,
5% due 8/15/2000 7/20/1995 1,551,500 1,581,000
Thermo Electron Corp.,
4.25% due 1/01/2003 11/28/1995 2,000,000 2,422,500
Thermo Optik Corp., 9/28/1995-
5% due 10/15/2000 11/19/1996 1,588,950 1,616,700
Thermo TerraTech, Inc.,
4.625% due 5/01/2003 5/02/1996 1,114,735 967,330
Tucson Electric & Power Co., 8/03/1993-
10.732% due 1/01/2013 10/11/1996 9,607,625 9,799,900
US Diagnostic Labs, Inc.,
9% due 3/31/2003 4/03/1996 1,000,000 1,235,000
US Office Products Co.,
5.50% due 5/15/2003 5/22/1996 1,000,000 935,000
Total $57,188,278 $58,933,669
=========== ===========
</TABLE>
(i)Non-income producing security.
See Notes to Financial Statements.
46
<PAGE> 113
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of December 31, 1996
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$1,186,362,466)
(Note 1a) $1,210,505,750
Put options purchased, at value (cost--$76,774) (Notes 1a & 1c) 204,000
Cash 558,948
Deposit for securities sold short (Note 1i) 6,238,819
Receivables:
Interest $ 25,448,496
Securities sold 3,856,497
Capital shares sold 593,579
Dividends 135,071
Variation margin (Note 1c) 115,139 30,148,782
--------------
Prepaid registration fees and other assets (Note 1g) 103,519
--------------
Total assets 1,247,759,818
--------------
Liabilities: Common stocks sold short, at market value (proceeds--
$4,980,614) (Note 1i) 5,449,592
Put options written, at value (premiums received--$21,875)
(Notes 1a & 1c) 9,380
Unrealized depreciation on forward foreign exchange contracts
(Note 1c) 2,972,119
Payables:
Dividends to shareholders (Note 1h) 5,132,915
Securities purchased 4,002,500
Capital shares redeemed 3,430,626
Distributor (Note 2) 642,154
Investment adviser (Note 2) 627,145 13,835,340
--------------
Accrued expenses and other liabilities 579,218
--------------
Total liabilities 22,845,649
--------------
Net Assets: Net assets $1,224,914,169
==============
Net Assets Class A Shares of Common Stock, $0.10 par value,
Consist of: 1,000,000,000 shares authorized $ 2,371,096
Class B Shares of Common Stock, $0.10 par value,
1,000,000,000 shares authorized 11,054,924
Class C Shares of Common Stock, $0.10 par value,
1,000,000,000 shares authorized 114,772
Class D Shares of Common Stock, $0.10 par value,
1,000,000,000 shares authorized 160,659
Paid-in capital in excess of par 1,246,257,428
Accumulated realized capital losses on investments and
foreign currency transactions--net (Note 5) (55,669,528)
Unrealized appreciation on investments and foreign currency
transactions--net 20,624,818
--------------
Net assets $1,224,914,169
==============
Net Asset Class A--Based on net assets of $212,084,841 and 23,710,959
Value: shares outstanding $ 8.94
==============
Class B--Based on net assets of $988,208,896 and 110,549,240
shares outstanding $ 8.94
==============
Class C--Based on net assets of $10,251,044 and 1,147,722
shares outstanding $ 8.93
==============
Class D--Based on net assets of $14,369,388 and 1,606,592
shares outstanding $ 8.94
==============
See Notes to Financial Statements.
</TABLE>
47
<PAGE> 114
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended December 31, 1996
<S> <C> <C> <C>
Investment Interest and discount earned (net of $680,248 withholding tax) $ 113,511,396
Income Dividends 2,615,568
(Notes 1e & 1f): --------------
Total income 116,126,964
--------------
Expenses: Account maintenance and distribution fees--Class B (Note 2) $ 8,379,565
Investment advisory fees (Note 2) 8,216,118
Transfer agent fees--Class B (Note 2) 1,185,887
Custodian fees 225,062
Transfer agent fees--Class A (Note 2) 204,501
Printing and shareholder reports 200,568
Accounting services (Note 2) 165,821
Professional fees 107,934
Registration fees (Note 1g) 80,998
Account maintenance and distribution fees--Class C (Note 2) 62,235
Directors' fees and expenses 45,392
Account maintenance fees--Class D (Note 2) 28,273
Transfer agent fees--Class D (Note 2) 9,381
Transfer agent fees--Class C (Note 2) 8,219
Pricing fees 7,799
Short sale of dividends (Note 1i) 2,850
Other 28,605
--------------
Total expenses 18,959,208
--------------
Investment income--net 97,167,756
--------------
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net 27,850,430
(Loss) on Foreign currency transactions--net (538,548) 27,311,882
Investments & --------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net 12,128,789
(Notes 1c, 1d, Foreign currency transactions--net (3,261,010) 8,867,779
1f & 3): -------------- --------------
Net realized and unrealized gain on investments and foreign
currency transactions 36,179,661
--------------
Net Increase in Net Assets Resulting from Operations $ 133,347,417
==============
See Notes to Financial Statements.
