<PAGE>
As filed with the Securities and Exchange Commission on April 27, 1999
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. 10
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
[X]
Amendment No. 11
(Check appropriate box or boxes)
---------------
Merrill Lynch World Income Fund, Inc.
(Exact Name of Registrant as Specified in Charter)
800 Scudders Mill Road, Plainsboro, New Jersey 08536
(Address of Principal Executive Offices)
Registrant's telephone number, including Area Code (609) 282-2800
TERRY K. GLENN
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 Michael J. Hennewinkel, 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.
---------------
It is proposed that this filing will become effective (check appropriate box)
[X] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[_] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
---------------
Title of Securities Being Registered: Shares of Common Stock, par value $.10
per share.
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- --------------------------------------------------------------------------------
<PAGE>
[LOGO] Merrill Lynch
Merrill Lynch World Income Fund, Inc.
[LOGO] [April 27, 1999]
This Prospectus contains information you should know
before investing, including information about risks.
Please read it before you invest and keep it for
future reference.
The Securities and Exchange Commission has not
approved or disapproved these securities or passed
upon the adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
[LOGO] Prospectus
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
PAGE
<S> <C>
[LOGO]
KEY FACTS
- -------------------------------------------------------------------------------
The Merrill Lynch World Income Fund at a Glance.............................. 3
Risk/Return Bar Chart........................................................ 5
Fees and Expenses............................................................ 7
[LOGO]
DETAILS ABOUT THE FUND
- -------------------------------------------------------------------------------
How the Fund Invests......................................................... 9
Investment Risks............................................................ 11
[LOGO]
YOUR ACCOUNT
- -------------------------------------------------------------------------------
Statement of Additional Information......................................... 19
Merrill Lynch Select Pricing SM System...................................... 20
How to Buy, Sell, Transfer and Exchange Shares.............................. 25
How Shares Are Priced....................................................... 29
Participation in Merrill Lynch Fee-Based Programs........................... 29
[LOGO]
MANAGEMENT OF THE FUND
- -------------------------------------------------------------------------------
Dividends and Taxes......................................................... 30
Fund Asset Management....................................................... 32
Financial Highlights........................................................ 33
[LOGO]
FOR MORE INFORMATION
- -------------------------------------------------------------------------------
Shareholder Reports................................................. Back Cover
Statement of Additional Information................................. Back Cover
</TABLE>
MERRILL LYNCH WORLD INCOME FUND, INC.
<PAGE>
[LOGO] Key Facts
In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined highlighted terms in this prospectus in
the sidebar.
Preferred Stock -- class of stock that often pays dividends at a specified rate
and has preference over common stock in dividend payments and liquidation of
assets. Preferred stock may also be convertible into common stock.
Yield -- the income generated by an investment in the Fund.
Maturity -- the time at which the principal amount of a bond is scheduled to be
returned to investors.
THE MERRILL LYNCH WORLD INCOME FUND AT A GLANCE
- --------------------------------------------------------------------------------
What is the Fund's investment objective?
The investment objective of the Fund is to seek high current income by
investing in a global portfolio of fixed income securities denominated in
various currencies, including multi-national currency units.
What are the Fund's main investment strategies?
In trying to achieve its objective, the Fund mainly invests in bonds and other
securities, including preferred stocks, that periodically pay interest (fixed
income securities). These securities may be denominated and pay interest in
U.S. dollars or other currencies and may be issued by United States or foreign
governments or corporations. The Fund will spread its investments among
different types of fixed income securities and different countries based upon
Fund management's analysis of the yield, maturity and currency considerations
affecting these securities. The Fund will normally invest in securities
denominated in at least three different currencies. The Fund presently expects
it will invest primarily in securities denominated in the currencies of the
United States, Canada, Western European nations (including the euro), New
Zealand and Australia of any maturity. The average maturity of the Fund's
portfolio securities will vary based upon the Investment Adviser's view of
economic and market conditions. However, the Fund does not expect the average
maturity of its portfolio to exceed ten years. The Fund may try to hedge
against changes in interest rates or currency valuations by buying or selling
options or futures and entering into foreign currency transactions.
The Fund may invest in fixed income securities that are rated in the lower
rating categories of the major rating agencies or that are unrated securities
that Fund management believes are of comparable quality. These securities are
commonly known as "junk bonds." Junk bonds are high risk investments that may
cause income and principal losses for the Fund.
The Fund cannot guarantee that it will achieve its objective.
What are the main risks of investing in the Fund?
As with any mutual fund, the value of the Fund's investments -- and therefore
the value of Fund shares -- may go up or down. The value of the Fund's
investments may change in response to interest rate changes or other factors
that may affect a particular issuer or obligation. Generally, when
MERRILL LYNCH WORLD INCOME FUND, INC.
3
<PAGE>
[LOGO] Key Facts
interest rates go up, the value of debt instruments goes down. If the value of
the Fund's investments go down, you may lose money.
Investments the Fund makes are also subject to credit risk. Credit risk is the
risk that the issuer will be unable to pay the interest or principal on an
obligation when due. The degree of credit risk depends on both the financial
condition of the issuer and the terms of the obligation.
The Fund will invest a large part of its assets in non-U.S. securities. Foreign
investing involves special risks--including foreign currency risk and the
possibility of substantial volatility due to adverse political, economic or
other developments. Foreign securities may also be less liquid and harder to
sell than U.S. securities. Many of the markets in which the Fund may invest are
emerging markets. The risks of foreign investing are greater for emerging
markets.
The Fund can invest up to 100% of its assets in junk bonds. Investments in junk
bonds involve greater risks than investments in higher quality debt securities,
such as greater price fluctuation and greater risk of loss of income and
principal.
The Fund is a non-diversified fund, which means that it may invest more of its
assets in fewer companies than if it were a diversified fund. By concentrating
in a smaller number of investments, the Fund's risk is increased because each
investment has a greater effect on the Fund's performance.
Who should invest?
The Fund may be an appropriate investment for you if you:
. Are looking for an investment
that provides income.
. Want a professionally managed
portfolio without the
administrative burdens of direct
investments in corporate or
government bonds and other debt
securities.
. Are looking for exposure to a
variety of fixed income markets
around the world.
. Are willing to accept the risk
of greater loss of income and
principal due to the Fund's
emphasis on foreign investing
and its ability to invest in
junk bonds.
MERRILL LYNCH WORLD INCOME FUND, INC.
4
<PAGE>
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund's performance
for Class A shares for the past ten calendar years. Sales charges are not
reflected in the bar chart. If these amounts were reflected, returns would be
less than those shown. The table compares the average annual total returns for
each class of the Fund's shares for the periods shown with those of the Credit
Suisse First Boston Global High Yield Index and the Composite Index. How the
Fund performed in the past is not necessarily an indication of how the Fund
will perform in the future.
[BAR CHART APPEARS HERE]
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- -------------------------------------------------------------------------------
6.91% 10.03% 23.12% 6.15% 14.12% -4.05% 15.35% 11.09% 6.15% -23.43%
MERRILL LYNCH WORLD INCOME FUND, INC. 5
<PAGE>
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
During the ten year period shown in the bar chart, the highest return for a
quarter was 7.99% (quarter ended September 30, 1991) and the lowest return for
a quarter was -24.03% (quarter ended September 30, 1998). The Fund's year-to-
date return as of March 31, 1999 was 2.25%.
<TABLE>
<CAPTION>
Average Annual Total
Returns (for the Past Ten
calendar year ended Past Past Years/Since
December 31, 1998) One Year Five Years Inception
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Merrill Lynch World Income Fund* - Class A -26.49% -0.83% 5.34%
Credit Suisse First Boston Global High Yield
Index** 0.58% 8.16% 10.74%
Composite Index*** -3.25% 8.16% 8.72%
- -----------------------------------------------------------------------------
Merrill Lynch World Income Fund* - Class B -26.87% -0.81% 2.16%+
Credit Suisse First Boston Global High Yield
Index** 0.58% 8.16% 10.79%
Composite Index*** -3.25% 8.16% 9.25%
- -----------------------------------------------------------------------------
Merrill Lynch World Income Fund* - Class C -24.79% N/A -0.12%++
Credit Suisse First Boston Global High Yield
Index** 0.58% N/A 10.09%
Composite Index*** 3.25% N/A 11.06%
- -----------------------------------------------------------------------------
Merrill Lynch World Income Fund* - Class D -26.80% N/A -0.54%++
Credit Suisse First Boston Global High Yield
Index** 0.58% N/A 10.09%
Composite Index*** -3.25% N/A 11.06%
- -----------------------------------------------------------------------------
</TABLE>
* Includes sales charge.
** This unmanaged market-weighted index, which mirrors the global high-yield
debt market, is comprised of securities rated BBB or below. Index is
comprised of intermediate-term Government bonds maturing in one to ten
years. Past performance is not predictive of future performance.
*** This unmanaged index is a 70% blend of the Credit Suisse First Boston
Global High Yield Index, which mirrors the global high-yield debt market
and is comprised of securities rated BBB or below, and 30% blend of the
JP Morgan Emerging Markets Bond Index Plus, which is a composite of
external currency-denominated debt instruments of various emerging markets.
Past performance is not predictive of future performance.
+ Inception date is November 18, 1991.
++ Inception date is October 21, 1994.
# Since November 30, 1991.
## Since October 31, 1994.
MERRILL LYNCH WORLD INCOME FUND, INC. 6
<PAGE>
[LOGO] Key Facts
UNDERSTANDING EXPENSES
Fund investors pay various fees and expenses, either directly or indirectly.
Listed below are some of the main types of expenses, which all mutual funds may
charge:
Expenses paid directly by the shareholder:
Shareholder Fees -- these include sales charges which you may pay when you buy
or sell shares of the Fund.
Expenses paid indirectly by the shareholder:
Annual Fund Operating Expenses -- expenses that cover the costs of operating
the Fund.
Investment Advisory Fee -- a fee paid to the Investment Adviser for managing
the Fund.
Distribution Fees -- fees used to support the Fund's marketing and distribution
efforts, such as compensating Financial Consultants, advertising and promotion.
Service (Account Maintenance) Fees -- fees used to compensate securities
dealers for account maintenance activities.
FEES AND EXPENSES
- --------------------------------------------------------------------------------
The Fund offers four different classes of shares. Although your money will be
invested the same way no matter which class of shares you buy, there are
differences among the fees and expenses associated with each class. Not
everyone is eligible to buy every class. After determining which classes you
are eligible to buy, decide which class best suits your needs. Your Merrill
Lynch Financial Consultant can help you with this decision.
This table shows the different fees and expenses that you may pay if you buy
and hold the different classes of shares of the Fund. Future expenses may be
greater or less than those indicated below.
<TABLE>
<CAPTION>
Shareholder Fee
(fees paid
directly from your
investment) Class A Class B(a) Class C Class D
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum Sales Charge
(Load) imposed on
purchases (as a
percentage of offering
price) 4.00%(b) None None 4.00%(b)
- ---------------------------------------------------------------
Maximum Deferred Sales
Charge (Load) (as a
percentage of original
purchase price or
redemption proceeds,
whichever is lower) None(c) 4.0%(b) 1.0%(b) None(c)
- ---------------------------------------------------------------
Maximum Sales Charge
(Load) imposed on
Dividend Reinvestments None None None None
- ---------------------------------------------------------------
Redemption Fee None None None None
- ---------------------------------------------------------------
Exchange Fee None None None None
- ---------------------------------------------------------------
Maximum Account Fee None None None None
- ---------------------------------------------------------------
Annual Fund Operating
Expenses (expenses
that are deducted from
Fund assets)
- ---------------------------------------------------------------
Investment Advisory Fee 0.60% 0.60% 0.60% 0.60%
- ---------------------------------------------------------------
Distribution and/or
Service (12b-1) Fees(d) None 0.75% 0.80% 0.25%
- ---------------------------------------------------------------
Other Expenses
(including transfer
agency fees)(e) 0.21% 0.24% 0.24% 0.21%
- ---------------------------------------------------------------
Total Annual Fund
Operating Expenses(f) 0.81% 1.59% 1.64% 1.06%
- ---------------------------------------------------------------
</TABLE>
(a) Class B shares automatically convert to Class D shares about ten years
after you buy them and will no longer be subject to distribution fees.
(b) Some investors may qualify for reductions in the sales charge (load).
(c) You may pay a deferred sales charge if you purchase $1 million or more and
you redeem within one year.
(d) The Fund calls the "Service Fee" an "Account Maintenance Fee." Account
Maintenance Fee is the term used elsewhere in this Prospectus and in all
other Fund materials. If you hold Class B or Class C shares for a long
time, it may cost you more in distribution (12b-1) fees than the maximum
sales charge that you would have paid if you had bought one of the other
classes.
(e) The Fund pays the Transfer Agent $11.00 for each Class A and Class D
shareholder account and $14.00 for each Class B and Class C shareholder
account and reimburses the Transfer Agent's out-of-pocket expenses. The
Fund pays a 0.10% fee for certain accounts that participate in the Merrill
Lynch Mutual Fund Advisor program. The Fund also pays a $0.20 monthly
closed account charge, which is assessed upon all accounts that close
during the year. This fee begins the month following the month the account
is closed and ends at the end of the calendar year. For the fiscal year
ended December 31, 1998, the Fund paid the Transfer Agent fees totaling
$812,277. The Investment Adviser provides accounting services to the Fund
at its cost. For the fiscal year ended December 31, 1998, the Fund
reimbursed the Investment Adviser $142,069 for these services.
(f) In addition, Merrill Lynch may charge clients a processing fee (currently
$5.35) when a client buys or redeems shares.
MERRILL LYNCH WORLD INCOME FUND, INC. 7
<PAGE>
[LOGO] Key Facts
Examples:
These examples are intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.
These examples assume that you invest $10,000 in the Fund for the time periods
indicated, that your investment has a 5% return each year, that you pay the
sales charges, if any, that apply to the particular class and that the Fund's
operating expenses remain the same. This assumption is not meant to indicate
you will receive a 5% annual rate of return. Your annual return may be more or
less than the 5% used in this example. Although your actual costs may be higher
or lower, based on these assumptions your costs would be:
EXPENSES IF YOU DID REDEEM YOUR SHARES:
---
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- -------------------------------------------
<S> <C> <C> <C> <C>
Class A $479 $648 $832 $1,362
- -------------------------------------------
Class B $562 $702 $866 $1,889
- -------------------------------------------
Class C $267 $517 $892 $1,944
- -------------------------------------------
Class D $504 $724 $961 $1,642
- -------------------------------------------
EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:
-------
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- -------------------------------------------
<S> <C> <C> <C> <C>
Class A $479 $648 $832 $1,362
- -------------------------------------------
Class B $162 $502 $866 $1,889
- -------------------------------------------
Class C $167 $517 $892 $1,944
- -------------------------------------------
Class D $504 $724 $961 $1,642
- -------------------------------------------
</TABLE>
8 MERRILL LYNCH WORLD INCOME FUND, INC.
<PAGE>
[LOGO] Details About the Fund
ABOUT THE PORTFOLIO MANAGER
Vincent T. Lathbury, III is the portfolio manager of the Fund. Mr. Lathbury
has been a First Vice President of Merrill Lynch Asset Management since
1997, a portfolio manager since 1982 and was a Vice President from 1982 to
1997. Mr. Lathbury is primarily responsible for the management of the
Fund's portfolio.
