<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 31, 1998
SECURITIES ACT FILE NO. 33-42681
INVESTMENT COMPANY ACT FILE NO. 811-5603
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [_]
[X]
POST-EFFECTIVE AMENDMENT NO. 8
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
[X]
AMENDMENT NO. 9
(Check appropriate box or boxes)
----------------
MERRILL LYNCH WORLD INCOME FUND, INC.
(Exact name of registrant as specified in charter)
800 SCUDDERS MILL ROAD 08536
PLAINSBORO, NEW JERSEY (Zip Code)
(Address of Principal Executive
Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH WORLD INCOME FUND, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(Name and address of agent for service)
----------------
COPIES TO:
COUNSEL FOR THE FUND: PHILIP L. KIRSTEIN, ESQ.
BROWN & WOOD 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.
----------------
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
[_]on (date) pursuant to paragraph (b) (a)(1)
[_]75 days after filing pursuant to
paragraph (a)(2)
[_]60 days after filing pursuant to paragraph (a)(1)
[_]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.
TITLE OF SECURITIES BEING REGISTERED:
Shares of Common Stock, par value $0.10 per share
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH WORLD INCOME FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A
ITEM NO. LOCATION
-------- --------
<C> <S> <C>
PART A
Item 1. Cover Page.................. Cover Page
Item 2. Synopsis.................... Fee Table
Item 3. Condensed Financial Financial Highlights
Information................
Item 4. General Description of Investment Objective and Policies;
Registrant................. Additional Information
Item 5. Management of the Fund...... Fee Table; Management of the Fund;
Inside Back Cover Page
Item 5A. Management's Discussion of
Fund Performance........... Not Applicable
Item 6. Capital Stock and Other Cover Page; Additional Information
Securities.................
Item 7. Purchase of Securities Being Cover Page; Fee Table; Merrill Lynch
Offered.................... Select PricingSM System; Purchase of
Shares; Shareholder Services;
Additional Information; Inside Back
Cover Page
Item 8. Redemption or Repurchase.... Fee Table; Merrill Lynch Select
PricingSM 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 General Information
History....................
Item 13. Investment Objective and Investment Objective and Policies
Policies...................
Item 14. Management of the Fund...... Management of the Fund
Item 15. Control Persons and
Principal Holders of Management of the Fund; Additional
Securities................. Information
Item 16. Investment Advisory and Management of the Fund; Purchase of
Other Services............. Shares; General Information
Item 17. Brokerage Allocation and Portfolio Transactions
Other Practices............
Item 18. Capital Stock and Other General Information
Securities.................
Item 19. Purchase, Redemption and
Pricing of Securities Being Purchase of Shares; Redemption of
Offered.................... Shares; Determination of Net Asset
Value; Shareholder Services
Item 20. Tax Status.................. Dividends, Distributions and Taxes
Item 21. Underwriters................ Purchase of Shares
Item 22. Calculation of Performance Performance Data
Data.......................
Item 23. Financial Statements........ Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
PROSPECTUS
MARCH 31, 1998
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 12. There can be no assurance that
the investment objective of the Fund will be realized.
----------------
Investment on an international basis and in lower rated or unrated
securities (commonly referred to as "junk bonds") involves special
considerations and certain risks, including risks of untimely payment of
interest and 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 PricingSM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select PricingSM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances. See
"Merrill Lynch Select PricingSM System" on page 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 participants in
certain fee-based programs, the minimum initial purchase is $500 and the
minimum subsequent purchase is $50 and 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 $5.35) for
confirming purchases and repurchases. Purchases and redemptions made directly
through Merrill Lynch Financial Data Services, Inc. (the "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 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 March 31, 1998 (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 Commission maintains a Web
site (http://www.sec.gov) that contains the Statement of Additional
Information, material incorporated by reference and other information
regarding the Fund. The Statement of Additional Information is hereby
incorporated by reference into this Prospectus.
----------------
FUND ASSET MANAGEMENT -- INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C CLASS D
---------- ---------- ------- -------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANS-
ACTION 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 4.0% during the first
lower)........... None(d) 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 OPERAT-
ING EXPENSES (AS A
PERCENTAGE OF AV-
ERAGE NET ASSETS):
Investment Advi-
sory Fees(g)..... 0.60% 0.60% 0.60% 0.60%
12b-1 Fees(h):
Account Mainte-
nance 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:
Shareholder Ser-
vicing Costs(i).. 0.09% 0.11% 0.11% 0.09%
Other............. 0.07% 0.07% 0.07% 0.07%
----- ----- ----- -----
Total Other Ex- 0.16% 0.18% 0.18% 0.16%
penses.......... ----- ----- ----- -----
Total Fund Operat- 0.76% 1.53% 1.58% 1.01%
ing Expenses..... ===== ===== ===== =====
</TABLE>
- --------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and participants in certain
fee-based programs. See "Purchase of Shares--Initial Sales Charge
Alternatives--Class A and Class D Shares"--page 29 and "Shareholder
Services--Fee-Based Programs"--page 40.
(b) Class B shares convert to Class D shares automatically approximately ten
years after initial purchase. See "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares"--page 31.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of
Class A shares by certain retirement plans and participants 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 29.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more 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 40.
(e) The CDSC may be modified in connection with certain fee-based programs.
See "Shareholder Services--Fee-Based Programs"--page 40.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"--page 40.
(g) See "Management of the Fund--Management and Advisory Arrangements"--page
25.
(h) See "Purchase of Shares--Distribution Plans"--page 34.
(i) See "Management of the Fund--Transfer Agency Services"--page 26.
2
<PAGE>
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES
PAID FOR THE PERIOD OF:
-------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses
on a $1,000 investment including the maximum
$40 initial sales charge (Class A and Class D
shares only) and assuming (1) the Total Fund
Operating Expenses for each class set forth
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 $81 $130
Class B..................................... $ 56 $68 $83 $182
Class C..................................... $ 26 $50 $86 $188
Class D..................................... $ 50 $71 $94 $159
An investor would pay the following expenses
on the same $1,000 investment assuming no re-
demption at the end of the period:
Class A..................................... $ 47 $63 $81 $130
Class B..................................... $ 16 $48 $83 $182
Class C..................................... $ 16 $50 $86 $188
Class D..................................... $ 50 $71 $94 $159
</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 an 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 $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 advised by MLAM or
FAM that utilize the Merrill Lynch Select Pricing SM System are referred to
herein as "MLAM-advised mutual funds."
3
<PAGE>
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 CDSCs 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 or her particular circumstances. More
detailed information as to each class of shares is set forth under "Purchase
of Shares."
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 4.00% initial No No No
sales charge(2)(3)
- -----------------------------------------------------------------------------------------
B CDSC for a period of four 0.25% 0.50% B shares convert to D
years, at a rate of 4.0% during shares automatically
the first year, decreasing 1.0% after approximately
annually to 0.0%(4) ten years(5)
- -----------------------------------------------------------------------------------------
C 1.0% CDSC for one year(6) 0.25% 0.55% No
- -----------------------------------------------------------------------------------------
D Maximum 4.00% initial 0.25% No No
sales charge(3)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs are imposed if the redemption occurs within
the applicable CDSC time period. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed.
(Footnotes continue on next page)
4
<PAGE>
(2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors."
(3) Reduced for purchases of $25,000 or more, and waived for purchases of
Class A shares by certain retirement plans and participants 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 and fee-based programs
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 of 4.00% 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 that 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 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
5
<PAGE>
at least once a month on the basis of the relative net asset values of
the shares of the two classes on the conversion date, without the
imposition of any sales load, fee or other charge. Conversion of Class
B shares to Class D shares will not be deemed a purchase or sale of the
shares for Federal income tax purposes. Shares purchased through
reinvestment of dividends on Class B shares also will convert
automatically to Class D shares. The conversion period for dividend
reinvestment shares and the conversion and holding periods for certain
retirement plans, is modified as described under "Purchase of Shares--
Deferred Sales Charge Alternatives--Class B and Class C Shares--
Conversion of Class B Shares to Class D Shares."
Class C: Class C shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.55% of the Fund's average net
assets attributable to Class C shares. Class C shares are also
subject to a 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 by retirement plans and
participants 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
PricingSM System that the investor believes is most beneficial under his or
her 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,
6
<PAGE>
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 accumulation that may qualify the
investor for reduced initial sales charges on new initial sales charge
purchases. In addition, the ongoing Class B and Class C account maintenance
and distribution fees will cause Class B and Class C shares to have higher
expense ratios, pay lower dividends and have lower total returns than the
initial sales charge shares. The ongoing Class D account maintenance fees will
cause Class D shares to have a higher expense ratio, pay lower dividends and
have a lower total return than Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the
benefit of putting all of the investor's dollars to work from the time the
investment is made. The deferred sales charge alternatives may be particularly
appealing to investors who do not qualify for a reduction in initial sales
charges. Both Class B and Class C shares are subject to ongoing account
maintenance fees and distribution fees; however, the ongoing account
maintenance and distribution fees potentially may be offset to the extent any
return is realized on the additional funds initially invested in Class B or
Class C shares. In addition, Class B shares will be converted into Class D
shares of the Fund after a conversion period of approximately ten years, and
thereafter investors will be subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend
to hold their shares for an extended period of time. Investors in Class B
shares should take into account whether they intend to redeem their shares
within the CDSC period and, if not, whether they intend to remain invested
until the end of the conversion period and thereby take advantage of the
reduction in ongoing fees resulting from the conversion into Class D shares.
Other investors, however, may elect to purchase Class C shares if they
determine that it is advantageous to have all their assets invested initially
and they are uncertain as to the length of time they intend to hold their
assets in MLAM-advised mutual funds. Although Class C shareholders are subject
to a shorter CDSC period at a lower rate, they forego the Class B conversion
feature, making their investment subject to account maintenance and
distribution fees for an indefinite period of time. In addition, while both
Class B and Class C distribution fees are subject to the limitations on asset-
based sales charges imposed by the NASD, the Class B distribution fees are
further limited under a voluntary waiver of asset-based sales charges. See
"Purchase of Shares--Limitations on the Payment of Deferred Sales Charges."
7
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in conjunction
with the annual audits of the financial statements of the Fund by Deloitte &
Touche LLP, independent auditors. Financial statements for the fiscal year
ended December 31, 1997 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
FOUR
FOR THE YEAR ENDED MONTHS FOR THE YEAR ENDED
DECEMBER 31, ENDED AUGUST 31,
------------------------------------------------- DECEMBER 31, ----------------------------
1997 1996 1995 1994# 1993 1992 1992 1991* 1990*
-------- -------- -------- -------- -------- ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE)
IN NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of peri-
od................. $ 8.94 $ 8.69 $ 8.20 $ 9.28 $ 8.85 $ 9.34 $ 9.07 $ 9.48 $ 9.32
-------- -------- -------- -------- -------- -------- -------- -------- --------
Investment income--
net................ .64 .67 .72 .72 .75 .29 .99 1.12 1.23
Realized and
unrealized gain
(loss) on invest-
ments and foreign
currency transac-
tions--net......... (.11) .25 .49 (1.09) .46 (.41) .40 (.16) .15
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total from
investment
operations......... .53 .92 1.21 (.37) 1.21 (.12) 1.39 .96 1.38
-------- -------- -------- -------- -------- -------- -------- -------- --------
Less dividends and
distributions:
Investment
income--net....... (.61) (.67) (.56) (.45) (.58) (.35) (1.12) (1.37) (1.17)
Realized gain on
investments--net.. -- -- -- -- (.03) (.02) -- -- (.05)
Return of
capital--net...... (.03) -- (.16) (.26) (.17) -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total dividends and
distributions...... (.64) (.67) (.72) (.71) (.78) (.37) (1.12) (1.37) (1.22)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value,
end of period...... $ 8.83 $ 8.94 $ 8.69 $ 8.20 $ 9.28 $ 8.85 $ 9.34 $ 9.07 $ 9.48
======== ======== ======== ======== ======== ======== ======== ======== ========
TOTAL INVESTMENT
RETURN:++
Based on net asset
value per share.... 6.15% 11.09% 15.35% (4.05)% 14.12% (1.26)%## 16.09% 11.50% 16.48%
======== ======== ======== ======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE
NET ASSETS:
Expenses........... .76% .75% .80% .77% .78% .76%** .88% .85% .86%
======== ======== ======== ======== ======== ======== ======== ======== ========
Investment income--
net................ 7.21% 7.71% 8.54% 8.17% 8.22% 8.09%** 11.16% 12.38% 16.27%
======== ======== ======== ======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of
period (in thou-
sands)............. $161,347 $212,085 $260,806 $311,181 $467,625 $455,672 $526,631 $292,709 $299,700
======== ======== ======== ======== ======== ======== ======== ======== ========
Portfolio turnover. 217.60% 208.53% 116.00% 115.95% 182.88% 68.42% 76.18% 63.83% 99.86%
======== ======== ======== ======== ======== ======== ======== ======== ========
<CAPTION>
FOR THE
PERIOD
SEPTEMBER 29,
1988+ TO
AUGUST 31,
1989*
--------------
<S> <C>
INCREASE (DECREASE)
IN NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of peri-
od................. $ 9.35
--------------
Investment income--
net................ 1.03
Realized and
unrealized gain
(loss) on invest-
ments and foreign
currency transac-
tions--net......... (.12)
--------------
Total from
investment
operations......... .91
--------------
Less dividends and
distributions:
Investment
income--net....... (.94)
Realized gain on
investments--net.. --
Return of
capital--net...... --
--------------
Total dividends and
distributions...... (.94)
--------------
Net asset value,
end of period...... $ 9.32
==============
TOTAL INVESTMENT
RETURN:++
Based on net asset
value per share.... 9.86%##
==============
RATIOS TO AVERAGE
NET ASSETS:
Expenses........... .81%**
==============
Investment income--
net................ 10.87%**
==============
SUPPLEMENTAL DATA:
Net assets, end of
period (in thou-
sands)............. $296,247
==============
Portfolio turnover. 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.
# Based on average shares outstanding.
## Aggregate total investment return.
8
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------------------------------------------------
FOR THE
FOR THE PERIOD
FOUR NOVEMBER 18,
FOR THE YEAR ENDED DECEMBER 31, MONTHS ENDED 1991+ TO
------------------------------------------------------- DECEMBER 31, AUGUST 31,
1997 1996 1995 1994# 1993 1992 1992
-------- -------- ---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $ 8.94 $ 8.69 $ 8.19 $ 9.28 $ 8.85 $ 9.33 $ 9.26
-------- -------- ---------- ---------- ---------- ---------- ----------
Investment income--net.. .57 .61 .65 .65 .70 .27 .77
Realized and unrealized
gain (loss) on
investments and foreign
currency transactions--
net..................... (.11) .25 .50 (1.10) .44 (.40) --
-------- -------- ---------- ---------- ---------- ---------- ----------
Total from investment
operations.............. .46 .86 1.15 (.45) 1.14 (.13) .77
-------- -------- ---------- ---------- ---------- ---------- ----------
Less dividends and
distributions:
Investment income--net. (.54) (.61) (.51) (.40) (.53) (.33) (.70)
Realized gain on
investments--net....... -- -- -- -- (.03) (.02) --
Return of capital--net. (.03) -- (.14) (.24) (.15) -- --
-------- -------- ---------- ---------- ---------- ---------- ----------
Total dividends and
distributions........... (.57) (.61) (.65) (.64) (.71) (.35) (.70)
-------- -------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of
period.................. $ 8.83 $ 8.94 $ 8.69 $ 8.19 $ 9.28 $ 8.85 $ 9.33
======== ======== ========== ========== ========== ========== ==========
TOTAL INVESTMENT
RETURN:++
Based on net asset value
per share............... 5.34% 10.25% 14.61% (4.90)% 13.27% (1.42)%## 8.61%##
======== ======== ========== ========== ========== ========== ==========
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ 1.53% 1.52% 1.56% 1.54% 1.55% 1.53%* 1.63%*
======== ======== ========== ========== ========== ========== ==========
Investment income--net.. 6.43% 6.94% 7.77% 7.41% 7.42% 7.08%* 8.02%*
======== ======== ========== ========== ========== ========== ==========
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands)... $641,242 $988,209 $1,241,896 $1,490,507 $2,106,120 $1,582,270 $1,514,406
======== ======== ========== ========== ========== ========== ==========
Portfolio turnover...... 217.60% 208.53% 116.00% 115.95% 182.88% 68.42% 76.18%
======== ======== ========== ========== ========== ========== ==========
</TABLE>
- -----
* Annualized.
+ Commencement of operations.
++ Total investment returns exclude the effects of sales loads.
# Based on average shares outstanding.
## Aggregate total investment return.
9
<PAGE>
FINANCIAL HIGHLIGHTS (CONCLUDED)
<TABLE>
<CAPTION>
CLASS C CLASS D
-------------------------------------- -------------------------------------
FOR THE FOR THE
PERIOD PERIOD
FOR THE YEAR ENDED OCTOBER 21, FOR THE YEAR ENDED OCTOBER 21,
DECEMBER 31, 1994+ TO DECEMBER 31, 1994+ TO
------------------------ DECEMBER 31, ----------------------- DECEMBER 31,
1997 1996 1995 1994# 1997 1996 1995 1994#
------- ------- ------ ------------ ------- ------ ------ ------------
<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..... $ 8.93 $ 8.68 $ 8.19 $ 8.42 $ 8.94 $ 8.69 $ 8.20 $ 8.43
------- ------- ------ ------ ------- ------ ------ ------
Investment income--net.. .56 .60 .64 .10 .61 .65 .70 .11
Realized and unrealized
gain (loss) on
investments and foreign
currency transactions--
net..................... (.11) .25 .49 (.20) (.11) .25 .49 (.20)
------- ------- ------ ------ ------- ------ ------ ------
Total from investment
operations.............. .45 .85 1.13 (.10) .50 .90 1.19 (.09)
------- ------- ------ ------ ------- ------ ------ ------
Less dividends and
distributions:
Investment income--net. (.53) (.60) (.50) (.08) (.58) (.65) (.55) (.09)
Return of capital--net. (.03) -- (.14) (.05) (.03) -- (.15) (.05)
------- ------- ------ ------ ------- ------ ------ ------
Total dividends and
distributions........... (.56) (.60) (.64) (.13) (.61) (.65) (.70) (.14)
------- ------- ------ ------ ------- ------ ------ ------
Net asset value, end of
period.................. $ 8.82 $ 8.93 $ 8.68 $ 8.19 $ 8.83 $ 8.94 $ 8.69 $ 8.20
======= ======= ====== ====== ======= ====== ====== ======
TOTAL INVESTMENT
RETURN:++
Based on net asset value
per share............... 5.28% 10.19% 14.38% (1.20)%## 5.88% 10.82% 15.06% (1.09)%##
======= ======= ====== ====== ======= ====== ====== ======
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ 1.58% 1.56% 1.65% 1.64%* 1.01% .99% 1.04% 1.04%*
======= ======= ====== ====== ======= ====== ====== ======
Investment income--net.. 6.41% 6.85% 7.65% 8.00%* 6.97% 7.42% 8.23% 8.60%*
======= ======= ====== ====== ======= ====== ====== ======
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands)... $11,738 $10,251 $5,406 $1,204 $15,072 14,369 $6,320 $1,410
======= ======= ====== ====== ======= ====== ====== ======
Portfolio turnover...... 217.60% 208.53% 116.00% 115.95% 217.60% 208.53% 116.00% 115.95%
======= ======= ====== ====== ======= ====== ====== ======
</TABLE>
- -----
* Annualized.
+ Commencement of operations.
++ Total investment returns exclude the effects of sales loads.
# Based on average shares outstanding.
## Aggregate total investment return.
10
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investment in the Fund involves special considerations including the fact
that the Fund makes investments on an international basis and in high
yield/high risk, lower rated or unrated securities.
International Investing. Investments in securities of foreign entities and
securities denominated in foreign currencies involve risks not typically
involved in domestic investment including fluctuations in foreign exchange
rates, future foreign political and economic developments, and the possible
imposition of exchange controls or other foreign or United States governmental
laws or restrictions applicable to such investments. Since the Fund may invest
in securities denominated or quoted in currencies other than the United States
dollar, changes in foreign currency exchange rates may affect the value of
investments in the portfolio and the unrealized appreciation or depreciation
of investments insofar as United States investors are concerned. Changes in
foreign currency exchange rates relative to the U.S. dollar will affect the
U.S. dollar value of the Fund's assets denominated in that currency and the
Fund's yield on such assets. Foreign currency exchange rates are determined by
forces of supply and demand on the foreign exchange markets. These forces are,
in turn, affected by the international balance of payments and other economic
and financial conditions, government intervention, speculation, and other
factors. Moreover, individual foreign economies may differ favorably or
unfavorably from the United States economy in such respects as growth of gross
national product, rate of inflation, capital reinvestment, resources, self-
sufficiency and balance of payments position.
With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, economic, political or social
instability or diplomatic developments 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.
11
<PAGE>
The operating expense ratio of the Fund can be expected to be higher than
that of an investment company investing exclusively in United States
securities since the expenses of the Fund, such as custodial costs, are
higher.
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
("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. 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 "Portfolio Transactions--Portfolio Turnover"
and "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-
12
<PAGE>
national currency units. The Fund may invest in United States and foreign
government and corporate fixed-income securities, including high yield/high
risk, lower rated and unrated securities. The Fund will, under normal
conditions, invest at least 90% of its total assets in such fixed-income
securities and may invest up to 100% of its total assets in lower rated, high
yield/high risk securities. In pursuing its investment objective, the Fund
will allocate its investments among different types of fixed income securities
denominated in various currencies based upon the Investment Adviser's analysis
of the yield, maturity and currency considerations affecting such securities.
The investment objective set forth in the first sentence of this paragraph is
a fundamental policy of the Fund 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,
13
<PAGE>
including government guaranteed mortgage-related or asset-backed securities,
some of which are backed by the full faith and credit of the U.S. Treasury
(e.g., direct pass-through certificates of the Government National Mortgage
Association), some of which are supported by the right of the issuer to borrow
from the U.S. Government (e.g., obligations of Federal Home Loan Banks) and
some of which are backed only by the credit of the issuer itself (e.g.,
obligations of the Student Loan Marketing Association).
In the case of mortgage-related securities, prepayments occur when the
holder of an individual mortgage prepays the remaining principal before the
mortgage's scheduled maturity date. As a result of the pass-through of
prepayments of principal on the underlying securities, a mortgage-related
security is often subject to more rapid prepayment of principal than its
stated maturity would indicate. Because the prepayment characteristics of the
underlying mortgages vary, it is not possible to predict accurately the
realized yield or average life of a particular issue of the mortgage-related
securities. (Asset-backed securities, other than those backed by home equity
loans, generally do not prepay in response to changes in interest rates but
may be subject to prepayment in response to other factors.) Prepayment rates
are important because of their effect on the yield and price of the
securities. Accelerated prepayments adversely impact yields for securities
purchased at a premium (i.e., a price in excess of principal amount) and may
involve additional risk of loss of principal because the premium may not have
been fully amortized at the time the obligation is repaid. The opposite is
true for securities purchased at a discount. The Fund may purchase mortgage-
related (and asset-backed) securities at a premium or at a discount.
The obligations of foreign governmental entities have various kinds of
government support and include obligations issued or guaranteed by foreign
governmental entities with taxing power. These obligations may or may not be
supported by the full faith and credit of a foreign government. The Fund will
invest in foreign government securities of issuers considered stable by the
Fund's Investment Adviser. The Investment Adviser does not believe that the
credit risk inherent in the obligations of stable foreign governments is
significantly greater than that of U.S. Government securities.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development 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.