</TABLE>
48
<PAGE> 115
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year
Ended December 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <C> <C> <C>
Operations: Investment income--net $ 97,167,756 $ 128,796,717
Realized gain (loss) on investments and foreign currency
transactions--net 27,311,882 (49,514,841)
Change in unrealized appreciation/depreciation on investments
and foreign currency transactions--net 8,867,779 144,343,205
-------------- --------------
Net increase in net assets resulting from operations 133,347,417 223,625,081
-------------- --------------
Dividends & Investment income--net:
Distributions to Class A (18,005,131) (18,898,095)
Shareholders Class B (77,786,819) (81,220,841)
(Note 1h): Class C (534,218) (203,152)
Class D (841,588) (179,224)
Return of capital:
Class A -- (5,320,682)
Class B -- (22,867,399)
Class C -- (57,196)
Class D -- (50,460)
-------------- --------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (97,167,756) (128,797,049)
-------------- --------------
Capital Share Net decrease in net assets derived from capital share transactions (325,693,217) (384,702,641)
Transactions -------------- --------------
(Note 4):
Net Assets: Total decrease in net assets (289,513,556) (289,874,609)
Beginning of year 1,514,427,725 1,804,302,334
-------------- --------------
End of year $1,224,914,169 $1,514,427,725
============== ==============
See Notes to Financial Statements.
</TABLE>
49
<PAGE> 116
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Class A
The following per share data and
ratios have been derived from For the
information provided in the Four For the
financial statements. Months Year
For the Year Ended Ended Ended
Increase (Decrease) in Net December 31, Dec. 31, Aug. 31,
Asset Value: 1996 1995 1994++ 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning
Operating of period $ 8.69 $ 8.20 $ 9.28 $ 8.85 $ 9.34 $ 9.07
Performance: -------- -------- -------- -------- -------- --------
Investment income--net .67 .72 .72 .75 .29 .99
Realized and unrealized
gain (loss) on investments
and foreign currency
transactions--net .25 .49 (1.09) .46 (.41) .40
-------- -------- -------- -------- -------- --------
Total from investment
operations .92 1.21 (.37) 1.21 (.12) 1.39
-------- -------- -------- -------- -------- --------
Less dividends and
distributions:
Investment income--net (.67) (.56) (.45) (.58) (.35) (1.12)
Realized gain on
investments--net -- -- -- (.03) (.02) --
Return of capital--net -- (.16) (.26) (.17) -- --
-------- -------- -------- -------- -------- --------
Total dividends and
distributions (.67) (.72) (.71) (.78) (.37) (1.12)
======== ======== ======== ======== ======== ========
Net asset value, end of
period $ 8.94 $ 8.69 $ 8.20 $ 9.28 $ 8.85 $ 9.34
======== ======== ======== ======== ======== ========
Total Investment Based on net asset value
Return:** per share 11.09% 15.35% (4.05%) 14.12% (1.26%)+++ 16.09%
======== ======== ======== ======== ======== ========
Ratios to Average Expenses .75% .80% .77% .78% .76%* .88%
Net Assets: ======== ======== ======== ======== ======== ========
Investment income--net 7.71% 8.54% 8.17% 8.22% 8.09%* 11.16%
======== ======== ======== ======== ======== ========
Supplemental Net assets, end of period
Data: (in thousands) $212,085 $260,806 $311,181 $467,625 $455,672 $526,631
======== ======== ======== ======== ======== ========
Portfolio turnover 208.53% 116.00% 115.95% 182.88% 68.42% 76.18%
======== ======== ======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effect of sales loads.
++Based on average shares outstanding during the period.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
50
<PAGE> 117
<TABLE>
FINANCIAL HIGHLIGHTS (concluded)
<CAPTION>
Class B
The following per share data and
ratios have been derived from For the For the
information provided in the Four Period
financial statements. Months Nov. 18,
For the Year Ended Ended 1991++ to
Increase (Decrease) in Net December 31, Dec. 31, Aug. 31,
Asset Value: 1996 1995 1994++ 1993 1992 1992
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning
Operating of period $ 8.69 $ 8.19 $ 9.28 $ 8.85 $ 9.33 $ 9.26
Performance: ---------- ---------- ---------- ---------- ---------- ----------
Investment income--net .61 .65 .65 .70 .27 .77
Realized and unrealized
gain (loss) on investments
and foreign currency
transactions--net .25 .50 (1.10) .44 (.40) --
---------- ---------- ---------- ---------- ---------- ----------
Total from investment
operations .86 1.15 (.45) 1.14 (.13) .77
---------- ---------- ---------- ---------- ---------- ----------
Less dividends and
distributions:
Investment income--net (.61) (.51) (.40) (.53) (.33) (.70)
Realized gain on
investments--net -- -- -- (.03) (.02) --
Return of capital--net -- (.14) (.24) (.15) -- --
---------- ---------- ---------- ---------- ---------- ----------
Total dividends and
distributions (.61) (.65) (.64) (.71) (.35) (.70)
========== ========== ========== ========== ========== ==========
Net asset value, end of
period $ 8.94 $ 8.69 $ 8.19 $ 9.28 $ 8.85 $ 9.33
========== ========== ========== ========== ========== ==========
Total Investment Based on net asset value
Return:** per share 10.25% 14.61% (4.90%) 13.27% (1.42%)+++ 8.61%+++
========== ========== ========== ========== ========== ==========
Ratios to Average Expenses 1.52% 1.56% 1.54% 1.55% 1.53%* 1.63%*
Net Assets: ========== ========== ========== ========== ========== ==========
Investment income--net 6.94% 7.77% 7.41% 7.42% 7.08%* 8.02%*