ABOUT THE INVESTMENT ADVISER
The Fund is managed by Fund Asset Management.
HOW THE FUND INVESTS
- --------------------------------------------------------------------------------
The Fund's main goal is to provide shareholders with high current income. In
other words, it tries to choose investments that will allow the Fund to pay
dividends at an attractive rate. The Fund tries to do this by investing in a
global portfolio of fixed income securities denominated in various currencies.
There is no restriction on the types of debt securities the Fund can buy or on
the maturity of those securities. The Fund may invest in United States and
foreign government and corporate fixed income securities, including junk bonds
and unrated securities. Government securities include securities issued or
guaranteed by a government or a government agency or instrumentality. The Fund
also may invest in securities issued by certain international organizations.
The Fund normally will invest at least 90% of its assets in fixed income
securities, and may invest up to 100% of its assets in securities classified as
junk bonds. The Fund will spread its investments among different types of fixed
income securities and different countries based upon Fund management's analysis
of the yield, maturity and currency considerations affecting these securities.
Fund management presently expects that the Fund will invest primarily in
securities denominated in the currencies of the United States, Canada, Western
European nations (including the euro), New Zealand and Australia, but also can
invest in securities denominated in other currencies. Issuers of securities may
not always be located in the country in whose currency the securities are
denominated. For example, the Fund may invest in a security denominated in U.S.
dollars but issued by a government or corporation located in a country commonly
considered to be an emerging market. The Fund's investments ordinarily will be
denominated in at least three currencies. Under certain adverse conditions, the
Fund may limit the financial markets or currencies in which it will invest. The
Fund presently intends to invest its assets solely in the United States
financial markets or United States dollar-denominated securities only for
temporary defensive purposes. Temporary defensive investments may limit
potential for an increase in the value of Fund shares or for the Fund to
achieve its investment objective.
The Fund may invest in several different kinds of securities issued by the
United States Government. These include U.S. Treasury obligations (bills, notes
and bonds) which have different interest rates and maturities and are issued at
different times. These securities are backed by the full faith and credit of
the United States Government. The Fund also may invest in obligations issued or
guaranteed by United States Government agencies or other U.S. Government
organizations. These include government guaranteed
MERRILL LYNCH WORLD INCOME FUND, INC. 9
<PAGE>
[LOGO] Details About the Fund
mortgage-related or asset backed securities. Some of these securities may be
backed by the full faith and credit of the U.S. Treasury, some may be supported
by the right of the issuer to borrow from the U.S. Treasury, and some are
backed only by the credit of the issuer itself.
The obligations of foreign governments and their related organizations have
various kinds of government support. These obligations may or may not be
supported by the full faith and credit of a foreign government.
The Fund may invest in securities issued by international organizations
designated or supported by governments or government agencies to promote
economic reconstruction or development. Examples of these 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 Fund may use a variety of portfolio strategies to hedge its portfolio
against interest rate and currency risk. These strategies include the use of
options on portfolio positions or currencies, financial and currency futures
and options on these futures, and forward foreign currency transactions. The
Fund may enter into these transactions only in connection with its hedging
strategies. The Fund may only engage in hedging activities from time to time
and may not necessarily be hedging when movements in interest rates or currency
exchange rates occur.
The Fund also may invest in convertible securities. Convertible securities are
generally debt securities or preferred stock that may be converted into common
stock. Convertible securities typically pay current income as either interest
(debt security convertible) or dividends (preferred stocks). A convertible
security's value usually reflects both the stream of current income payments
and the value of the underlying common stock. The market value of a convertible
security ordinarily performs like regular debt securities; that is, as market
interest rates rise, the value of a convertible usually falls. Although the
Fund generally expects that it will sell convertible securities rather than
convert them into common stock, the Fund can invest up to 10% of its assets in
common stock obtained through conversion.
The Fund may invest in securities whose investment return is based on the
change in a particular measurement of value or rates (an "index"). The Fund
also may buy securities whose potential investment return is inversely based on
the change in particular indices. The Fund can also lend its portfolio
securities.
MERRILL LYNCH WORLD INCOME FUND, INC. 10
<PAGE>
INVESTMENT RISKS
- --------------------------------------------------------------------------------
This section contains a summary discussion of the general risks of investing in
the Fund. As with any mutual fund, there can be no guarantee that the Fund will
meet its goals or that the Fund's performance will be positive for any period
of time.
Market and Selection Risk -- Market risk is the risk that the stock or bond
markets will go up or down in value, including the possibility that the markets
will go down sharply and unpredictably. Selection risk is the risk that the
investments that Fund management selects will underperform the market or other
funds with similar investment objectives and investment strategies.
Credit Risk -- Credit risk is the risk that the issuer of a bond or other fixed
income security will be unable to pay the interest or principal when due. The
degree of credit risk depends on both the financial condition of the issuer and
the terms of the obligation.
Interest Rate Risk -- Interest rate risk is the risk that prices of bonds
generally increase when interest rates decline and decrease when interest rates
increase. Prices of longer term securities generally change more in response to
interest rate changes than prices of shorter term securities.
Call and Redemption Risk -- A bond's issuer may call a bond for redemption
before it matures. If this happens to a bond the Fund holds, the Fund may lose
income and may have to invest the proceeds in bonds with lower yields.
Concentration Risk -- The Fund is a non-diversified fund. By concentrating in a
smaller number of investments, the Fund's risk is increased because each
investment has a greater effect on the Fund's performance.
Foreign Market Risk -- Since the Fund invests in foreign securities, it offers
the potential for more diversification than an investment only in the United
States. This is because securities traded on foreign markets have often (though
not always) performed differently than securities in the United States.
However, such investments involve special risks not present in U.S. investments
that can increase the chances that the Fund will lose money. In particular, the
Fund is subject to the risk that because there are generally fewer investors on
foreign exchanges and a smaller number of shares traded each day, it may make
it difficult for the Fund to buy and sell securities on those exchanges. In
addition, prices of foreign securities may go up and down more than prices of
securities traded in the United States.
MERRILL LYNCH WORLD INCOME FUND, INC. 11
<PAGE>
[LOGO] Details About the Fund
Foreign Economy Risk -- The economies of certain foreign markets often do not
compare favorably with that of the United States with respect to such issues as
growth of gross national product, reinvestment of capital, resources and
balance of payments position. Certain such economies may rely heavily on
particular industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular country
or countries, changes in international trading patterns, trade barriers and
other protectionist or retaliatory measures.
Investments in foreign markets may also be adversely affected by governmental
actions such as the imposition of capital controls, nationalization of
companies or industries, expropriation of assets or the imposition of punitive
taxes. In addition, the governments of certain countries may prohibit or impose
substantial restrictions on foreign investing in their capital markets or in
certain industries. Any of these actions could severely affect security prices,
impair the Fund's ability to purchase or sell foreign securities or transfer
the Fund's assets or income back into the United States, or otherwise adversely
affect the Fund's operations.
Other foreign market risks include foreign exchange controls, difficulties in
pricing securities, defaults on foreign government securities, difficulties in
enforcing favorable legal judgments in foreign courts and political and social
instability. Legal remedies available to investors in certain foreign countries
may be less extensive than those available to investors in the United States or
other foreign countries.
Emerging Markets Risk -- Many of the markets in which the Fund may invest
generally are considered to be emerging markets. The risks of foreign
investments are usually much greater for emerging markets. Investments in
emerging markets may be considered speculative. Emerging markets include those
in countries defined as emerging or developing by the World Bank, the
International Finance Corporation or the United Nations. Emerging markets are
riskier because they develop unevenly and may never fully develop. They are
more likely to experience hyperinflation and currency devaluations, which
adversely affects returns to U.S. investors. In addition, the securities
markets in many of these countries have far lower trading volumes and less
liquidity than developed markets. Since these markets are so small, they may be
more likely to suffer sharp and frequent price changes or long term price
depression because of adverse publicity, investor perceptions or the actions of
a few large investors. In addition, traditional measures of investment value
used in the United States, such as price to earnings ratios, may not apply to
certain small markets.
12 MERRILL LYNCH WORLD INCOME FUND, INC.
<PAGE>
Many emerging markets have histories of political instability and abrupt
changes in policies. As a result, their governments are more likely to take
actions that are hostile or detrimental to private enterprise or foreign
investment than those of more developed countries. Certain emerging markets may
also face other significant internal or external risks, including the risk of
war, and ethnic, religious and racial conflicts. In addition, governments in
many emerging market countries participate to a significant degree in their
economies and securities markets, which may impair investment and economic
growth.
Currency Risk -- Securities in which the Fund invests are usually denominated
or quoted in currencies other than the U.S. dollar. Changes in foreign currency
exchange rates affect the value of the Fund's portfolio. Generally, when the
U.S. dollar rises in value against a foreign currency, a security denominated
in that currency loses value because the currency is worth fewer U.S. dollars.
Conversely, when the U.S. dollar decreases in value against a foreign currency,
a security denominated in that currency gains value because the currency is
worth more U.S. dollars. This risk, generally known as "currency risk," means
that a strong U.S. dollar will reduce returns for U.S. investors while a weak
U.S. dollar will increase those returns.
European Economic and Monetary Union ("EMU") -- Certain European countries have
entered EMU in an effort to, among other things, reduce barriers between
countries, increase competition among companies, reduce government subsidies in
certain industries, and reduce or eliminate currency fluctuations among these
countries. EMU established a single common European currency (the "euro") that
was introduced on January 1, 1999 and is expected to replace the existing
national currencies of all EMU participants by July 1, 2002. Certain securities
(beginning with government and corporate bonds) were redenominated in the euro,
and are listed, trade and make dividend and other payments only in euros.
Although EMU is generally expected to have a beneficial effect, it could
negatively affect the Fund in a number of situations, including as follows:
. If the transition to the euro, or
EMU as a whole, does not proceed
as planned, the Fund's
investments could be adversely
affected. For example, sharp
currency fluctuations, exchange
rate volatility, and other
disruptions of the markets could
occur.
MERRILL LYNCH WORLD INCOME FUND, INC. 13
<PAGE>
[LOGO] Details About the Fund
. Withdrawal from EMU by a
participating country could also
have a negative effect on the
Fund's investments, for example
if securities redenominated in
euros are transferred back into
that country's national currency.
. Computer, accounting, and trading
systems must be capable of
recognizing the euro as a
distinct currency. If not
properly addressed, this may
negatively affect the operations
of the companies in which the
Fund invests.
Governmental Supervision and Regulation/Accounting Standards --Many foreign
governments supervise and regulate stock exchanges, brokers and the sale of
securities less than the United States does. Other countries may not have laws
to protect investors the way that the U.S. securities laws do. For example,
some foreign countries may have no laws or rules against insider trading.
Insider trading occurs when a person buys or sells a company's securities based
on non-public information about that company. Accounting standards in other
countries are not necessarily the same as in the United States. If the
accounting standards in another country do not require as much detail as U.S.
accounting standards, it may be harder for the Fund's management to completely
and accurately determine a company's financial condition. Also, brokerage
commissions and other costs of buying or selling securities often are higher in
foreign countries than they are in the United States. This reduces the amount
the Fund can earn on its investments.
Certain Risks of Holding Fund Assets Outside the United States --The Fund
generally holds its foreign securities in foreign banks and securities
depositories. Some foreign banks and securities depositories may be recently
organized or new to the foreign custody business. In addition, there may be
limited or no regulatory oversight over their operations. Also, the laws of
certain countries may put limits on the Fund's ability to recover its assets if
a foreign bank, depository or issuer of a security, or any of their agents,
goes bankrupt. In addition, it is often more expensive for the Fund to buy,
sell and hold securities in certain foreign markets than in the U.S. The
increased expense of investing in foreign markets reduces the amount the Fund
can earn on its investments and typically results in a higher operating expense
ratio for the Fund than investment companies invested only in the U.S.
Settlement Risk -- Settlement and clearance procedures in certain foreign
markets differ significantly from those in the United States. Foreign
settlement procedures and trade regulations also may involve certain risks
(such as
14 MERRILL LYNCH WORLD INCOME FUND, INC.
<PAGE>
delays in payment for or delivery of securities) not typically generated by the
settlement of U.S. investments. Communications between the United States and
emerging market countries may be unreliable, increasing the risk of delayed
settlements or losses of security certificates. Settlements in certain foreign
countries at times have not kept pace with the number of securities
transactions; these problems may make it difficult for the Fund to carry out
transactions. If the Fund cannot settle or is delayed in settling a purchase of
securities, it may miss attractive investment opportunities and certain of its
assets may be uninvested with no return earned thereon for some period. If the
Fund cannot settle or is delayed in settling a sale of securities, it may lose
money if the value of the security then declines or, if it has contracted to
sell the security to another party, the Fund could be liable to that party for
any losses incurred.
Securities Lending -- The Fund may lend securities to financial institutions
that provide government securities as collateral. Securities lending involves
the risk that the borrower may fail to return the securities in a timely manner
or at all. As a result, the Fund may lose money and there may be a delay in
recovering the loaned securities. The Fund could also lose money if it does not
recover the loaned securities and the value of the collateral falls. These
events could trigger adverse tax consequences to the Fund.
Borrowing and Leverage -- The Fund may borrow for temporary emergency purposes
including to meet redemptions. Borrowing may exaggerate changes in the net
asset value of Fund shares and the yield on the Fund's portfolio. Borrowing
will cost the Fund interest expenses and other fees. The cost of borrowing may
reduce the Fund's return. Certain securities that the Fund buys may create
leverage including, for example, when issued and delayed delivery securities,
forward commitments, options, warrants and repurchase agreements.
Risks associated with certain types of securities in which the Fund may invest
include:
Sovereign Debt -- The Fund may invest in sovereign debt securities. These
securities are issued or guaranteed by foreign government entities. Investments
in sovereign debt subject the Fund to the risk that a government entity may
delay or refuse to pay interest or repay principal on its sovereign debt. Some
of these reasons may include cash flow problems, insufficient foreign currency
reserves, political considerations, the relative size of its debt position to
its economy or its failure to put in place economic reforms
MERRILL LYNCH WORLD INCOME FUND, INC. 15
<PAGE>
[LOGO] Details About the Fund
required by the International Monetary Fund or other multilateral agencies. If
a government entity defaults, it may ask for more time in which to pay or for
further loans. There may be no bankruptcy proceeding by which all or part of
sovereign debt that a government entity has not repaid may be collected.