14
<PAGE>
No Rating Criteria for Debt Securities. The Fund has established no rating
criteria for the fixed income securities in which it may invest, and a
substantial portion of the securities in the Fund's portfolio may be
securities rated in the medium to lower rating categories of nationally
recognized statistical rating organizations such as Moody's, Standard & Poor's
or IBCA, or in unrated securities of comparable quality. See the Appendix to
this Prospectus for a description of these rating categories. High yield/high
risk securities are predominantly speculative with respect to the capacity to
pay interest and repay principal in accordance with the terms of the security
and generally involve a greater volatility of price than securities in higher
rating categories. In purchasing such securities, the Fund will rely on the
Investment Adviser's judgment, analysis and experience in evaluating the
creditworthiness of an issuer of such securities. The Investment Adviser will
take into consideration, among other things, the issuer's financial resources,
its sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters. The Fund does not
intend to purchase securities that are in default.
The market values of high yield/high risk securities tend to reflect
individual issuer developments to a greater extent than do higher rated
securities, which react primarily to fluctuations in the general level of
interest rates. Issuers of high yield/high risk securities may be highly
leveraged and may not have available to them more traditional methods of
financing. Therefore, the risk associated with acquiring the securities of
such issuers generally is greater than is the case with higher rated
securities. For example, during an economic downturn or a sustained period of
rising interest rates, issuers of high yield/high risk securities may be more
likely to experience financial stress, especially if such issuers are highly
leveraged. During periods of economic recession, such issuers may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service its debt obligations also may be adversely affected by
specific issuer developments or the issuer's inability to meet specific
projected business forecasts or the unavailability of additional financing.
The risk of loss due to default by the issuer is significantly greater for the
holders of high yield/high risk securities because such securities may be
unsecured and may be subordinated to other creditors of the issuer.
High yield/high risk securities may have call or redemption features 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.
15
<PAGE>
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high
yield/high risk securities, particularly in a thinly traded market. Factors
adversely affecting the market value of high yield/high risk securities are
likely to affect adversely the Fund's net asset value. In addition, the Fund
may incur additional expenses to the extent it is required to seek recovery
upon a default on a portfolio holding or participate in the restructuring of
the obligation.
The table below shows the average monthly dollar-weighted market value, by
Standard & Poor's rating category, of all bonds held by the Fund during the
fiscal year ended December 31, 1997:
<TABLE>
<CAPTION>
% NET
RATING ASSETS
------ ------
<S> <C>
A................................................................. 4.74%
A+................................................................ 2.19%
A-................................................................ 0.50%
A-1............................................................... 3.95%
A-1+.............................................................. 0.40%
A-2............................................................... 0.07%
AAA............................................................... 22.06%
AA................................................................ 0.14%
B................................................................. 16.76%
B+................................................................ 2.97%
BB................................................................ 27.12%
BB+............................................................... 0.36%
BB-............................................................... 2.30%
BBB............................................................... 3.65%
CCC............................................................... 0.75%
CC................................................................ 0.31%
Not Rated*........................................................ 10.99%
-----
Total........................................................... 99.26%
=====
</TABLE>
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* Bonds that are not rated by Standard & Poor's. Such securities may be rated
by nationally recognized statistical rating organizations other than
Standard & Poor's or may not be rated by any such organizations. With
respect to the percentage of the Fund's assets invested in unrated
securities, the Fund's Investment Adviser believes that 2.10% are of
comparable quality to obligations rated A, 1.81% are of comparable quality
to obligations rated AAA, 1.77% are of comparable quality to obligations
rated B, 1.81% are of comparable quality to obligations rated B+, 3.27% are
of comparable quality to obligations rated BB, 0.03% are of comparable
quality to obligations rated BBB, 0.06% are of comparable quality to
obligations rated CCC, 0.01% are of comparable quality to obligations rated
D and 0.13% are of other quality. 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 if it were
to rate the securities.
For a description of the above referenced ratings, see the appendix to this
Prospectus. 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,
16
<PAGE>
options on such futures and forward foreign currency transactions. The Fund
may enter into such transactions only in connection with its hedging
strategies. While the Fund's use of hedging strategies is intended to reduce
the volatility of the net asset value of Fund shares, the Fund's net asset
value will fluctuate. When the Fund engages in transactions denominated in
foreign currencies, it will be subject to the risks of adverse changes in the
exchange rates between such foreign currencies and the U.S. dollar, the
currency used to value the Fund's assets. There can be no assurance that the
Fund's hedging transactions will be effective. Furthermore, the Fund may only
engage in hedging activities from time to time and may not necessarily be
engaging in hedging activities when movements in interest rates or currency
exchange rates occur. Reference is made to the Statement of Additional
Information for further information concerning these strategies.
Although certain risks are involved in options and futures transactions (as
discussed below in "Risk Factors in Options, Futures and Currency
Transactions"), the Investment Adviser believes that, because the Fund will
only engage in these transactions for hedging purposes, the options and
futures portfolio strategies of the Fund will not subject the Fund to the
risks frequently associated with the speculative use of options and futures
transactions. Tax requirements may limit the Fund's ability to engage in the
hedging transactions and strategies described below. See "Taxes."
The following is a description of the hedging instruments the Fund may
utilize with respect to interest rate and currency risks.
Hedging Interest Rate Risks. The Fund may purchase and write (i.e., sell)
call options and put options on securities and engage in transactions in
financial futures and related options, as described below.
The Fund may write covered call options with respect to securities it owns
and enter into closing purchase transactions with respect to such options. A
covered call option provides the holder of the option with the right to buy
the underlying security covered by the option at the stated exercise price
until the option expires. A covered call option is an option where the Fund,
in return for a premium, gives another party a right to buy particular
securities held by the Fund at a specified price for a certain period of time.
In return for the premium income realized from the sale of the option, the
Fund gives up the opportunity to profit from a price increase in the
underlying security above the option exercise price while the option is in
effect. In addition, the Fund's ability to sell the underlying security will
be limited until the option is closed or expires. A closing purchase
transaction cancels out the Fund's position as the writer of an option by
means of an offsetting purchase of an identical option prior to the expiration
of the option it has written. The Fund also may purchase call options on
securities held in its portfolio on which it has written call options or on
securities which it intends to purchase. There is no percentage limitation
with respect to portfolio securities on which the Fund may write call options.
The Fund may purchase put options on portfolio securities. In return for
payment of a premium, the purchase of a put option gives the holder thereof
the right to sell the security underlying the option to another party at a
specified price until the put option is closed out, expires or is exercised.
The Fund will purchase put options to seek to reduce the risk of a decline in
value of the underlying security owned by the Fund. The Fund does not intend
to purchase uncovered puts in excess of 10% of its total assets. The total
return on the security 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
17
<PAGE>
deposited and maintained with its custodian cash or liquid securities with a
value equal to or greater than the exercise price of the underlying
securities. By writing a put, the Fund will be obligated to purchase the
underlying security at a price that may be higher than the market value of
that security at the time of exercise for as long as the option is
outstanding. The Fund may engage in closing transactions in order to terminate
put options that it has written or purchased. The Fund intends to limit its
writing of covered puts so that the aggregate value of the obligations
underlying the puts will not exceed 50% of its net assets.
The Fund may also purchase and sell financial futures contracts ("futures
contracts") as a hedge against adverse changes in interest rates, as described
below. A futures contract is an agreement between two parties 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.
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<PAGE>
The staff of the Commission has taken the position that purchased OTC
options and the assets used as cover for written OTC options are illiquid
securities. 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 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
19
<PAGE>
or bought pursuant to the forward contract will fall or rise, as the case may
be, whenever there is a decline or increase, respectively, in the U.S. dollar
value of the currency in which portfolio securities of the Fund are
denominated (this practice being referred to as a "cross-hedge").
The Fund will not speculate in forward foreign exchange. Hedging against a
decline in the value of a currency does not eliminate fluctuations in the
prices of portfolio securities or prevent losses if the prices of such
securities decline. Such transactions also preclude the opportunity for gain
if the value of the hedged currency should rise. Moreover, it may not be
possible for the Fund to hedge against a devaluation that is so generally
anticipated that the Fund is not able to contract to sell the currency at a
price above the devaluation level it anticipates.
The Fund also is authorized to purchase or sell listed or OTC foreign
currency options, foreign currency futures and related options on foreign
currency futures as a short or long hedge against possible variations in
foreign exchange rates. Such transactions may be effected with respect to
hedges on non-U.S. dollar denominated securities (including securities
denominated in the ECU) owned by the Fund, sold by the Fund but not yet
delivered, or committed or anticipated to be purchased by the Fund. As an
illustration, the Fund may use such techniques to hedge the stated value in
United States dollars of an investment in a Japanese yen-denominated security.
In such circumstances, for example, the Fund may purchase a foreign currency
put option enabling it to sell a specified amount of yen for dollars at a
specified price by a future date. To the extent the hedge is successful, a
loss in the value of the dollar relative to the yen will tend to be offset by
an increase in the value of the put option. To offset, in whole or in part,
the cost of acquiring such a put option, the Fund also may sell a call option
which, if exercised, requires it to sell a specified amount of yen for dollars
at a specified price by a future date (a technique called a "straddle"). By
selling such call option in this illustration, the Fund gives up on the
opportunity to profit without limit from increases in the relative value of
the yen to the dollar.
Certain differences exist between these foreign currency hedging
instruments. Foreign currency options provide the holder thereof the right to
buy or to sell a currency at a fixed price on a future date. Listed options
are third-party contracts (i.e., performance of the parties' obligations is
guaranteed by an exchange or clearing corporation) 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 liquid 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
20
<PAGE>
to currencies and securities positions, including net liabilities with respect
to cross-currency hedges, of more than 33 1/3% of its total assets from
foreign currency options, futures, related options and forward currency
transactions.
In connection with its trading in forward foreign currency contracts, the
Fund will contract with a foreign or domestic bank, or foreign or domestic
securities dealer, to make or take future delivery of a specified amount of a
particular currency. There are no limitations on daily price moves in such
forward contracts, and banks and dealers are not required to continue to make
markets in such contracts. There have been periods during which certain banks
and dealers have refused to quote prices for such forward contracts or have
quoted prices with an unusually wide spread between the price at which the
bank or dealer is prepared to buy and that at which it is prepared to sell.
Governmental imposition of credit controls might limit any such forward
contract trading. With respect to its trading of forward contracts, if any,
the Fund will be subject to the risk of bank or dealer failure and the
inability of, or refusal by, a bank or dealer to perform with respect to such
contracts. Any such default would deprive the Fund of any profit potential or
force the Fund to cover its commitments for resale, if any, at the then-market
price and could result in a loss to the Fund.
Restrictions on the Use of Futures Transactions. Regulations of the
Commodity Futures Trading Commission ("CFTC") applicable to the Fund permit
the Fund's futures and options on futures transactions to include (i) bona
fide hedging transactions without regard to the percentage of the Fund's
assets committed to margin and option premiums, and (ii) non-hedging
transactions, provided that the Fund not enter into such non-hedging
transactions if, immediately thereafter, the sum of the amount of initial
margin and option premiums required to establish non-hedging transactions
would exceed 5% of the market value of the Fund's liquidation value, after
taking into account unrealized profits and unrealized losses on any such
transactions. However, as stated above, the Fund intends to engage in options
and futures transactions only for hedging purposes.
When the Fund purchases a futures contract or writes a put option or
purchases a call option thereon, it will maintain an amount of cash, cash
equivalents (e.g., high grade commercial paper and daily tender adjustable
notes) or other liquid 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 to close an options or
futures transaction. The inability to close options and futures positions also
could have an adverse
21
<PAGE>
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 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
22
<PAGE>
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 special tax treatment afforded "regulated investment
companies" under the Code. See "Taxes." To qualify,
23
<PAGE>
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 of the Fund are:
Arthur Zeikel*--Chairman of the Investment Adviser and its affiliate, MLAM;
Chairman and Director of Princeton Services, Inc. ("Princeton Services");
Executive Vice President of ML & Co.
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.
Andre F. Perold--Professor, Harvard Business School.
- --------
* Interested person, as defined by the Investment Company Act, of the Fund.
24
<PAGE>
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 Asset Management Group of ML & Co. (which includes
the Investment Adviser) acts as the investment adviser to more than 100
registered investment companies. MLAM also provides investment advisory
services to individuals and institutional accounts. As of February, 1998, the
Asset Management Group had a total of approximately $476 billion in investment
company and other portfolio assets under management. This amount includes
assets managed for certain affiliates of MLAM.
The Fund's management agreement with the Investment Adviser (the "Investment
Advisory Agreement") provides that, subject to the supervision 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 Paolo H. Valle are primarily responsible for
the day to day management of the Fund's investment portfolio. Vincent T.
Lathbury, III has been First Vice President of MLAM since 1997, Portfolio
Manager of the Investment Adviser and MLAM since 1982 and was Vice President
of the Investment Adviser and MLAM from 1982 to 1997. Paolo H. Valle has been
First Vice President of MLAM since 1997, Senior Portfolio Manager since 1992
and was Vice President from 1992 to 1997.
The Fund pays the Investment Adviser a monthly fee at an annual rate of
0.60% of the average daily net assets of the Fund. For the fiscal year ended
December 31, 1997, the total fee paid by the Fund to the Investment Adviser
was $6,059,356 (based on average net assets of approximately $1.0 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.
Pursuant to the Investment Advisory Agreement, the Fund pays certain
expenses incurred in the Fund's operations, including, among other things, the
management fee, legal and audit fees, unaffiliated Directors' fees and
expenses, registration fees, custodian and transfer agency fees, accounting
and pricing costs, and certain of the costs of printing proxies, shareholder
reports, prospectuses and statements of additional information. Accounting
services are provided to the Fund by the Investment Adviser, and the Fund
reimburses the Investment Adviser for its costs in connection with such
services. For the fiscal year ended December 31, 1997, the Fund reimbursed the
Investment Adviser $170,484 for accounting services. For the fiscal year ended
December 31, 1997, the ratio of total expenses to average net assets was 0.76%
for Class A shares, 1.53% for Class B shares, 1.58% for Class C shares and
1.01% for Class D shares.
25
<PAGE>
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 that 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
The Transfer Agent, 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 an annual 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 the Transfer Agent under the Transfer Agency Agreement.
Additionally, a $.20 monthly closed account charge will be assessed on all
accounts which close during the calendar year. Application of this fee will
commence the month following the month the account is closed. At the end of
the calendar year, no further fees will be due. For purposes of 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, 1997, the total fee paid by the
Fund to the Transfer Agent was $1,107,431 pursuant to the Transfer Agency
Agreement.
PURCHASE OF SHARES
The Distributor, an affiliate of each of 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 that for participants in certain fee-based programs,
the minimum initial purchase is $500 and the minimum subsequent purchase is
$50 and for retirement plans, the minimum initial purchase is $100 and the
minimum subsequent purchase is $1.
26
<PAGE>
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
PricingSM System, as described below. The applicable offering price for
purchase orders is based upon the net asset value of the Fund next determined
after receipt of the purchase orders by the Distributor. As to purchase orders
received by securities dealers prior to the close of business on the New York
Stock Exchange ("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 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 $5.35) to confirm a sale of shares to
such customers. Purchases made directly through the Fund's Transfer Agent are
not subject to the processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
PricingSM System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. Shares of Class A and Class D are
sold to investors choosing the initial sales charge alternatives and shares of
Class B and Class C are sold to investors choosing the deferred sales charge
alternatives. Investors should determine whether under their particular
circumstances it is more advantageous to incur an initial sales charge or to
have the entire initial purchase price invested in the Fund with the
investment thereafter being subject to a 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 PricingSM System is
set forth under "Merrill Lynch Select PricingSM 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. The proceeds
from the account maintenance fees are used to compensate the Distributor and
Merrill Lynch (pursuant to a sub-agreement) for providing continuing account
maintenance activities. 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
27
<PAGE>
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 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 CDSC 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, that 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 PricingSM System.
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(/1/) FEE FEE FEATURE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 4.00% initial No No No
sales charge(/2/)(/3/)
- ------------------------------------------------------------------------------------------------
B CDSC for a period of four 0.25% 0.50% B shares convert to D
years, at a rate of 4.0% during shares automatically
the first year, decreasing 1.0% after approximately
annually to 0.0%(/4/) ten years(/5/)
- ------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(/6/) 0.25% 0.55% No
- ------------------------------------------------------------------------------------------------
D Maximum 4.00% initial sales charge(/3/) 0.25% No No
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. 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 and participants 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 shares are 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.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares, certain retirement
plans and certain fee-based programs 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.
28
<PAGE>
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible to
purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternative is the next determined net asset
value plus varying sales charges (i.e., sales loads), as set forth below.
<TABLE>
<CAPTION>
DISCOUNT TO
SALES CHARGE AS SELECTED DEALERS
SALES CHARGE AS PERCENTAGE* AS PERCENTAGE OF
PERCENTAGE OF OF THE NET THE OFFERING
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED PRICE
------------------ --------------- --------------- ----------------
<S> <C> <C> <C>
Less than $25,000............. 4.00% 4.17% 3.75%
$25,000 but less than $50,000. 3.75 3.90 3.50
$50,000 but less than
$100,000..................... 3.25 3.36 3.00
$100,000 but less than
$250,000..................... 2.50 2.56 2.25
$250,000 but less than
$1,000,000................... 1.50 1.52 1.25
$1,000,000 and over**......... 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 by certain retirement
plan investors and participants 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 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 charge will be assessed
on an amount equal to the lesser of the proceeds of redemption or the cost
of the shares being redeemed. A sales charge of 0.75% will be charged on
purchases of $1 million or more of Class A or Class D shares by certain
employer sponsored retirement or savings plans.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and
Class D shares of the Fund will receive a concession equal to most of the
sales charge, they may be deemed to be underwriters under the Securities Act
of 1933, as amended (the "Securities Act"). The proceeds from the account
maintenance fees are used to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing continuing account maintenance
activities.
For the fiscal year ended December 31, 1997, the Fund sold 1,471,571 Class A
shares for aggregate net proceeds of $13,032,610. The gross sales charges for
the sale of Class A shares of the Fund for the fiscal year ended December 31,
1997 were $20,949, of which $1,741 and $19,208 were received by the
Distributor and Merrill Lynch, respectively. For the fiscal year ended
December 31, 1997, 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,
1997, the Fund sold 290,672 Class D shares for aggregate net proceeds of
$2,569,167. The gross sales charges for the sale of Class D shares of the Fund
for the year were $16,997, of which $1,583 and $15,414 were received by the
Distributor and Merrill Lynch, respectively. For the fiscal year ended
December 31, 1997, 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.
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
29
<PAGE>
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 and U.S. branches of foreign owned
banking institutions provided that the program or branch has $3 million or
more initially invested in MLAM-advised mutual funds. Also eligible to
purchase Class A shares at net asset value are participants in certain
investment programs including TMASM Managed Trusts to which Merrill Lynch
Trust Company provides discretionary trustee services, 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 AccessSM Accounts
available through authorized employers. Class A shares are offered at net
asset value to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.,
and, 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. 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. Class
D shares are offered with reduced sales charges and, in certain circumstances,
at net asset value, to participants in Merrill Lynch Blueprint SM Program.
Additional information concerning these reduced initial sales charges is set
forth in the Statement of Additional Information.
30
<PAGE>
DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four year CDSC,
which declines each year, 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 (pursuant to a sub-
agreement) 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 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. 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 redemption or the cost of the shares being redeemed. Accordingly, no CDSC
will be imposed on increases in net asset value
31
<PAGE>
above the initial purchase price. In addition, no charge will be assessed on
shares derived from reinvestment of dividends or capital gains distributions.
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 CHARGE
------------------- -----------------
<S> <C>
0-1........................................................ 4.0%
1-2........................................................ 3.0%
2-3........................................................ 2.0%
3-4........................................................ 1.0%
4 and thereafter........................................... None
</TABLE>
For the fiscal year ended December 31, 1997, the Distributor received CDSCs
of $996,571 with respect to redemptions of Class B shares, all of which were
paid to Merrill Lynch. Additional CDSCs payable to the Distributor may have
been waived or converted to a contingent obligation in connection with a
shareholder's participation in certain fee-based programs.
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 and in connection with certain group plans
placing orders through the Merrill Lynch Blueprint SM Programs. 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. 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
32
<PAGE>
MLAM Private Portfolio Group and held in such account at the time of
redemption. The Class B CDSC also is waived for any Class B shares that are
purchased within qualifying Employee AccessSM Accounts. Additional information
concerning the waiver of the Class B 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." For the fiscal year ended December 31, 1997, the Distributor
received CDSCs of $4,508 with respect to redemptions of Class C shares, all of
which were paid to Merrill Lynch.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible rate being charged. Therefore, it will be assumed that the redemption
is first of shares held for over one year or shares acquired pursuant to
reinvestment of dividends or distributions and then of shares held longest
during the one-year period. The charge will not be applied to dollar amounts
representing an increase in the net asset value since the time of purchase. A
transfer of shares from a shareholder's account to another account will be
assumed to be made in the same order as a redemption.
Conversion of Class B Shares to Class D Shares. After approximately ten
years (the "Conversion Period"), Class B shares will be converted
automatically into Class D shares of the Fund. Class D shares are subject to
an ongoing account maintenance fee of 0.25% of net assets but are not subject
to the distribution fee that is borne by Class B shares. Automatic conversion
of Class B shares into Class D shares will occur at least once each month (on
the "Conversion Date") on the basis of the relative net asset values of the
shares of the two classes on the Conversion Date, without the imposition of
any sales load, fee or other charge. Conversion of Class B shares to Class D
shares will not be deemed a purchase or sale of the shares for Federal income
tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class
D shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the
Fund held in the account on the Conversion Date will be converted to Class D
shares of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
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In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of
taxable and tax-exempt fixed income MLAM-advised mutual funds will convert
approximately ten years after initial purchase. If, during the Conversion
Period, a shareholder exchanges Class B shares with an eight-year Conversion
Period for Class B shares with a ten-year Conversion Period, or vice versa,
the Conversion Period applicable to the Class B shares acquired in the
exchange will apply, and the holding period for the shares exchanged will be
tacked onto the holding period for the shares acquired.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans 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 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.
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For the fiscal year ended December 31, 1997, the Fund paid the Distributor
$6,002,265 pursuant to the Class B Distribution Plan (based on average daily
net assets subject to such Class B Distribution Plan of approximately $800.3
million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection
with Class B shares. For the fiscal year ended December 31, 1997, the Fund
paid the Distributor $89,735 pursuant to the Class C Distribution Plan (based
on average net daily assets subject to such Class C Distribution Plan of
approximately $11.2 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,
1997, the Fund paid the Distributor $37,287 pursuant to the Class D
Distribution Plan (based on average daily net assets subject to such Class D
Distribution Plan of approximately $14.9 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, 1997, 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 $8,341,000
(1.30% of Class B net assets at that date). As of December 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
$41,066,880 (6.40% of Class B net assets at that date). As of December 31,
1997, for Class C Shares, 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 $54,000 (.46% of Class C net assets at that
date). As of December 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 $114,396 (.97% 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
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with the account maintenance and/or distribution of each class of shares
separately. The initial sales charges, the account maintenance fee, the
distribution fee and/or the CDSCs received with respect to one class will not
be used to subsidize the sale of shares of another class. Payments of the
distribution fee on Class B shares will terminate upon conversion of those
Class B shares into Class D shares as set forth under "Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class B Shares to
Class D Shares."