========== ========== ========== ========== ========== ==========
Supplemental Net assets, end of period
Data: (in thousands) $ 988,209 $1,241,896 $1,490,507 $2,106,120 $1,582,270 $1,514,406
========== ========== ========== ========== ========== ==========
Portfolio turnover 208.53% 116.00% 115.95% 182.88% 68.42% 76.18%
========== ========== ========== ========== ========== ==========
<CAPTION>
Class C Class D
The following per share data
and ratios have been derived For the For the
from information provided in Period Period
the financial statements. Oct. 21, Oct. 21,
For the Year Ended 1994++ to For the Year Ended 1994++ to
Increase (Decrease) in Net December 31, Dec. 31, December 31, Dec. 31,
Asset Value: 1996 1995 1994++++ 1996 1995 1994++++
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning
Operating of period $ 8.68 $ 8.19 $ 8.42 $ 8.69 $ 8.20 $ 8.43
Performance: -------- -------- -------- -------- -------- --------
Investment income--net .60 .64 .10 .65 .70 .11
Realized and unrealized
gain (loss) on investments
and foreign currency
transactions--net .25 .49 (.20) .25 .49 (.20)
-------- -------- -------- -------- -------- --------
Total from investment
operations .85 1.13 (.10) .90 1.19 (.09)
-------- -------- -------- -------- -------- --------
Less dividends and
distributions:
Investment income--net (.60) (.50) (.08) (.65) (.55) (.09)
Return of capital--net -- (.14) (.05) -- (.15) (.05)
-------- -------- -------- -------- -------- --------
</TABLE>
51
<PAGE> 118
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Total dividends and
distributions (.60) (.64) (.13) (.65) (.70) (.14)
======== ======== ======== ======== ======== ========
Net asset value, end of
period $ 8.93 $ 8.68 $ 8.19 $ 8.94 $ 8.69 $ 8.20
======== ======== ======== ======== ======== ========
Total Investment Based on net asset value
Return:** per share 10.19% 14.38% (1.20%)+++ 10.82% 15.06% (1.09%)+++
======== ======== ======== ======== ======== ========
Ratios to Average Expenses 1.56% 1.65% 1.64%* 0.99% 1.04% 1.04%*
Net Assets: ======== ======== ======== ======== ======== ========
Investment income--net 6.85% 7.65% 8.00%* 7.42% 8.23% 8.60%*
======== ======== ======== ======== ======== ========
Supplemental Net assets, end of period
Data: (in thousands) $ 10,251 $ 5,406 $ 1,204 $ 14,369 $ 6,320 $ 1,410
======== ======== ======== ======== ======== ========
Portfolio turnover 208.53% 116.00% 115.95% 208.53% 116.00% 115.95%
======== ======== ======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales
loads.
++Commencement of Operations.
++++Based on average shares outstanding during the period.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch World Income Fund, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 as a non-diversified, open-
end management investment company. The Fund offers 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
52
<PAGE> 119
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.
NOTES TO FINANCIAL STATEMENTS (continued)
(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 and purchase call and put
options. When the Fund writes an option, an amount equal to the
premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written. When a security is purchased or sold through an exercise of
an option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
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). Dividend income is recorded on the ex-
dividend dates. Dividends from foreign securities where the ex-
dividend date may have passed are subsequently recorded when the
Fund has determined the ex-dividend date. Interest income (including
amortization of discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on
the identified cost basis.
(g) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.
53
<PAGE> 120
(h) Dividends and distributions--Dividends from net investment
income, excluding transaction gains/losses, are declared daily and
paid monthly. Distributions of capital gains are recorded on the ex-
dividend dates. A portion of the net investment income paid by the
Fund during the fiscal year ended December 31, 1995 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
proceeds received.
(j) Reclassification--Generally accepted accounting principles
require that certain components of net assets be adjusted to reflect
permanent differences between financial and tax reporting.
Accordingly, current year's permanent book/tax differences of
$2,066,050 have been reclassified between accumulated net realized
capital losses and paid-in capital in excess of par. 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.
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, 1996, 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 $3,597 $29,956
Class D $4,675 $50,380
For the year ended December 31, 1996, MLPF&S received contingent
deferred sales charges of $1,827,822 and $5,909 relating to
transactions in Class B and Class C Shares, respectively.
In addition, MLPF&S received $52,478 in commissions on the execution
of portfolio security transactions for the Fund for the year ended
December 31, 1996.
During the year ended December 31, 1996, the Fund paid Merrill Lynch
Security Pricing Service, an affiliate of MLPF&S, $2,768 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.
54
<PAGE> 121
NOTES TO FINANCIAL STATEMENTS (concluded)
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended December 31, 1996 were $2,600,291,272 and
$3,012,592,084, respectively.