Junk Bonds -- Junk bonds are debt securities that are rated below investment
grade by the major rating agencies or are unrated securities that Fund
management believes are of comparable quality. Although junk bonds generally
pay higher rates of interest than investment grade bonds, they are high risk
investments that may cause income and principal losses for the Fund. Junk bonds
generally are less liquid and experience more price volatility than higher
rated debt securities. The issuers of junk bonds may have a larger amount of
outstanding debt relative to their assets than issuers of investment grade
bonds. In the event of an issuer's bankruptcy, claims of other creditors may
have priority over the claims of junk bond holders, leaving few or no assets
available to repay junk bond holders. Junk bonds may be subject to greater call
and redemption risk than higher rated debt securities.
Mortgage backed Securities -- Mortgage backed securities represent the right to
receive a portion of principal and/or interest payments made on a pool of
residential or commercial mortgage loans. When interest rates fall, borrowers
may refinance or otherwise repay principal on their mortgages earlier than
scheduled. When this happens, certain types of mortgage backed securities will
be paid off more quickly than originally anticipated and the Fund has to invest
the proceeds in securities with lower yields. This risk is known as "prepayment
risk." When interest rates rise, certain types of mortgage backed securities
will be paid off more slowly than originally anticipated and the value of these
securities will fall. This risk is known as extension risk.
Because of prepayment risk and extension risk, mortgage backed securities react
differently to changes in interest rates than other fixed income securities.
Small movements in interests rates (both increases and decreases) may quickly
and significantly reduce the value of certain mortgage backed securities.
Indexed and Inverse Floating Rate Securities -- The Fund may invest in
securities whose potential returns are directly related to changes in an
underlying index or interest rate, known as indexed securities. The return on
indexed securities will rise when the underlying index or interest rate rises
and fall when the index or interest rate falls. The Fund may also invest in
securities whose return is inversely related to changes in an interest rate
16 MERRILL LYNCH WORLD INCOME FUND, INC.
<PAGE>
(inverse floaters). In general, income on inverse floaters will decrease when
interest rates increase and increase when interest rates decrease. Investments
in inverse floaters may subject the Fund to the risks of reduced or eliminated
interest payments and losses of principal. In addition, certain indexed
securities and inverse floaters may increase or decrease in value at a greater
rate than the underlying interest rate, which effectively leverages the Fund's
investment. As a result, the market value of such securities will generally be
more volatile than that of fixed rate, tax exempt securities. Both indexed
securities and inverse floaters are derivative securities and can be considered
speculative.
Derivatives -- The Fund may use derivative instruments including futures,
forwards, options and indexed securities. Derivatives are financial instruments
whose value is derived from another security, a commodity (such as gold or oil)
or an index such as the Standard & Poor's 500 Index. Derivatives allow the Fund
to increase or decrease its risk exposure more quickly and efficiently than
other types of instruments. Derivatives are volatile and involve significant
risks, including:
Credit risk -- the risk that the
counterparty (the party on the
other side of the transaction) on
a derivative transaction will be
unable to honor its financial ob-
ligation to the Fund.
Currency risk -- the risk that
changes in the exchange rate be-
tween currencies will adversely
affect the value (in U.S. dollar
terms) of an investment.
Leverage risk -- the risk associ-
ated with certain types of in-
vestments or trading strategies
(such as borrowing money to in-
crease the amount of investments)
that relatively small market
movements may result in large
changes in the value of an in-
vestment. Certain investments or
trading strategies that involve
leverage can result in losses
that greatly exceed the amount
originally invested.
Liquidity risk -- the risk that
certain securities may be
difficult or impossible to sell
at the time that the seller would
like or at the price that the
seller believes the security is
currently worth.
MERRILL LYNCH WORLD INCOME FUND, INC. 17
<PAGE>
[LOGO] Details About the Fund
The Fund may use derivatives for hedging purposes, including anticipatory
hedges. Hedging is a strategy in which the Fund uses a derivative to offset the
risk that other Fund holdings may decrease in value. While hedging can reduce
losses, it can also reduce or eliminate gains if the market moves in a
different manner than anticipated by the Fund or if the cost of the derivative
outweighs the benefit of the hedge. Hedging also involves the risk that changes
in the value of the derivative will not match those of the holdings being
hedged as expected by the Fund, in which case any losses on the holdings being
hedged may not be reduced. There can be no assurance that the Fund's hedging
strategy will reduce risk or that hedging transactions will be either available
or cost effective. The Fund is not required to use hedging and may choose not
to do so.
Warrants -- A warrant gives the Fund the right to buy a quantity of stock. The
warrant specifies the amount of underlying stock, the purchase (or "exercise")
price, and the date the warrant expires. The Fund has no obligation to exercise
the warrant and buy the stock.
A warrant has value only if the Fund can either exercise it or sell it before
it expires. If the price of the underlying stock does not rise above the
exercise price before the warrant expires, the warrant generally expires
without any value and the Fund loses any amount it paid for the warrant. Thus,
investments in warrants may involve substantially more risk than investments in
common stock. Warrants may trade in the same markets as their underlying stock;
however, the price of the warrant does not necessarily move with the price of
the underlying stock.
Convertibles -- Convertibles are generally debt securities or preferred stocks
that may be converted into common stock. The issuer of the convertible may be
the same as or different from the issuer of the underlying common stock.
Convertibles typically pay current income as either interest (debt security
convertibles) or dividends (preferred stocks). A convertible's value usually
reflects both the stream of current income payments and the value of the
underlying common stock. The market value of a convertible performs like that
of regular debt securities; that is, if market interest rates rise, the value
of a convertible usually falls. Since it is convertible into common stock, the
convertible also has the same types of market and issuer risk as the value of
the underlying common stock.
Illiquid Securities -- The Fund may invest up to 15% of its net assets in
illiquid securities that it cannot easily resell within seven days at current
value
18 MERRILL LYNCH WORLD INCOME FUND, INC.
<PAGE>
or that have contractual or legal restrictions on resale. If the Fund buys
illiquid securities it may be unable to quickly resell them or may be able to
sell them only at a price below current value.
Restricted Securities -- Restricted securities have contractual or legal
restrictions on their resale. They include private placement securities that
the Fund buys directly from the issuer. Private placement and other restricted
securities may not be listed on an exchange and may have no active trading
market.
Restricted securities may be illiquid. The Fund may be unable to sell them on
short notice or may be able to sell them only at a price below current value.
The Fund may get only limited information about the issuer, so it may be less
able to predict a loss. In addition, if Fund management receives material
adverse nonpublic information about the issuer, the Fund will not be able to
sell the security.
STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
If you would like further information about the Fund, including how it invests,
please see the Statement of Additional Information.
MERRILL LYNCH WORLD INCOME FUND, INC. 19
<PAGE>
[LOGO] Your Account
MERRILL LYNCH SELECT PRICING SM SYSTEM
- --------------------------------------------------------------------------------
The Fund offers four share classes, each with its own sales charge and expense
structure, allowing you to invest in the way that best suits your needs. Each
share class represents an ownership interest in the same investment portfolio.
When you choose your class of shares you should consider the size of your
investment and how long you plan to hold your shares. Your Merrill Lynch
Financial Consultant can help you determine which share class is best suited to
your personal financial goals.
For example, if you select Class A or D shares, you generally pay a sales
charge at the time of purchase. If you buy Class D shares, you also pay an
ongoing account maintenance fee of 0.25%. You may be eligible for a sales
charge waiver.
If you select Class B or C shares, you will invest the full amount of your
purchase price, but you will be subject to a distribution fee of 0.50% for
Class B shares and 0.55% for Class C shares and an account maintenance fee of
0.25%. Because these fees are paid out of the Fund's assets on an ongoing
basis, over time these fees increase the cost of your investment and may cost
you more than paying an initial sales charge. In addition, you may be subject
to a deferred sales charge when you sell Class B or C shares.
The Fund's shares are distributed by Merrill Lynch Funds Distributor, a
division of Princeton Funds Distributor, Inc., an affiliate of Merrill Lynch.
20 MERRILL LYNCH WORLD INCOME FUND, INC.
<PAGE>
The table below summarizes key features of the Merrill Lynch Select Pricing SM
System.
<TABLE>
<CAPTION>
Class A Class B Class C Class D
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Availability Limited to certain Generally available Generally available Generally available
investors including: through Merrill through Merrill through Merrill Lynch.
. Current Class A Lynch. Limited Lynch. Limited Limited availability
shareholders availability availability through other
. Certain Retirement through other through other securities dealers.
Plans securities dealers. securities dealers.
. Participants in
certain Merrill Lynch-
sponsored programs
. Certain affiliates of
Merrill Lynch.
- ----------------------------------------------------------------------------------------------------------------
Initial Sales Yes. Payable at time of No. Entire purchase No. Entire purchase Yes. Payable at time of
Charge? purchase. Lower sales price is invested price is invested purchase. Lower sales
charges available in shares of the in shares of the charges available
for larger investments. Fund. Fund. for larger investments.
- ----------------------------------------------------------------------------------------------------------------
Deferred Sales No. (May be charged for Yes. Payable if you Yes. Payable if you No. (May be charged for
Charge? purchases over redeem within four redeem within one purchases over
$1 million that are years of purchase. year of purchase. $1 million that are
redeemed within redeemed within
one year.) one year.)
- ----------------------------------------------------------------------------------------------------------------
Account No. 0.25% Account 0.25% Account 0.25% Account
Maintenance and Maintenance Fee Maintenance Fee Maintenance Fee
Distribution Fees? 0.50% Distribution 0.55% Distribution No Distribution Fee.
Fee. Fee.
- ----------------------------------------------------------------------------------------------------------------
Conversion to No. Yes, automatically No. No.
Class D shares? after approximately
ten years.
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
MERRILL LYNCH WORLD INCOME FUND, INC. 21
<PAGE>
[LOGO] Your Account
Right of Accumulation -- permits you to pay the sales charge that would apply
to the cost or value (whichever is higher) of all shares you own in the Merrill
Lynch mutual funds that offer Select Pricing options.
Letter of Intent -- permits you to pay the sales charge that would be
applicable if you add up all shares of Merrill Lynch Select Pricing SM System
funds that you agree to buy within a 13 month period. Certain restrictions
apply.
Class A and Class D Shares -- Initial Sales Charge Options
If you select Class A or Class D shares, you will pay a sales charge at the
time of purchase.
<TABLE>
<CAPTION>
Dealer
Compensation
As a % of As a % of as a % of
Your Investment Offering Price Your Investment* Offering Price
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $25,000 4.00% 4.17% 3.75%
- -------------------------------------------------------------------------------
$25,000 but less than $50,000 3.75% 3.90% 3.50%
- -------------------------------------------------------------------------------
$50,000 but less than
$100,000 3.25% 3.36% 3.00%
- -------------------------------------------------------------------------------
$100,000 but less than
$250,000 2.50% 2.56% 2.25%
- -------------------------------------------------------------------------------
$250,000 but less than
$1,000,000 1.50% 1.52% 1.25%
- -------------------------------------------------------------------------------
$1,000,000 and over** 0.00% 0.00% 0.00%
- -------------------------------------------------------------------------------
</TABLE>
* Rounded to the nearest one-hundredth percent.
** If you invest $1,000,000 or more in Class A or Class D shares, you may not
pay an initial sales charge. However, if you redeem your shares within one
year after purchase, you may be charged a deferred sales charge. This charge
is 1% of the lesser of the original cost of the shares being redeemed or
your redemption proceeds. A sales charge of 0.75% will be charged on
purchases of $1,000,000 or more of Class A or Class D shares by certain
employer- sponsored retirement or savings plans.
No initial sales charge applies to Class A or Class D shares that you buy
through reinvestment of dividends or distributions.
A reduced or waived sales charge on a purchase of Class A or Class D shares may
apply for:
. Purchases under a Right of Accumulation or Letter of Intent.
. TMA SM Managed Trusts.
. Certain Merrill Lynch investment
or central asset accounts.
. Certain employer-sponsored
retirement or savings plans.
. Purchases using proceeds from the
sale of certain Merrill Lynch
closed-end funds under certain
circumstances.
22 MERRILL LYNCH WORLD INCOME FUND, INC.
<PAGE>
. Certain investors, including
directors or trustees of Merrill
Lynch mutual funds and Merrill
Lynch employees.
. Certain Merrill Lynch fee-based
programs.
Only certain investors are eligible to buy Class A shares. Your Merrill Lynch
Financial Consultant can help you determine whether you are eligible to buy
Class A shares or to participate in any of these programs.
If you decide to buy shares under the initial sales charge alternative and you
are eligible to buy both Class A and Class D shares, you should buy Class A
shares since Class D shares are subject to an account maintenance fee, while
Class A shares are not.
If you redeem Class A or Class D shares and within 30 days buy new shares of
the same class, you will not pay a sales charge on the new purchase amount. The
amount eligible for this "Reinstatement Privilege" may not exceed the amount of
your redemption proceeds. To exercise the privilege, contact your Merrill Lynch
Financial Consultant or the Fund's Transfer Agent at 1-800-MER-FUND.
Class B and Class C Shares -- Deferred Sales Charge Options
If you select Class B or Class C shares, you do not pay an initial sales charge
at the time of purchase. However, if you redeem your Class B shares within four
years after purchase, or your Class C shares within one year after purchase,
you may be required to pay a deferred sales charge. You will also pay account
maintenance fees of 0.25% for Class B and C shares and distribution fees of
0.50%, with respect to Class B shares, and 0.55%, with respect to Class C
shares, each year under distribution plans that the Fund has adopted under Rule
12b-1. Because these fees are paid out of the Fund's assets on an ongoing
basis, over time these fees increase the cost of your investment and may cost
you more than paying an initial sales charge. The Distributor uses the money
that it receives from the deferred sales charges and the distribution fees to
cover the costs of marketing, advertising and compensating the Merrill Lynch
Financial Consultant or other securities dealer who assists you in purchasing
Fund shares.
MERRILL LYNCH WORLD INCOME FUND, INC. 23
<PAGE>
[LOGO] Your Account
Class B Shares
If you redeem Class B shares within four years after purchase, you may be
charged a deferred sales charge. The amount of the charge gradually decreases
as you hold your shares over time, according to the following schedule:
<TABLE>
<CAPTION>
Years Since
Purchase Sales Charge*
- -------------------------------
<S> <C>
0 - 1 4.00%
- -------------------------------
1 - 2 3.00%
- -------------------------------
2 - 3 2.00%
- -------------------------------
3 - 4 1.00%
- -------------------------------
4 and thereafter 0.00%
- -------------------------------
</TABLE>
* The percentage charge will apply to the lesser of the original cost of the
shares being redeemed or the proceeds of your redemption. Shares acquired
through reinvestment of dividends are not subject to a deferred sales
charge. Not all Merrill Lynch funds have identical deferred sales charge
schedules. If you exchange your shares for shares of another fund, the
higher charge will apply.