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 in either event requires
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the signature(s) of all persons in whose name(s) the shares are registered,
signed exactly as such name(s) appear(s) on the Transfer Agent's register or
on the certificate, as the case may be. The signature(s) on the redemption
request must be guaranteed by an "eligible guarantor institution" as such is
defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended,
the existence and validity of which may be verified by the Transfer Agent
through the use of industry publications. Notarized signatures are not
sufficient. In certain instances, the Transfer Agent may require additional
documents such as, but not limited to, trust instruments, death certificates,
appointments as executor or administrator, or certificates of corporate
authority. For shareholders redeeming directly with the Transfer Agent,
payments will be mailed within seven days of receipt of a proper notice of
redemption.
At various times the Fund may be requested to redeem shares for which it has
not yet received good payment (e.g., cash, Federal funds or certified check
drawn on a United States bank). The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as it has assured itself that
good payment has been collected for the purchase of such Fund shares, which
will not exceed 10 days.
REPURCHASE
The Fund also will repurchase shares through a shareholder's listed
securities dealer. The Fund will normally accept orders to repurchase shares
by wire or telephone from dealers for their customers at the net asset value
next computed after receipt of the order by the dealer, provided that the
request for repurchase is received by the dealer prior to the normal close of
business on the 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 that 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 $5.35) to confirm a repurchase of
shares. Repurchases made 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 will 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
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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.
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 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.
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
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exchange privilege. The exchange privilege may be modified or terminated in
accordance with the rules of the Commission.
Under the Merrill Lynch Select PricingSM System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-
advised mutual fund if the shareholder holds any Class A shares of the second
fund in 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.
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AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All dividends and capital gains distributions are reinvested automatically
in full and fractional shares of the Fund, without a sales charge, at the net
asset value per share at the close of business on the payable date for such
dividends or distributions. A shareholder may at any time, by written
notification to Merrill Lynch if the shareholder's account is maintained with
Merrill Lynch or by written notification or telephone (1-800-MER-FUND) to the
Transfer Agent if the shareholder's account is maintained with the Transfer
Agent, elect to have subsequent dividends, or both dividends and capital gains
distributions, paid in cash, rather than reinvested, in which event payment
will be mailed on or about the payment date. The Fund is not responsible for
any failure of delivery to the shareholder's address of record and no interest
will accrue on amounts represented by uncashed distribution or redemption
checks. 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 PLANS
A shareholder may elect to receive systematic withdrawal payments from his
Investment Account through automatic payment by check or through automatic
payment by direct deposit to his bank account on either a monthly or quarterly
basis. Alternatively, a shareholder whose shares are held within a CMA(R),
CBA(R) or Retirement Account may elect to have shares redeemed on a monthly,
bimonthly, quarterly, semiannual or annual basis through the CMA(R) or CBA(R)
Systematic Redemption Program, subject to certain conditions. With respect to
redemptions of Class B or Class C shares pursuant to a systematic withdrawal
plan, the maximum number of Class B or Class C shares that can be redeemed
from an account annually shall not exceed 10% of the value of shares of such
class in that account at the time the election to join the systematic
withdrawal plan was made. Any CDSC that otherwise might be due on such
redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See "Purchase of Shares--
Deferred Sales Charge Alternatives--Class B and Class C Shares--Contingent
Deferred Sales Charges--Class B Shares" and "--Contingent Deferred Sales
Charges--Class C Shares." Where the systematic withdrawal plan is applied to
Class B shares, upon conversion of the last Class B shares in an account to
Class D shares, the systematic withdrawal plan will automatically be applied
thereafter to Class D shares. See "Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class B Shares to
Class D Shares."
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
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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 the Transfer Agent at
(800) MER-FUND or (800) 637-3863.
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 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). Recent legislation
creates additional categories of capital gains taxable at different rates.
Generally 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, as well as the amount
of capital gain dividends in the different categories of capital gain referred
to above.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. 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
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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. In addition,
recent legislation permits a foreign tax credit to be claimed with respect to
withholding tax on a dividend only if the shareholder meets certain holding
period requirements. 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. In the case of foreign taxes passed through
by a RIC, the holding period requirements referred to above must be met by
both the shareholder and the RIC. No deductions for foreign taxes, moreover,
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 and other
information needed to claim the foreign tax credit.
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
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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.
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
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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.
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, 1997 was 6.89% for Class A shares, 6.40% for
Class B shares, 6.35% for Class C shares and 6.65% 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.
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PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors of the Fund, the
Investment Adviser is primarily responsible for the execution of the Fund's
portfolio transactions. In executing such transactions, the Investment Adviser
seeks to obtain the best results for the Fund, taking into account such
factors as price (including the applicable brokerage commission or dealer
spread), size of order, difficulty of execution and operational facilities of
the firm involved and the firm's risk in positioning a block of securities.
While the Investment Adviser generally seeks reasonably competitive commission
rates or spreads, the Fund does not necessarily pay the lowest commission or
spread available.
The Fund has no obligation to deal with any broker or dealer in execution of
transactions in portfolio securities. Subject to obtaining the best price and
execution, securities firms which provided supplemental investment research to
the Investment Adviser, including Merrill Lynch, may receive orders for
transactions by the Fund. Information so received will be in addition to and
not in lieu of the services required to be performed by the Investment Adviser
under the Investment Advisory Agreement, and the expenses of the Investment
Adviser will not necessarily be reduced as a result of the receipt of such
supplemental information.
The securities in which the Fund invests are traded primarily in the OTC
market. Since portfolio transactions will generally not be effected on foreign
securities exchanges, the Fund does not expect typically to incur potential
settlement delays which may occur on certain of such exchanges. Where
possible, the Fund will deal directly with the dealers who make a market in
the securities involved except in those circumstances where better prices and
execution are available elsewhere. Such dealers usually are acting as
principal for their own account. On occasion, securities may be purchased
directly from the issuer. Such portfolio securities are generally traded on a
net basis and do not normally involve either brokerage commissions or transfer
taxes. Securities firms may receive brokerage commissions on certain portfolio
transactions, including options, futures and options on futures transactions
and the purchase and sale of underlying securities upon exercise of options.
Under the Investment Company Act, persons affiliated with the Fund, including
Merrill Lynch, are prohibited from dealing with the Fund as a principal in the
purchase and sale of securities unless a permissive order allowing such
transactions is obtained from the Commission. Affiliated persons of the Fund
may serve as its broker in transactions conducted on an exchange and in over-
the-counter transactions conducted on an agency basis. Costs associated with
transactions in foreign securities are generally higher than with transactions
in United States securities, although, as noted above, the Fund will endeavor
to achieve the best net results in effecting such transactions.
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of United States national securities exchanges from
executing exchange transactions for their affiliates and institutional
accounts which they manage unless the member (i) has obtained prior express
authorization from the account to effect such transactions, (ii) at least
annually furnished the account with the aggregate compensation received by the
member in effecting such transactions, and (iii) complies with any rules the
Commission has prescribed with respect to the requirements of clauses (i) and
(ii). To the extent Section 11(a) would apply to Merrill Lynch acting as a
broker for the Fund in any of its portfolio transactions executed on any such
securities exchange of which it is a member, appropriate consents have been
obtained from the Fund and annual statements as to aggregate compensation will
be provided to the Fund.
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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.
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all its net investment income.
Dividends from such net investment income are paid monthly. All net realized
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 year. 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 basis in the Fund shares for
Federal income tax purposes. See "Taxes." If in any fiscal year, the Fund has
net income from certain foreign currency transactions, such income will be
distributed annually. Dividends may be reinvested automatically in shares of
the Fund at net asset value. 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 under "Taxes," whether they are
reinvested in shares of the Fund or received in cash.
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."
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.
The NYSE is not open on New Year's Day, Martin Luther King, Jr. 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. 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 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
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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 for long positions and
at the last available ask price for short positions. 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. Long positions in securities traded in the OTC market are
valued at the last available bid price in the OTC market prior to the time of
valuation. Short positions in securities traded in the OTC market are valued
at the last available ask 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 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 the 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
Directors of the Fund.
YEAR 2000 ISSUES
Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the Year 2000 from the
Year 1900 (commonly known as the "Year 2000 Problem"). Like other investment
companies and financial and business organizations, the Fund could be
adversely affected if the computer systems used by the Investment Adviser or
other Fund service providers do not properly address this problem prior to
January 1, 2000. The Investment Adviser has established a dedicated group to
analyze these issues and to implement any systems modifications necessary to
prepare for the Year 2000. Currently, the Investment Adviser does not
anticipate that the transition to the 21st Century will have any material
impact on its ability to continue to service the Fund at current levels. In
addition, the Investment Adviser has sought assurances from the Fund's other
service providers that they are taking all necessary steps to ensure that
their computer systems will accurately reflect the Year 2000, and the
Investment Adviser will continue to monitor the situation. At this time,
however, no assurance can be given that the Fund's other service providers
have anticipated every step necessary to avoid any adverse effect on the Fund
attributable to the Year 2000 Problem.
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.
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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.
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") LONG-TERM DEBT
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 edged." 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 risk 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 the desirable
investment. 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.
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NOTE: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a
ranking in the lower end of that generic rating category.
DESCRIPTION OF MOODY'S SHORT-TERM DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated
issuers.
PRIME 1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
--Leading market positions in well-established industries.
--High rates of return on funds employed.
--Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
--Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
--Well-established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME 2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt 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, may be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
PRIME 3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt 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 may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime
rating categories.
If an issuer represents to Moody's that its short-term debt 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
arrangement.
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Moody's ratings are opinions, not recommendations to buy or sell, and their
accuracy is not guaranteed. A rating should be weighted solely as one factor
in an investment decision and you should make your own study and evaluation of
any issuer whose securities or debt obligations you consider buying or
selling.
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS
Because of the fundamental differences between preferred stocks and bonds, a
variation of Moody's bond rating symbols is used in the quality ranking of
preferred stock. The symbols, presented below, are designed to avoid
comparison with bond quality in absolute terms. It should always be borne in
mind that preferred stock occupies 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.
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NOTE: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
DESCRIPTION OF STANDARD & POOR'S ("STANDARD & POOR'S") ISSUE CREDIT RATINGS
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial
obligation, a specific class of financial obligations or a specific program
(including ratings on medium term note programs and commercial paper
programs). It takes into consideration the creditworthiness of guarantors,
insurers, or other forms of credit enhancement on the obligation and takes
into account the currency in which the obligation is denominated. The issue
credit rating is not a recommendation to purchase, sell or hold a financial
obligation, inasmuch as it does not comment as to market price or suitability
for a particular investor.
Issue credit ratings are based on current information furnished by the
obligors 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. Credit
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
Issue credit ratings can be either long-term or short-term. Short-term
ratings are generally assigned to those obligations considered short-term in
the relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days including commercial paper. Short-
term ratings are also used to indicate the creditworthiness of an obligor with
respect to put features on long-term obligations. The result is a dual rating,
in which the short-term rating addresses the put feature, in addition to the
usual long-term rating. Medium-term notes are assigned long-term ratings.
Long-Term Issue Credit Ratings
Issue credit ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of payment--capacity and willingness of the obligor to
meet its financial commitment on an obligation in accordance with the
terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded to, 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.
The issue rating definitions are expressed in terms of default risk. As
such, they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority
in bankruptcy, as noted above. (Such differentiation applies when an entity
has both senior and subordinated obligations, secured and unsecured
obligations, or operating company and holding company obligations.)
Accordingly, in the case of junior debt, the rating may not conform exactly
with the category definition.
AAA An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
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AA An obligation rated AA differs from the higher rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity
to meet its financial commitment on the obligation is still strong.
BBB An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
Obligations rated BB, B, CCC, CC and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation and
C the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties or
major exposures to adverse conditions.
BB An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated B is more vulnerable to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial or
economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation.
CCC An obligation rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial and economic conditions for
the obligor to meet its financial commitment on the obligation. In the
event of adverse business, financial or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on
the obligation.
CC An obligation rated CC is currently highly vulnerable to nonpayment.
C The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken but payments on
this obligation are being continued.
D An obligation rated D is in payment default. The D rating category is
used when payments on an obligation 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 or the
taking of similar action if payments on an obligation 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 within the major
ratings categories.
r This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples
include: obligations linked or indexed to equities, currencies, or
commodities; obligations exposed to severe prepayment risk such as
interest-only or principal-only mortgage securities; and obligations
with unusually risky interest terms, such as inverse floaters.
53
<PAGE>
Short-Term Issue Credit Ratings
A-1 A short-term obligation rated A-1 is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is strong. Within this category, certain
obligations are designated with a plus sign (+). This indicates that the
obligor's capacity to meet its financial commitment on these obligations
is extremely strong.
A-2 A short-term obligation rated A-2 is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity
to meet its financial commitment on the obligation is satisfactory.
A-3 A short-term obligation rated A-3 exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligations.
B A short-term obligation rated B is regarded as having significant
speculative characteristics. The obligor currently has the capacity to
meet its financial commitment on the obligation; however, it faces major
ongoing uncertainties which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation.
C A short-term obligation rated C is currently vulnerable to nonpayment
and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the
obligation.
D A short-term obligation rated D is in payment default. The D rating
category is used when payments on an obligation 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 or the taking of a similar action if payments on an obligation
are jeopardized.
Local Currency and Foreign Currency Risks
Country risk considerations are a standard part of Standard & Poor's
analysis for credit ratings on any issuer or issue. Currency of repayment is a
key factor in this analysis. An obligor's capacity to repay foreign currency
obligations may be lower than its capacity to repay obligations in its local
currency due to the sovereign government's own relatively lower capacity to
repay external versus domestic debt. These sovereign risk considerations are
incorporated in the debt ratings assigned to specific issues. Foreign currency
issuer ratings are also distinguished from local currency issuer ratings to
identify those instances where sovereign risks make them different for the
same issuer.
DESCRIPTION OF STANDARD & POOR'S RATING OUTLOOK AND CREDITWATCH
A Standard & Poor's Rating Outlook assesses the potential direction of an
issuer's long-term debt rating over the intermediate to longer term. In
determining a Rating Outlook, consideration is given to any changes in the
economic and/or fundamental business conditions. An Outlook is not necessarily
a precursor of a rating change or future CreditWatch action. Ratings appear on
CreditWatch when an event or deviation from an expected trend has occurred or
is expected and additional information is necessary to take a rating action.
For example, an issue is placed under such special surveillance as the result
of mergers, recapitalizations, regulatory
54
<PAGE>
actions, or unanticipated operating developments. Such rating reviews normally
are completed within 90 days, unless the outcome of a specific event is
pending. CreditWatch designations and Rating Outlooks may be:
"Positive" indicates that ratings may be raised.
"Negative" means ratings may be lowered.
"Stable" indicates that ratings are not likely to change.
"Developing" means ratings may be raised or lowered.
"N.M." means not meaningful.
DESCRIPTION OF STANDARD & POOR'S PREFERRED STOCK RATINGS
A Standard & Poor's preferred stock rating is an assessment of the capacity
and willingness of an issuer to pay preferred stock dividends and any
applicable sinking fund obligations. A preferred stock rating differs from a
bond rating inasmuch as it is assigned to an equity issue, which issue is
intrinsically different from, and subordinated to, a debt issue. Therefore, to
reflect this difference, the preferred stock rating symbol will normally not
be higher than the debt rating symbol assigned to, or that would be assigned
to, the senior debt of the same issuer.
Preferred stock ratings are based on the following considerations:
1. 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;
2. Nature of, and provisions of, the issue;
3. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangement under the laws of bankruptcy and
other laws 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.
55
<PAGE>
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. 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.
N.R. This 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.
Plus (+) or Minus (-): To provide more detailed indications of preferred stock
quality, 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.
A preferred stock 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 to Standard & Poor's by the issuer, and 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 based on other circumstances.
DESCRIPTION OF STANDARD & POOR'S DUAL RATINGS
Standard & Poor's assigns "dual" ratings to all debt issues that have a put
option or demand feature as part of their structure. The first rating
addresses the likelihood of repayment of principal and interest as due, and
the second rating addresses only the demand feature. The long-term debt rating
symbols are used for bonds to denote the long-term maturity and the short-term
issue credit rating symbols for the put option (for example, "AAA/A-1+"). With
short-term demand debt, Standard & Poor's note rating symbols are used with
the short-term issue credit rating symbols (for example, "SP-1+/A-1+").
56
<PAGE>
MERRILL LYNCH WORLD INCOME FUND, INC. -- AUTHORIZATION FORM (PART 1)
- -------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
[_] Class A shares [_] Class B shares [_] Class C
shares [_] Class D shares
of Merrill Lynch World Income Fund, Inc. and establish an Investment Account
as described in the Prospectus. In the event that I am not eligible to
purchase Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $............ payable to Merrill Lynch Financial
Data Services, Inc., as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price next to
be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of
paper if necessary.)
1. .................................... 4. ................................
2. .................................... 5. ................................
3. .................................... 6. ................................
Name...........................................................................
First Name Initial Last
Name
Name of Co-Owner (if any)......................................................
First Name Initial Last
Name
Address........................................................................
.................................................... Date......................
(Zip Code)
Occupation............................. Name and Address of Employer.......
...................................
...................................
....................................... ...................................
Signature of Owner Signature of Co-Owner (if any)
(In the case of co-owner, a joint-tenancy with right of survivorship will be
presumed unless otherwise specified.)
- -------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
Ordinary Income Dividends Long-term Capital
Gains
SELECT ONE:
[_] Reinvest SELECT ONE:
[_] Reinvest
[_] Cash [_] Cash
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: [_] Check
or [_] Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by
direct deposit to my bank account and, if necessary, debit entries and
adjustments for any credit entries made to my account in accordance with the
terms I have selected on the Merrill Lynch World Income Fund, Inc.
Authorization Form.
SPECIFY TYPE OF ACCOUNT (CHECK ONE): [_] checking [_] savings
Name on your account...........................................................
Bank Name......................................................................
Bank Number......................... Account Number ...........................
Bank Address ..................................................................
I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE WRITTEN
NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Signature of Depositor.........................................................
Signature of Depositor .................................. Date.................
(If joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED
CHECK MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD
ACCOMPANY THIS APPLICATION.
- -------------------------------------------------------------------------------
57
<PAGE>
MERRILL LYNCH WORLD INCOME FUND, INC. -- AUTHORIZATION FORM (PART 1) --
(CONTINUED)
- -------------------------------------------------------------------------------
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security Number or Taxpayer Identification Number and (2)
that I am not subject to backup withholding (as discussed in the Prospectus
under "Taxes") either because I have not been notified that I am subject
thereto as a result of a failure to report all interest or dividends, or the
Internal Revenue Service ("IRS") has notified me that I am no longer subject
thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDERREPORTING AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS
BEEN TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS
CERTIFICATION TO OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
....................................... ...................................
Signature of Owner Signature of Co-Owner (if any)
- -------------------------------------------------------------------------------
4. LETTER OF INTENTION--CLASS A AND D SHARES ONLY (SEE TERMS AND CONDITIONS
IN THE STATEMENT OF ADDITIONAL INFORMATION)
................., 19......
Dear Sir/Madam: Date of initial purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch World Income Fund, Inc. or any other investment company with an initial
sales charge or deferred sales charge for which Merrill Lynch Funds
Distributor, Inc. acts as distributor over the next 13-month period which will
equal or exceed:
[_] $25,000 [_] $50,000 [_] $100,000 [_] $250,000 [_] $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch World Income Fund,
Inc. Prospectus.
I agree to the terms and conditions of this Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch World Income Fund, Inc. held as security.
By: ................................... ...................................
Signature of Owner Signature of Co-Owner
(If registered in joint names,
both must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name............................... (2) Name...........................
Account Number......................... Account Number.....................
- -------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp We hereby authorize Merrill Lynch
- -- -- Funds Distributor, Inc. to act as
our agent in connection with
transactions under this
authorization form and agree to
notify the Distributor of any
purchases or sales made under a
Letter of Intention, Automatic
Investment Plan or Systematic
Withdrawal Plan. We guarantee the
shareholder's signature.
- -- --
This form when completed, should be ...................................
mailed to: Dealer Name and Address
Merrill Lynch World Income Fund, Inc. By: ...............................
c/o Merrill Lynch Financial Authorized Signature of Dealer
Data Services, Inc. [_][_][_] [_][_][_][_]............
P.O. Box 45289 Branch Code F/C No. F/C Last
Jacksonville, FL 32232-5289 Name
[_][_][_] [_][_][_][_][_]
Dealer's Customer Account No.
58
<PAGE>
MERRILL LYNCH WORLD INCOME FUND, INC.--AUTHORIZATION FORM (PART 2)
- -------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR
AUTOMATIC INVESTMENT PLANS ONLY.
- -------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
(Please Print)
Name of Owner........................ Social Security No. or
First Name Initial Last Name Taxpayer Identification No.
Name of Co-Owner (if any)............
First Name
Initial
Last Name
Address.............................. Account Number ..................
(if existing account)
.....................................
(Zip Code)
- -------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN--(SEE TERMS AND CONDITIONS IN THE STATEMENT OF
ADDITIONAL INFORMATION)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for quarterly,
of [_] Class A, [_] Class B*, [_] Class C* 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 in ........... or as soon as
possible thereafter.
(month)
SPECIFY THE AMOUNT OF THE WITHDRAWAL YOU WOULD LIKE PAID TO YOU (CHECK ONE):
[_] $............. of [_] Class A, [_] Class B*, [_] Class C* 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.
- --------
* Annual withdrawal cannot exceed 10% of the value of shares of such class
held in the account at the time the election to join the Systematic
Withdrawal Plan is made.
59
<PAGE>
MERRILL LYNCH WORLD INCOME FUND, INC.--AUTHORIZATION FORM (PART 2)--
(CONTINUED)
- --------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account as described
below each month to purchase: (choose one)
[_] Class A shares [_] Class B shares [_] Class C
shares [_] Class D shares
of Merrill Lynch World Income Fund, Inc. subject to the terms set forth below.
In the event that I am not eligible to purchase Class A shares, I understand
that Class D shares will be purchased.
MERRILL LYNCH FINANCIAL DATA
SERVICES, INC.
AUTHORIZATION TO HONOR ACH DEBITS
You are hereby authorized to draw an DRAWN BY MERRILL LYNCH FINANCIAL
ACH debit each month on my bank DATA SERVICES, INC.
account for investment in Merrill
Lynch World Income Fund, Inc. as
indicated below:
To...............................Bank
(Investor's Bank)
Bank Address.........................
Amount of each ACH debit $........
City...... State...... Zip Code......
Account No. .......................
As a convenience to me, I hereby
Please date and invest ACH debits on request and authorize you to pay and
the 20th of each month beginning..... charge to my account ACH debits
..................................... drawn on my account by and payable
(month) to Merrill Lynch Financial Data
or as soon thereafter as possible. I Services, Inc. I agree that your
agree that you are drawing these ACH rights in respect to each such debit
debits voluntarily at my request and shall be the same as if it were a
that you shall not be liable for any check drawn on you and signed
loss arising from any delay in personally by me. This authority is
preparing or failure to prepare any to remain in effect until revoked
such debit. If I change banks or personally by me in writing. Until
desire to terminate or suspend this you receive such notice, you shall
program, I agree to notify you be fully protected in honoring any
promptly in writing. I hereby such debit. I further agree that if
authorize you to take any action to any such debit be dishonored,
correct erroneous ACH debits of my whether with or without cause and
bank account or purchases of Fund whether intentionally or
shares including liquidating shares of inadvertently, you shall be under no
the Fund and credit my bank account. I liability.