Net realized and unrealized gains (losses) as of December 31, 1996
were as follows:
Realized Unrealized
Gains (Losses) Gains (Losses)
Investments:
Long-term $ 33,532,224 $ 24,141,361
Short-term 11,710 1,923
Short sales (1,166,748) (468,978)
Options purchased 14,844 --
Options written 81,172 12,495
Financial futures contracts (4,622,772) (69,854)
-------------- --------------
Total investments 27,850,430 23,616,947
-------------- --------------
Currency transactions:
Options purchased (829,475) 127,226
Options written (3,043,560) --
Foreign currency transactions 9,782,977 (147,236)
Forward foreign exchange
contracts (6,448,490) (2,972,119)
-------------- --------------
Total currency transactions (538,548) (2,992,129)
-------------- --------------
Total $ 27,311,882 $ 20,624,818
============== ==============
Transactions in call options written for the year ended December 31,
1996 were as follows:
Nominal Value
Covered by Premiums
Call Options Written Written Options Received
Outstanding call options
written, beginning of year -- $ --
Options written 313,262,331 3,353,427
Options closed (274,573,750) (3,204,589)
Options expired (38,688,581) (148,838)
-------------- --------------
Outstanding call options
written, end of year -- $ --
============== ==============
Transactions in put options written for the year ended December 31,
1996 were as follows:
Nominal Value
Covered by Premiums
Put Options Written Written Options Received
Outstanding put options
written, beginning of year 40,000,000 $ 230,028
Options written 95,000,000 603,437
Options closed (45,000,000) (274,559)
Options exercised (80,000,000) (537,031)
-------------- --------------
Outstanding put options
written, end of year 10,000,000 $ 21,875
============== ==============
As of December 31, 1996, net unrealized appreciation for Federal
income tax purposes aggregated $23,661,144, of which $38,286,778
related to appreciated securities and $14,625,634 related to
depreciated securities. The aggregate cost of investments, net
premiums received for options written, at December 31, 1996 for
Federal income tax purposes was $1,186,835,226.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions
was $325,693,217 and $384,702,641 for the years ended December 31,
1996 and December 31, 1995, respectively.
Transactions in shares of capital for each class were as follows:
Class A Shares for the Year Dollar
Ended December 31, 1996 Shares Amount
Shares sold 387,712 $ 3,388,308
Shares issued to shareholders
in reinvestment of dividends 659,250 5,758,981
-------------- --------------
Total issued 1,046,962 9,147,289
Shares redeemed (7,346,115) (64,121,789)
-------------- --------------
Net decrease (6,299,153) $ (54,974,500)
============== ==============
55
<PAGE> 122
Class A Shares for the Year Ended Dollar
December 31, 1995 Shares Amount
Shares sold 1,983,935 $ 16,765,904
Shares issued to shareholders
in reinvestment of dividends
and distributions 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 B Shares for the Year Ended Dollar
December 31, 1996 Shares Amount
Shares sold 9,132,221 $ 79,678,830
Shares issued to shareholders
in reinvestment of dividends 3,887,024 33,921,915
-------------- --------------
Total issued 13,019,245 113,600,745
Automatic conversion of shares (505,096) (4,380,377)
Shares redeemed (44,956,418) (392,147,393)
-------------- --------------
Net decrease (32,442,269) $ (282,927,025)
============== ==============
Class B Shares for the Dollar
Year Ended December 31, 1995 Shares Amount
Shares sold 9,982,719 $ 81,289,015
Shares issued to shareholders
in reinvestment of dividends
and distributions 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 C Shares for the Dollar
Year Ended December 31, 1996 Shares Amount
Shares sold 854,651 $ 7,451,497
Shares issued to shareholders
in reinvestment of dividends 32,774 286,396
-------------- --------------
Total issued 887,425 7,737,893
Shares redeemed (362,658) (3,170,946)
-------------- --------------
Net increase 524,767 $ 4,566,947
============== ==============
Class C Shares for the Dollar
Year Ended December 31, 1995 Shares Amount
Shares sold 820,363 $ 6,919,696
Shares issued to shareholders
in reinvestment of dividends
and distributions 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 D Shares for the Dollar
Year Ended December 31, 1996 Shares Amount
Shares sold 790,966 $ 6,912,547
Automatic conversion of shares 504,658 4,380,377
Shares issued to shareholders
in reinvestment of dividends 52,423 458,594
-------------- --------------
Total issued 1,348,047 11,751,518
Shares redeemed (468,704) (4,110,157)
-------------- --------------
Net increase 879,343 $ 7,641,361
============== ==============
Class D Shares for the Dollar
Year Ended 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
and distributions 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
============== ==============
5. Capital Loss Carryforward:
At December 31, 1996, the Fund had a net capital loss carryforward
of approximately $51,122,000, of which $25,379,000 expires in 2002
and $25,743,000 expires in 2003. This amount will be available to
offset like amounts of any future taxable gains.