The deferred sales charge relating to Class B shares may be reduced or waived
in certain circumstances, such as:
. Certain post-retirement
withdrawals from an IRA or other
retirement plan if you are over
59 1/2 years old.
. Redemption by certain eligible
401(a) and 401(k) plans, certain
related accounts and group plans
participating in certain
retirement plan rollovers.
. Redemption in connection with
participation in certain Merrill
Lynch fee-based programs.
. Withdrawals resulting from
shareholder death or disability
as long as the waiver request is
made within one year of death or
disability or, if later,
reasonably promptly follow- ing
completion of probate, or in
connection with involuntary
termination of an account in
which Fund shares are held.
. Withdrawal through the Merrill
Lynch Systematic Withdrawal Plan
of up to 10% per year of your
Class B account value at the time
the plan is established.
Your Class B shares convert automatically into Class D shares approximately ten
years after purchase. Any Class B shares received through reinvestment of
24 MERRILL LYNCH WORLD INCOME FUND, INC.
<PAGE>
dividends paid on converting shares will also convert at that time. Class D
shares are subject to lower annual expenses than Class B shares. The conversion
of Class B to Class D shares is not a taxable event for Federal income tax
purposes.
Different conversion schedules apply to Class B shares of different Merrill
Lynch mutual funds. For example, Class B shares of an equity fund convert
approximately eight years after purchase compared to approximately ten years
for fixed income funds. If you acquire your Class B shares in an exchange from
another fund with a shorter conversion schedule, the Fund's ten year conversion
schedule will apply. If you exchange your Class B shares in the Fund for Class
B shares of a fund with a longer conversion schedule, the other fund's
conversion schedule will apply. The length of time that you hold both the
original and exchanged Class B shares in both funds will count toward the
conversion schedule. The conversion schedule may be modified in certain other
cases as well.
Class C Shares
If you redeem Class C shares within one year after purchase, you may be charged
a deferred sales charge of 1.00%. The charge will apply to the lesser of the
original cost of the shares being redeemed or the proceeds of your redemption.
You will not be charged a deferred sales charge when you redeem shares that you
acquire through reinvestment of Fund dividends. The deferred sales charge
relating to Class C shares may be reduced or waived in connection with
involuntary termination of an account in which Fund shares are held and
withdrawals through the Merrill Lynch Systematic Withdrawal Plan.
Class C shares do not offer a conversion privilege.
HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
- --------------------------------------------------------------------------------
The chart below summarizes how to buy, sell, transfer and exchange shares
through Merrill Lynch or other securities dealers. You may also buy shares
through the Transfer Agent. To learn more about buying shares through the
Transfer Agent, call 1-800-MER-FUND. Because the selection of a mutual fund
involves many considerations, your Merrill Lynch Financial Consultant may help
you with this decision.
MERRILL LYNCH WORLD INCOME FUND, INC. 25
<PAGE>
[LOGO] Your Account
<TABLE>
<CAPTION>
If You Want To Your Choices Information Important for You to Know
- ---------------------------------------------------------------------------------------------------
<C> <C> <S>
Buy Shares First, select the share Refer to the Merrill Lynch Select Pricing table on page
class appropriate for 20. Be sure to read this prospectus carefully.
you
----------------------------------------------------------------------------------------
Next, determine the The minimum initial investment for the Fund is $1,000
amount of your for all accounts except:
investment .$250 for certain Merrill Lynch fee-based programs
.$100 for retirement plans.
(The minimums for initial investments may be waived
under certain circumstances.)
----------------------------------------------------------------------------------------
Have your Merrill Lynch The price of your shares is based on the next
Financial Consultant or calculation of net asset value after your order is
securities dealer submit placed. Any purchase orders placed within fifteen
your purchase order minutes after the close of business on the New York
Stock Exchange will be priced at the net asset value
determined that day.
Purchase orders placed after that time will be priced at
the net asset value determined on the next business day.
The Fund may reject any order to buy shares and may
suspend the sale of shares at any time. Merrill Lynch
may charge a processing fee to confirm a purchase. This
fee is currently $5.35.
----------------------------------------------------------------------------------------
Or contact the Transfer To purchase shares directly, call the Transfer Agent at
Agent 1-800-MER-FUND and request an application. Mail the
completed application to the Transfer Agent at the
address on the inside back cover of this Prospectus.
- ---------------------------------------------------------------------------------------------------
Add to Your Purchase additional The minimum investment for additional purchases is $50
Investment shares for all accounts except that retirement plans have a
minimum additional purchase of $1.
(The minimums for additional purchases may be waived
under certain circumstances.)
----------------------------------------------------------------------------------------
Acquire additional All dividends and capital gains distributions are
shares through the automatically reinvested without a sales charge.
automatic dividend
reinvestment plan
----------------------------------------------------------------------------------------
Participate in the You may invest a specific amount on a periodic basis
automatic investment through certain Merrill Lynch investment or central
plan asset accounts.
- ---------------------------------------------------------------------------------------------------
Transfer Shares Transfer to a You may transfer your Fund shares only to another
to Another participating securities securities dealer that has entered into an agreement
Securities dealer with Merrill Lynch. All shareholder services will be
Dealer available for the transferred shares. You may only
purchase additional shares of funds previously owned
before the transfer. All future trading of these assets
must be coordinated by the receiving firm.
----------------------------------------------------------------------------------------
Transfer to a non- You must either:
participating securities .Transfer your shares to an account with the Transfer
dealer Agent; or
.Sell your shares.
- ---------------------------------------------------------------------------------------------------
</TABLE>
26 MERRILL LYNCH WORLD INCOME FUND, INC.
<PAGE>
<TABLE>
<CAPTION>
If You Want To Your Choices Information Important for You to Know
- ---------------------------------------------------------------------------------------------------
<C> <C> <S>
Sell Your Have your Merrill Lynch The price of your shares is based on the next
Shares Financial Consultant or calculation of net asset value after your order is
securities dealer submit placed. For your redemption request to be priced at the
your sales order net asset value on the day of your request, you must
submit your request to your dealer within fifteen
minutes after that day's close of business on the New
York Stock Exchange (generally 4:00 p.m. Eastern time).
Any redemption request placed after that time will be
priced at the net asset value at the close of business
on the next business day. Dealers must submit redemption
requests to the Fund not more than thirty minutes after
the close of business on the New York Stock Exchange on
the day the request was received.
Securities dealers, including Merrill Lynch, may charge
a fee to process a redemption of shares. Merrill Lynch
currently charges a fee of $5.35. No processing fee is
charged if you redeem shares directly through the
Transfer Agent.
The Fund may reject an order to sell shares under
certain circumstances.
----------------------------------------------------------------------------------------
Sell through the You may sell shares held at the Transfer Agent by
Transfer Agent writing to the Transfer Agent at the address on the
inside back cover of this prospectus. All shareholders
on the account must sign the letter and signatures must
be guaranteed. If you hold stock certificates, return
the certificates with the letter. The Transfer Agent
will normally mail redemption proceeds within seven days
following receipt of a properly completed request. If
you make a redemption request before the Fund has
collected payment for the purchase of shares, the Fund
or the Transfer Agent may delay mailing your proceeds.
This delay will usually not exceed ten days.
If you hold share certificates, they must be delivered
to the Transfer Agent before they can be converted.
Check with the Transfer Agent or your Merrill Lynch
Financial Consultant for details.
- ---------------------------------------------------------------------------------------------------
Sell Shares Participate in the You can choose to receive systematic payments from your
Systematically Fund's Systematic Fund account either by check or through direct deposit
Withdrawal Plan to your bank account on a monthly or quarterly basis. If
you have a Merrill Lynch CMA(R), CBA(R) or Retirement
Account you can arrange for systematic redemptions of a
fixed dollar amount on a monthly, bi-monthly, quarterly,
semi-annual or annual basis, subject to certain
conditions. Under either method you must have dividends
and other distributions automatically reinvested. For
Class B and C shares your total annual withdrawals
cannot be more than 10% per year of the value of your
shares at the time your plan is established. The
deferred sales charge is waived for systematic
redemptions. Ask your Merrill Lynch Financial Consultant
for details.
- ---------------------------------------------------------------------------------------------------
</TABLE>
MERRILL LYNCH WORLD INCOME FUND, INC. 27
<PAGE>
[LOGO] Your Account
<TABLE>
<CAPTION>
If You Want To Your Choices Information Important for You to Know
- ---------------------------------------------------------------------------------------------------
<C> <C> <S>
Exchange Your Select the fund into You can exchange your shares of the Fund for shares of
Shares which you want to many other Merrill Lynch mutual funds. You must have
exchange. Be sure to held the shares used in the exchange for at least 15
read that fund's calendar days before you can exchange to another fund.
prospectus
Each class of Fund shares is generally exchangeable for
shares of the same class of another fund. If you own
Class A shares and wish to exchange into a fund in which
you have no Class A shares, you will exchange into Class
D shares.
Some of the Merrill Lynch mutual funds impose a
different initial or deferred sales charge schedule. If
you exchange Class A or D shares for shares of a fund
with a higher initial sales charge than you originally
paid, you will be charged the difference at the time of
exchange. If you exchange Class B shares for shares of a
fund with a different deferred sales charge schedule,
the higher schedule will apply. The time you hold Class
B or C shares in both funds will count when determining
your holding period for calculating a deferred sales
charge at redemption. If you exchange Class A or D
shares for money market fund shares, you will receive
Class A shares of Summit Cash Reserves Fund. Class B or
C shares of the Fund will be exchanged for Class B
shares of Summit.
Although there is currently no limit on the number of
exchanges that you can make, the exchange privilege may
be modified or terminated at any time in the future.
- ---------------------------------------------------------------------------------------------------
</TABLE>
28 MERRILL LYNCH WORLD INCOME FUND, INC.
<PAGE>
Net Asset Value -- the market value of the Fund's total assets after deducting
liabilities, divided by the number of shares outstanding.
HOW SHARES ARE PRICED
- --------------------------------------------------------------------------------
When you buy shares, you pay the net asset value, plus any applicable sales
charge. This is the offering price. Shares are also redeemed at their net asset
value, minus any applicable deferred sales charge. The Fund calculates its net
asset value (generally by using market quotations) each day the New York Stock
Exchange is open, fifteen minutes after the close of business on the Exchange
(the Exchange generally closes at 4:00 p.m. Eastern time). The net asset value
used in determining your price is the next one calculated after your purchase
or redemption order is placed. Foreign securities owned by the Fund may trade
on weekends or other days when the Fund does not price its shares. As a result,
the Fund's net asset value may change on days when you will not be able to
purchase or redeem the Fund's shares.
Generally, Class A shares will have the highest net asset value because that
class has the lowest expenses, and Class D shares will have a higher net asset
value than Class B or Class C shares. Generally, Class B shares will have a
higher net asset value than Class C shares because Class B shares have lower
distribution expenses than Class C shares. Also dividends paid on Class A and
Class D shares will generally be higher than dividends paid on Class B and
Class C shares because Class A and Class D shares have lower expenses.
PARTICIPATION IN MERRILL LYNCH FEE-BASED PROGRAMS
- --------------------------------------------------------------------------------
If you participate in certain fee-based programs offered by Merrill Lynch, you
may be able to buy Class A shares at net asset value, including by exchanges
from other share classes. Sales charges on the shares being exchanged may be
reduced or waived under certain circumstances.
You generally cannot transfer shares held through a fee-based program into
another account. Instead, you will have to redeem your shares held through the
program and purchase shares of another class, which may be subject to
distribution and account maintenance fees. This may be a taxable event and you
will pay any applicable sales charges.
If you leave one of these programs, your shares may be redeemed or
automatically exchanged into another class of Fund shares or into a money
market fund. The class you receive may be the class you originally owned
MERRILL LYNCH WORLD INCOME FUND, INC. 29
<PAGE>
[LOGO] Your Account
Dividends -- ordinary income and capital gains paid to shareholders. Dividends
may be reinvested in additional Fund shares as they are paid.
when you entered the program, or in certain cases, a different class. If the
exchange is into Class B shares, the period before conversion to Class D shares
may be modified. Any redemption or exchange will be at net asset value.
However, if you participate in the program for less than a specified period,
you may be charged a fee in accordance with the terms of the program.
Details about these features and the relevant charges are included in the
client agreement for each fee-based program and are available from your Merrill
Lynch Financial Consultant.
DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
The Fund will distribute any net investment income monthly and any net realized
capital gains at least annually. The Fund may also pay a special distribution
at the end of the calendar year to comply with Federal tax requirements. If
your account is with Merrill Lynch and you would like to receive dividends in
cash, contact your Merrill Lynch Financial Consultant. If your account is with
the Transfer Agent and you would like to receive dividends in cash, contact the
Transfer Agent. Although this can not be predicted with any certainty, the Fund
anticipates that the majority of its dividends, if any, will consist of
ordinary income.
You will pay tax on dividends from the Fund whether you receive them in cash or
additional shares. If you redeem Fund shares or exchange them for shares of
another fund, any gain on the transaction may be subject to tax. Capital gains
dividends are generally taxed at different rates than ordinary income
dividends.
If you are neither a lawful permanent resident nor a citizen of the U.S. or if
you are a foreign entity, the Fund's ordinary income dividends (which include
distributions of net short-term capital gains) will generally be subject to a
30% U.S. withholding tax, unless a lower treaty rate applies.
30 MERRILL LYNCH WORLD INCOME FUND, INC.
<PAGE>
"BUYING A DIVIDEND"
Unless your investment is in a tax deferred account, you may want to avoid
buying shares shortly before the Fund pays a dividend. The reason? If you buy
shares when a fund has realized but not yet distributed income or capital
gains, you will pay the full price for the shares and then receive a portion of
the price back in the form of a taxable dividend. Before investing you may want
to consult your tax adviser.
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 a credit or take a deduction for foreign
taxes paid by the Fund if certain requirements are met.
By law, the Fund must withhold 31% of your dividends and proceeds if you have
not provided a taxpayer identification number or social security number.
This section summarizes some of the consequences under current Federal tax law
of an investment in the Fund. It is not a substitute for personal tax advice.
Consult your personal tax adviser about the potential tax consequences of an
investment in the Fund under all applicable tax laws.