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 Date Signature of
Depositor Depositor
...................... ............. ......................
Signature of Depositor Bank Account Signature of Depositor
(If joint account, Number (If joint account,
both must sign) both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" SHOULD ACCOMPANY THIS APPLICATION.
60
<PAGE>
[This page intentionally left blank]
<PAGE>
[This page intentionally left blank]
<PAGE>
INVESTMENT ADVISER
Fund Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 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>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH
THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER IN-
FORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND, THE INVESTMENT ADVISER, OR DISTRIBUTOR. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table.................................................................. 2
Merrill Lynch Select PricingSM System...................................... 3
Financial Highlights....................................................... 8
Risk Factors and Special Considerations.................................... 11
Investment Objective and Policies.......................................... 12
International Investing................................................... 13
Allocation of Investments and Risks of High Yield/High Risk Securities.... 14
Hedging Techniques........................................................ 16
Other Investment Policies and Practices................................... 22
Investment Restrictions................................................... 24
Management of the Fund..................................................... 24
Directors................................................................. 24
Management and Advisory Arrangements...................................... 25
Code of Ethics............................................................ 26
Transfer Agency Services.................................................. 26
Purchase of Shares......................................................... 26
Initial Sales Charge Alternatives--Class A and Class D Shares............. 29
Deferred Sales Charge Alternatives--Class B and Class C Shares............ 31
Distribution Plans........................................................ 34
Limitations on the Payment of Deferred Sales Charges...................... 36
Redemption of Shares....................................................... 36
Redemption................................................................ 36
Repurchase................................................................ 37
Reinstatement Privilege--Class A and Class D Shares....................... 37
Shareholder Services....................................................... 38
Investment Account........................................................ 38
Exchange Privilege........................................................ 38
Automatic Reinvestment of Dividends and Capital Gains Distributions....... 40
Systematic Withdrawal Plans............................................... 40
Automatic Investment Plans................................................ 40
Fee-Based Programs........................................................ 40
Taxes...................................................................... 41
Performance Data........................................................... 43
Portfolio Transactions..................................................... 45
Portfolio Turnover........................................................ 46
Additional Information..................................................... 46
Dividends and Distributions............................................... 46
Determination of Net Asset Value.......................................... 46
Year 2000 Issues.......................................................... 47
Organization of the Fund.................................................. 47
Shareholder Inquiries..................................................... 48
Shareholder Reports....................................................... 48
Appendix--Ratings of Debt Securities....................................... 49
Authorization Form......................................................... 57
</TABLE>
Code # 16102-0398
[LOGO] MERRILL LYNCH
Merrill Lynch
World Income Fund, Inc.
[ART]
PROSPECTUS
March 31, 1998
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be retained for further reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH WORLD INCOME FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
----------------
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. There can be no assurance that the
investment objective of the Fund will be realized.
Investment on an international basis and in lower rated or unrated
securities (commonly referred to as "junk bonds") involves special
considerations and certain risks, including risks of untimely payment of
interest and principal, default, and price volatility. Investors should
carefully consider these risks before investing.
Pursuant to the Merrill Lynch Select PricingSM System, the Fund offers four
classes of shares each with a different combination of sales charges, ongoing
fees and other features. The Select PricingSM System permits an investor to
choose the method of purchasing shares that the investor believes is most
beneficial given the amount of the purchase, the length of time the investor
expects to hold the shares and other relevant circumstances.
----------------
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 March 31,
1998 (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 March 31, 1998.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek to provide shareholders with
high current income by investing in a global portfolio of fixed income
securities denominated in various currencies, including multi-national
currency units. The Fund may invest in United States and foreign government
and corporate fixed income securities, including high yield high risk, lower
rated and unrated securities. The Fund will invest at least 90% of its total
assets in such fixed income securities. In pursuing its investment objective,
the Fund will, under normal circumstances, allocate its investments among
different types of fixed income securities denominated in various currencies
based upon management's analysis of the yield, maturity and currency
considerations affecting such securities. Reference is made to "Investment
Objective and Policies" in the Prospectus for a discussion of the investment
objective and policies of the Fund.
HEDGING TECHNIQUES
Reference is made to the discussion concerning hedging techniques under the
caption "Hedging Techniques" in the Prospectus.
The Fund may engage in various portfolio strategies to hedge its portfolio
against interest rate and currency risks. These strategies include use of
options on its portfolio securities, financial and currency futures and
options on such futures and forward foreign currency transactions. While the
Fund's use of hedging strategies is intended to reduce the volatility of the
net asset value of Fund shares, the Fund's net asset value will fluctuate.
Although certain risks are involved in options and futures transactions (as
discussed below in "Risk Factors in Options and Futures Transactions"), the
Investment Adviser believes that, because the Fund will engage in these
transactions only for hedging purposes, the options and futures portfolio
strategies of the Fund will not subject the Fund to the risks frequently
associated with the speculative use of options and futures transactions.
The following information relates to the hedging instruments the Fund may
utilize with respect to interest rate and currency risks.
The Fund may purchase and write (i.e., sell) call options and put options on
securities, enter into closing purchase transactions with respect to such
options and engage in transactions in financial futures as described below.
The Fund writes only covered options, which means that so long as the Fund is
obligated as the writer of a call option, it will own the underlying
securities subject to the option and, in the case of put options, that the
Fund, through its custodian, has deposited and maintained cash, cash
equivalent, U.S. Government securities or other high grade liquid debt
securities denominated in U.S. dollars or non-U.S. currencies with a
securities depository with a value equal to or greater than the exercise price
of the underlying securities.
Writing Options. The Fund will receive a premium from writing an option,
which increases the Fund's return on the underlying security in the event the
option expires unexercised or is closed out at a profit. The amount of the
premium will reflect, among other factors, the current market price of the
underlying security, the relationship of the exercise price to the market
price, interest rates and the time period until the expiration of the option.
By writing a call, the Fund limits its opportunity to profit from an
increase in the market value of the underlying security above the exercise
price of the option for as long as the Fund's obligation as a writer
2
<PAGE>
continues. Thus, in some periods the Fund will receive less total return and
in other periods greater total return from its hedged positions than it would
have received from underlying securities unhedged. By writing a put option,
the Fund will be obligated to purchase the underlying security at a price that
may be higher than the market value of that security at the time of exercise
for as long as the option is outstanding. To facilitate closing transactions,
as described below, the Fund will ordinarily write only options for which a
secondary market exists.
The Fund may engage in closing transactions in order to terminate
outstanding exchange-traded options that it has written. To effect a closing
transaction, the Fund purchases, prior to the exercise of an outstanding
option that it has written, an option of the same series as that on which it
desires to terminate its obligation. Profit or loss from a closing purchase
transaction will depend on whether the cost of such transaction is more or
less than the premium received on the sale of the option plus the related
transaction costs.
Purchase of Options. The Fund may purchase put and call options in
connection with its hedging activities. By buying a put, the Fund has the
right to sell the underlying securities at the exercise price, thus limiting
the Fund's risk of loss through a decline in the market value of the security
until the put expires. The Fund may also purchase call options on securities
which it intends to purchase. By purchasing a call, the Fund has the right to
purchase the underlying securities at the option price.
The Fund may enter into both exchange-traded and over-the-counter ("OTC")
put and call option transactions. OTC option transactions are two party
contracts with price and terms negotiated between the buyer and seller. The
Fund will enter into OTC option transactions only with respect to portfolio
securities for which the Investment Adviser believes there is regularly
available a price quotation from a dealer in such options. The Fund will
engage in OTC options only with member banks of the Federal Reserve System and
primary dealers in U.S. Government securities or with affiliates of such banks
or dealers which have capital of at least $50 million or whose obligations are
guaranteed by an entity having capital of at least $50 million. The staff of
the 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 selling long-term securities and either
reinvesting the proceeds in securities with shorter maturities or by holding
3
<PAGE>
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 adverse price movements, the Fund will
continue to be required to make daily cash payments of variation margin. In
such situations, if the
4
<PAGE>
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.
5
<PAGE>
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise.
Moreover, it may not be possible for the Fund to hedge against a devaluation
that is so generally anticipated that the Fund is not able to contract to sell
the currency at a price above the devaluation level it anticipates. The cost
to the Fund of engaging in foreign currency transactions varies with such
factors as the currency involved, the length of the contract period and the
market conditions then prevailing. Since transactions in foreign currency
exchange are usually conducted on a principal basis, no fees or commissions
are involved.
OTHER INVESTMENT POLICIES AND PRACTICES
Convertible Securities. The convertible securities to be held by the Fund
include any corporate debt security or preferred stock 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 the security. In such event, the Fund would have
rights against the
6
<PAGE>
seller for breach of contract with respect to any losses arising from market
fluctuations following the failure of the seller to perform.
Lending of Portfolio Securities. Subject to the investment restrictions
stated below, the Fund may lend securities from its portfolio to approved
borrowers and receive collateral in cash or securities issued or guaranteed by
the United States Government. Such collateral will be maintained at all times
in an amount equal to at least 100% of the current market value of the loaned
securities. The purpose of such loans is to permit the borrower to use such
securities for delivery to purchasers when such borrower has sold short. If
cash collateral is received by the Fund, it is invested in short-term money
market securities, and a portion of the yield received in respect of such
investment is retained by the Fund. Alternatively, if securities are delivered
to the Fund as collateral, the Fund and the borrower negotiate a rate for the
loan premium to be received by the Fund for lending its portfolio securities.
In either event, the total yield on the Fund's portfolio is increased by loans
of its portfolio securities. The Fund will have the right to retain record
ownership of loaned securities to exercise beneficial rights such as voting
rights, subscription rights and rights to dividends, interest or other
distributions. Such loans are terminable at any time. The Fund may pay
reasonable finder's, administrative and custodial fees in connection with such
loans.
INVESTMENT RESTRICTIONS
The Fund has adopted a number of fundamental and non-fundamental
restrictions and policies relating to the investment of its assets and its
activities. The fundamental policies set forth below may not be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities (which for this purpose and under the Investment Company Act
of 1940, as amended (the "Investment Company Act"), means the lesser of (i)
67% of the Fund's shares represented at a meeting at which more than 50% of
the outstanding shares of the Fund are represented or (ii) more than 50% of
the Fund's outstanding shares). 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
7
<PAGE>
may borrow up to an additional 5% of its total assets for temporary
purposes, (iii) the Fund may obtain such short-term credit as may be
necessary for the clearance of purchases and sales of portfolio securities
and (iv) the Fund may purchase securities on margin to the extent permitted
by applicable law. The Fund may not pledge its assets other than to secure
such borrowings or, to the extent permitted by the Fund's investment
policies as set forth in its Prospectus and Statement of Additional
Information, as they may be amended from time to time, in connection with
hedging transactions, short sales, when-issued and forward commitment
transactions and similar investment strategies.
7. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the "Securities Act"), in selling portfolio securities.
8. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
Under the non-fundamental investment restrictions, which may be changed by
the Board of Directors without shareholder approval, the Fund may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law. As a matter of
policy, however, the Fund will not purchase shares of any registered open-
end investment company or registered unit investment trust in reliance on
Section 12(d)(i)(F) or (G) (the "fund of funds" provisions) of the
Investment Company Act, at any time its shares are owned by another
investment company that is part of the same group of investment companies
as the Fund.
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 Investment Adviser, 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.
8
<PAGE>
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 of the portfolio managers and of each executive officer and Director is
P.O. Box 9011, Princeton, New Jersey 08543-9011.
Arthur Zeikel (65)--President and Director(1)(2)--Chairman of the Investment
Adviser (which term as used herein includes its corporate predecessors) and of
Merrill Lynch Asset Management, L.P. ("MLAM," which term as used herein
includes its corporate predecessors) since 1997; President of the Investment
Adviser and MLAM from 1977 to 1997; Chairman of Princeton Services, Inc.
("Princeton Services") since 1997, Director thereof since 1993 and President
thereof from 1993 to 1997; Executive Vice President of Merrill Lynch & Co.,
Inc. ("ML & Co.") since 1990.
James H. Bodurtha (54)--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 (59)--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 1976 to 1993; Distinguished Fellow, Herman Kahn Chair, Hudson
Institute from 1984 to 1985; Trustee, Hudson Institute since 1980 and
President since 1997; Director, Damon Corporation from 1991 to 1995; Overseer,
Center for Naval Analyses from 1983 to 1993; Limited Partner, Hypertech L.P.
in 1996.
Robert R. Martin (71)--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 (68)--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 (45)--Director(2)--Morgan Hall, Soldiers Field, Boston,
Massachusetts 02163. Professor, Harvard Business School and Associate
Professor from 1983 to 1989; Trustee, The Common Fund, since 1989; Director,
Quantec Limited since 1991 and TIBCO from 1994 to 1996.
9
<PAGE>
Terry K. Glenn (57)--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 Merrill
Lynch Funds Distributor, Inc. ("MLFD" or the "Distributor") since 1986 and
Director thereof since 1991; President of Princeton Administrators, L.P. since
1988.
Joseph T. Monagle, Jr.(49)--Senior Vice President(1)(2)--Senior Vice
President and Department Head of the Global Fixed Income Division of the
Investment Adviser and MLAM since 1990; Vice President of the Investment
Adviser from 1978 to 1990; Senior Vice President of Princeton Services since
1993.
Vincent T. Lathbury, III (57)--Vice President and Portfolio Manager(1)(2)--
First Vice President of MLAM since 1997; Vice President of the Investment
Adviser and MLAM from 1982 to 1997; Portfolio Manager of the Investment
Adviser and MLAM since 1982.
Donald C. Burke (37)--Vice President(1)(2)--First Vice President of MLAM
since 1997; Vice President of MLAM from 1990 to 1997; Director of Taxation of
MLAM since 1990.
Paolo H. Valle (40)--Senior Vice President and Portfolio Manager(1)(2)--
First Vice President of MLAM since 1997, Senior Portfolio Manager since 1992
and Vice President from 1992 to 1997.
Gerald M. Richard (48)--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.
Lawrence A. Rogers (51)--Secretary(1)(2)--Director (Legal Advisory) of MLAM
since 1997; Attorney in private practice prior thereto.
- --------
(1)Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a director, trustee or officer of one or more
additional investment companies for which the Investment Adviser or MLAM
acts as investment adviser or manager.
At February 27, 1998, 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 the Fund. At such date, Mr. Zeikel, a Director and officer of
the Fund, and the other officers of the Fund, owned less than 1% of the
outstanding shares of common stock of ML&Co.
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, 1997,
fees and expenses paid to the non-affiliated Directors aggregated $45,438.
10
<PAGE>
The following table sets forth for the year ended December 31, 1997,
compensation paid by the Fund to the non-affiliated Directors and for the year
ended December 31, 1997, the aggregate compensation paid by all registered
investment companies (including the Fund) advised by MLAM and its affiliate,
FAM ("MLAM/FAM Advised Funds"), to the non-affiliated Directors.
<TABLE>
<CAPTION>
PENSION OR TOTAL COMPENSATION
RETIREMENT FROM FUND AND OTHER
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).
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, 1995, 1996 and 1997, the fees paid by the
Fund to the Investment Adviser aggregated $9,774,596, $8,216,118 and
$6,059,356, respectively.
As described in the Prospectus, the Investment Adviser has also 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.
11
<PAGE>
The Investment Advisory Agreement obligates the Investment Adviser to
provide investment advisory services and to pay all compensation of and
furnish office space for officers and employees of the Fund connected with
investment and economic research, trading and investment management of the
Fund, as well as the fees of all Directors of the Fund who are affiliated
persons of ML & Co. or any of its affiliates. The Fund pays all other expenses
incurred in the operation of the Fund, including, among other things, taxes,
expenses for legal and auditing services, costs of printing proxies, stock
certificates, shareholder reports and prospectuses and statements of
additional information (except to the extent paid by the Distributor), charges
of the custodian, any subcustodian and transfer agent, expenses of redemption
of shares, Securities and Exchange Commission fees, expenses of registering
the shares under Federal, state or foreign laws, fees and expenses of non-
affiliated 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, 1995, 1996 and 1997, the Fund reimbursed the Investment Adviser
$150,832, $165,821 and $170,484 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."
The Investment Adviser is a limited partnership, the partners of which are
ML & Co. and Princeton Services. ML & Co. and Princeton Services are
"controlling persons" of the Investment Adviser as defined under the
Investment Company Act because of their ownership of its voting securities or
their power to exercise a controlling influence over its management or
policies. Similarly, the following entities may be considered "controlling
persons" of MLAM U.K.: Merrill Lynch Europe Limited (MLAM U.K.'s parent), a
subsidiary of ML International Holdings, a subsidiary of Merrill Lynch
International, Inc., a subsidiary of ML & Co.
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
12
<PAGE>
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 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, 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 A shares for the fiscal year ended
December 31, 1997 were $20,949, of which the Distributor received $1,741 and
Merrill Lynch received $19,208. For the fiscal years ended December 31, 1995,
1996 and 1997, 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. 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 gross sales charges for the sale of Class
D shares for the fiscal year ended December 31, 1997 were $16,997, of which
the Distributor received $1,583 and Merrill Lynch received $15,414. For the
fiscal years ended December 31, 1995, 1996 and 1997, 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.
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
13
<PAGE>
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
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 from 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
14
<PAGE>
of shares of the Fund. This investment option is available only with respect
to eligible shares as to which no Early Withdrawal Charge or CDSC (each as
defined in the eligible fund's prospectus) is applicable. Purchase orders from
eligible fund shareholders wishing to exercise this investment option will be
accepted only on the day that the related tender offer terminates and will be
effected at the net asset value of the designated class of the Fund on such
day.
REDUCED INITIAL SALES CHARGES
Rights of Accumulation. Reduced sales charges are applicable through a right
of accumulation under which eligible investors are permitted to purchase
shares of the Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the shares then
being purchased plus (b) an amount equal to the then current net asset value
or cost, whichever is higher, of the purchaser's combined holdings of all
classes of shares of the Fund and of other MLAM-advised mutual funds. For any
such right of accumulation to be made available, the Distributor must be
provided at the time of purchase, by the purchaser or the purchaser's
securities dealer, with sufficient information to permit confirmation of
qualification. Acceptance of the purchase order is subject to such
confirmation. The right of accumulation may be amended or terminated at any
time. Shares held in the name of a nominee or custodian under pension, profit-
sharing or other employee benefit plans may not be combined with other shares
to qualify for the right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A or Class D shares of the Fund or of
any other MLAM-advised mutual funds made within a 13-month period starting
with the first purchase pursuant to the Letter of Intention in the form
provided in the Prospectus. The Letter of Intention is available only to
investors whose accounts are maintained at the Fund's transfer agent. The
Letter of Intention is not available to employee benefit plans for which
Merrill Lynch provides plan participant record-keeping services. The Letter of
Intention is not a binding obligation to purchase any amount of Class A or
Class D shares; however, its execution will result in the purchaser paying a
lower sales charge at the appropriate quantity purchase level. A purchase not
originally made pursuant to a Letter of Intention may be included under a
subsequent Letter of Intention executed within 90 days of such purchase if the
Distributor is informed in writing of this intent within such 90-day period.
The value of Class A and Class D shares of the Fund and of other MLAM-advised
mutual funds presently held, at cost or maximum offering price (whichever is
higher), on the date of the first purchase under the Letter of Intention, may
be included as a credit toward the completion of such Letter, but the reduced
sales charge applicable to the amount covered by such Letter will be applied
only to new purchases. If the total amount of shares does not equal the amount
stated in the Letter of Intention (minimum of $25,000), the investor will be
notified and must pay, within 20 days of the expiration of such Letter, the
difference between the sales charge on the Class A or Class D shares purchased
at the reduced rate and the sales charge applicable to the shares actually
purchased through the Letter. Class A or Class D shares equal to at least five
percent of the intended amount will be held in escrow during the 13-month
period (while 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
15
<PAGE>
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 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; and 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
16
<PAGE>
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 that might result from an acquisition of assets
having net unrealized appreciation that 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 that (i) meet the investment objective and policies of
the Fund; (ii) are acquired for investment and not for resale (subject to the
understanding that the disposition of the Fund's portfolio securities shall at
all times remain within its control); and (iii) are liquid securities, the
value of which is readily ascertainable, which are not restricted as to
transfer either by law or liquidity of market (except that the Fund may
acquire through such transactions restricted or illiquid securities to the
extent the Fund does not exceed the applicable limits on acquisition of such
securities set forth under "Investment Objective and Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.
EMPLOYER-SPONSORED RETIREMENT OR SAVINGS PLANS AND CERTAIN OTHER ARRANGEMENTS
Certain employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class A or Class D shares at net asset value, based
on the number of employees 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
17
<PAGE>
that such Distribution Plan will benefit the Fund and its related class of
shareholders. Each Distribution Plan can be terminated at any time, without
penalty, by the vote of a majority of the Independent Directors or by the vote
of the holders of a majority of the outstanding related class of voting
securities of the Fund. A Distribution Plan cannot be amended to increase
materially the amount to be spent by the Fund without the approval of the
related class of shareholders and all material amendments are required to be
approved by the vote of Directors, including a majority of the Independent
Directors who have no direct or indirect financial interest in such
Distribution Plan, cast in person at a meeting called for that purpose. Rule
12b-1 further requires that the Fund preserve copies of each Distribution Plan
and any reports made pursuant to the plan for a period of not less than six
years from the date of such Distribution Plan or such report, the first two
years in an easily accessible place.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the National
Association of Securities Dealers, Inc. (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 payment in excess of the amount payable under the NASD formula
will not be made.
18
<PAGE>
The following table sets forth comparative information as of December 31,
1997 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.
DATA CALCULATED AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
ANNUAL
DISTRIBUTION
ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
---------- --------- ---------- -------- -------------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES, FOR THE
PERIOD NOVEMBER 18,
1991 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER
31, 1997:
Under NASD Rule as
Adopted................ $2,186,928 $136,683 $53,442 $190,125 $57,951 $132,174 $3,206
Under Distributor's
Voluntary Waiver....... $2,186,928 $136,683 $10,935 $147,618 $57,951 $ 89,667 $3,206
CLASS C SHARES, FOR THE
PERIOD OCTOBER 21, 1994
(COMMENCEMENT OF
OPERATIONS) TO DECEMBER
31, 1997:
Under NASD Rule as
Adopted................ $ 17,794 $ 1,112 $ 182 $ 1,294 $ 138 $ 1,156 $ 65
</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. This
figure may include CDSCs that were deferred when a shareholder redeemed
shares prior to the expiration of the applicable CDSC period and invested
the proceeds, without the imposition of a sales charge, in Class A shares
in conjunction with the shareholder's participation in the Merrill Lynch
Mutual Fund Advisor (Merrill Lynch MFASM) Program ("MFA Program"). The
CDSC is booked as a contingent obligation that may be payable if the
shareholder terminates participation in the MFA Program.
(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.
19
<PAGE>
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days 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 in part on the market value of the securities
held by the Fund at any 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 Retirement Account ("IRA") or other retirement
plan or following the death or disability of a Class B shareholder.