56
<PAGE> 123
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............. 10
Management and Advisory
Arrangements........................ 11
Purchase of Shares...................... 12
Initial Sales Charge
Alternatives -- Class A and Class D
Shares.............................. 13
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.................... 19
Deferred Sales Charge -- Class B and
Class C Shares...................... 19
Portfolio Transactions.................. 20
Determination of Net Asset Value........ 21
Shareholder Services.................... 22
Investment Account.................... 23
Automatic Investment Plans............ 23
Automatic Reinvestment of Dividends
and Capital Gains Distributions..... 24
Systematic Withdrawal Plans -- Class A
and Class D Shares.................. 24
Retirement Plans...................... 25
Exchange Privilege.................... 25
Dividends, Distributions and Taxes...... 27
Dividends and Distributions........... 27
Taxes................................. 28
Tax Treatment of Options, Futures and
Forward Foreign Exchange
Transactions........................ 30
Special Rules for Certain Foreign
Currency Transactions............... 30
Performance Data........................ 31
General Information..................... 34
Description of Shares................. 34
Computation of Offering Price Per
Share............................... 35
Independent Auditors.................. 35
Custodian............................. 35
Transfer Agent........................ 35
Legal Counsel......................... 36
Reports to Shareholders............... 36
Additional Information................ 36
Independent Auditors' Report............ 37
Financial Statements.................... 38
Code # 16103-0497
</TABLE>
[MERRILL LYNCH LOGO]
MERRILL LYNCH
WORLD INCOME
FUND, INC.
[MLYNCH COMPASS]
STATEMENT OF
ADDITIONAL
INFORMATION
April 28, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE> 124
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission File due to ASCII-incompatibility and
cross-references this material to the location of each occurrence in the text.
<TABLE>
<CAPTION>
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
<S> <C>
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull.
</TABLE>
<PAGE> 125
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements
Contained in Part A:
Financial Highlights for each of the years in the four-year period
ended December 31, 1996, for the period September 1, 1992 to
December 31, 1992, for each of the years 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, 1996.
Statement of Assets and Liabilities as of December 31, 1996.
Statement of Operations for the year ended December 31, 1996.
Statements of Changes in Net Assets for each of the years in the
two-year period ended December 31, 1996.
Financial Highlights for each of the years in the four-year period
ended December 31, 1996, for the four months ended December 31,
1992, and for the year ended August 31, 1992.
(b) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ---------------------------------------------------------------------------------
<S> <C> <C>
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.
-- Copies of instruments defining the rights of shareholders, including the relevant
portions of the
4 -- 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)
(c) -- Sub-Advisory Agreement between Fund Asset Management, L.P. and Merrill Lynch
Asset Management U.K. Limited.
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. (now Merrill Lynch
Financial Data Services, Inc.).(d)
10 -- Opinion of Brown & Wood LLP, counsel for Registrant.
11 -- Consent of Deloitte & Touche LLP, independent auditors for Registrant.
12 -- None.
13 -- None.
14 -- None.
</TABLE>
C-1
<PAGE> 126
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ---------------------------------------------------------------------------------
<S> <C> <C>
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)
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 Class A Shares.
(b) -- Financial Data Schedule for Class B Shares.
(c) -- Financial Data Schedule for Class C Shares.
(d) -- Financial Data Schedule for Class D Shares.
18 -- Merrill Lynch Select Pricing(SM) System Plan Pursuant to Rule 18f-3(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.
C-2
<PAGE> 127
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
TITLE OF CLASS MARCH 31, 1997
- ------------------------------------------------------------------------------- --------------
<S> <C>
Class A shares of Common Stock, par value $0.10 per share...................... 16,378
Class B shares of Common Stock, par value $0.10 per share...................... 54,811
Class C shares of Common Stock, par value $0.10 per share...................... 777
Class D shares of Common Stock, par value $0.10 per share...................... 1,125
</TABLE>
- ---------------
* The number of holders includes holders of record plus beneficial owners, whose
shares are held of record by Merrill Lynch, Pierce, Fenner & Smith
Incorporated.
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 1933 Act, 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
C-3
<PAGE> 128
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
Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch Healthcare
Fund, Inc., Merrill Lynch Intermediate Government Bond Fund, Merrill Lynch
International Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch
Middle East/Africa Fund, Inc., Merrill Lynch Municipal Series Trust, Merrill
Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill Lynch
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. 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" or the "Investment Adviser"), 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
Emerging Tigers Fund, Inc., Merrill Lynch Federal Securities Trust, Merrill
Lynch Funds for Institutions Series, Merrill Lynch Multi-State Limited Maturity
Municipal Series Trust, Merrill Lynch Multi-State Municipal Series Trust,
Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc.,
Merrill Lynch Special Value Fund, Inc., Merrill Lynch World Income Fund, Inc.
and The Municipal Fund Accumulation Program, Inc.; and the following closed-end
investment companies: Apex Municipal Fund, Inc., Corporate High Yield Fund,
Inc., Corporate High Yield Fund II, Inc., Income Opportunities Fund 1999, Inc.,
Income Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund,
Inc., MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc.,
MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest Florida Fund, MuniVest
Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest
Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc., MuniYield California
Fund, Inc., MuniYield California Insured Fund, Inc., MuniYield California
Insured Fund II, Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund,
MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield Michigan Fund,
Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc.,
MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc.,
MuniYield New York Insured Fund II, Inc., MuniYield Pennsylvania Fund, MuniYield
Quality Fund, Inc., MuniYield Quality Fund II, Inc., Senior High Income
Portfolio, Inc., 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 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 Merrill
Lynch Financial Data Services, Inc. ("MLFDS") is 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or employment
of a substantial nature in which each such person has been engaged since January
1, 1995, for its own account or in the capacity of director, officer, partner or
trustee.