MERRILL LYNCH WORLD INCOME FUND, INC. 31
<PAGE>
[LOGO] Management of the Fund
FUND ASSET MANAGEMENT
- --------------------------------------------------------------------------------
Fund Asset Management, the Fund's Investment Adviser, manages the Fund's
investments and its business operations under the overall supervision of the
Fund's Board of Directors. The Investment Adviser has the responsibility for
making all investment decisions for the Fund. The Investment Adviser has a sub-
advisory agreement with Merrill Lynch Asset Management U.K. Limited, an
affiliate, under which the Investment Adviser may pay a fee for services it
receives. The Fund has agreed to pay the Investment Adviser a fee at the annual
rate of 0.60% of the average daily net assets of the Fund. For the fiscal year
ended December 31, 1998, the Investment Adviser received a fee of $3,683,766
(based on average daily net assets of approximately $610.6 million).
Fund Asset Management is part of Merrill Lynch Asset Management Group, which
had approximately $515 billion in investment company and other portfolio assets
under management as of March 1999. This amount includes assets managed for
Merrill Lynch affiliates.
A Note About Year 2000
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"). The Fund could be adversely
affected if the computer systems used by the Fund's management or other Fund
service providers do not properly address this problem before January 1, 2000.
The Fund's management expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely affected.
The Fund's other service providers have told Fund management that they also
expect to resolve the Year 2000 Problem, and Fund management will continue to
monitor the situation as the Year 2000 approaches. However, if the problem has
not been fully addressed, the Fund could be negatively affected. The Year 2000
Problem could also have a negative impact on the companies in which the Fund
invests. This negative impact may be greater for companies in foreign markets,
especially emerging markets, since they may be less prepared for the Year 2000
Problem than domestic companies and markets. If the companies in which the Fund
invests have Year 2000 Problems, the Fund's returns could be adversely
affected.
32 MERRILL LYNCH WORLD INCOME FUND, INC.
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Financial Highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects fi-
nancial results for a single Fund share. The total returns in the table repre-
sent the rate an investor would have earned on an investment in the Fund (as-
suming reinvestment of all dividends). This information has been audited by
Deloitte & Touche LLP, whose report, along with the Fund's financial state-
ments, are included in the Fund's annual report to shareholders, which is
available upon request.
<TABLE>
<CAPTION>
Class A
------------------------------------------------
For the Year Ended December 31,
Increase (Decrease) in ------------------------------------------------
Net Asset Value: 1998 1997 1996 1995 1994+
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
- -----------------------------------------------------------------------------------
Net asset value,
beginning of year $ 8.83 $ 8.94 $ 8.69 $ 8.20 $ 9.28
- -----------------------------------------------------------------------------------
Investment income -- net .71 .64 .67 .72 .72
- -----------------------------------------------------------------------------------
Realized and unrealized
gain (loss) on
investments and foreign
currency transactions --
net (2.69) (.11) .25 .49 (1.09)
- -----------------------------------------------------------------------------------
Total from investment
operations (1.98) .53 .92 1.21 (.37)
- -----------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.68) (.61) (.67) (.56) (.45)
Return of capital -- net (.03) (.03) -- (.16) (.26)
- -----------------------------------------------------------------------------------
Total dividends and
distributions (.71) (.64) (.67) (.72) (.71)
- -----------------------------------------------------------------------------------
Net asset value, end of
year $ 6.14 $ 8.83 $ 8.94 $ 8.69 $ 8.20
- -----------------------------------------------------------------------------------
Total Investment Return:*
- -----------------------------------------------------------------------------------
Based on net asset value
per share (23.43)% 6.15% 11.09% 15.35% (4.05)%
- -----------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -----------------------------------------------------------------------------------
Expenses .81% .76% .75% .80% .77%
- -----------------------------------------------------------------------------------
Investment income -- net 9.36% 7.21% 7.71% 8.54% 8.17%
- -----------------------------------------------------------------------------------
Supplemental Data:
- -----------------------------------------------------------------------------------
Net assets, end of year
(in thousands) $78,528 $161,347 $212,085 $260,806 $311,181
- -----------------------------------------------------------------------------------
Portfolio turnover 148.67% 217.60% 208.53% 116.00% 115.95%
- -----------------------------------------------------------------------------------
<CAPTION>
Class B
-------------------------------------------------------
For the Year Ended December 31,
Increase (Decrease) in -------------------------------------------------------
Net Asset Value: 1998 1997 1996 1995 1994+
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
- -----------------------------------------------------------------------------------
Net asset value,
beginning of year $ 8.83 $ 8.94 $ 8.69 $ 8.19 $ 9.28
- -----------------------------------------------------------------------------------
Investment income -- net .65 .57 .61 .65 .65
- -----------------------------------------------------------------------------------
Realized and unrealized
gain (loss) on
investments and foreign
currency transactions --
net (2.70) (.11) .25 .50 (1.10)
- -----------------------------------------------------------------------------------
Total from investment
operations (2.05) .46 .86 1.15 (.45)
- -----------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.62) (.54) (.61) (.51) (.40)
Return of capital -- net (.03) (.03) -- (.14) (.24)
- -----------------------------------------------------------------------------------
Total dividends and
distributions (.65) (.57) (.61) (.65) (.64)
- -----------------------------------------------------------------------------------
Net asset value, end of
year $ 6.13 $ 8.83 $ 8.94 $ 8.69 $ 8.19
- -----------------------------------------------------------------------------------
Total Investment Return:*
- -----------------------------------------------------------------------------------
Based on net asset value
per share (24.15)% 5.34% 10.25% 14.61% (4.90)%
- -----------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -----------------------------------------------------------------------------------
Expenses 1.59% 1.53% 1.52% 1.56% 1.54%
- -----------------------------------------------------------------------------------
Investment income -- net 8.56% 6.43% 6.94% 7.77% 7.41%
- -----------------------------------------------------------------------------------
Supplemental Data:
- -----------------------------------------------------------------------------------
Net assets, end of year
(in thousands) $283,018 $641,242 $988,209 $1,241,896 $1,490,507
- -----------------------------------------------------------------------------------
Portfolio turnover 148.67% 217.60% 208.53% 116.00% 115.95%
- -----------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales loads.
+ Based on average shares outstanding.
MERRILL LYNCH WORLD INCOME FUND, INC. 33
<PAGE>
[LOGO] Management of the Fund
FINANCIAL HIGHLIGHTS (concluded)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
------------------------------------------------------
For the Year Ended December 31, For the Period
------------------------------------- Oct. 21, 1994++
Increase (Decrease) in to Dec. 31,
Net Asset Value: 1998 1997 1996 1995 1994+
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
- --------------------------------------------------------------------------------
<CAPTION>
Class D
------------------------------------------------------
For the Year Ended December 31, For the Period
-------------------------------------- Oct. 21, 1994++
Increase (Decrease) in to Dec. 31,
Net Asset Value: 1998 1997 1996 1995 1994+
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
- --------------------------------------------------------------------------------
Net asset value,
beginning of
period $ 8.82 $ 8.93 $ 8.68 $ 8.19 $ 8.42
- --------------------------------------------------------------------------------
Net asset value,
beginning of
period $ 8.83 $ 8.94 $ 8.69 $ 8.20 $ 8.43
- --------------------------------------------------------------------------------
Investment
income -- net .65 .56 .60 .64 .10
- --------------------------------------------------------------------------------
Investment
income -- net .69 .61 .65 .70 .11
- --------------------------------------------------------------------------------
Realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions --
net (2.69) (.11) .25 .49 (.20)
- --------------------------------------------------------------------------------
Realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions --
net (2.70) (.11) .25 .49 (.20)
- --------------------------------------------------------------------------------
Total from
investment
operations (2.04) .45 .85 1.13 (.10)
- --------------------------------------------------------------------------------
Total from
investment
operations (2.01) .50 .90 1.19 (.09)
- --------------------------------------------------------------------------------
Less dividends and distributions:
Investment
income -- net (.62) (.53) (.60) (.50) (.08)
Return of
capital -- net (.03) (.03) -- (.14) (.05)
- --------------------------------------------------------------------------------
Less dividends and distributions:
Investment
income -- net (.66) (.58) (.65) (.55) (.09)
Return of
capital -- net (.03) (.03) -- (.15) (.05)
- --------------------------------------------------------------------------------
Total dividends
and
distributions (.65) (.56) (.60) (.64) (.13)
- --------------------------------------------------------------------------------
Total dividends
and
distributions (.69) (.61) (.65) (.70) (.14)
- --------------------------------------------------------------------------------
Net asset value,
end of period $ 6.13 $ 8.82 $ 8.93 $ 8.68 $ 8.19
- --------------------------------------------------------------------------------
Net asset value,
end of period $ 6.13 $ 8.83 $ 8.94 $ 8.69 $ 8.20
- --------------------------------------------------------------------------------
Total Investment Return:**
- --------------------------------------------------------------------------------
Total Investment Return:**
- --------------------------------------------------------------------------------
Based on net
asset value per
share (24.11)% 5.28% 10.19% 14.38% (1.20)%#
- --------------------------------------------------------------------------------
Based on net
asset value per
share (23.75)% 5.88% 10.82% 15.06% (1.09)%#
- --------------------------------------------------------------------------------
Ratios to Average Net Assets:
- --------------------------------------------------------------------------------
Ratios to Average Net Assets:
- --------------------------------------------------------------------------------
Expenses 1.64% 1.58% 1.56% 1.65% 1.64%*
- --------------------------------------------------------------------------------
Expenses 1.06% 1.01% .99% 1.04% 1.04%*
- --------------------------------------------------------------------------------
Investment
income -- net 8.53% 6.41% 6.85% 7.65% 8.00%*
- --------------------------------------------------------------------------------
Supplemental Data:
- --------------------------------------------------------------------------------
Investment
income -- net 9.12% 6.97% 7.42% 8.23% 8.60%*
- --------------------------------------------------------------------------------
Supplemental Data:
- --------------------------------------------------------------------------------
Net assets, end
of period
(in thousands) $ 4,370 $ 11,738 $ 10,251 $ 5,406 $1,204
- --------------------------------------------------------------------------------
Net assets, end
of period
(in thousands) $ 8,148 $ 15,072 $ 14,369 $ 6,320 $1,410
- --------------------------------------------------------------------------------
Portfolio
turnover 148.67% 217.60% 208.53% 116.00% 115.95%
- --------------------------------------------------------------------------------
Portfolio
turnover 148.67% 217.60% 208.53% 116.00% 115.95%
- --------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Based on average shares outstanding.
++ Commencement of operations.
# Aggregate total investment return.
34 MERRILL LYNCH WORLD INCOME FUND, INC.
<PAGE>
------------------------------
POTENTIAL
_____________ INVESTORS ____________
| Open an account (two options). |
| ------------------------------ |
1 2
| |
- ----------------------- --------------------------------
MERRILL LYNCH TRANSFER AGENT
FINANCIAL CONSULTANT FINANCIAL DATA SERVICES, INC.
OR SECURITIES DEALER P.O. Box 45289
Advises shareholders on Jacksonville, Florida 32232-5289
their fund investments. Performs recordkeeping and
- ----------------------- reporting services.
| --------------------------------
| |
|_______________________________________________________|
|
|
----------------------------------------------
DISTRIBUTOR
MERRILL LYNCH FUNDS DISTRIBUTOR,
A DIVISION OF PRINCETON FUNDS DISTRIBUTOR, INC.
P.O. Box 9081
Princeton, New Jersey 08543-9081
Arranges for the sale of fund shares.
----------------------------------------------
|
|
- ---------------------- | -----------------------------
COUNSEL --------------------- CUSTODIAN
BROWN & WOOD LLP ___ THE FUND ___ STATE STREET BANK AND TRUST
One World Trade Center The Board of Directors COMPANY
New York, New York oversees the Fund. P.O. Box 351
10048-0557 --------------------- Boston, Massachusetts 02101
Provides legal advice | | Holds the Fund's assets
to the Fund. | | for safekeeping.
- ----------------------- | | -----------------------------
| |
___________| |_________________
| |
- ---------------------------------- -----------------------------------------
INDEPENDENT AUDITORS INVESTMENT ADVISER
DELOITTE & TOUCHE LLP FUND
117 Campus Drive ASSET MANAGEMENT, L.P.
Princeton, New Jersey 08540 ADMINISTRATIVE OFFICES
800 Scudders Mill Road
Audits the financial Plainsboro, New Jersey 08536
statements of the Fund on behalf of
the shareholders. MAILING ADDRESS
- ---------------------------------- P.O. Box 9011
Princeton, New Jersey 08543-9011
TELEPHONE NUMBER
1-800-MER-FUND
Manages the Fund's day-to-day activities.
-----------------------------------------
MERRILL LYNCH WORLD INCOME FUND, INC.
<PAGE>
[LOGO] For More Information
[LOGO] Merrill Lynch
Shareholder Reports
Additional information about the Fund's investments is available in the Fund's
annual and semi-annual reports to shareholders. In the Fund's annual report you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. You
may obtain these reports at no cost by calling 1-800-MER-FUND.
The Fund will send you one copy of each shareholder report and certain other
mailings, regardless of the number of Fund accounts you have. To receive
separate shareholder reports for each account, call your Merrill Lynch
Financial Consultant or write to the Transfer Agent at its mailing address.
Include your name, address, tax identification number and Merrill Lynch
brokerage or mutual fund account number. If you have any questions, please call
your Merrill Lynch Financial Consultant or the Transfer Agent at 1-800-MER-
FUND.
Statement of Additional Information
The Fund's Statement of Additional Information contains further information
about the Fund and is incorporated by reference (legally considered to be part
of this prospectus). You may request a free copy by writing the Fund at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289
or by calling 1-800-MER-FUND.
Contact your Merrill Lynch Financial Consultant or the Fund at the telephone
number or address indicated above if you have any questions.
Information about the Fund (including the Statement of Additional Information)
can be reviewed and copied at the SEC's Public Reference Room in Washington,
D.C. Call 1-800-SEC-0330 for information on the operation of the public
reference room. This information is also available on the SEC's Internet site
at http://www.sec.gov and copies may be obtained upon payment of a duplicating
fee by writing the Public Reference Section of the SEC, Washington, D.C.
20549-6009.
You should rely only on the information contained in this Prospectus. No one is
authorized to provide you with information that is different from information
contained in this Prospectus.
Investment Company Act file #811-5603
Code #16102-04-99
(C)Fund Asset Management, L.P.
Prospectus
Merrill Lynch
World Income Fund, Inc.
[LOGO] April 27, 1999
<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 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 ("junk bonds"). 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 (including the euro), New Zealand and
Australia. 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. For more information on the Fund's investment-objectives and
policies, see "Investment Objective and Policies."
Pursuant to the Merrill Lynch Select Pricing SM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select Pricing SM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances. See
"Purchase of Shares."
----------------
This Statement of Additional Information of the Fund is not a prospectus and
should be read in conjunction with the Prospectus of the Fund, dated April 27,
1999 (the "Prospectus"), which has been filed with the Securities and Exchange
Commission (the "Commission") and can be obtained, without charge, by calling
(800) MER-FUND or by writing the Fund at the above address. The Prospectus is
incorporated by reference into this Statement of Additional Information, and
this Statement of Additional Information is incorporated by reference into the
Prospectus. The Fund's audited financial statements are incorporated in this
Statement of Additional Information by reference to its 1998 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling 1 (800) 456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m. on any
business day.