Redemptions for which the waiver applies in the case of such withdrawals are:
(a) any partial or complete redemption in connection with a distribution
following retirement under a tax-deferred retirement plan or attaining age 59
1/2 in the case of an IRA or other retirement plan, or part of a series of
equal periodic payments (not less frequently than annually) made for the life
(or life expectancy), or any redemption resulting from the tax-free return of
an excess contribution to an IRA; or (b) any partial or complete redemption
following the death or disability (as defined in the Code) of a Class B
shareholder (including one who owns the Class B shares as joint tenant with
his or her spouse) provided the redemption is requested within one year of the
death or initial determination of disability. For the fiscal year ended
December 31, 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 $
1,822,022 with respect to redemptions of Class B shares, all of which were
paid to Merrill Lynch. For the fiscal year ended December 31, 1997, the
Distributor received CDSCs of $996,571 with respect to redemptions of Class B
shares, all of which were paid to Merrill Lynch. For the fiscal years ended
December 31, 1996 and 1997, additional CDSCs payable to the Distributor with
respect to redemptions of Class B shares may have been waived or converted to
a contingent obligation in connection with a shareholder's participation in
certain fee-based programs. For the fiscal year ended December 31, 1995, the
Distributor received CDSCs of $ 4,150 with respect to redemptions of 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. For
the fiscal year ended December 31, 1997, the Distributor received CDSCs of
$4,508 with respect to redemptions of Class C shares, all of which were paid
to Merrill Lynch.
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PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors of the Fund, the
Investment Adviser is primarily responsible for the execution of the Fund's
portfolio transactions. In executing such transactions, the Investment Adviser
seeks to obtain the best results for the Fund, taking into account such
factors as price (including the applicable brokerage commission or dealer
spread), size of order, difficulty of execution and operational facilities of
the firm involved and the firm's risk in positioning a block of securities.
While the Investment Adviser generally seeks reasonably competitive commission
rates or spreads, the Fund does not necessarily pay the lowest commission or
spread available.
The Fund has no obligation to deal with any broker or dealer in execution of
transactions in portfolio securities. Subject to obtaining the best price and
execution, securities firms 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 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, 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. For the
fiscal year ended December 31, 1997, the Fund paid total brokerage commissions
of $200,854, of which $57,158 or 28.5% was paid to Merrill Lynch for effecting
3.7% of the aggregate dollar amount of transactions on which the Fund paid
brokerage commissions. For the fiscal years ended December 31, 1996 and 1997,
the portfolio turnover rates were 208.53% and 217.60%, respectively.
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the United States national securities exchanges from
executing exchange transactions for their affiliates and
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institutional accounts which they manage unless the member (i) has obtained
prior express authorization from the account to effect such transactions, (ii)
at least annually furnishes the account with a statement of the aggregate
compensation received by the member in effecting such transactions, and (iii)
complies with any rules the Commission has prescribed with respect to the
requirements of clauses (i) and (ii). To the extent Section 11(a) would apply
to Merrill Lynch acting as a broker for the Fund in any of its portfolio
transactions executed on any such securities exchange of which it is a member,
appropriate consents have been obtained from the Fund and annual statements as
to aggregate compensation will be provided to the Fund.
While the Fund generally does not expect to engage in trading for short-term
gains, it will effect portfolio transactions without regard to holding period
if, in the judgment of the Fund's Investment Adviser, 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
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.
The NYSE is not open on New Year's Day, Martin Luther King, Jr. 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. 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 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 for long positions and
at the last available ask price for short positions. 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. Long positions in securities traded in the OTC market are
valued at the last available bid price in the OTC market prior to the time of
valuation. Short positions in securities traded in the OTC market are valued
at the last available ask price
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in the OTC market prior to the time of valuation. Portfolio securities that
are traded in both the OTC market and on a stock exchange are valued according
to the broadest and most representative market. 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 of the Fund. The Fund employs Merrill Lynch Securities Pricing
Service ("MLSPS"), an affiliate of the Investment Adviser, to provide
securities prices for the Fund. During the fiscal year ended December 31, 1995
the Fund paid $5,414 to MLSPS for such service. During the fiscal year ended
December 31, 1996 the Fund paid $2,768 to MLSPS for such service. During the
fiscal year ended December 31, 1997, the Fund paid $3,079 to MLSPS for such
service.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below and in the
Prospectus under "Shareholder Services" that 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 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
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<PAGE>
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 by purchasing
Class A shares (if he or she is an eligible Class A investor as described in
the Prospectus), Class B, Class C or Class D shares at the applicable public
offering price either through the shareholder's securities dealer or by mail
directly to the Transfer Agent, acting as agent for such securities dealer.
Voluntary accumulation also can be made through a service known as the Fund's
Automatic Investment Plan whereby the Fund is authorized through pre-
authorized checks or automated clearing house debits of $50 or more to charge
the regular bank account of the shareholder on a regular basis to provide
systematic additions to the Investment Account of such shareholder. The Fund's
Automatic Investment Plan is not available to shareholders whose shares are
held in brokerage accounts with Merrill Lynch. Alternatively, investors who
maintain CMA(R) or CBA(R) accounts may arrange to have periodic investments
made in the Fund, in their CMA(R) or CBA(R) accounts or in certain related
accounts in the amount of $100 or more ($1 for retirement accounts) through
the CMA(R) 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 Merrill Lynch in writing if the
shareholder's account is maintained with Merrill Lynch or notify the Transfer
Agent in writing or by telephone (1-800-MER-FUND) if their account is
maintained with the Transfer Agent 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. The Fund is not
responsible for any failure of delivery to the shareholder's address of record
and no interest will accrue on amounts represented by uncashed distribution or
redemption checks.
SYSTEMATIC WITHDRAWAL PLANS
A shareholder may elect to make systematic withdrawals from an Investment
Account of Class A, Class B, Class C or Class D shares 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 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
shares having a value of $10,000 or more.
At the time of each withdrawal payment, sufficient 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 the dollar
amount and class of shares to be redeemed. 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
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Exchange is not open for business on such date, the shares will be redeemed at
the close of business on the following business day. The check for the
withdrawal payment will be mailed, or the direct deposit for the withdrawal
payment will be made, on the next business day following redemption. When a
shareholder is making systematic withdrawals, dividends and distributions on
all shares in the Investment Account are reinvested automatically in shares of
the Fund. A shareholder's Systematic Withdrawal Plan may be terminated at any
time, without charge or penalty, by the shareholder, the Fund, the Transfer
Agent or the Distributor.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously
exceed reinvested dividends, the shareholder's original investment may be
reduced correspondingly. Purchases of additional 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 shares of the Fund from investors who maintain a systematic
withdrawal plan unless such purchase is equal to at least one year's scheduled
withdrawals or $1,200, whichever is greater. Periodic investments may not be
made into an Investment Account in which the shareholder has elected to make
systematic withdrawals.
Alternatively, a 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. The minimum fixed dollar amount redeemable is
$50. The proceeds of systematic redemptions will be posted to the
shareholder's account three business days after the date the shares are
redeemed. All redemptions are made at net asset value on the first, second,
third or fourth Monday of each month, in the case of monthly redemptions, or
of every other month in the case of bimonthly redemptions. For quarterly,
semiannual or annual redemptions, the shareholder may select the month in
which the shares are to be redeemed and may designate whether the redemption
is to be made on the first, second, third or fourth Monday of the month. If
the Monday selected is not a business day, 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 Program. For more information on the CMA(R)or
CBA(R) Systematic Redemption Program, eligible shareholders should contact
their Merrill Lynch Financial Consultant.
With respect to redemptions of Class B and Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares
that can be redeemed from an account annually shall not exceed 10% of the
value of shares of such class in that account at the time the election to join
the systematic withdrawal plan was made. Any CDSC that otherwise might be due
on such redemption of Class B or Class C shares will be waived. Shares
redeemed pursuant to a systematic withdrawal plan will be redeemed in the same
order as Class B or Class C shares are otherwise redeemed. See "Purchase of
Shares--Deferred Sales Charge Alternatives--Class B and Class C Shares--
Contingent Deferred Sales Charges--Class B Shares" and "--Contingent Deferred
Sales Charges--Class C Shares" in the Prospectus. Where the systematic
withdrawal plan is applied to Class B shares, upon conversion of the last
Class B shares in an account to Class D shares, the systematic withdrawal plan
will automatically be applied thereafter to Class D shares. See "Purchase of
Shares--Deferred Sales Charge Alternatives--Class B and Class C Shares--
Conversion of Class B Shares to Class D Shares" in the Prospectus; if an
investor wishes to change the amount being withdrawn in a systematic
withdrawal plan the investor should contact his or her Financial Consultant.
EXCHANGE PRIVILEGE
U.S. 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
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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 or her account at the time of the exchange and is not otherwise eligible
to acquire Class A shares of the second fund, the shareholder will receive
Class D shares of the second fund as a result of the exchange. Class D shares
also may be exchanged for Class A shares of a second MLAM-advised mutual fund
at any time as long as, at the time of the exchange, the shareholder holds
Class A shares of the second fund in the account in which the exchange is made
or is otherwise eligible to purchase Class A shares of the second fund. Class
B, Class C and Class D shares are exchangeable with shares of the same class
of other MLAM-advised mutual funds. For purposes of computing the CDSC that
may be payable upon a disposition of the shares acquired in the exchange, the
holding period for the previously owned shares of the Fund is "tacked" to the
holding period of the newly acquired shares of the other fund as more fully
described below. Class A, Class B, Class C and Class D shares also are
exchangeable for shares of certain MLAM-advised money market funds as follows:
Class A shares may be exchanged for shares of Merrill Lynch Ready Assets
Trust, Merrill Lynch Retirement Reserves Money Fund (available only for
exchanges within certain retirement plans), Merrill Lynch U.S.A. Government
Reserves and Merrill Lynch U.S. Treasury Money Fund; Class B, Class C and
Class D shares may be exchanged for shares of Merrill Lynch Government Fund,
Merrill Lynch Institutional Fund, Merrill Lynch Institutional Tax-Exempt Fund
and Merrill Lynch Treasury Fund. Shares with a net asset value of at least
$100 are required to qualify for the exchange privilege, and any shares
utilized in an exchange must have been held by the shareholder for at least 15
days. It is contemplated that the exchange privilege may be applicable to
other new mutual funds whose shares may be distributed by the Distributor.
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 with a
reduced sales charge or 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
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<PAGE>
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 Special Value Fund Class B shares for
more than five years.
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
that 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 that 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 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.
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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 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 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 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 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). Recent legislation
creates additional categories of capital gains taxable at different rates.
Generally 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, as well as the amount
of capital gain dividends in the different categories of capital gain referred
to above.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. 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
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<PAGE>
date in one of such months, then such dividend will be treated for tax
purposes as being paid by the Fund and received by its shareholders on
December 31 of the year in which such dividend was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult
their own tax advisers concerning the applicability of the United States
withholding tax.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have
furnished an incorrect number. When establishing an account, an investor must
certify under penalty of perjury that such number is correct and that such
investor is not otherwise subject to backup withholding.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
Shareholders may be able to claim United States foreign tax credits with
respect to such taxes, subject to certain conditions and limitations contained
in the Code. For example, certain retirement accounts cannot claim foreign tax
credits on investments in foreign securities held in the Fund. In addition,
recent legislation permits a foreign tax credit to be claimed with respect to
withholding tax on a dividend only if the shareholder meets certain holding
period requirements. 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 to, 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. In the case of
foreign taxes passed through by a RIC, the holding period requirements
referred to above must be met by both the shareholder and the RIC. No
deductions for foreign taxes, moreover, 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 and other information needed to
claim the foreign tax credit. 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.
29
<PAGE>
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 statistical 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 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
30
<PAGE>
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.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether the Fund qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options, foreign currency
futures and forward foreign currency contracts will be valued for purposes of
the RIC diversification requirements applicable to the Fund.
Under Code Section 988, special rules are provided for certain transactions
in a currency other than the taxpayer's functional currency (i.e., unless
certain special rules apply, currencies other than the United States dollar).
In general, foreign currency gains or losses from certain debt instruments,
from certain forward contracts, from futures contracts that are not "regulated
futures contracts" and from unlisted options will be treated as ordinary
income or loss under Code Section 988. In certain circumstances, the Fund may
elect capital gain or loss treatment for such transactions. Regulated futures
contracts, as described above, will be taxed under Code Section 1256 unless
application of Section 988 is elected by the Fund. In general, however, Code
Section 988 gains or losses will increase or decrease the amount of the Fund's
investment company taxable income available to be distributed to shareholders
as ordinary income. Additionally, if Code Section 988 losses exceed other
investment company taxable income during a taxable year, the Fund would not be
able to make any ordinary income dividend distributions and all or a portion
of distributions made before the losses were realized but in the same taxable
year would be recharacterized as a return of capital to shareholders, thereby
reducing the basis of each shareholder's Fund shares and resulting in a
capital gain for any shareholder who received a distribution greater than such
shareholder's basis in Fund shares (assuming the shares were held as a capital
asset). These rules and the mark-to-market rules described above, however,
will not apply to certain transactions entered into by the Fund solely to
reduce the risk of currency fluctuations with respect to its investments.
Finally, Section 988 losses with respect to foreign currency denominated tax-
exempt securities may be subject to disallowance.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code 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.
31
<PAGE>
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 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>
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
------------ ------------- ------------ ------------- ------------ ------------- ------------ -------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One Year Ended
December 31,
1997............ 1.90% $1,019.00 1.39% $1,013.90 4.29% $1,042.90 1.65% $1,016.50
Five Years Ended
December 31,
1997............ 7.41% $1,429.80 7.47% $1,433.70 -- -- -- --
Inception
(November 18,
1991)
to December 31,
1997............ -- -- 7.26% $1,535.00 -- -- -- --
Inception
(September 29,
1988)
to December 31,
1997............ 9.63% $2,340.80 -- -- -- -- -- --
Inception
(October 21,
1994)
to December 31,
1997............ -- -- -- -- 8.85% $1,311.00 8.09% $1,282.00
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended
December 31,
1997............ 6.15% $1,061.50 5.34% $1,053.40 5.28% $1,052.80 5.88% $1,058.80
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 (No-
vember 18,
1991)
to December 31,
1991........... -- -- 1.64% $1,016.40 -- -- -- --
Inception (Octo-
ber 21, 1994)
to December 31,
1995........... -- -- -- -- (1.20)% $ 988.00 (1.09)% $ 989.10
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Inception (Novem-
ber 18, 1991)
to December 31,
1997............ -- -- 53.50% $1,535.00 -- -- -- --
Inception (Sep-
tember 29, 1988)
to December 31,
1997*........... 134.08% $2,340.80 -- -- -- -- -- --
Inception (Octo-
ber 21, 1994)
to December 31,
1997............ -- -- -- -- 31.10% $1,311.00 28.20% $1,282.00
<CAPTION>
YIELD
<S> <C> <C> <C> <C> <C> <C> <C> <C>
30 Days Ended De-
cember 31, 1997. 6.89% -- 6.40% -- 6.35% -- 6.65% --
</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>
In order to reflect the reduced sales charges in the case of Class A or
Class D shares or the waiver of the CDSC in the case of Class B shares
applicable to certain investors, as described under "Purchase of Shares" and
"Redemption of Shares," respectively, the total return data quoted by the Fund
in advertisements directed to such investors may take into account the
reduced, and not the maximum, sales charge or may take into account the waiver
of the CDSC and therefore may reflect greater total return since, due to the
reduced sales charges or the waiver of sales charges, a lower amount of
expenses is deducted.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund was incorporated under Maryland law on July 1, 1988 as a closed-end
investment company. On October 25, 1991, the shareholders of the Fund voted to
convert the Fund to an open-end investment company. The Fund was converted to
an open-end investment company on November 15, 1991 and commenced operations
as such on November 18, 1991. At the time of conversion of the Fund into an
open-end investment company, the Fund had approximately 32,447,786 shares of
Common Stock outstanding, all of which were reclassified into shares of Class
A Common Stock upon such conversion. At the date of this Statement of
Additional Information, the Fund has an authorized capital of 4,000,000,000
shares of Common Stock, par value $0.10 per share, divided into four classes,
designated Class A, Class B, Class C and Class D Common Stock, each of which
consists of 1,000,000,000 shares. Class A, Class B, Class C and Class D Common
Stock represent an interest in the same assets of the Fund and are identical
in all respects except that the Class B, Class C and Class D shares bear
certain expenses related to the account maintenance and/or distribution of
such shares and have exclusive voting rights with respect to matters relating
to such expenditures. The Board of Directors of the Fund may classify and
reclassify the shares of the Fund into additional classes of Common Stock at a
future date.
Shareholders are entitled to one vote for each full share held and
fractional votes for fractional shares held and will vote on the election of
Directors and any other matter submitted to a shareholder vote. The Fund does
not intend to hold meetings of shareholders in any year in which the
Investment Company Act does not require shareholders to act upon any of the
following matters: (i) election of Directors; (ii) approval of an investment
advisory agreement; (iii) approval of a distribution agreement; and (iv)
ratification of selection of independent accountants. Generally, under
Maryland law, a meeting of shareholders may be called for any purpose on the
written request of the holders of at least 25% of the outstanding shares of
the Fund. Under the By-laws of the Fund, a special meeting of shareholders may
be called for any purpose on the written request of the holders of at least
10% of the outstanding shares of the Fund. Voting rights for Directors are not
cumulative. Shares issued are fully paid and non-assessable and have no
preemptive rights. Redemption and conversion rights are discussed elsewhere
herein and in the Prospectus. Each share of Class B, Class C and Class D
Common Stock is entitled to participate equally in dividends and distributions
declared by the Fund and in the net assets of the Fund upon liquidation or
dissolution after satisfaction of outstanding liabilities. Stock certificates
will be issued by the Transfer Agent only on specific request. Certificates
for fractional shares are not issued in any case.
34
<PAGE>
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for each class of
shares of the Fund based on the value of the Fund's net assets and number of
shares outstanding as of December 31, 1997 is calculated as set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net Assets................... $161,346,717 $641,242,067 $11,737,599 $15,072,489
============ ============ =========== ===========
Number of Shares Outstanding. 18,266,879 72,644,554 1,330,763 1,706,412
============ ============ =========== ===========
Net Asset Value Per Share
(net assets divided by
number of shares
outstanding)................ $ 8.83 $ 8.83 $ 8.82 $ 8.83
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............... $ 9.20 $ 8.83 $ 8.82 $ 9.20
============ ============ =========== ===========
</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 selection of
independent auditors is subject to approval by the non-affiliated Directors of
the Fund. The independent auditors are responsible for auditing the annual
financial statements of the Fund.
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 351, Boston, Massachusetts
02101, acts as the custodian of the Fund's assets. The Custodian is
responsible for safeguarding and controlling the Fund's cash and securities,
handling the receipt and delivery of securities and collecting interest and
dividends on the Fund's investment.
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, acts as the Fund's transfer agent. The
Transfer Agent is responsible for the issuance, transfer and redemption of
shares and the opening, maintenance and servicing of shareholder accounts. See
"Management of the Fund--Transfer Agency Services" in the Prospectus.
LEGAL COUNSEL
Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
35
<PAGE>
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on December 31 of each year. The Fund sends
to its shareholders at least semi-annually reports showing the Fund's
portfolio and other information. An annual report, containing financial
statements audited by Independent Auditors, is sent to shareholders each year.
After the end of each year, shareholders will receive Federal income tax
information regarding dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Commission, Washington,
D.C., under the Securities Act of 1933 and the Investment Company Act, to
which reference is hereby made.
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's shares on March 2, 1998.