C-4
<PAGE> 129
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 first two paragraphs of this item and Messrs. Giordano, Harvey, Kirstein,
and Monagle are directors or officers of one or more of such companies.
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------- ------------------------- ------------------------------------------
<S> <C> <C>
ML & Co.................. Limited Partner Financial Services Holding Company
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.
Terry K. Glenn........... Executive Vice President Executive Vice President of MLAM;
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
Michael J. Hennewinkel... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Philip L. Kirstein....... Senior Vice President, Senior Vice President, General Counsel and
General Counsel, and Secretary of MLAM; Senior Vice
Secretary President, General Counsel, Director and
Secretary of Princeton Services;
Director of MLFD
Ronald M. Kloss.......... Senior Vice President and Senior Vice President and Controller of
Controller MLAM; Senior Vice President and
Controller of Princeton Services
Stephen M. Miller........ Senior Vice President Executive Vice President of Princeton
Administrators, L.P.; Senior Vice
President of Princeton Services
Joseph T. Monagle, Jr.... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Michael L. Quinn......... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services;
Managing Director and First Vice
President of Merrill Lynch from 1989 to
1995.
Gerald M. Richard........ Senior Vice President and Senior Vice President and Treasurer of
Treasurer 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>
(b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as
sub-adviser for the following registered investment companies: Corporate High
Yield Fund, Inc., Corporate High Yield Fund II, Inc., Income Opportunities Fund
1999, Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Americas Income
Fund Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch Basic Value
Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Developing Capital
Markets, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch Emerging Tigers
Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc.,
Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond
C-5
<PAGE> 130
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 Value Fund, Inc.,
Merrill Lynch Healthcare Fund, Inc., Merrill Lynch International Equity Fund,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund,
Inc., Merrill Lynch Pacific Fund, Inc., Merrill Lynch Phoenix Fund, Inc.,
Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Special Value
Fund, Inc., Merrill Lynch Technology Fund, Inc., Merrill Lynch World Income
Fund, Inc. and Worldwide DollarVest Fund, Inc. The address of each of these
investment companies is P.O. Box 9011, Princeton, New Jersey 08543-9011. The
address of MLAM U.K. is Milton Gate, 1 Moor Lane, London EC2Y 9HA, England.
Set forth below is a list of each executive officer and director of MLAM
U.K. indicating each business, profession, vocation or employment of a
substantial nature in which each such person has been engaged since January 1,
1995, for his or her own account or in the capacity of director, officer,
partner or trustee. In addition, Messrs. Zeikel, Albert, Bascand, Glenn, Richard
and Yardley are officers of one or more of the registered investment companies
listed in the first two paragraphs of this Item 28.
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------- ---------------------------- --------------------------------------
<S> <C> <C>
Arthur Zeikel............ Director and Chairman President of MLAM and FAM; President
and Director of Princeton Services,
Director of MLFD; Executive Vice
President of ML & Co.
Alan J. Albert........... Senior Managing Director Vice President of the MLAM
Terry K. Glenn........... Director Executive Vice President of MLAM and
FAM; Executive Vice President and
Director of Princeton Services;
President and Director of MLFD;
Director of MLFDS; President of
Princeton Administrators, L.P.
Adrian Holmes............ Managing Director Director of Merrill Lynch Global Asset
Management
Andrew John Bascand...... Director Director of Merrill Lynch Global Asset
Management
Edward Gobora............ Director Director of Merrill Lynch Global Asset
Management
Richard Kilbride......... Director Managing Director of Merrill Lynch
Global Asset Management
Robert M. Ryan........... Director Vice President Institutional
Marketing, Debt and Equity Group,
Merrill Lynch Capital Markets from
1989 to 1994
Gerald M. Richard........ Senior Vice President Senior Vice President and Treasurer of
MLAM and FAM; Senior Vice President
and Treasurer of Princeton Services;
Vice President and Treasurer of MLFD
Stephen J. Yardley....... Director Director of Merrill Lynch Global Asset
Management
Carol Ann Langham........ Company Secretary None
Debra Anne Searle........ Assistant Company Secretary None
</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. The Corporate Fund Accumulation Program,
Inc.,
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<PAGE> 131
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.
(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 POSITION(S) AND OFFICES
NAME WITH MLFD WITH REGISTRANT
- ------------------------------ --------------------------------------- -------------------------
<S> <C> <C>
Terry K. Glenn................ President and Director Executive Vice President
Arthur Zeikel................. Director President and Director
Philip L. Kirstein............ Director None
William E. Aldrich............ Senior Vice President None
Robert W. Crook............... Senior Vice President None
Kevin P. Boman................ Vice President None
Michael Brady................. Vice President None
William M. Breen.............. Vice President None
Michael G. Clark.............. Vice President 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 of 1940, as amended, 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-7
<PAGE> 132
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, 1997.
Merrill Lynch World Income Fund, Inc.
(Registrant)
By: /s/ GERALD M. RICHARD
------------------------------------
(Gerald M. Richard, Treasurer)
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- -------------------------------- ---------------
<C> <S> <C>
ARTHUR ZEIKEL* President and Director
- --------------------------------------------- (Principal Executive Officer)
(Arthur Zeikel)
GERALD M. RICHARD* Treasurer (Principal Financial
- --------------------------------------------- and Accounting Officer)
(Gerald M. Richard)
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)
By:/s/ GERALD M. RICHARD
- ---------------------------------------------
(Gerald M. Richard, Attorney-in-Fact) April 25, 1997
</TABLE>
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<PAGE> 133
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------ -------------------------------------------------------------------------
<S> <C> <C> <C>
5(c) -- Sub-Advisory Agreement between Fund Asset Management, L.P. and Merrill
Lynch Asset Management U.K. Limited......................................