----------------
Fund Asset Management -- Investment Adviser
Merrill Lynch Funds Distributor -- Distributor
----------------
The date of this Statement of Additional Information is April 27, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Investment Objective and Policies......................................... 2
International Investing.................................................. 2
Allocation of Investments and Risks of High Yield/High Risk Securities... 3
Mortgage-Backed Securities............................................... 3
Junk Bonds............................................................... 4
Convertible Securities................................................... 5
Foreign Investment Risks................................................. 6
European Economic and Monetary Union ("EMU")............................. 6
Derivatives.............................................................. 7
Other Investment Policies, Practices and Risk Factors.................... 12
Investment Restrictions.................................................. 14
Portfolio Turnover....................................................... 16
Management of the Fund.................................................... 16
Directors and Officers................................................... 16
Compensation of Directors................................................ 17
Management and Advisory Arrangements..................................... 18
Code of Ethics........................................................... 19
Purchase of Shares........................................................ 20
Initial Sales Charge Alternatives -- Class A and Class D Shares.......... 20
Deferred Sales Charge Alternatives -- Class B and Class C Shares......... 25
Distribution Plans....................................................... 27
Limitations on the Payment of Deferred Sales Charges..................... 29
Redemption of Shares...................................................... 30
Redemption............................................................... 31
Repurchase............................................................... 31
Reinstatement Privilege -- Class A and Class D Shares.................... 31
Pricing of Shares......................................................... 32
Determination of Net Asset Value......................................... 32
Computation of Offering Price Per Share.................................. 33
Portfolio Transactions.................................................... 33
Transactions in Portfolio Securities..................................... 33
Shareholder Services...................................................... 34
Investment Account....................................................... 35
Exchange Privilege....................................................... 35
Fee-Based Programs....................................................... 37
Retirement Plans......................................................... 37
Automatic Investment Plans............................................... 38
Automatic Dividend Reinvestment Plan..................................... 38
Systematic Withdrawal Plan............................................... 38
Dividends and Taxes....................................................... 39
Dividends................................................................ 39
Taxes.................................................................... 40
Tax Treatment of Options, Futures and Forward Foreign Exchange
Transactions............................................................ 42
Special Rules for Certain Foreign Currency Transactions.................. 42
Performance Data.......................................................... 43
General Information....................................................... 45
Description of Shares.................................................... 45
Independent Auditors..................................................... 46
Custodian................................................................ 46
Transfer Agent........................................................... 46
Legal Counsel............................................................ 46
Reports to Shareholders.................................................. 46
Shareholder Inquiries.................................................... 46
Additional Information................................................... 47
Financial Statements...................................................... 47
Appendix I -- Ratings of Fixed Income Securities.......................... I-1
</TABLE>
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
Reference is made to "How the Fund Invests" and "Investment Risks" in the
Prospectus.
The investment objective of the Fund is to seek 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
("junk bonds"). 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 junk bonds. 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 analysis of Fund Asset
Management, L.P. (the "Investment Adviser") 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 ("government entities") or issued or
guaranteed by international organizations designated or supported by multiple
government 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. 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 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 (including the euro), New Zealand and
Australia. 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.
U.S. Government securities include: (i) U.S. Treasury obligations (bills,
notes and bonds), which differ in their interest rates, maturities and times
of issuance, all of which are backed by the full faith and credit of the
United States; and (ii) obligations issued or guaranteed by U.S. Government
agencies or instrumentalities, including government guaranteed mortgage-
related 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).
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
Manager. The Manager 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.
2
<PAGE>
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.
The Fund has not established any rating criteria for the fixed income
securities in which it may invest. The Fund is authorized to invest in debt
securities of governmental issuers and of corporate issuers, including
convertible debt securities, rated BBB or better by Standard & Poor's or Baa
or better by Moody's or which, in the Manager's judgment, possess similar
credit characteristics ("investment grade bonds"). Debt securities ranked in
the fourth highest rating category, while considered "investment grade," have
more speculative characteristics and are more likely to be downgraded than
securities rated in the three highest rating categories. The Manager considers
the ratings assigned by Standard & Poor's and Moody's as one of several
factors in its independent credit analysis of issuers.
The average maturity of the Fund's portfolio of debt securities will vary
based on the Investment Adviser's assessment of pertinent economic market
conditions. As with all debt securities, changes in market yields will affect
the value of such securities. Prices 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.
Mortgage-Backed Securities
Mortgage-backed securities are "pass-through" securities, meaning that
principal and interest payments made by the borrower on the underlying
mortgages are passed through to the Fund. The value of mortgage-backed
securities, like that of traditional fixed income securities, typically
increases when interest rates fall and decreases when interest rates rise.
However, mortgage-backed securities differ from traditional fixed income
securities because of their potential for prepayment without penalty. The
price paid by the Fund for its mortgage-backed securities, the yield the Fund
expects to receive from such securities and the average life of the securities
are based on a number of factors, including the anticipated rate of prepayment
of the underlying mortgages. In a period of declining interest rates,
borrowers may prepay the underlying mortgages more quickly than anticipated,
thereby reducing the yield to maturity and the average life of the mortgage-
backed securities. Moreover, when the Fund reinvests the proceeds of a
prepayment in these circumstances, it will likely receive a rate of interest
that is lower than the rate on the security that was prepaid. To the extent
that the Fund purchases mortgage-backed securities at a premium, mortgage
foreclosures and principal prepayments may result in a loss to the extent of
the premium paid. If the Fund buys such securities at a discount, both
scheduled payments of principal and unscheduled prepayments will increase
current and total returns and will accelerate the recognition of income which,
when distributed to shareholders, will be taxable as ordinary income. In a
period of rising interest rates, prepayments of the underlying mortgages may
occur at a slower than expected rate, creating maturity extension risk. This
particular risk may effectively change a security that was considered short-
or intermediate-term at the time of purchase into a long-term security. Since
long-term securities generally fluctuate more widely in response to changes in
interest rates than do short-term securities, maturity extension risk could
increase the inherent volatility of the Fund.
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Asset-Backed Securities. Asset-backed securities are "pass-through"
securities, meaning that principal and interest payments made by the borrower
on the underlying assets (such as credit card receivables) are passed through
to the Fund. The value of asset-backed securities, like that of traditional
fixed-income securities, typically increases when interest rates fall and
decreases when interest rates rise. However, asset-backed securities differ
from traditional fixed-income securities because of their potential for
prepayment. The price paid by the Fund for its asset-backed securities, the
yield the Fund expects to receive from such securities and the average life of
the securities are based on a number of factors, including the anticipated
rate of prepayment of the underlying assets. In a period of declining interest
rates, borrowers may prepay the underlying assets more quickly than
anticipated, thereby reducing the yield to maturity and the average life of
the asset-backed securities. Moreover, when the Fund reinvests the proceeds of
a prepayment in these circumstances, it will likely receive a rate of interest
that is lower than the rate on the security that was prepaid. To the extent
that the Fund purchases asset-backed securities at a premium, prepayments may
result in a loss to the extent of the premium paid. If the Fund buys such
securities at a discount, both scheduled payments and unscheduled prepayments
will increase current and total returns and will accelerate the recognition of
income which, when distributed to shareholders, will be taxable as ordinary
income. In a period of rising interest rates, prepayments of the underlying
assets may occur at a slower than expected rate, creating maturity extension
risk. This particular risk may effectively change a security that was
considered short- or intermediate-term at the time of purchase into a long-
term security. Since long-term securities generally fluctuate more widely in
response to changes in interest rates than short-term securities, maturity
extension risk could increase the inherent volatility of the Fund. See "Other
Investment Policies, Practices and Risk Factors -- Illiquid or Restricted
Securities."
Junk Bonds
Junk Bonds are debt securities that are rated below investment grade by the
major rating agencies or are unrated securities that Fund management believes
are of comparable quality. Although junk bonds generally pay higher rates of
interest than investment grade bonds, they are high-risk investments that may
cause income and principal losses for the Fund. The major risks in junk bond
investments include the following:
Junk bonds may be issued by less creditworthy companies. These securities
are vulnerable to adverse changes in the issuer's industry and to general
economic conditions. Issuers of junk bonds may be unable to meet their
interest or principal payment obligations because of an economic downturn,
specific issuer developments or the unavailability of additional financing.
The issuers of junk bonds may have a larger amount of outstanding debt
relative to their assets than issuers of investment grade bonds. If the issuer
experiences financial stress, it may be unable to meet its debt obligations.
The issuer's ability to pay its debt obligations also may be lessened by
specific issuer developments, or the unavailability of additional financing.
Junk bonds are frequently ranked junior to claims by other creditors. If the
issuer cannot meet its obligations, the senior obligations are generally paid
off before the junior obligations.
Junk bonds frequently have redemption features that permit an issuer to
repurchase the security from the Fund before it matures. If an issuer redeems
the junk bonds, the Fund may have to invest the proceeds in bonds with lower
yields and may lose income.
Prices of junk bonds are subject to extreme price fluctuations. Negative
economic developments may have a greater impact on the prices of junk bonds
than on other higher rated fixed income securities.
Junk bonds may be less liquid than higher rated fixed income securities even
under normal economic conditions. There are fewer dealers in the junk bond
market, and there may be significant differences in the prices quoted for junk
bonds by the dealers. Because they are less liquid, judgement may play a
greater role in valuing certain of the Fund's portfolio securities than in the
case of securities trading in a more liquid market.
The Fund may incur expenses to the extent necessary to seek recovery upon
default or to negotiate terms with a defaulting issuer.
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Convertible Securities
Convertible securities entitle the holder to receive interest 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.
The characteristics of convertible securities make them appropriate
investments for an investment company seeking high total return from capital
appreciation and investment income. These characteristics include the
potential for capital appreciation as the value of the underlying common stock
increases, the relatively high yield received from dividend or interest
payments as compared to common stock dividends and decreased risks of decline
in value relative to the underlying common stock due to their fixed income
nature. As a result of the conversion feature, however, the interest rate or
dividend preference on a convertible security is generally less than would be
the case if the securities were issued in nonconvertible form.
In analyzing convertible securities, the Investment Adviser will consider
both the yield on the convertible security and the potential capital
appreciation that is offered by the underlying common stock.
Convertible securities are issued and traded in a number of securities
markets. For the past several years, the principal markets have been the
United States, the Euromarket and Japan. Issuers during this period have
included major corporations domiciled in the United States, Japan, France,
Switzerland, Canada and the United Kingdom. Even in cases where a substantial
portion of the convertible securities held by the Fund are denominated in
United States dollars, the underlying equity securities may be quoted in the
currency of the country where the issuer is domiciled. With respect to
convertible securities denominated in a currency different from that of the
underlying equity securities, the conversion price may be based on a fixed
exchange rate established at the time the security is issued. As a result,
fluctuations in the exchange rate between the currency in which the debt
security is denominated and the currency in which the share price is quoted
will affect the value of the convertible security. As described below, the
Fund is authorized to enter into foreign currency hedging transactions in
which it may seek to reduce the effect of such fluctuations.
Apart from currency considerations, the value of convertible securities is
influenced by both the yield of nonconvertible securities of comparable
issuers and by the value of the underlying common stock. The value of a
convertible security viewed without regard to its conversion feature (i.e.,
strictly on the basis of its yield) is sometimes referred to as its
"investment value." To the extent interest rates change, the investment value
of the convertible security typically will fluctuate. However, at the same
time, the value of the convertible security will be influenced by its
"conversion value," which is the market value of the underlying common stock
that would be obtained if the convertible security were converted. Conversion
value fluctuates directly with the price of the underlying common stock. If,
because of a low price of the common stock the conversion value is
substantially below the investment value of the convertible security, the
price of the convertible security will be governed principally by its
investment value.
To the extent the conversion value of a convertible security increases to a
point that approximates or exceeds its investment value, the price of the
convertible security will be influenced principally by its conversion value. A
convertible security will sell at a premium over the conversion value to the
extent investors place value on the right to acquire the underlying common
stock while holding a fixed income security. The yield and conversion premium
of convertible securities issued in Japan and the Euromarket are frequently
determined at levels that cause the conversion value to affect their market
value more than the securities' investment value.
Holders of convertible securities generally have a claim on the assets of
the issuer prior to the common stockholders but may be subordinated to other
debt securities of the same issuer. A convertible security may be subject to
redemption at the option of the issuer at a price established in the charter
provision, indenture or other governing instrument pursuant to which the
convertible security was issued. If a convertible security held by the Fund is
called for redemption, the Fund will be required to redeem the security,
convert it into the underlying common stock or sell it to a third party.
Certain convertible debt securities may provide a put option to the holder
which entitles the holder to cause the security to be redeemed by the issuer
at a premium over the stated principal amount of the debt security under
certain circumstances.
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Foreign Investment Risks
As a global fund, the Fund may invest in U.S. and foreign securities.
Investments in securities of foreign entities and securities denominated in
foreign currencies involve risks not typically involved in domestic
investment, including, but not limited to, fluctuations in foreign exchange
rates, future foreign political and economic developments, and the possible
imposition of exchange controls or other foreign or U.S. governmental laws or
restrictions applicable to such investments. Since the Fund may invest in
securities denominated or quoted in currencies other than the U.S. 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 U.S. 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 those currencies 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 U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resources, self-sufficiency
and balance of payments position.
With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social
instability or diplomatic developments that could affect investment in those
countries. There may be less publicly available information about a foreign
financial instrument than about a U.S. instrument, and foreign entities may
not be subject to accounting, auditing and financial reporting standards and
requirements comparable to those to which U.S. entities are subject. In
addition, certain foreign investments may be subject to foreign withholding
taxes. Investors may be able to deduct such taxes in computing their taxable
income or to use such amounts as credits against their U.S. income taxes if
certain requirements are met. See "Taxes." Foreign financial markets, while
generally growing in volume, typically have substantially less volume than
U.S. 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 or other problems 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, in possible liability to the purchaser. Brokerage
commissions and costs associated with transactions in foreign securities are
generally higher than with transactions in U.S. securities. There is generally
less government supervision and regulation of exchanges, financial
institutions and issuers in foreign countries than there is in the United
States. For example, there may be no provisions under certain foreign laws
comparable to insider trading and similar investor protection provisions of
the securities laws that apply with respect to securities transactions
consummated in the United States.
The operating expense ratio of the Fund can be expected to be higher than
that of an investment company investing exclusively in U.S. securities because
the expenses of the Fund, such as custodial costs, are higher.