36
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch World Income Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch World Income Fund, Inc. as of
December 31, 1997, 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 each of the years in the five-year
period then ended. 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, 1997 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, 1997, 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 20, 1998
37
<PAGE>
Merrill Lynch World Income Fund, Inc., December 31, 1997
SCHEDULE OF INVESTMENTS (in US dollars)
<TABLE>
<CAPTION>
LATIN AMERICA
Value Percent of
Industries Face Amount Fixed-Income Investments Cost (Note 1a) Net Assets
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Argentina
Banking & Finance US$ 2,000,000 Banco Hipotecario Nacional, 8% due 6/04/1999 $ 2,005,000 $ 1,960,000 0.3%
----------------------------------------------------------------------------------------------------------------------------------
Foreign Government 7,000,000 Republic of Argentina, 9.75%
Obligations due 9/19/2027 5,852,000 6,685,000 0.8
9,600,000 Republic of Argentina, Floating Rate Brady Bonds,
6.687% due 3/31/2005+ 8,280,000 8,592,000 1.0
Republic of Argentina, Global Bonds:
3,000,000 8.375% due 12/20/2003 3,061,020 2,850,000 0.4
250,000 11.375% due 1/30/2017 266,625 274,000 0.0
------------ ------------ -----
17,459,645 18,401,000 2.2
----------------------------------------------------------------------------------------------------------------------------------
Total Fixed-Income Investments in Argentina 19,464,645 20,361,000 2.5
====================================================================================================================================
Brazil
Communications 1,500,000 Comtel Brasileira Ltd., 10.75% due 9/26/2004 (e) 1,500,000 1,470,000 0.2
----------------------------------------------------------------------------------------------------------------------------------
Foreign Government 35,348,060 Republic of Brazil, Floating Rate Brady Bonds,
Obligations 7.06% due 4/15/2014+ 27,573,266 27,659,857 3.3
----------------------------------------------------------------------------------------------------------------------------------
Total Fixed-Income Investments in Brazil 29,073,266 29,129,857 3.5
====================================================================================================================================
Colombia
Energy 5,000,000 Oleoducto Central S.A., 9.35% due 9/01/2005 (e) 5,000,000 5,403,550 0.6
----------------------------------------------------------------------------------------------------------------------------------
Utilities 9,916,000 Transgas de Occidente S.A., 9.79% due 11/01/2010 (e) 10,052,345 10,643,448 1.3
----------------------------------------------------------------------------------------------------------------------------------
Total Fixed-Income Investments in Colombia 15,052,345 16,046,998 1.9
====================================================================================================================================
Ecuador
Foreign Government 9,842,040 Republic of Ecuador, PDI, Floating Rate
Obligations Brady Bonds, 5.39% due 2/27/2015+ 6,264,994 6,421,931 0.8
5,000,000 Republic of Ecuador, Par, Global Brady Bonds,
- ------------------------------------------------------------------------------------------------------------------------------------
3.50% due 2/28/2025+ 2,953,125 2,725,000 0.3
Total Fixed-Income Investments in Ecuador 9,218,119 9,146,931 1.1
====================================================================================================================================
Mexico
Foreign Government 5,000,000 United Mexican States, Par, Series B, Floating Rate
Obligations Brady Bonds, 6.25% due 12/31/2019+ 4,181,250 4,162,500 0.5
----------------------------------------------------------------------------------------------------------------------------------
Total Fixed-Income Investments in Mexico 4,181,250 4,162,500 0.5
====================================================================================================================================
Venezuela
Foreign Government 49,000,000 Republic of Venezuela, 9.25% due 9/15/2027 44,419,500 43,904,000 5.3
Obligations
----------------------------------------------------------------------------------------------------------------------------------
Total Fixed-Income Investments in Venezuela 44,419,500 43,904,000 5.3
====================================================================================================================================
Total Investments in Latin American Securities 121,409,125 122,751,286 14.8
====================================================================================================================================
NORTH
AMERICA
====================================================================================================================================
Canada
Broadcasting/Cable 10,000,000 Videotron Group, Ltd. Co., 10.25% due 10/15/2002 10,043,750 10,550,000 1.3
----------------------------------------------------------------------------------------------------------------------------------
Paper 10,000,000 Doman Industries Ltd., 8.75% due 3/15/2004 9,300,000 9,550,000 1.1
----------------------------------------------------------------------------------------------------------------------------------
Total Fixed-Income Investments in Canada 19,343,750 20,100,000 2.4
====================================================================================================================================
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
United States
Airlines 10,000,000 US Airways Group Inc., 10.375% due 3/01/2013 10,000,000 11,191,600 1.4
----------------------------------------------------------------------------------------------------------------------------------
Broadcasting/Cable 10,000,000 Lenfest Communications, Inc., 10.50% due 6/15/2006 9,922,100 11,125,000 1.4
9,625,000 TCI Communications Financing II, 10%
due 5/31/2045 (a) 9,926,111 10,279,618 1.2
------------ ------------ -----
19,848,211 21,404,618 2.6
----------------------------------------------------------------------------------------------------------------------------------
Building Materials 10,000,000 Pacific Lumber Co., 10.50% due 3/01/2003 10,140,625 10,350,000 1.2
11,035,000 USG Corp., 8.75% due 3/01/2017 9,717,469 11,366,050 1.4
------------ ------------ ----------
19,858,094 21,716,050 2.6
----------------------------------------------------------------------------------------------------------------------------------
Chemicals 10,340,000 ISP Holdings Inc., 9.75% due 2/15/2002 10,340,000 10,908,700 1.3
----------------------------------------------------------------------------------------------------------------------------------
Conglomerates 10,000,000 Sequa Corp., 9.375% due 12/15/2003 9,915,000 10,400,000 1.3
----------------------------------------------------------------------------------------------------------------------------------
Consumer Products 10,000,000 Coleman Escrow Corp., 11.573%* due 5/15/2001 6,846,175 6,625,000 0.8
10,000,000 Playtex Products, Inc., 8.875% due 7/15/2004 10,000,000 10,162,500 1.2
------------ ------------ -----
16,846,175 16,787,500 2.0
----------------------------------------------------------------------------------------------------------------------------------
Energy 10,000,000 Chesapeake Energy Corporation, 8.50% due 3/15/2012 (e) 9,941,400 9,925,000 1.2
10,000,000 Seagull Energy Corp., 8.625% due 8/01/2005 10,000,000 10,500,000 1.3
TransAmerican Energy (e):
825,000 11.50% due 6/15/2002 816,750 808,500 0.1
14,350,000 13.29%* due 6/15/2002 11,890,362 11,480,000 1.4
------------ ------------ -----
32,648,512 32,713,500 4.0
----------------------------------------------------------------------------------------------------------------------------------
Entertainment 10,000,000 Viacom, Inc., 8% due 7/07/2006 10,031,250 10,050,000 1.2
----------------------------------------------------------------------------------------------------------------------------------
Financial Services 10,000,000 Penn Financial Corp., 9.25% due 12/15/2003 10,000,000 10,475,000 1.2
10,000,000 Reliance Group Holdings, Inc., 9% due 11/15/2000 10,000,000 10,483,400 1.3
------------ ------------ -----
20,000,000 20,958,400 2.5
----------------------------------------------------------------------------------------------------------------------------------
Food & Beverage 6,536,985 Fresh Del Monte Co., 10% due 5/01/2003 6,494,045 6,798,464 0.8
----------------------------------------------------------------------------------------------------------------------------------
Food Distribution 10,000,000 AmeriServ Food Company, 8.875% due 10/15/2006 10,000,000 10,050,000 1.2
----------------------------------------------------------------------------------------------------------------------------------
Gaming 10,000,000 Greate Bay Properties, Inc., 10.875% due 1/15/2004 9,996,250 8,400,000 1.0
7,500,000 Harrah's Jazz Co., 14.25% due 11/15/2001 (g) 5,178,125 2,325,000 0.3
10,000,000 Showboat, Inc., 9.25% due 5/01/2008 9,748,750 10,700,000 1.3
10,000,000 Trump Atlantic City Associates, 11.25% due 5/01/2006 9,943,750 9,750,000 1.2
------------ ------------ -----
34,866,875 31,175,000 3.8
----------------------------------------------------------------------------------------------------------------------------------
Hotels 10,000,000 HMC Acquisition Properties, 9% due 12/15/2007 9,346,250 10,450,000 1.3
----------------------------------------------------------------------------------------------------------------------------------
Paper 10,000,000 Container Corp. of America, 9.75% due 4/01/2003 10,200,000 10,750,000 1.3
----------------------------------------------------------------------------------------------------------------------------------
Semiconductors 10,000,000 Advanced Micro Devices, Inc., 11% due 8/01/2003 11,025,000 10,700,000 1.3
----------------------------------------------------------------------------------------------------------------------------------
Supermarkets 10,000,000 Pueblo Xtra International Inc., 9.50% due 8/01/2003 10,116,875 9,525,000 1.1
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE>
Pages 8 & 9
Merrill Lynch World Income Fund, Inc., December 31, 1997
SCHEDULE OF INVESTMENTS (in US dollars)
<TABLE>
<CAPTION>
NORTH AMERICA
(Continued)
Value Percent of
Industries Face Amount Fixed-Income Investments Cost (Note 1a) Net Assets
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
United States
(concluded)
====================================================================================================================================
Telecommunications US$ 10,000,000 Century Communications Corp., 9.50% due 3/01/2005 $ 9,797,500 $ 10,600,000 1.3%
10,000,000 Millicom International Cellular S.A., 11.834%*
due 6/01/2006 7,068,731 7,350,000 0.9
10,000,000 NTL Incorporated, 10% due 2/15/2007 9,880,000 10,525,000 1.2
------------ ------------ -----
26,746,231 28,475,000 3.4
----------------------------------------------------------------------------------------------------------------------------------
Transportation 5,000,000 GS Superhighway Holdings, 9.875% due 8/15/2004 (e) 4,987,500 4,500,000 0.5
9,921,000 Viking Star Shipping Co., 9.625% due 7/15/2003 9,949,141 10,417,050 1.3
------------ ------------ -----
14,936,641 14,917,050 1.8
----------------------------------------------------------------------------------------------------------------------------------
US Government US Treasury Bonds:
Obligations 30,000,000 6.625% due 2/15/2027 31,490,625 32,568,600 3.9
10,000,000 6.375% due 8/15/2027 10,484,375 10,546,900 1.3
------------ ------------ -----
41,975,000 43,115,500 5.2
----------------------------------------------------------------------------------------------------------------------------------
Utilities 9,848,000 Beaver Valley II Funding Corp., 9% due 6/01/2017 7,262,900 10,948,612 1.3
Midland Cogeneration Venture Limited Partnership:
6,693,446 10.33% due 7/23/2002 (b) 6,559,577 7,198,901 0.9
10,000,000 13.25% due 7/23/2006 11,183,750 12,848,300 1.5
10,000,000 Tucson Electric & Power Co., 10.732% due 1/01/2013 9,607,625 10,618,200 1.3
------------ ------------ -----
34,613,852 41,614,013 5.0
----------------------------------------------------------------------------------------------------------------------------------
Total Fixed-Income Investments
in the United States 359,808,011 373,700,395 45.1
====================================================================================================================================
Convertible Bonds
====================================================================================================================================
United States
Automotive Parts The Pep Boys--Manny, Moe & Jack:
1,000,000 4% due 9/15/1999 1,028,750 987,500 0.1
1,500,000 4.029%* due 9/20/2011 872,881 806,250 0.1
------------ ------------ -----
1,901,631 1,793,750 0.2
----------------------------------------------------------------------------------------------------------------------------------
Banking BankAtlantic Bancorp, Inc.***:
823,000 6.75% due 7/01/2006 1,629,952 1,563,700 0.2
1,200,000 5.625% due 12/01/2007 1,200,000 1,290,000 0.1
------------ ------------ -----
2,829,952 2,853,700 0.3
----------------------------------------------------------------------------------------------------------------------------------
Building & Construction 1,613,000 M.D.C. Holdings, Inc., 8.75% due 12/15/2005*** 2,334,253 3,161,480 0.4
----------------------------------------------------------------------------------------------------------------------------------
Computers 4,000,000 Apple Computer, Inc., 6% due 6/01/2001 (e)*** 3,945,000 3,225,000 0.4
----------------------------------------------------------------------------------------------------------------------------------
Conglomerates 600,000 Polyphase Corp., 12% due 7/01/1999 (f)*** 600,000 456,000 0.1
1,000,000 Thermo Electron Corp., 4.25% due 1/01/2003 (e) 1,000,000 1,241,250 0.1
1,000,000 Thermo Fibertek Inc., 4.50% due 7/15/2004 1,000,000 1,066,250 0.1
Thermo Instrument Systems, Inc.:
500,000 4.50% due 10/15/2003 505,000 574,375 0.1
1,000,000 4.50% due 10/15/2003 (e) 1,017,500 1,137,500 0.1
------------ ------------ -----
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
4,122,500 4,475,375 0.5
----------------------------------------------------------------------------------------------------------------------------------
Environmental 725,000 Thermo Ecotek Corp., 4.875% due 4/15/2004 724,094 838,281 0.1
1,063,000 Thermo TerraTech, Inc., 4.625% due 5/01/2003 (e) 1,114,735 946,070 0.1
1,500,000 US Filter Corp., 4.50% due 12/15/2001 1,580,250 1,522,500 0.2
------------ ------------ -----
3,419,079 3,306,851 0.4
----------------------------------------------------------------------------------------------------------------------------------
Health Care 1,500,000 Integrated Health Services Inc., 5.75% due 1/01/2001 1,493,750 1,584,375 0.2
----------------------------------------------------------------------------------------------------------------------------------
Health Services 2,370,000 PhyCor, Inc., 4.50% due 2/15/2003 2,241,600 2,298,900 0.3
1,000,000 Quantum Health Resources, Inc., 4.75% due 10/01/2000 935,000 925,000 0.1
------------ ------------ -----
3,176,600 3,223,900 0.4
----------------------------------------------------------------------------------------------------------------------------------
Homebuilders 350,000 Continental Homes Holding Corp., 6.875%
due 11/01/2002*** 350,000 611,625 0.1
170,000 Engle Homes, Inc., 7% due 3/01/2003 165,580 223,550 0.0
------------ ------------ -----
515,580 835,175 0.1
----------------------------------------------------------------------------------------------------------------------------------
Imaging Systems 600,000 ThermoTrex Corporation, 3.25% due 11/01/2007 600,000 600,000 0.1
----------------------------------------------------------------------------------------------------------------------------------
Manufacturing 2,000,000 Mascotech, Inc., 4.50% due 12/15/2003 1,842,500 1,772,500 0.2
----------------------------------------------------------------------------------------------------------------------------------
Medical Laser Systems 2,000,000 Thermolase Corp., 4.375% due 8/05/2004 (e) 2,000,000 1,780,000 0.2
----------------------------------------------------------------------------------------------------------------------------------
Mining 1,000,000 Coeur D'Alene Mines Corporation, 7.25%
due 10/31/2005 (e) 735,000 775,000 0.1
----------------------------------------------------------------------------------------------------------------------------------
Office Products 2,000,000 Office Depot, Inc., 4.891%* due 11/01/2008 1,183,175 1,295,000 0.2
US Office Products Co.:
2,000,000 5.50% due 5/15/2003 1,711,875 1,833,500 0.2
2,500,000 5.50% due 5/15/2003 (e) 2,413,750 2,246,875 0.3
------------ ------------ -----
5,308,800 5,375,375 0.7
----------------------------------------------------------------------------------------------------------------------------------
Oil Drilling 500,000 Loews Corp., 3.125% due 9/15/2007
(Convertible in Diamond Offshore Drilling, Inc.) 500,000 501,875 0.1
----------------------------------------------------------------------------------------------------------------------------------
Oil Services 1,000,000 Key Energy Group, Inc., 5% due 9/15/2004 834,300 838,750 0.1
----------------------------------------------------------------------------------------------------------------------------------
Optical Equipment 1,585,000 Thermo Optik Corp., 5% due 10/15/2000 (e) 1,588,950 1,798,975 0.2
----------------------------------------------------------------------------------------------------------------------------------
Pharmaceuticals 1,000,000 Alza Corp., 5% due 5/01/2006 1,065,625 1,038,750 0.1
----------------------------------------------------------------------------------------------------------------------------------
Restaurants 500,000 Boston Chicken, Inc., 7.75% due 5/01/2004 465,000 315,000 0.0
----------------------------------------------------------------------------------------------------------------------------------
Retirement Care 700,000 Assisted Living Concepts, Inc., 6% due 11/01/2002 700,000 756,000 0.1
----------------------------------------------------------------------------------------------------------------------------------
Semiconductors 750,000 Cypress Semiconductor Corp., 6% due 10/01/2002 (e) 750,000 630,938 0.1
----------------------------------------------------------------------------------------------------------------------------------
Technology 1,250,000 Broadband Technologies, Inc., 5% due 5/15/2001 (e) 1,246,250 787,500 0.1
750,000 Data General Corporation, 6% due 5/15/2004 750,000 724,688 0.1
------------ ------------ -----
1,996,250 1,512,188 0.2
----------------------------------------------------------------------------------------------------------------------------------
Telecommunications 500,000 Premiere Technologies, Inc., 5.75%
Equipment due 7/01/2004 (e)*** 500,000 519,375 0.1
----------------------------------------------------------------------------------------------------------------------------------
Total Convertible Bonds in the United States 42,624,770 42,674,332 5.2
====================================================================================================================================
</TABLE>
41
<PAGE>
Pages 10 & 11
Merrill Lynch World Income Fund, Inc., December 31, 1997
SCHEDULE OF INVESTMENTS (in US dollars)
<TABLE>
<CAPTION>
NORTH AMERICA
(concluded)
Convertible Preferred Stocks, Preferred Stocks, Value Percent of
Industries Shares Held Common Stocks & Warrants Cost (Note 1a) Net Assets
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
United States
Broadcasting/Cable 137,257 On Command Corporation $ 4,061,096 $ 1,715,713 0.2%
43,675 On Command Corporation (Warrants) (c) 349,400 242,942 0.0
----------- ----------- -----
4,410,496 1,958,655 0.2
----------------------------------------------------------------------------------------------------------------------------------
Entertainment 11,897 Time Warner, Inc. (Series M), Pfd. (a) 11,954,972 13,354,382 1.6
----------------------------------------------------------------------------------------------------------------------------------
Environmental 10,000 Allied Waste Industries, Inc. 48,105 233,125 0.0
----------------------------------------------------------------------------------------------------------------------------------
Financial Services 28,125 NAL Acceptance Corp. (Warrants) (c)(f) 0 4,500 0.0
----------------------------------------------------------------------------------------------------------------------------------
Gaming 75,000 Goldriver Hotel & Casino Corp., Liquidating Trust (f) 75,000 0 0.0
----------------------------------------------------------------------------------------------------------------------------------
Health Care 50,000 MedPartners, Inc., Conv. Pfd. 1,109,375 1,100,000 0.1
----------------------------------------------------------------------------------------------------------------------------------
Oil & Gas 10,000 Lomak Petroleum, Inc., Conv. Pfd. (e) 500,000 470,000 0.1
20,000 Western Gas Resources, Inc., Conv. Pfd. $2.62 1,000,000 817,500 0.1
----------- ----------- -----
1,500,000 1,287,500 0.2
----------------------------------------------------------------------------------------------------------------------------------
Pharmaceuticals 727 Crescendo Pharmaceuticals Corporation 8,360 8,360 0.0
----------------------------------------------------------------------------------------------------------------------------------
Power Generation 10,000 Calenergy Capital Trust II, Conv. Pfd. (e) 500,000 448,750 0.1
10,000 Calenergy Capital Trust III, Conv. Pfd. 500,000 431,250 0.0
----------- ----------- -----
1,000,000 880,000 0.1
----------------------------------------------------------------------------------------------------------------------------------
Restaurants 10,000 Wendy's Financing I, Conv. Pfd. 522,375 550,000 0.1
----------------------------------------------------------------------------------------------------------------------------------
Steel 50,000 Worthington Industries, Inc., Conv. Pfd.
(Convertible in Rouge Industries, Inc.) 850,000 681,250 0.1
----------------------------------------------------------------------------------------------------------------------------------
Transportation 19,000 Sea Containers Ltd., Conv. Pfd. $4.00 875,463 1,059,250 0.1
----------------------------------------------------------------------------------------------------------------------------------
Utilities 50,200 Citizens Utilities Company, Conv. Pfd. (Class A) 2,149,062 2,397,050 0.3
----------------------------------------------------------------------------------------------------------------------------------
Total Convertible Preferred Stocks, Preferred Stocks,
Common Stocks & Warrants in the United States 24,503,208 23,514,072 2.8
====================================================================================================================================
Total Investments in North American Securities 446,279,739 459,988,799 55.5
====================================================================================================================================
PACIFIC
BASIN Face Amount Fixed-Income Investments
====================================================================================================================================
Indonesia
Paper US$ 5,000,000 P.T. Indah Kiat International Finance, 12.50%
due 6/15/2006 5,025,000 4,837,500 0.6
----------------------------------------------------------------------------------------------------------------------------------
Total Fixed-Income Investments in Indonesia 5,025,000 4,837,500 0.6
====================================================================================================================================
Philippines
Telecommunications 5,000,000 Philippine Long Distance Telephone Co.,
8.35% due 3/06/2017 4,981,200 4,137,500 0.5
----------------------------------------------------------------------------------------------------------------------------------
Total Fixed-Income Investments in the Philippines 4,981,200 4,137,500 0.5
====================================================================================================================================
Total Investments in Pacific Basin Securities 10,006,200 8,975,000 1.1
====================================================================================================================================
WESTERN
EUROPE
====================================================================================================================================
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Germany
Foreign Government Bundesobligations:
Obligations DM 32,000,000 6.625% due 1/20/1998 18,760,199 17,810,985 2.1
17,000,000 6.375% due 5/20/1998 10,066,914 9,541,472 1.2
95,000,000 Bundesrepublik Deutschland, 6% due 7/04/2007 56,073,993 55,374,416 6.7
----------------------------------------------------------------------------------------------------------------------------------
Total Fixed-Income Investments in Germany 84,901,106 82,726,873 10.0
====================================================================================================================================
Russia
Financial Services US$ 2,500,000 Unexim International Finance B.V.,
9.875% due 8/01/2000 2,514,750 2,200,000 0.2
----------------------------------------------------------------------------------------------------------------------------------
Foreign Government 5,000,000 Ministry Finance of Russia, 10% due 6/26/2007 4,706,250 4,632,500 0.6
Obligations 27,500,000 Russia--Floating Rate Principal Loans, 5.623%
due 12/15/2020 (a) 16,980,784 16,764,463 2.0
----------- ----------- -----
21,687,034 21,396,963 2.6
----------------------------------------------------------------------------------------------------------------------------------
Total Fixed-Income Investments in Russia 24,201,784 23,596,963 2.8
====================================================================================================================================
Sweden
Foreign Government Skr 70,000,000 Government of Sweden, 5.50%
Obligations due 4/12/2002 9,151,263 8,781,498 1.0
----------------------------------------------------------------------------------------------------------------------------------
Total Fixed-Income Investments in Sweden 9,151,263 8,781,498 1.0
====================================================================================================================================
United Kingdom
Communications US$ 20,000,000 TeleWest Communications PLC, 11.41%* due 10/01/2007 14,902,941 15,550,000 1.9
----------------------------------------------------------------------------------------------------------------------------------
Total Fixed-Income Investments in the United Kingdom 14,902,941 15,550,000 1.9
====================================================================================================================================
Convertible Bonds
====================================================================================================================================
Ireland
Dental Equipment & 500,000 Phoenix Shannon PLC, 9.50%
Supplies due 11/01/2000 (e)(g) 272,370 60,000 0.0
----------------------------------------------------------------------------------------------------------------------------------
Total Convertible Bonds in Ireland 272,370 60,000 0.0
====================================================================================================================================
Total Investments in Western European Securities 133,429,464 130,715,334 15.7
====================================================================================================================================
SHORT-TERM
SECURITIES Issue
====================================================================================================================================
Commercial Paper** 27,000,000 AESOP Funding Corp., 5.75% due 1/20/1998 26,922,375 26,922,375 3.3
5,000,000 Block Financial Corp., 5.72% due 1/20/1998 4,985,700 4,985,700 0.6
15,000,000 Ciesco L.P., 5.75% due 1/12/1998 14,976,042 14,976,042 1.8
8,607,000 General Motors Acceptance Corp.,
6.75% due 1/02/1998 8,607,000 8,607,000 1.0
</TABLE>
43
<PAGE>
Pages 12 & 13
Merrill Lynch World Income Fund, Inc., December 31, 1997
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<TABLE>
<CAPTION>
====================================================================================================================================
SHORT-TERM
SECURITIES Value Percent of
(concluded) Face Amount Issue Cost (Note 1a) Net Assets
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Commercial Paper** US$ 8,370,000 Goldman Sachs Group L.P., 5.80% due 1/16/1998 $ 8,351,121 $ 8,351,121 1.0%
(concluded) Lexington Parker Discount LLC:
20,000,000 5.75% due 1/08/1998 19,980,833 19,980,833 2.4
5,910,000 5.89% due 1/12/1998 5,900,331 5,900,331 0.7
20,000,000 WCP Funding Inc., 5.75% due 1/09/1998 19,977,639 19,977,639 2.4
------------ ------------ -----
109,701,041 109,701,041 13.2
----------------------------------------------------------------------------------------------------------------------------------
US Government 1,250,000 US Treasury Bills, 5.14% due 3/12/1998 (d) 1,237,685 1,237,638 0.2
Obligations**
----------------------------------------------------------------------------------------------------------------------------------
Total Investments in Short-Term Securities 110,938,726 110,938,679 13.4
====================================================================================================================================
OPTIONS
PURCHASED
Nominal Value Premiums
Covered by Options Paid
====================================================================================================================================
Currency Put 28,000,000 Deutschemark, expiring January 1998 at DM 1.788 136,920 202,076 0.0
Options Purchased
----------------------------------------------------------------------------------------------------------------------------------
Total Options Purchased 136,920 202,076 0.0
====================================================================================================================================
Total Investments 822,200,174 833,571,174 100.5
====================================================================================================================================
OPTIONS Premiums
WRITTEN Received
====================================================================================================================================
Currency Call 28,000,000 Deutschemark, expiring January 1998 at DM 1.7385 (136,920) (28) 0.0
Options Written
----------------------------------------------------------------------------------------------------------------------------------
Total Options Written (136,920) (28) 0.0
====================================================================================================================================
Total Investments, Net of Options Written $822,063,254 833,571,146 100.5
============
Short Sales (Proceeds--$5,755,930)*** (5,668,356) (0.7)
Variation Margin on Financial Futures Contracts**** (104,367) 0.0
Unrealized Appreciation on Forward Foreign Exchange Contracts***** 10,018 0.0
Other Assets Less Liabilities 1,590,431 0.2
------------ -----
Net Assets $829,398,872 100.0%
============ =====
====================================================================================================================================
</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.
** Commercial Paper and certain US Government Obligations are traded on a
discount basis; the interest rates shown are the discount rates paid at
the time of purchase by the Fund.