10 -- Opinion of Brown & Wood LLP, counsel for Registrant......................
11 -- Consent of Deloitte & Touche LLP, independent auditors for Registrant....
17(a) -- Financial Data Schedule for Class A Shares...............................
(b) -- Financial Data Schedule for Class B Shares...............................
(c) -- Financial Data Schedule for Class C Shares...............................
(d) -- Financial Data Schedule for Class D Shares...............................
</TABLE>
C-9
<PAGE> 1
SUB-ADVISORY AGREEMENT
AGREEMENT made as of the 28th day of April, 1997, by and between
FUND ASSET MANAGEMENT, L.P., a Delaware limited partnership (hereinafter
referred to as "FAM"), and MERRILL LYNCH ASSET MANAGEMENT U.K. LIMITED, a
corporation organized under the laws of England and Wales (hereinafter referred
to as "MLAM U.K.").
W I T N E S S E T H:
WHEREAS, MERRILL LYNCH WORLD INCOME FUND, INC. (the "Fund") is a
Maryland corporation engaged in business as a non-diversified, open-end
investment company registered under the Investment Company Act of 1940, as
amended (hereinafter referred to as the "Investment Company Act"); and
WHEREAS, FAM and MLAM U.K. are engaged principally in rendering
investment advisory services and are registered as investment advisers under the
Investment Advisers Act of 1940, as amended; and
WHEREAS, MLAM U.K. is a member of the Investment Management
Regulatory Organization, a self-regulating organization recognized under the
Financial Services Act of 1986 of the United Kingdom (hereinafter referred to as
"IMRO"), and the conduct of its investment business is regulated by IMRO; and
WHEREAS, FAM has entered into an investment advisory agreement (the
"Investment Advisory Agreement") dated June 14,
<PAGE> 2
1991, pursuant to which FAM provides management and investment and advisory
services to the Fund; and
WHEREAS, MLAM U.K. is willing to provide investment advisory
services to FAM in connection with the Fund's operations on the terms and
conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, MLAM U.K. and FAM hereby agree as follows:
ARTICLE I
Duties of MLAM U.K.
FAM hereby employs MLAM U.K. to act as investment adviser to FAM and
to furnish, or arrange for affiliates to furnish, the investment advisory
services described below, subject to the broad supervision of FAM and the Fund,
for the period and on the terms and conditions set forth in this Agreement. MLAM
U.K. hereby accepts such employment and agrees during such period, at its own
expense, to render, or arrange for the rendering of, such services and to assume
the obligations herein set forth for the compensation provided for herein. FAM
and its affiliates shall for all purposes herein be deemed a Professional
Investor as defined under the rules promulgated by IMRO (hereinafter referred to
as the "IMRO Rules"). MLAM U.K. and its affiliates shall for all purposes herein
be deemed to be an independent contractor and shall, unless otherwise expressly
provided or authorized, have no authority to act for or represent the Fund in
any way or otherwise be deemed an agent of the Fund.
2
<PAGE> 3
MLAM U.K. shall have the right to make unsolicited calls on FAM and
shall provide FAM with such investment research, advice and supervision as the
latter may from time to time consider necessary for the proper supervision of
the assets of the Fund; shall furnish continuously an investment program for the
Fund and shall make recommendations from time to time as to which securities
shall be purchased, sold or exchanged and what portion of the assets of the Fund
shall be held in the various securities in which the Fund invests, options,
futures, options on futures or cash; all of the foregoing subject always to the
restrictions of the Articles of Incorporation and By-Laws of the Fund, as they
may be amended and/or restated from time to time, the provisions of the
Investment Company Act and the statements relating to the Fund's investment
objective, investment policies and investment restrictions as the same are set
forth in the currently effective prospectus and statement of additional
information relating to the shares of the Fund under the Securities Act of 1933,
as amended (the "Prospectus" and "Statement of Additional Information",
respectively). MLAM U.K. shall make recommendations and effect transactions with
respect to foreign currency matters, including foreign exchange contracts,
foreign currency options, foreign currency futures and related options on
foreign currency futures and forward foreign currency transactions. MLAM U.K.
shall also make recommendations or take action as to the manner in which voting
rights, rights to consent
3
<PAGE> 4
to corporate action and any other rights pertaining to the portfolio securities
of the Fund shall be exercised.
MLAM U.K. will not hold money on behalf of FAM or the Fund, nor will
MLAM U.K. be the registered holder of the registered investments of FAM or the
Fund or be the custodian of documents or other evidence of title.
ARTICLE II
Allocation of Charges and Expenses
MLAM U.K. assumes and shall pay for maintaining the staff and
personnel necessary to perform its obligations under this Agreement and shall at
its own expense provide the office space, equipment and facilities which it is
obligated to provide under Article I hereof and shall pay all compensation of
officers of the Fund and all Directors of the Fund who are affiliated persons of
MLAM U.K.