The Fund's ability and decisions to purchase or sell portfolio securities
may be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are redeemable on a
daily basis on each day the Fund determines its net asset value in U.S.
dollars, the Fund intends to manage its portfolio so as to give reasonable
assurance that it will be able to obtain U.S. dollars to the extent necessary
to meet anticipated redemptions. See "Redemption of Shares." Under present
conditions, the Investment Adviser does not believe that these considerations
will have any significant effect on its portfolio strategy, although there can
be no assurance in this regard.
European Economic and Monetary Union ("EMU")
For a number of years, certain European countries have been seeking economic
unification that would, among other things, reduce barriers between countries,
increase competition among companies, reduce government
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subsidies in certain industries, and reduce or eliminate currency fluctuations
among these European countries. The Treaty on European Union (the "Maastricht
Treaty") sets out a framework for the European Economic and Monetary Union
("EMU") among the countries that comprise the European Union ("EU"). EMU
established a single common European currency (the "euro") that was introduced
on January 1, 1999 and is expected to replace the existing national currencies
of all EMU participants by July 1, 2002. EMU took effect for the initial EMU
participants as of January 1, 1999. Certain securities issued in participating
EU countries (beginning with government and corporate bonds) were
redenominated in the euro, and are listed, traded, and make dividend and other
payments only in euros.
No assurance can be given that EMU will take full effect, that all the
changes planned for the EU can be successfully implemented or that these
changes will result in the economic and monetary unity and stability intended.
There is a possibility that EMU will not be completed, or will be completed
but then partially or completely unwound. Because any participating country
may opt out of EMU within the first three years, it is also possible that a
significant participant could choose to abandon EMU, which could diminish its
credibility and influence. Any of these occurrences could have adverse effects
on the markets of both participating and non-participating countries,
including sharp appreciation or depreciation of participants' national
currencies and a significant increase in exchange rate volatility, a
resurgence in economic protectionism, an undermining of confidence in the
European markets, an undermining of European economic stability, the collapse
or slowdown of the drive toward European economic unity, and/or reversion of
the attempts to lower government debt and inflation rates that were introduced
in anticipation of EMU. Also, withdrawal from EMU by an initial participant
could cause disruption of the financial markets as securities denominated in
euros are transferred back into that country's national currency, particularly
if the withdrawing country is a major economic power. Such developments could
have an adverse impact on the Fund's investments in Europe generally or in
specific countries participating in EMU. Gains or losses from euro conversions
may be taxable to Fund shareholders under foreign or, in certain limited
circumstances, U.S. tax laws. In addition, computer, accounting, and trading
systems must be capable of recognizing the euro as a distinct currency. If not
properly addressed, this may negatively affect the operations of the companies
in which the Fund invests.
Derivatives
The Fund may use instruments referred to as "Derivatives." Derivatives are
financial instruments the value of which is derived from another security, a
commodity (such as gold or oil) or an index (a measure of value or rates, such
as the Standard & Poor's 500 Index or the prime lending rate). Derivatives
allow the Fund to increase or decrease the level of risk to which the Fund is
exposed more quickly and efficiently than transactions in other types of
instruments. Derivatives, however, are volatile and involve significant risks,
including:
Credit risk -- the risk that the counterparty on a Derivative transaction
will be unable to honor its financial obligation to the Fund.
Currency risk -- the risk that changes in the exchange rate between two
currencies will adversely affect the value ( in U.S. dollar terms) of an
investment.
Leverage risk -- the risk associated with certain types of investments or
trading strategies (such as borrowing money to increase the amount of
investments) that relatively small market movements may result in large
changes in the value of an investment. Certain investments or trading
strategies that involve leverage can result in losses that greatly exceed
the amount originally invested.
Liquidity Risk -- the risk that certain securities may be difficult or
impossible to sell at the time that the seller would like or at the price
that the seller believes the security is currently worth.
Hedging. The Fund may use Derivatives for hedging purposes. Hedging is a
strategy in which a Derivative is used to offset the risk that other Fund
holdings may decrease in value. Losses on the other investment may be
substantially reduced by gains on a Derivative that reacts in an opposite
manner to market movements. While hedging can reduce losses, it can also
reduce or eliminate gains if the market moves in a different manner than
anticipated by the Fund or if the cost of the Derivative outweighs the benefit
of the hedge. Hedging also involves
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the risk that changes in the value of the Derivative will not match those of
the holdings being hedged as expected by the Fund, in which case any losses on
the holdings being hedged may not be reduced.
The Fund may use the following types of derivative instruments and trading
strategies:
Indexed and Inverse Securities
The Fund may invest in securities the potential return of which is based on
an index. As an illustration, the Fund may invest in a debt security that pays
interest based on the current value of an interest rate index, such as the
prime rate. In addition, the Fund may invest in securities on which the
potential return is based inversely on the change in an index (that is, a
security the value of which will move in the opposite direction of changes to
an index). For example, the Fund may invest in securities that pay a higher
rate of interest when a particular index decreases and pay a lower rate of
interest (or do not fully return principal) when the value of the index
increases. If the Fund invests in such securities, it may be subject to
reduced or eliminated interest payments or loss of principal in the event of
an adverse movement in the relevant index or indices. Indexed and inverse
securities involve credit risk, and certain indexed and inverse securities may
involve leverage risk, liquidity risk and currency risk. The Fund may invest
in indexed and inverse securities for hedging purposes only. When used for
hedging purposes, indexed and inverse securities involve correlation risk.
Options on Securities and Securities Indices
Purchasing Put Options. The Fund may purchase put options on securities held
in its portfolio or securities or interest rate indices which are correlated
with securities held in its portfolio. When the Fund purchases a put option,
in consideration for an up front payment (the "option premium") the Fund
acquires a right to sell to another party specified securities owned by the
Fund at a specified price (the "exercise price") on or before a specified date
(the "expiration date"), in the case of an option on securities, or to receive
from another party a payment based on the amount a specified securities index
declines below a specified level on or before the expiration date, in the case
of an option on a securities index. The purchase of a put option limits the
Fund's risk of loss in the event of a decline in the market value of the
portfolio holdings underlying the put option prior to the option's expiration
date. If the market value of the portfolio holdings associated with the put
option increases rather than decreases, however, the Fund will lose the option
premium and will consequently realize a lower return on the portfolio holdings
than would have been realized without the purchase of the put. Purchasing a
put option may involve correlation risk, and may also involve liquidity and
credit risk.
Purchasing Call Options. The Fund may also purchase call options on
securities it intends to purchase or securities or interest rate indices,
which are correlated with the types of securities it intends to purchase. When
the Fund purchases a call option, in consideration for the option premium the
Fund acquires a right to purchase from another party specified securities at
the exercise price on or before the expiration date, in the case of an option
on securities, or to receive from another party a payment based on the amount
a specified securities index increases beyond a specified level on or before
the expiration date, in the case of an option on a securities index. The
purchase of a call option may protect the Fund from having to pay more for a
security as a consequence of increases in the market value for the security
during a period when the Fund is contemplating its purchase, in the case of an
option on a security, or attempting to identify specific securities in which
to invest in a market the Fund believes to be attractive, in the case of an
option on an index (an "anticipatory hedge"). In the event the Fund determines
not to purchase a security underlying a call option, however, the Fund may
lose the entire option premium. Purchasing a call option involves correlation
risk, and may also involve liquidity and credit risk.
The Fund is also authorized to purchase put or call options in connection
with closing out put or call options it has previously sold. However, the Fund
will not purchase options on securities if, as a result of such purchase, the
aggregate cost (option plus premiums paid) of all outstanding options on
securities held by the Fund would exceed 10% of the market value of the Fund's
total assets.
Writing Call Options. The Fund may write (i.e., sell) call options on
securities held in its portfolio or securities indices the performance of
which correlates with securities held in its portfolio. When the Fund writes a
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call option, in return for an option premium, the Fund gives another party the
right to buy specified securities owned by the Fund at the exercise price on
or before the expiration date, in the case of an option on securities, or
agrees to pay to another party an amount based on any gain in a specified
securities index beyond a specified level on or before the expiration date, in
the case of an option on a securities index. The Fund may write call options
to earn income, through the receipt of option premiums. In the event the party
to which the Fund has written an option fails to exercise its rights under the
option because the value of the underlying securities is less than the
exercise price, the Fund will partially offset any decline in the value of the
underlying securities through the receipt of the option premium. By writing a
call option, however, the Fund limits its ability to sell the underlying
securities, and gives up the opportunity to profit from any increase in the
value of the underlying securities beyond the exercise price, while the option
remains outstanding. Writing a call option may involve correlation risk.
Writing Put Options. The Fund may also write put options on securities or
securities indices. When the Fund writes a put option, in return for an option
premium the Fund gives another party the right to sell to the Fund a specified
security at the exercise price on or before the expiration date, in the case
of an option on a security, or agrees to pay to another party an amount based
on any decline in a specified securities index below a specified level on or
before the expiration date, in the case of an option on a securities index.
The Fund may write put options to earn income, through the receipt of option
premiums. In the event the party to which the Fund has written an option fails
to exercise its rights under the option because the value of the underlying
securities is greater than the exercise price, the Fund will profit by the
amount of the option premium. By writing a put option, however, the Fund will
be obligated to purchase the underlying security at a price that may be higher
than the market value of the security at the time of exercise as long as the
put option is outstanding, in the case of an option on a security, or make a
cash payment reflecting any decline in the index, in the case of an option on
an index. Accordingly, when the Fund writes a put option it is exposed to a
risk of loss in the event the value of the underlying securities falls below
the exercise price, which loss potentially may substantially exceed the amount
of option premium received by the Fund for writing the put option. The Fund
will write a put option on a security or a securities index only if the Fund
would be willing to purchase the security at the exercise price for investment
purposes (in the case of an option on a security) or is writing the put in
connection with trading strategies involving combinations of options -- for
example, the sale and purchase of options with identical expiration dates on
the same security or index but different exercise prices (a technique called a
"spread"). Writing a put option may involve substantial leverage risk.
The Fund is also authorized to sell call or put options in connection with
closing out call or put options it has previously purchased.
Other than with respect to closing transactions, the Fund will only write
call or put options that are "covered." A call or put option will be
considered covered if the Fund has segregated assets with respect to such
option. A call option will also be considered covered if the Fund owns the
securities it would be required to deliver upon exercise of the option (or, in
the case of option on a securities index, securities which substantially
correlate with the performance of such index) or owns a call option, warrant
or convertible instrument which is immediately exercisable for, or convertible
into, such security.
Types of Options. The Fund may engage in transactions in options on
securities or securities indices on exchanges and in the over-the-counter
("OTC") markets. In general, exchange-traded options have standardized
exercise prices and expiration dates and require the parties to post margin
against their obligations, and the performance of the parties' obligations in
connection with such options is guaranteed by the exchange or a related
clearing corporation. OTC options have more flexible terms negotiated between
the buyer and the seller, but generally do not require the parties to post
margin and are subject to greater credit risk. OTC options also involve
greater liquidity risk. See "Additional Risk Factors of OTC Transactions;
Limitations on the Use of OTC Derivatives" below.
Futures
The Fund may engage in transactions in futures and options thereon. Futures
are standardized, exchange-traded contracts which obligate a purchaser to take
delivery, and a seller to make delivery, of a specific amount of an asset at a
specified future date at a specified price. No price is paid upon entering
into a futures contract. Rather,
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upon purchasing or selling a futures contract the Fund is required to deposit
collateral ("margin") equal to a percentage (generally less than 10%) of the
contract value. Each day thereafter until the futures position is closed, the
Fund will pay additional margin representing any loss experienced as a result
of the futures position the prior day or be entitled to a payment representing
any profit experienced as a result of the futures position the prior day.
Futures involve substantial leverage risk.
The sale of a futures contract limits the Fund's risk of loss through a
decline in the market value of portfolio holdings correlated with the futures
contract prior to the futures contract's expiration date. In the event the
market value of the portfolio holdings correlated with the futures contract
increases rather than decreases, however, the Fund will realize a loss on the
futures position and a lower return on the portfolio holdings than would have
been realized without the purchase of the futures contract.
The purchase of a futures contract may protect the Fund from having to pay
more for securities as a consequence of increases in the market value for such
securities during a period when the Fund was attempting to identify specific
securities in which to invest in a market the Fund believes to be attractive.
In the event that such securities decline in value or the Fund determines not
to complete an anticipatory hedge transaction relating to a futures contract,
however, the Fund may realize a loss relating to the futures position.
The Fund will limit transactions in futures and options on futures to
financial futures contracts (i.e., contracts for which the underlying asset is
a currency or securities or interest rate index) purchased or sold for hedging
purposes (including anticipatory hedges). The Fund will further limit
transactions in futures and options on futures to the extent necessary to
prevent the Fund from being deemed a "commodity pool" under regulations of the
Commodity Futures Trading Commission.
Swaps
The Fund is authorized to enter into swaps, which are OTC contracts in which
each party agrees to make a periodic payment based on an index or the value of
an asset in return for a periodic payment from the other party based on a
different index or asset.
The Fund will enter into a swap transaction only if, immediately following
the time the Fund enters into the transaction, the aggregate notional
principal amount of swap transactions to which the Fund is a party would not
exceed 5% of the Fund's net assets.
Foreign Exchange Transactions
The Fund may engage in spot and forward foreign exchange transactions and
currency swaps, purchase and sell options on currencies and purchase and sell
currency futures and related options thereon (collectively, "Currency
Instruments") for purposes of hedging against the decline in the value of
currencies in which its portfolio holdings are denominated against the U.S.
dollar.
Forward Foreign Exchange Transactions. Forward foreign exchange transactions
are OTC contracts to purchase or sell a specified amount of a specified
currency or multinational currency unit at a price and future date set at the
time of the contract. Spot foreign exchange transactions are similar but
require current, rather than future, settlement. The Fund will enter into
foreign exchange transactions only for purposes of hedging either a specific
transaction or a portfolio position. The Fund may enter into a forward foreign
exchange transaction for purposes of hedging a specific transaction by, for
example, purchasing a currency needed to settle a security transaction or
selling a currency in which the Fund has received or anticipates receiving a
dividend or distribution. The Fund may enter into a foreign exchange
transaction for purposes of hedging a portfolio position by selling forward a
currency in which a portfolio position of the Fund is denominated or by
purchasing a currency in which the Fund anticipates acquiring a portfolio
position in the near future. The Fund may also hedge portfolio positions
through currency swaps, which are transactions in which one currency is
simultaneously bought for a second currency on a spot basis and sold for the
second currency on a forward basis. Forward foreign exchange transactions
involve substantial currency risk, and also involve credit and liquidity risk.
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<PAGE>
Currency Futures. The Fund may also hedge against the decline in the value
of a currency against the U.S. dollar through use of currency futures or
options thereon. Currency futures are similar to forward foreign exchange
transactions except that futures are standardized, exchange-traded contracts.