*** Covered Short Sales entered into as of December 31, 1997 were as follows:
--------------------------------------------------------------------------
Value
Shares Issue (Note 1i)
--------------------------------------------------------------------------
70,000 Apple Computer, Inc. $ (918,750)
85,000 BankAtlantic Bancorp, Inc. (1,386,562)
7,000 Continental Homes Holding Corp. (281,750)
183,600 M.D.C. Holdings, Inc. (2,765,475)
4,500 Polyphase Corp. (3,656)
11,300 Premiere Technologies, Inc. (312,163)
--------------------------------------------------------------------------
Total (Proceeds--$5,755,930) $ (5,668,356)
============
44
<PAGE>
--------------------------------------------------------------------------
**** Financial futures contracts sold as of December 31, 1997 were as follows:
--------------------------------------------------------------------------
Number of Expiration Value
Contracts Issue Exchange Date (Notes 1a & 1c)
--------------------------------------------------------------------------
151 Bundes LIFFE March 1998 $ 21,865,535
109 US Treasury Bonds CBOT March 1998 13,131,094
--------------------------------------------------------------------------
Total Financial Futures Contracts Sold
(Total Contract Price--$34,649,328) $ 34,996,629
=============
--------------------------------------------------------------------------
***** Forward foreign exchange contracts sold as of December 31, 1997 were as
follows:
--------------------------------------------------------------------------
Foreign Unrealized
Currency Expiration Appreciation
Sold Date (Note 1c)
--------------------------------------------------------------------------
DM 25,000,000 January 1998 $ 10,018
--------------------------------------------------------------------------
Total Unrealized Appreciation on Forward
Foreign Exchange Contracts--Net
(US$ Commitment--$13,911,534) $ 10,018
=========
--------------------------------------------------------------------------
(a) Represents a pay-in-kind security which may pay interest/ dividends in
additional face/shares.
(b) Subject to principal paydowns as a result of prepayments or refinancings
of the underlying mortgage instruments. As a result, the average life may
be substantially less than the original maturity.
(c) Warrants entitle the Fund to purchase a predetermined number of shares of
Common Stock. The purchase price and number of shares are subject to
adjustment under certain conditions until the expiration date.
(d) Securities held as collateral in connection with open financial futures
contracts.
(e) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(f) Restricted securities as to resale. The value of the Fund's investments in
restricted securities was approximately $461,000, representing 0.1% of net
assets.
--------------------------------------------------------------------------
Acquisition Value
Issue Date(s) Cost (Note 1a)
--------------------------------------------------------------------------
Goldriver Hotel & Casino 5/04/1989-
Corp., Liquidating Trust 10/07/1993 $ 75,000 $ --
NAL Acceptance Corp.
(Warrants) 9/12/1996 -- 4,500
Polyphase Corp., 12%
due 7/01/1999 7/05/1994 600,000 456,000
--------------------------------------------------------------------------
Total $675,000 $460,500
======== ========
--------------------------------------------------------------------------
(g) Non-income producing security.
See Notes to Financial Statements.
45
<PAGE>
Merrill Lynch World Income Fund, Inc., December 31, 1997
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
As of December 31, 1997
==================================================================================================================================
<S> <C> <C>
Assets: Investments, at value (identified cost--$822,063,254) (Note 1a) .................... $ 833,369,098
Put options purchased, at value (cost--$136,920) (Notes 1a & 1c) ................... 202,076
Cash ............................................................................... 307,436
Unrealized appreciation on forward foreign exchange contracts (Note 1c) ............ 10,018
Deposit for securities sold short (Note 1i) ........................................ 5,755,930
Receivables:
Interest ....................................................................... $17,584,716
Securities sold ................................................................ 3,154,199
Capital shares sold ............................................................ 184,214
Dividends .......................................................................... 89,466 21,012,595
----------
Prepaid registration fees and other assets (Note 1g) ............................... 90,701
--------------
Total assets ....................................................................... 860,747,854
--------------
==================================================================================================================================
Liabilities: Common stocks sold short, at market value (proceeds--$5,755,930) (Note 1i) ......... 5,668,356
Call options written, at value (premiums received--$136,920) (Notes 1a & 1c) ....... 28
Payables:
Securities purchased ........................................................... 17,659,925
Dividends to shareholders (Note 1h) ............................................ 3,611,860
Capital shares redeemed ........................................................ 2,789,221
Investment adviser (Note 2) .................................................... 441,021
Distributor (Note 2) ........................................................... 438,187
Forward foreign exchange contracts (Note 1c) ................................... 233,939
Variation margin (Note 1c) ..................................................... 104,367
Dividends on short sales (Note 1i) ............................................. 3,155 25,281,675
----------
Accrued expenses and other liabilities ............................................. 398,923
--------------
Total liabilities .................................................................. 31,348,982
--------------
==================================================================================================================================
Net Assets: Net assets ......................................................................... $ 829,398,872
==============
==================================================================================================================================
Net Assets Class A Shares of Common Stock, $0.10 par value, 1,000,000,000 shares authorized ... $ 1,826,688
Consist of: Class B Shares of Common Stock, $0.10 par value, 1,000,000,000 shares authorized ... 7,264,455
Class C Shares of Common Stock, $0.10 par value, 1,000,000,000 shares authorized ... 133,076
Class D Shares of Common Stock, $0.10 par value, 1,000,000,000 shares authorized ... 170,641
Paid-in capital in excess of par 855,371,098
Accumulated realized capital losses on investments and foreign currency
transactions--net (Note 5) ....................................................... (46,484,986)
Unrealized appreciation on investments and foreign currency transactions--net ...... 11,117,900
--------------
Net assets ......................................................................... $ 829,398,872
==============
==================================================================================================================================
Net Asset Class A--Based on net assets of $161,346,717 and 18,266,879 shares outstanding ..... $ 8.83
Value: ==============
Class B--Based on net assets of $641,242,067 and 72,644,554 shares outstanding ..... $ 8.83
==============
Class C--Based on net assets of $11,737,599 and 1,330,763 shares outstanding ....... $ 8.82
==============
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Class D--Based on net assets of $15,072,489 and 1,706,412 shares outstanding ....... $ 8.83
==============
==================================================================================================================================
</TABLE>
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
==================================================================================================================================
<S> <C> <C> <C>
Investment Interest and discount earned $ 77,526,268
Income Dividends 2,903,796
-------------
(Notes 1e & 1f): Total income 80,430,064
-------------
==================================================================================================================================
Expenses: Investment advisory fees (Note 2) $ 6,059,356
Account maintenance and distribution fees--Class B (Note 2) 6,002,265
Transfer agent fees--Class B (Note 2) 907,983
Transfer agent fees--Class A (Note 2) 172,663
Accounting services (Note 2) 170,484
Printing and shareholder reports 161,464
Custodian fees 100,915
Professional fees 99,266
Account maintenance and distribution fees--Class C (Note 2) 89,735
Registration fees (Note 1g) 73,952
Directors' fees and expenses 45,438
Account maintenance fees--Class D (Note 2) 37,287
Dividends on short sales (Note 1i) 16,703
Transfer agent fees--Class D (Note 2) 13,958
Transfer agent fees--Class C (Note 2) 12,827
Pricing fees 5,314
Other 23,055
Total expenses ----------- 13,992,665
-------------
Investment income--net 66,437,399
-------------
==================================================================================================================================
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net 10,208,728
(Loss) on Foreign currency transactions--net (17,009,181) (6,800,453)
Investments & -----------
Foreign Change in unrealized appreciation/depreciation on:
Currency Investments--net (12,570,830)
Transactions - Foreign currency transactions--net 3,063,912 (9,506,918)
Net (Notes 1c, ----------- ----------
1d, 1f & 3) Net realized and unrealized loss on investments and
foreign currency transactions (16,307,371)
-------------
Net Increase in Net Assets Resulting from Operations $ 50,130,028
=============
==================================================================================================================================
</TABLE>
See Notes to Financial Statements.
47
<PAGE>
Merrill Lynch World Income Fund, Inc., December 31, 1997
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended
December 31,
------------------
Increase (Decrease) in Net Assets: 1997 1996
====================================================================================================================================
<C> <S> <C> <C>
Operations: Investment income--net ................................................... $ 66,437,399 $ 97,167,756
Realized gain (loss) on investments and foreign currency transactions--net (6,800,453) 27,311,882
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net ..................................... (9,506,918) 8,867,779
--------------- ---------------
Net increase in net assets resulting from operations ..................... 50,130,028 133,347,417
--------------- ---------------
====================================================================================================================================
Dividends to Investment income--net:
Shareholders Class A .............................................................. (12,612,653) (18,005,131)
(Note 1h): Class B .............................................................. (49,068,797) (77,786,819)
Class C .............................................................. (685,580) (534,218)
Class D .............................................................. (991,622) (841,588)
Return of capital:
Class A .............................................................. (612,879) --
Class B .............................................................. (2,384,369) --
Class C .............................................................. (33,314) --
Class D .............................................................. (48,185) --
--------------- ---------------
Net decrease in net assets resulting from dividends to shareholders ...... (66,437,399) (97,167,756)
--------------- ---------------
====================================================================================================================================
Capital Share Net decrease in net assets derived from capital share transactions ....... (379,207,926) (325,693,217)
Transactions --------------- ---------------
(Note 4):
====================================================================================================================================
Net Assets: Total decrease in net assets ............................................. (395,515,297) (289,513,556)
Beginning of year ........................................................ 1,224,914,169 1,514,427,725
--------------- ---------------
End of year .............................................................. $ 829,398,872 $ 1,224,914,169
=============== ===============
====================================================================================================================================
</TABLE>
See Notes to Financial Statements.
48
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Class A
-----------------------------------------
The following per share data and ratios have been derived For the Year Ended
from information provided in the financial statements. December 31,
-----------------------------------------
Increase (Decrease) in Net Asset Value: 1997 1996 1995
=================================================================================================================================
<C> <S> <C> <C> <C>
Per Share Net asset value, beginning of year ........................... $ 8.94 $ 8.69 $ 8.20
Operating ----------- ----------- -----------
Performance: Investment income--net ....................................... .64 .67 .72
Realized and unrealized gain (loss) on investments and foreign
currency transactions--net ................................... (.11) .25 .49
----------- ----------- -----------
Total from investment operations ............................. .53 .92 1.21
----------- ----------- -----------
Less dividends and distributions:
Investment income--net ....................................... (.61) (.67) (.56)
Realized gain on investments--net ............................ -- -- --
Return of capital--net ....................................... (.03) -- (.16)
----------- ----------- -----------
Total dividends and distributions ............................ (.64) (.67) (.72)
----------- ----------- -----------
Net asset value, end of year ................................. $ 8.83 $ 8.94 $ 8.69
=========== =========== ===========
=================================================================================================================================
Total Investment Based on net asset value per share ........................... 6.15% 11.09% 15.35%
Return:* =========== =========== ===========
=================================================================================================================================
Ratios to Average Expenses ..................................................... .76% .75% .80%
Net Assets: =========== =========== ===========
Investment income--net ....................................... 7.21% 7.71% 8.54%
=========== =========== ===========
=================================================================================================================================
Supplemental Net assets, end of year (in thousands) ....................... $ 161,347 $ 212,085 $ 260,806
Data =========== =========== ===========
Portfolio turnover ........................................... 217.60% 208.53% 116.00%
=========== =========== ===========
=================================================================================================================================
<CAPTION>
Class A
------------------------
The following per share data and ratios have been derived For the Year Ended
from information provided in the financial statements. December 31,
------------------------
Increase (Decrease) in Net Asset Value: 1994+ 1993
=================================================================================================================
<C> <S> <C> <C>
Per Share Net asset value, beginning of year ........................... $ 9.28 $ 8.85
Operating ----------- -----------
Performance: Investment income--net ....................................... .72 .75
Realized and unrealized gain (loss) on investments and foreign
currency transactions--net ................................... (1.09) .46
----------- -----------
Total from investment operations ............................. (.37) 1.21
----------- -----------
Less dividends and distributions:
Investment income--net ....................................... (.45) (.58)
Realized gain on investments--net ............................ -- (.03)
Return of capital--net ....................................... (.26) (.17)
----------- -----------
Total dividends and distributions ............................ (.71) (.78)
----------- -----------
Net asset value, end of year ................................. $ 8.20 $ 9.28
=========== ===========
=================================================================================================================
Total Investment Based on net asset value per share ........................... (4.05%) 14.12%
Return:* =========== ===========
=================================================================================================================
Ratios to Average Expenses ..................................................... .77% .78%
Net Assets: =========== ===========
Investment income--net ....................................... 8.17% 8.22%
=========== ===========
=================================================================================================================
Supplemental Net assets, end of year (in thousands) ....................... $ 311,181 $ 467,625
Data =========== ===========
Portfolio turnover ........................................... 115.95% 182.88%
=========== ===========
=================================================================================================================
</TABLE>
* Total investment returns exclude the effects of sales
loads.
+ Based on average shares outstanding.
See Notes to Financial Statements.
49
<PAGE>
Merrill Lynch World Income Fund, Inc., December 31, 1997
FINANCIAL HIGHLIGHTS (concluded)
<TABLE>
<CAPTION>
Class B
--------------------------------------------
The following per share data and ratios have been derived For the Year Ended
from information provided in the financial statements. December 31,
--------------------------------------------
Increase (Decrease) in Net Asset Value: 1997 1996 1995
===============================================================================================================================
<C> <S> <C> <C> <C>
Per Share Net asset value, beginning of year ........................... $ 8.94 $ 8.69 $ 8.19
Operating ------------- ------------- -------------
Performance: Investment income--net ....................................... .57 .61 .65
Realized and unrealized gain (loss) on investments and foreign
currency transactions--net ................................... (.11) .25 .50
------------- ------------- -------------
Total from investment operations ............................. .46 .86 1.15
------------- ------------- -------------
Less dividends and distributions:
Investment income--net ..................................... (.54) (.61) (.51)
Realized gain on investments--net .......................... -- -- --
Return of capital--net ..................................... (.03) -- (.14)
------------- ------------- -------------
Total dividends and distributions ............................ (.57) (.61) (.65)
------------- ------------- -------------
Net asset value, end of year ................................. $ 8.83 $ 8.94 $ 8.69
============= ============= =============
===============================================================================================================================
Total Investment Based on net asset value per share ........................... 5.34% 10.25% 14.61%
Return:** ============= ============= =============
===============================================================================================================================
Ratios to Average Expenses ..................................................... 1.53% 1.52% 1.56%
Net Assets: ============= ============= =============
Investment income--net ....................................... 6.43% 6.94% 7.77%
============= ============= =============
===============================================================================================================================
Supplemental Net assets, end of year (in thousands) ....................... $ 641,242 $ 988,209 $ 1,241,896
Data: ============= ============= =============
Portfolio turnover ........................................... 217.60% 208.53% 116.00%
============= ============= =============
===============================================================================================================================
<CAPTION>
Class B
-------------------------------
The following per share data and ratios have been derived For the Year Ended
from information provided in the financial statements. December 31,
-------------------------------
Increase (Decrease) in Net Asset Value: 1994++ 1993
===================================================================================================================
<C> <S> <C> <C>
Per Share Net asset value, beginning of year ........................... $ 9.28 $ 8.85
Operating ------------- -------------
Performance: Investment income--net ....................................... .65 .70
Realized and unrealized gain (loss) on investments and foreign
currency transactions--net ................................... (1.10) .44
------------- -------------
Total from investment operations ............................. (.45) 1.14
------------- -------------
Less dividends and distributions:
Investment income--net ..................................... (.40) (.53)
Realized gain on investments--net .......................... -- (.03)
Return of capital--net ..................................... (.24) (.15)
------------- -------------
Total dividends and distributions ............................ (.64) (.71)
------------- -------------
Net asset value, end of year ................................. $ 8.19 $ 9.28
============= =============
===================================================================================================================
Total Investment Based on net asset value per share ........................... (4.90%) 13.27%
Return:** ============= =============
===================================================================================================================
Ratios to Average Expenses ..................................................... 1.54% 1.55%
Net Assets: ============= =============
Investment income--net ....................................... 7.41% 7.42%
============= =============
===================================================================================================================
Supplemental Net assets, end of year (in thousands) ....................... $ 1,490,507 $ 2,106,120
Data: ============= =============
Portfolio turnover ........................................... 115.95% 182.88%
============= =============
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Class C
-------------------------------------------------------
For the
Period
Oct. 21,
The following per share data and ratios have been derived For the Year Ended 1994+ to
from information provided in the financial statements. December 31, Dec. 31,
---------------------------------------
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994++
=================================================================================================================================
<C> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period ............... $ 8.93 $ 8.68 $ 8.19 $ 8.42
Operating ---------- ---------- ---------- ----------
Performance: Investment income--net ............................. .56 .60 .64 .10
Realized and unrealized gain (loss) on
investments and foreign currency transactions--net . (.11) .25 .49 (.20)
---------- ---------- ---------- ----------
Total from investment operations ................... .45 .85 1.13 (.10)
---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net ........................... (.53) (.60) (.50) (.08)
Return of capital--net ........................... (.03) -- (.14) (.05)
---------- ---------- ---------- ----------
Total dividends and distributions .................. (.56) (.60) (.64) (.13)
---------- ---------- ---------- ----------
Net asset value, end of period ..................... $ 8.82 $ 8.93 $ 8.68 $ 8.19
========== ========== ========== ==========
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
=================================================================================================================================
Total Investment Based on net asset value per share ................. 5.28% 10.19% 14.38% (1.20%)+++
Return:** ========== ========== ========== ==========
=================================================================================================================================
Ratios to Average Expenses ........................................... 1.58% 1.56% 1.65% 1.64%*
Net Assets: ========== ========== ========== ==========
Investment income--net ............................. 6.41% 6.85% 7.65% 8.00%*
========== ========== ========== ==========
=================================================================================================================================
Supplemental Net assets, end of period (in thousands) ........... $ 11,738 $ 10,251 $ 5,406 $ 1,204
Data: ========== ========== ========== ==========
Portfolio turnover ................................. 217.60% 208.53% 116.00% 115.95%
========== ========== ========== ==========
=================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Class D
------------------------------------------------------
For the
Period
Oct. 21,
The following per share data and ratios have been derived For the Year Ended 1994+ to
from information provided in the financial statements. December 31, Dec. 31,
---------------------------------------
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994++
=================================================================================================================================
<C> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period ................ $ 8.94 $ 8.69 $ 8.20 $ 8.43
Operating ---------- ---------- ---------- ----------
Performance: Investment income--net .............................. .61 .65 .70 .11
Realized and unrealized gain (loss) on
investments and foreign currency transactions--net .. (.11) .25 .49 (.20)
---------- ---------- ---------- ----------
Total from investment operations .................... .50 .90 1.19 (.09)
---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net ............................ (.58) (.65) (.55) (.09)
Return of capital ................................. (.03) -- (.15) (.05)
---------- ---------- ---------- ----------
Total dividends and distributions ................... (.61) (.65) (.70) (.14)
---------- ---------- ---------- ----------
Net asset value, end of period ...................... $ 8.83 $ 8.94 $ 8.69 $ 8.20
========== ========== ========== ==========
=================================================================================================================================
Total Investment Based on net asset value per share .................. 5.88% 10.82% 15.06% (1.09%)+++
Return:** ========== ========== ========== ==========
=================================================================================================================================
Ratios to Average Expenses ............................................ 1.01% .99% 1.04% 1.04%*
Net Assets: ========== ========== ========== ==========
Investment income--net .............................. 6.97% 7.42% 8.23% 8.60%*
========== ========== ========== ==========
=================================================================================================================================
Supplemental Net assets, end of period (in thousands) ............ $ 15,072 $ 14,369 $ 6,320 $ 1,410
Data: ========== ========== ========== ==========
Portfolio turnover .................................. 217.60% 208.53% 116.00% 115.95%
========== ========== ========== ==========
=================================================================================================================================
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales
loads.
+ Commencement of operations.
++ Based on average shares outstanding.
+++ Aggregate total investment return.
See Notes to Financial Statements.
51
<PAGE>
Pages 20 & 21
Merrill Lynch World Income Fund, Inc., December 31, 1997
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 PricingSM System. Shares of Class A and Class D are sold with a
front-end sales charge. Shares of Class B and Class C may be subject to a
contingent deferred sales charge. All classes of shares have identical voting,
dividend, liquidation and other rights and the same terms and conditions, except
that Class B, Class C and Class D Shares bear certain expenses related to the
account maintenance of such shares, and Class B and Class C Shares also bear
certain expenses related to the distribution of such shares. Each class has
exclusive voting rights with respect to matters relating to its account
maintenance and distribution expenditures. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities which are traded on stock
exchanges are valued at the last sale price on the exchange on which such
securities are traded, as of the close of business on the day the securities are
being valued or, lacking any sales, at the last available bid price. Securities
traded in the over-the-counter market are valued at the last available bid price
prior to the time of valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange designated by or
under the authority of the Board of Directors as the primary market. Securities
which are traded both in the over-the-counter market and on a stock exchange are
valued according to the broadest and most representative market. Options written
are valued at the last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last asked price.
Options purchased are valued at the last sale price in the case of
exchange-traded options or, in the case of options traded in the
over-the-counter market, the last bid price. Short-term securities are valued at
amortized cost, which approximates market value. Other investments, including
futures contracts and related options, are stated at market value. Securities
and assets for which market quotations are not available are valued at fair
value as determined in good faith by or under the direction of the Fund's Board
of Directors.
(b) Repurchase agreements--The Fund invests in US Government securities pursuant
to repurchase agreements with a member bank of the Federal Reserve System or a
primary dealer in US Government securities. Under such agreements, the bank or
primary dealer agrees to repurchase the security at a mutually agreed upon time
and price. The Fund takes possession of the underlying securities, marks to
market such securities and, if necessary, receives additional securities daily
to ensure that the contract is fully collateralized.
(c) Derivative financial instruments--The Fund may engage in various portfolio
strategies to seek to increase its return by hedging its portfolio against
adverse movements in the equity, debt and currency markets. Losses may arise due
to changes in the value of the contract or if the counterparty does not perform
under the contract.
. Financial futures contracts--The Fund may purchase or sell interest rate
futures contacts 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
52
<PAGE>
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.
(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 dividends paid by the Fund during the year ended December 31,
1997 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 $15,984,995 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.
53
<PAGE>
Pages 22 & 23
Merrill Lynch World Income Fund, Inc., December 31, 1997
NOTES TO FINANCIAL STATEMENTS (continued)
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 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 Distribution
Maintenance Fee 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 sub- sidiary 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, 1997, 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 ................................................. $1,741 $19,208
Class D ................................................. $1,583 $15,414
- --------------------------------------------------------------------------------
For the year ended December 31, 1997, MLPF&S received contingent deferred sales
charges of $1,140,664 and $4,508 relating to transactions in Class B and Class C
Shares, respectively.
During the year ended December 31, 1997, the Fund paid Merrill Lynch Security
Pricing Service, an affiliate of MLPF&S, $3,079 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
MLFD, FAM, PSI, MLFDS, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended December 31, 1997 were $1,606,883,203 and $1,939,387,292,
respectively.