ARTICLE III
Compensation of MLAM U.K.
For the services rendered, the facilities furnished and expenses
assumed by MLAM U.K., FAM shall pay to MLAM U.K. a fee in an amount to be
determined from time to time by FAM and MLAM U.K. but in no event in excess of
the amount that FAM actually receives for providing services to the Fund
pursuant to the Investment Advisory Agreement.
4
<PAGE> 5
ARTICLE IV
Limitation of Liability of MLAM U.K.
MLAM U.K. shall not be liable for any error of judgment or mistake
of law or for any loss arising out of any investment or for any act or omission
in the performance of sub-advisory services rendered with respect to the Fund,
except for willful misfeasance, bad faith or gross negligence in the performance
of its duties, or by reason of reckless disregard of its obligations and duties
hereunder. As used in this Article IV, MLAM U.K. shall include any affiliates of
MLAM U.K. performing services for FAM contemplated hereby and directors,
officers and employees of MLAM U.K. and such affiliates.
ARTICLE V
Activities of MLAM U.K.
The services of MLAM U.K. to the Fund are not to be deemed to be
exclusive, MLAM U.K. and any person controlled by or under common control with
MLAM U.K. (for purposes of this Article V referred to as "affiliates") being
free to render services to others. It is understood that directors, officers,
employees and shareholders of the Fund are or may become interested in MLAM U.K.
and its affiliates, as directors, officers, employees and shareholders or
otherwise and that directors, officers, employees and shareholders of MLAM U.K.
and its affiliates are or may become similarly interested in the Fund, and that
MLAM U.K. and directors, officers, employees, partners and shareholders of its
5
<PAGE> 6
affiliates may become interested in the Fund as shareholders or otherwise.
ARTICLE VI
MLAM U.K. Statements Pursuant to IMRO Rules
Any complaints concerning MLAM U.K. should be in writing addressed
to the attention of the Managing Director of MLAM U.K. FAM has the right to
obtain from MLAM U.K. a copy of the IMRO complaints procedure and to approach
IMRO directly.
MLAM U.K. may make recommendations, subject to the investment
restrictions referred to in Article I herein, regarding Investments Not Readily
Realisable (as that term is used in the IMRO Rules) or investments denominated
in a currency other than British pound sterling. There can be no certainty that
market makers will be prepared to deal in unlisted or thinly traded securities
and an accurate valuation may be hard to obtain. The value of investments
recommended by MLAM U.K. may be subject to exchange rate fluctuations which may
have favorable or unfavorable effects on investments.
MLAM U.K. may make recommendations, subject to the investment
restrictions referred to in Article I herein, regarding options, futures or
contracts for differences. Markets can be highly volatile and such investments
carry a high degree of risk of loss exceeding the original investment and any
margin on deposit.
6
<PAGE> 7
ARTICLE VII
Duration and Termination of this Agreement
This Agreement shall become effective as of the date first above
written and shall remain in force until the date of termination of the
Investment Advisory Agreement (but not later than two years after the date
hereof) and thereafter, but only so long as such continuance is specifically
approved at least annually by (i) the Directors of the Fund or by the vote of a
majority of the outstanding voting securities of the Fund and (ii) a majority of
those Directors who are not parties to this Agreement or interested persons of
any such party cast in person at a meeting called for the purpose of voting on
such approval.
This Agreement may be terminated at any time, without the payment of
any penalty, by FAM or by vote of a majority of the outstanding voting
securities of the Fund, or by MLAM U.K., on sixty days' written notice to the
other party. This Agreement shall automatically terminate in the event of its
assignment or in the event of the termination of the Investment Advisory
Agreement. Any termination shall be without prejudice to the completion of
transactions already initiated.
ARTICLE VIII
Amendments of this Agreement
This Agreement may be amended by the parties only if such amendment
is specifically approved by (i) the Directors of the Fund or by the vote of a
majority of outstanding voting securities of the Fund and (ii) a majority of
those Directors who
7
<PAGE> 8
are not parties to this Agreement or interested persons of any such party cast
in person at a meeting called for the purpose of voting on such approval.
ARTICLE IX
Definitions of Certain Terms
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act and the rules and regulations thereunder, subject, however, to such
exemptions as may be granted by the Securities and Exchange Commission under
said Act.
ARTICLE X
Governing Law
This Agreement shall be construed in accordance with the laws of the
State of New York and the applicable provisions of the Investment Company Act.
To the extent that the applicable laws of the State of New York, or any of the
provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
8
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the date first above written.
FUND ASSET MANAGEMENT, L.P.
By /s/ Arthur Zeikel
-------------------------------------------
Title:
MERRILL LYNCH ASSET MANAGEMENT U.K. LIMITED
By /s/ Arthur Zeikel
-------------------------------------------
Title:
9
<PAGE> 1
BROWN & WOOD LLP
ONE WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
TELEPHONE: (212) 839-5300
FACSIMILE: (212) 839-5599
April 28, 1997
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> 2
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.
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 LLP
2
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch World Income Fund, Inc.:
We consent to the use in Post-Effective Amendment No. 7 to Registration
Statement No. 33-42681 of our report dated February 7, 1997 appearing in the
Statement of Additional Information, which is 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, 1997
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