Net realized and unrealized gains (losses) as of December 31, 1997 were as
follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains (Losses)
- --------------------------------------------------------------------------------
Investments:
Long-term ........................ $ 12,530,153 $ 11,305,892
Short-term ....................... 9,303 (48)
Short sales ...................... (1,152,536) 87,574
Options written .................. 365,264 --
Financial futures contracts ...... (1,543,456) (347,301)
------------ ------------
Total investments .................. $ 10,208,728 $ 11,046,117
------------ ------------
54
<PAGE>
Currency transactions:
Options purchased ................ (120,220) 65,156
Options written .................. 1,212,653 136,892
Foreign currency transactions .... (24,595,449) (140,283)
Forward foreign
exchange contracts ............... 6,493,835 10,018
------------ ------------
Total currency transactions ........ (17,009,181) 71,783
------------ ------------
Total .............................. $ (6,800,453) $ 11,117,900
============ ============
- --------------------------------------------------------------------------------
Transactions in call options written for the year ended December 31, 1997 were
as follows:
- --------------------------------------------------------------------------------
Nominal Value
Covered by Premiums
Call Options Written Written Options Received
- --------------------------------------------------------------------------------
Outstanding call options written,
beginning of year .................. -- $ --
Options written ...................... 595,875,500 2,844,582
Options closed ....................... (215,100,000) (1,610,878)
Options exercised .................... (25,000,000) (46,875)
Options expired ...................... (327,775,500) (1,049,909)
------------ ------------
Outstanding call options written,
end of year ........................ 28,000,000 $ 136,920
============ ============
- --------------------------------------------------------------------------------
Transactions in put options written for the year ended December 31, 1997 were as
follows:
- --------------------------------------------------------------------------------
Nominal Value
Covered by Premiums
Put Options Written Written Options Received
- --------------------------------------------------------------------------------
Outstanding put options written,
beginning of year .................. 10,000,000 $ 21,875
Options exercised .................... (10,000,000) (21,875)
------------ ------------
Outstanding put options written,
end of year ........................ -- $ --
============ ============
- --------------------------------------------------------------------------------
As of December 31, 1997, net unrealized appreciation for Federal income tax
purposes aggregated $5,916,589, of which $24,515,737 related to appreciated
securities and $18,599,148 related to depreciated securities. The aggregate cost
of investments at December 31, 1997 for Federal income tax purposes was
$827,452,509.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions was
$379,207,926 and $325,693,217 for the years ended December 31, 1997 and December
31, 1996, respectively.
Transactions in shares of capital for each class were as follows:
- --------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended December 31, 1997 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .......................... 1,471,571 $ 13,032,610
Shares issued to shareholders
in reinvestment of dividends ......... 490,171 4,320,941
------------ ------------
Total issued ......................... 1,961,742 17,353,551
Shares redeemed ...................... (7,405,822) (65,315,197)
------------ ------------
Net decrease ......................... (5,444,080) $(47,961,646)
============ ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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>
Pages 24 & 25
Merrill Lynch World Income Fund, Inc., December 31, 1997
NOTES TO FINANCIAL STATEMENTS (concluded)
- --------------------------------------------------------------------------------
Class B Shares for the Year Dollar
Ended December 31, 1997 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .......................... 4,411,827 $ 38,945,000
Shares issued to shareholders
in reinvestment of dividends ......... 2,511,110 22,118,936
------------ ------------
Total issued ......................... 6,922,937 61,063,936
Automatic conversion of shares ....... (394,158) (3,459,877)
Shares redeemed ...................... (44,433,465) (391,363,688)
------------ ------------
Net decrease ......................... (37,904,686) $(333,759,629)
=========== =============
- --------------------------------------------------------------------------------
Class B Shares for the Year Dollar
Ended 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 C Shares for the Year Dollar
Ended December 31, 1997 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .......................... 667,088 $ 5,892,830
Shares issued to shareholders
in reinvestment of dividends ......... 45,030 396,332
------------ ------------
Total issued ......................... 712,118 6,289,162
Shares redeemed ...................... (529,077) (4,662,828)
------------ ------------
Net increase ......................... 183,041 $ 1,626,334
============ ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class C Shares for the Year Dollar
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 D Shares for the Year Dollar
Ended December 31, 1997 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .......................... 290,672 $ 2,569,167
Automatic conversion of shares ....... 393,764 3,459,877
Shares issued to shareholders
in reinvestment of dividends ......... 63,282 557,815
------------ ------------
Total issued ......................... 747,718 6,586,859
Shares redeemed ...................... (647,898) (5,699,844)
------------ ------------
Net increase ......................... 99,820 $ 887,015
============ ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class D Shares for the Year Dollar
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
============ ============
- --------------------------------------------------------------------------------
5. Capital Loss Carryforward:
At December 31, 1997, the Fund had a net capital loss carryforward of
approximately $38,225,000, of which $12,482,000 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
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<PAGE>
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<PAGE>
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies......................................... 2
Hedging Techniques....................................................... 2
Risk Factors in Options and Futures Transactions......................... 4
Forward Foreign Exchange Transactions.................................... 5
Other Investment Policies and Practices.................................. 6
Investment Restrictions.................................................. 7
Management of the Fund.................................................... 9
Directors and Officers................................................... 9
Compensation of Directors................................................ 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...................................................... 20
Deferred Sales Charge--Class B and Class C Shares........................ 20
Portfolio Transactions.................................................... 21
Determination of Net Asset Value.......................................... 22
Shareholder Services...................................................... 23
Investment Account....................................................... 23
Automatic Investment Plans............................................... 24
Automatic Reinvestment of Dividends and Capital Gains Distributions...... 24
Systematic Withdrawal Plans.............................................. 24
Exchange Privilege....................................................... 25
Dividends, Distributions and Taxes........................................ 28
Dividends and Distributions.............................................. 28
Taxes.................................................................... 28
Tax Treatment of Options, Futures and Forward Foreign Exchange
Transactions............................................................ 30
Special Rules for Certain Foreign Currency Transactions.................. 31
Performance Data.......................................................... 32
General Information....................................................... 34
Description of Shares.................................................... 34
Computation of Offering Price Per Share.................................. 35
Independent Auditors..................................................... 35
Custodian................................................................ 35
Transfer Agent........................................................... 35
Legal Counsel............................................................ 35
Reports to Shareholders.................................................. 36
Additional Information................................................... 36
Independent Auditors' Report.............................................. 37
Financial Statements...................................................... 38
</TABLE>
Code # 16103-0398
[LOGO] MERRILL LYNCH
Merrill Lynch
World Income Fund, Inc.
[ART]
STATEMENT OF
ADDITIONAL
INFORMATION
March 31, 1998
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A)FINANCIAL STATEMENTS
Contained in Part A:
Financial Highlights for each of the years in the five-year period
ended December 31, 1997, the period September 1, 1992 to December 31,
1992, each of the years in the three-year period ended August 31,
1992, and the period September 29, 1988 (commencement of operations)
to August 31, 1989.
Contained in Part B:
Schedule of Investments as of December 31, 1997.
Statement of Assets and Liabilities as of December 31, 1997.
Statement of Operations for the year ended December 31, 1997.
Statements of Changes in Net Assets for each of the years in the two-
year period ended December 31, 1997.
Financial Highlights for each of the years in the five-year period
ended December 31, 1997.
(B)EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1(a) --Articles of Amendment and Restatement, dated November 8, 1991.(d)
(b) --Articles of Amendment to Articles of Incorporation, as filed on
October 19, 1994.(d)
(c) --Articles Supplementary to Articles of Incorporation, as filed on
October 21, 1994.(d)
2 --Revised By-Laws of Registrant.(d)
3 --None.
--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.(f)
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 --None.
11 --Consent of Deloitte & Touche LLP, independent auditors for
Registrant.
12 --None.
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
13 --None.
14 --None.
15(a) --Amended and Restated Class B Distribution Plan of Registrant
and Distribution Plan Sub-Agreement.(d)
(b) --Form of Class C Shares Distribution Plan and Class C Shares
Distribution Plan Sub-Agreement of the Registrant.(c)
(c) --Form of Class D Shares Distribution Plan and Class D Shares
Distribution Plan Sub-Agreement of the Registrant.(c)
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 PricingSM 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
Registrant's Registration Statement on Form N-1A under the Securities Act
of 1933, as amended (File No. 33-42681) (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) Filed on April 29, 1994 as an Exhibit to Post-Effective Amendment No. 3 to
the Registration Statement.
(c) Filed on October 18, 1994 as an Exhibit to Post-Effective Amendment No. 4
to the Registration Statement.
(d) Filed on April 27, 1995 as an Exhibit to Post-Effective Amendment No. 5 to
the Registration Statement.
(e) Incorporated by reference to Exhibit 18 Post-Effective Amendment No. 13 to
the Registration Statement on Form N-1A under the Securities Act of 1933,
as amended, filed on January 25, 1996, relating to shares of Merrill Lynch
New York Municipal Bond Fund series of Merrill Lynch Multi-State Municipal
Series Trust (File No. 2-99473).
(f) Filed on April 27, 1997 as an Exhibit to Post-Effective Amendment No. 7 to
the Registration Statement.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The Registrant is not controlled by or under common control with any person.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
TITLE OF CLASS FEBRUARY 27, 1998
-------------- -----------------
<S> <C>
Class A shares of Common Stock, par value $0.10 per share..... 14,792
Class B shares of Common Stock, par value $0.10 per share..... 40,915
Class C shares of Common Stock, par value $0.10 per share .... 835
Class D shares of Common Stock, par value $0.10 per share..... 1,221
</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.
C-2
<PAGE>
ITEM 27. INDEMNIFICATION.
Reference is made to Article VI of Registrant's Articles of Incorporation,
Article VI of Registrant's By-Laws, Section 2-418 of the Maryland General
Corporation Law and Section 9 of the Class A, Class B, Class C and Class D
Distribution Agreements.
Insofar as the conditional advancing of indemnification moneys for actions
based on the Investment Company Act of 1940, as amended (the "Investment
Company Act"), may be concerned, such payments will be made only on the
following conditions: (i) the advances must be limited to amounts used, or to
be used, for the preparation or presentation or 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 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 receipt 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 registered investment companies: Merrill Lynch
Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income Fund,
Inc. Merrill Lynch Asset Builder Program, Inc., Merrill Lynch Asset Growth
Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Capital Fund,
Inc., Merrill Lynch Convertible 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 Growth 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 Real Estate Fund, Inc., Merrill Lynch Retirement Series Trust, Merrill
Lynch Series Fund, Inc., Merrill Lynch Short-Term Global
C-3
<PAGE>
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., Merrill
Lynch Variable Series Funds, Inc. and by Hotchkis and Wiley Funds (advised
Hotchkis and Wiley, a division of MLAM); and the following closed-end
registered investment companies; Merrill Lynch High Income Municipal Bond
Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc. MLAM also acts as
sub-advisor to Merrill Lynch World Strategy Portfolio and Merrill Lynch Basic
Value Equity Portfolio, two investment portfolios of EQ Advisors Trust.
Fund Asset Management, L.P. ("FAM" or the "Investment Adviser"), an
affiliate of MLAM, acts as the investment adviser for the following open-end
registered 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 registered investment companies: Apex Municipal Fund,
Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc.,
Corporate High Yield Fund III, Inc., Debt Strategies Fund, Inc., Debt
Strategies Fund II, Inc., Income Opportunities Fund 1999, Inc., Income
Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund, Inc.,
MuniAssets Funds, Inc., MuniEnhanced Fund, Inc., MuniHoldings California
Insured Fund, Inc., MuniHoldings California Insured Fund II, Inc.,
MuniHoldings Florida Insured Fund, MuniHoldings Florida Insured Fund II,
MuniHoldings Fund, Inc., MuniHoldings Fund II, Inc., MuniHoldings New Jersey
Insured Fund, Inc., MuniHoldings New York Fund, Inc., MuniHoldings New York
Insured 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., and
Worldwide DollarVest Fund, Inc.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series and Merrill Lynch Intermediate Government Bond
Fund is One Financial Center, 23rd 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 the Fund's transfer agent, 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 Advisor indicating each business, profession, vocation or
employment of a substantial nature in which each such person has been engaged
since January 1, 1996, for his, her or its own account or in the capacity of
director, officer, partner or trustee. In addition, Mr. Zeikel is President,
Mr. Glenn is Executive Vice President and Mr. Richard is Treasurer of
substantially all the investment companies described in the first two
paragraphs of this item and Messrs. Giordano, Harvey, Kirstein, and Monagle
are directors or officers of one or more of such companies.
C-4
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
---- ------------------ ----------------------------------
<C> <C> <S>
ML & Co................. Limited Partner Financial Services Holding
Company; Limited Partner of MLAM
Princeton Services...... General Partner General Partner of MLAM
Arthur Zeikel........... Chairman Chairman of MLAM; President of
MLAM and FAM from 1977 to 1997;
Chairman and Director of
Princeton Services; President of
Princeton Services from 1993 to
1997; Executive Vice President
of ML & Co.
Jeffrey M. Peek......... President President of MLAM; President and
Director of Princeton Services;
Executive Vice President of ML &
Co.
Terry K. Glenn.......... Executive Vice Executive Vice President of MLAM;
President Executive Vice President and
Director of Princeton Services;
President and Director of MLFD;
Director of MLFDS; President of
Princeton Administrators, L.P.
Linda L. Federici....... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services
Vincent R. Giordano..... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services
Elizabeth A. Griffin.... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services
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
General Counsel, Counsel and Secretary of MLAM;
and Secretary Senior Vice President, General
Counsel, Director and Secretary
of Princeton Services
Ronald M. Kloss......... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services
Debra W. Landsman-Yaros. Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services; Vice
President of MLFD
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.
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
---- ------------------ ----------------------------------
<C> <C> <S>
Richard L. Reller. Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services;
Director of MLFD
Gerald M. Richard. Senior Vice President Senior Vice President and Treasurer of
and Treasurer MLAM; Senior Vice President and
Treasurer of Princeton Services; Vice
President and Treasurer of MLFD
Gregory D. Upah... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Ronald L. Welburn. Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
</TABLE>
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., Corporate High Yield
Fund III, 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 Consults International Portfolio, Merrill
Lynch Convertible 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 Fund for
Investment and Retirement, Merrill Lynch Global Convertible Fund, Inc.,
Merrill Lynch Global Growth 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 Growth Fund,
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 Real Estate Fund, Inc., Merrill Lynch Series 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,
1996, for his or her own account or in the capacity of director, officer,
partner or trustee. In addition, Messrs. Zeikel, Albert and Richard 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
---- ---------------- ----------------------------------
<C> <S> <C>
Arthur Zeikel........... Director and Chairman Chairman of MLAM and FAM; President of
MLAM and FAM from 1977 to 1997;
Chairman and Director of Princeton Services;
President of Princeton Services from 1993 to
1997; Executive Vice President of ML & Co.
Alan J. Albert.......... Senior Managing
Director Vice President of MLAM
Nicholas C.D. Hall...... Director Director of Merrill Lynch Europe PLC; General
Counsel of Merrill Lynch International Private
Banking Group
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
---- ---------------- ----------------------------------
<C> <S> <C>
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
Carol Ann Langham....... Company Secretary None
Debra Anne Searle....... Assistant Company
Secretary None
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriters for the Registrant and for each
of the open-end registered 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., 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,
Breen, Crook, Fatseas and Wasel is One Financial Center, 23rd Floor, Boston,
Massachusetts 02111-2665.
<TABLE>
<CAPTION>
POSITIONS AND OFFICES POSITIONS AND OFFICES
NAME WITH MLFD WITH REGISTRANT
---- --------------------- ---------------------
<S> <C> <C>
Terry K. Glenn.......... President and Director Executive Vice President
Richard L. Reller....... Director None
Thomas J. Verage........ Director None
William E. Aldrich...... Senior Vice President None
Robert W. Crook......... Senior Vice President None
Michael Brady........... Vice President None
William M. Breen........ Vice President None
Michael G. Clark........ 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 MLFDS, 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484.
C-7
<PAGE>
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-8
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT CERTIFIES THAT IT MEETS ALL THE
REQUIREMENTS FOR EFFECTIVENESS OF THIS POST-EFFECTIVE AMENDMENT TO ITS
REGISTRATION STATEMENT PURSUANT TO RULE 485(B) UNDER THE SECURITIES ACT OF
1933 AND HAS DULY CAUSED THIS POST-EFFECTIVE AMENDMENT TO ITS 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
31ST DAY OF MARCH, 1998.
Merrill Lynch World Income Fund,
Inc.
(Registrant)
/s/ Gerald M. Richard
By: _________________________________
GERALD M. RICHARD, TREASURER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS POST-
EFFECTIVE AMENDMENT TO ITS REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
President and
Arthur Zeikel* Director (Principal
- ------------------------------------- Executive Officer)
(ARTHUR ZEIKEL)
Treasurer (Principal
Gerald M. Richard* 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)
March 31, 1998
*By /s/ Gerald M. Richard
___________________________
(GERALD M. RICHARD, ATTORNEY-IN-
FACT)
C-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S> <C>
--Consent of Deloitte & Touche LLP, independent auditors for
11 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>
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission file due to ASCII-incompatibility and cross-
references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> MERRILL LYNCH WORLD INCOME FUND, INC. - CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 816307324
<INVESTMENTS-AT-VALUE> 827902790
<RECEIVABLES> 21012595
<ASSETS-OTHER> 6164085
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 855079470
<PAYABLE-FOR-SECURITIES> 17659925
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 8020673
<TOTAL-LIABILITIES> 25680598
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 864765958
<SHARES-COMMON-STOCK> 18266879
<SHARES-COMMON-PRIOR> 23710959
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (46484986)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11117900
<NET-ASSETS> 161346717
<DIVIDEND-INCOME> 2903796
<INTEREST-INCOME> 77526268
<OTHER-INCOME> 0
<EXPENSES-NET> (13992665)
<NET-INVESTMENT-INCOME> 66437399
<REALIZED-GAINS-CURRENT> (6800453)
<APPREC-INCREASE-CURRENT> (9506918)
<NET-CHANGE-FROM-OPS> 50130028
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (12612653)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (612879)
<NUMBER-OF-SHARES-SOLD> 1471571
<NUMBER-OF-SHARES-REDEEMED> (7405822)
<SHARES-REINVESTED> 490171
<NET-CHANGE-IN-ASSETS> (395515297)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (55669528)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 6059356
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 13992665
<AVERAGE-NET-ASSETS> 183459046
<PER-SHARE-NAV-BEGIN> 8.94
<PER-SHARE-NII> .64
<PER-SHARE-GAIN-APPREC> (.11)
<PER-SHARE-DIVIDEND> (.61)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> (.03)
<PER-SHARE-NAV-END> 8.83
<EXPENSE-RATIO> .76
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> MERRILL LYNCH WORLD INCOME FUND, INC. - CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 816307324
<INVESTMENTS-AT-VALUE> 827902790
<RECEIVABLES> 21012595
<ASSETS-OTHER> 6164085
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 855079470
<PAYABLE-FOR-SECURITIES> 17659925
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 8020673
<TOTAL-LIABILITIES> 25680598
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 864765958
<SHARES-COMMON-STOCK> 72644554
<SHARES-COMMON-PRIOR> 110549240
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (46484986)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11117900
<NET-ASSETS> 641242067
<DIVIDEND-INCOME> 2903796
<INTEREST-INCOME> 77526268
<OTHER-INCOME> 0
<EXPENSES-NET> (13992665)
<NET-INVESTMENT-INCOME> 66437399
<REALIZED-GAINS-CURRENT> (6800453)
<APPREC-INCREASE-CURRENT> (9506918)
<NET-CHANGE-FROM-OPS> 50130028
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (49068797)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (2384369)
<NUMBER-OF-SHARES-SOLD> 4411827
<NUMBER-OF-SHARES-REDEEMED> (44827623)
<SHARES-REINVESTED> 2511110
<NET-CHANGE-IN-ASSETS> (395515297)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (55669528)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 6059356
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 13992665
<AVERAGE-NET-ASSETS> 800301969
<PER-SHARE-NAV-BEGIN> 8.94
<PER-SHARE-NII> .57
<PER-SHARE-GAIN-APPREC> (.11)
<PER-SHARE-DIVIDEND> (.54)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> (.03)
<PER-SHARE-NAV-END> 8.83
<EXPENSE-RATIO> 1.53
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> MERRILL LYNCH WORLD INCOME FUND, INC. - CLASS C
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 816307324
<INVESTMENTS-AT-VALUE> 827902790
<RECEIVABLES> 21012595
<ASSETS-OTHER> 6164085
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 855079470
<PAYABLE-FOR-SECURITIES> 17659925
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 8020673
<TOTAL-LIABILITIES> 25680598
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 864765958
<SHARES-COMMON-STOCK> 1330763
<SHARES-COMMON-PRIOR> 1147722
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (46484986)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11117900
<NET-ASSETS> 11737599
<DIVIDEND-INCOME> 2903796
<INTEREST-INCOME> 77526268
<OTHER-INCOME> 0
<EXPENSES-NET> (13992665)
<NET-INVESTMENT-INCOME> 66437399
<REALIZED-GAINS-CURRENT> (6800453)
<APPREC-INCREASE-CURRENT> (9506918)
<NET-CHANGE-FROM-OPS> 50130028
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (685580)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (33314)
<NUMBER-OF-SHARES-SOLD> 667088
<NUMBER-OF-SHARES-REDEEMED> (529077)
<SHARES-REINVESTED> 45030
<NET-CHANGE-IN-ASSETS> (395515297)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (55669528)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 6059356
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 13992665
<AVERAGE-NET-ASSETS> 11216865
<PER-SHARE-NAV-BEGIN> 8.93
<PER-SHARE-NII> .56
<PER-SHARE-GAIN-APPREC> (.11)
<PER-SHARE-DIVIDEND> (.53)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> (.03)
<PER-SHARE-NAV-END> 8.82
<EXPENSE-RATIO> 1.58
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 004
<NAME>MERRILL LYNCH WORLD INCOME FUND, INC.- CLASS D
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 816307324
<INVESTMENTS-AT-VALUE> 827902790
<RECEIVABLES> 21012595
<ASSETS-OTHER> 6164085
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 855079470
<PAYABLE-FOR-SECURITIES> 17659925
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 8020673
<TOTAL-LIABILITIES> 25680598
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 864765958
<SHARES-COMMON-STOCK> 1706412
<SHARES-COMMON-PRIOR> 1606592
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (46484986)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11117900
<NET-ASSETS> 15072489
<DIVIDEND-INCOME> 2903796
<INTEREST-INCOME> 77526268
<OTHER-INCOME> 0
<EXPENSES-NET> (13992665)
<NET-INVESTMENT-INCOME> 66437399
<REALIZED-GAINS-CURRENT> (6800453)
<APPREC-INCREASE-CURRENT> (9506918)
<NET-CHANGE-FROM-OPS> 50130028
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (991622)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (48185)
<NUMBER-OF-SHARES-SOLD> 684436
<NUMBER-OF-SHARES-REDEEMED> (647898)
<SHARES-REINVESTED> 63282
<NET-CHANGE-IN-ASSETS> (395515297)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (55669528)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 6059356
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 13992665
<AVERAGE-NET-ASSETS> 14914780
<PER-SHARE-NAV-BEGIN> 8.94
<PER-SHARE-NII> .61
<PER-SHARE-GAIN-APPREC> (.11)
<PER-SHARE-DIVIDEND> (.58)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> (.03)
<PER-SHARE-NAV-END> 8.83
<EXPENSE-RATIO> 1.01
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
Exhibit 99.11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch World Income Fund, Inc.
We consent to the use in Post-Effective Amendment No. 8 to Registration
Statement No. 33-42681 of our report dated February 20, 1998 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Princeton, New Jersey
March 31, 1998