See "Futures" above. Currency futures involve substantial currency risk, and
also involve leverage risk.
Currency Options. The Fund may also hedge against the decline in the value
of a currency against the U.S. dollar through the use of currency options.
Currency options are similar to options on securities, but in consideration
for an option premium the writer of a currency option is obligated to sell (in
the case of a call option) or purchase (in the case of a put option) a
specified amount of a specified currency on or before the expiration date for
a specified amount of another currency. The Fund may engage in transactions in
options on currencies either on exchanges or OTC markets. See "Types of
Options" above and "Additional Risk Factors of OTC Transactions; Limitations
on the Use of OTC Derivatives" below. Currency options involve substantial
currency risk, and may also involve credit, leverage or liquidity risk.
Limitations on Currency Hedging. The Fund will not speculate in Currency
Instruments. Accordingly, the Fund will not hedge a currency in excess of the
aggregate market value of the securities which it owns (including receivables
for unsettled securities sales), or has committed to or anticipates
purchasing, which are denominated in such currency. The Fund may, however,
hedge a currency by entering into a transaction in a Currency Instrument
denominated in a currency other than the currency being hedged (a "cross-
hedge"). The Fund will only enter into a cross-hedge if the Investment Adviser
believes that (i) there is a demonstrable high correlation between the
currency in which the cross-hedge is denominated and the currency being
hedged, and (ii) executing a cross-hedge through the currency in which the
cross-hedge is denominated will be significantly more cost-effective or
provide substantially greater liquidity than executing a similar hedging
transaction by means of the currency being hedged.
Risk Factors in Hedging Foreign Currency Risks. Hedging transactions
involving Currency Instruments involve substantial risks, including
correlation risk. While the Fund's use of Currency Instruments to effect
hedging strategies is intended to reduce the volatility of the net asset value
of the Fund's shares, the net asset value of the Fund's shares will fluctuate.
Moreover, although Currency Instruments will be used with the intention of
hedging against adverse currency movements, transactions in Currency
Instruments involve the risk that anticipated currency movements will not be
accurately predicted and that the Fund's hedging strategies will be
ineffective. To the extent that the Fund hedges against anticipated currency
movements which do not occur, the Fund may realize losses, and decrease its
total return, as the result of its hedging transactions. Furthermore, the Fund
will only engage in hedging activities from time to time and may not be
engaging in hedging activities when movements in currency exchange rates
occur.
It may not be possible for the Fund to hedge against currency exchange rate
movements, even if correctly anticipated, in the event that (i) the currency
exchange rate movement is so generally anticipated that the Fund is not able
to enter into a hedging transaction at an effective price, or (ii) the
currency exchange rate movement relates to a market with respect to which
Currency Instruments are not available (such as certain developing markets)
and it is not possible to engage in effective foreign currency hedging.
Risk Factors in Derivatives. Use of Derivatives for hedging purposes
involves correlation risk. If the value of the Derivative moves more or less
than the value of the hedged instruments the Fund will experience a gain or
loss which will not be completely offset by movements in the value of the
hedged instruments.
The Fund intends to enter into transactions involving Derivatives only if
there appears to be a liquid secondary market for such instruments or, in the
case of illiquid instruments traded in OTC transactions, such instruments
satisfy the criteria set forth below under "Additional Risk Factors of OTC
Transactions; Limitations on the Use of OTC Derivatives." However, there can
be no assurance that, at any specific time, either a liquid secondary market
will exist for a Derivative or the Fund will otherwise be able to sell such
instrument at an acceptable price. It may therefore not be possible to close a
position in a Derivative without incurring substantial losses, if at all.
Certain transactions in Derivatives (such as futures transactions or sales
of put options) involve substantial leverage risk and may expose the Fund to
potential losses, which exceed the amount originally invested by the
11
<PAGE>
Fund. When the Fund engages in such a transaction, the Fund will deposit in a
segregated account at its custodian liquid securities with a value at least
equal to the Fund's exposure, on a mark-to-market basis, to the transaction
(as calculated pursuant to requirements of the Securities and Exchange
Commission). Such segregation will ensure that the Fund has assets available
to satisfy its obligations with respect to the transaction, but will not limit
the Fund's exposure to loss.
Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC
Derivatives. Certain Derivatives traded in OTC markets, including indexed
securities, swaps and OTC options, involve substantial liquidity risk. The
absence of liquidity may make it difficult or impossible for the Fund to sell
such instruments promptly at an acceptable price. The absence of liquidity may
also make it more difficult for the Fund to ascertain a market value for such
instruments. The Fund will therefore acquire illiquid OTC instruments (i) if
the agreement pursuant to which the instrument is purchased contains a formula
price at which the instrument may be terminated or sold, or (ii) for which the
Investment Adviser anticipates the Fund can receive on each business day at
least two independent bids or offers, unless a quotation from only one dealer
is available, in which case that dealer's quotation may be used.
Because Derivatives traded in OTC markets are not guaranteed by an exchange
or clearing corporation and generally do not require payment of margin, to the
extent that the Fund has unrealized gains in such instruments or has deposited
collateral with its counterparty, the Fund is at risk that its counterparty
will become bankrupt or otherwise fail to honor its obligations. The Fund will
attempt to minimize the risk that a counterparty will become bankrupt or
otherwise fail to honor its obligations by engaging in transactions in
Derivatives traded in OTC markets only with financial institutions which have
substantial capital or which have provided the Fund with a third-party
guaranty or other credit enhancement.
Other Investment Policies, Practices and Risk Factors
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. To qualify, among other requirements, the Fund will
limit its investments so that, at the close of each quarter of the taxable
year, (i) not more than 25% of the market value of the Fund's total assets
will be invested in the securities of a single issuer, 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, and the Fund will not own more than 10% of the outstanding voting
securities of a single issuer. Foreign government securities (unlike U.S.
government securities) are not exempt from the diversification requirements of
the Code and the securities of each foreign government issuer are considered
to be the obligations of a single issuer. A fund that 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 net asset value may fluctuate to a greater extent than
that of a diversified investment company as a result of changes in the
financial condition or in the market's assessment of the issuers, and the Fund
may be more susceptible to any single economic, political or regulatory
occurrence than a diversified company.
Securities Lending. The Fund may lend securities with a value not exceeding
33 1/3% of its total assets (subject to investment restriction (4) below). In
return, the Fund receives collateral in an amount equal to at least 100% of
the current market value of the loaned securities in cash or securities issued
or guaranteed by the United States Government. The Fund receives securities as
collateral for the loaned securities and the Fund and the borrower negotiate a
rate for the loan premium to be received by the Fund for the loaned
securities, which increases the Fund's yield. The Fund may receive a flat fee
for its loans. The loans are terminable at any time and the borrower, after
notice, is required to return borrowed securities within five business days.
The Fund may pay reasonable finder's, administrative and custodial fees in
connection with its loans. In the event that the borrower defaults on its
obligation to return borrowed securities because of insolvency or for any
other reason, the Fund could experience delays and costs in gaining access to
the collateral and could suffer a loss to the extent the value of the
collateral falls below the market value of the borrowed securities.
12
<PAGE>
Illiquid or Restricted Securities. The Fund may invest up to 15% of its net
assets in securities that lack an established secondary trading market or
otherwise are considered illiquid. Liquidity of a security relates to the
ability to dispose easily of the security and the price to be obtained upon
disposition of the security, which may be less than would be obtained for a
comparable more liquid security. Illiquid securities may trade at a discount
from comparable, more liquid investments. Investment of the Fund's assets in
illiquid securities may restrict the ability of the Fund to dispose of its
investments in a timely fashion and for a fair price as well as its ability to
take advantage of market opportunities. The risks associated with illiquidity
will be particularly acute where the Fund's operations require cash, such as
when the Fund redeems shares or pays dividends, and could result in the Fund
borrowing to meet short-term cash requirements or incurring capital losses on
the sale of illiquid investments.
The Fund may invest in securities that are not registered ("restricted
securities") under the Securities Act of 1933, as amended (the "Securities
Act"). Restricted securities may be sold in private placement transactions
between the issuers and their purchasers and may be neither listed on an
exchange nor traded in other established markets. In many cases, privately
placed securities may not be freely transferable under the laws of the
applicable jurisdiction or due to contractual restrictions on resale. As a
result of the absence of a public trading market, privately placed securities
may be less liquid and more difficult to value than publicly traded
securities. To the extent that privately placed securities may be resold in
privately negotiated transactions, the prices realized from the sales, due to
illiquidity, could be less than those originally paid by the Fund or less than
their fair market value. In addition, issuers whose securities are not
publicly traded may not be subject to the disclosure and other investor
protection requirements that may be applicable if their securities were
publicly traded. If any privately placed securities held by the Fund are
required to be registered under the securities laws of one or more
jurisdictions before being resold, the Fund may be required to bear the
expenses of registration. Certain of the Fund's investments in private
placements may consist of direct investments and may include investments in
smaller, less-seasoned issuers, which may involve greater risks. These issuers
may have limited product lines, markets or financial resources, or they may be
dependent on a limited management group. In making investments in such
securities, the Fund may obtain access to material nonpublic information which
may restrict the Fund's ability to conduct portfolio transactions in such
securities.
Repurchase Agreements and Purchase and Sale Contracts. The Fund may invest
in securities pursuant to repurchase agreements or purchase and sale
contracts. Foreign currency-denominated agreements will be limited to purchase
and sale contracts entered into with financial institutions that have at least
$50 million in capital or whose obligations are guaranteed by an entity having
at least $50 million in capital. U.S. dollar-denominated repurchase agreements
and purchase and sale contracts may be entered into only with a member bank of
the Federal Reserve System or a primary dealer in U.S. Government securities
or an affiliate thereof. Under such agreements, the bank or primary dealer or
an affiliate thereof agrees, upon entering into the contract, to repurchase
the security at a mutually agreed upon time and price in a specified currency,
thereby determining the yield during the term of the agreement. This results
in a fixed rate of return insulated from market fluctuations during such
period although it may be affected by currency fluctuations. In the case of
repurchase agreements, the prices at which the trades are conducted do not
reflect accrued interest on the underlying obligations, whereas, in the case
of purchase and sale contracts, the prices take into account accrued interest.
Such agreements usually cover short periods, such as under one week.
Repurchase agreements may be construed to be collateralized loans by the
purchaser to the seller secured by the securities transferred to the
purchaser. In the case of a repurchase agreement, as a purchaser, the Fund
will require the seller to provide additional collateral if the market value
of the securities falls below the repurchase price at any time during the term
of the repurchase agreement; the Fund does not have the right to seek
additional collateral in the case of purchase and sale contracts. In the event
of default by the seller under a repurchase agreement construed to be a
collateralized loan, the underlying securities are not owned by the Fund but
only constitute collateral for the seller's obligation to pay the repurchase
price. Therefore, the Fund may suffer time delays and incur costs or possible
losses in connection with disposition of the collateral. A purchase and sale
contract differs from a repurchase agreement in that the contract arrangements
stipulate that the securities are owned by the Fund. In the event of a default
under such a repurchase agreement or under a purchase and sale contract,
instead of the contractual fixed rate, the rate of return to the Fund shall be
dependent upon intervening fluctuations of the market value of such security
and the accrued interest on the security. In such event, the Fund would have
rights against the seller for breach of contract with respect to any losses
arising from market fluctuations following the failure of the seller to
perform.
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<PAGE>
Borrowing and Leverage. The use of leverage by the Fund creates an
opportunity for greater total return, but, at the same time, creates special
risks. For example, leveraging may exaggerate changes in the net asset value
of Fund shares and in the yield on the Fund's portfolio. Although the
principal of such borrowings will be fixed, the Fund's assets may change in
value during the time the borrowings are outstanding. Borrowings will create
interest expenses for the Fund which can exceed the income from the assets
purchased with the borrowings. To the extent the income or capital
appreciation derived from securities purchased with borrowed funds exceeds the
interest the Fund will have to pay on the borrowings, the Fund's return will
be greater than if leverage had not been used. Conversely, if the income or
capital appreciation from the securities purchased with such borrowed funds is
not sufficient to cover the cost of borrowings, the return to the Fund will be
less than if leverage had not been used, and therefore the amount available
for distribution to shareholders as dividends and other distributions will be
reduced. In the latter case, the Investment Adviser in its best judgment
nevertheless may determine to maintain the Fund's leveraged position if it
expects that the benefits to the Fund's shareholders of maintaining the
leveraged position will outweigh the current reduced return.
Certain types of borrowings by the Fund may result in the Fund being subject
to covenants in credit agreements relating to asset coverage, portfolio
composition requirements and other matters. It is not anticipated that
observance of such covenants would impede the Investment Adviser from managing
the Fund's portfolio in accordance with the Fund's investment objectives and
policies. However, a breach of any such covenants not cured within the
specified cure period may result in acceleration of outstanding indebtedness
and require the Fund to dispose of portfolio investments at a time when it may
be disadvantageous to do so.
The Fund at times may borrow from affiliates of the Investment Adviser,
provided that the terms of such borrowings are no less favorable than those
available from comparable sources of funds in the marketplace. The fee paid to
the Investment Adviser will be calculated on the basis of the Fund's average
daily net assets including proceeds from any borrowings.
Suitability. The economic benefit of an investment in the Fund depends upon
many factors beyond the control of the Fund, the Investment Adviser and its
affiliates. Because the Fund invests worldwide, the Fund should be considered
a vehicle for diversification and not as a balanced investment program. The
suitability for any particular investor of a purchase of shares in the Fund
will depend upon, among other things, such investor's investment objectives
and such investor's ability to accept the risks associated with investing in
foreign securities, including the risk of loss of principal.
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
means the lesser of (i) 67% of the Fund's shares present 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 that
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
14
<PAGE>
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in its Prospectus and Statement
of Additional Information, as they may be amended from time to time.
(5) Issue senior securities to the extent such issuance would violate
applicable law.
(6) Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may, to the
extent permitted by applicable law, 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 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 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)(1)(F) or
(G) (the "fund of funds" provisions) of the Investment Company Act, at any
time the Fund's 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 that cannot be readily resold because of legal
or contractual restrictions or that 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 that mature within seven days or
securities that 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 with the Investment Adviser, the
Fund is prohibited from engaging in certain transactions involving Merrill
Lynch 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
any of its affiliates acting as principal.
The staff of the Securities and Exchange Commission has taken the position
that purchased OTC options and the assets underlying written OTC options are
illiquid securities. The Fund has therefore adopted an investment
15
<PAGE>
policy pursuant to which it 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 securities underlying OTC call options
currently outstanding which have been sold by the Fund and margin deposits on
the Fund's outstanding OTC options exceeds 15% of the total assets of the
Fund, taken at market value, together with all other assets of the Fund which
are deemed to be illiquid or are otherwise not readily marketable.
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 the Fund's annual sales or purchases of
portfolio securities (exclusive of purchases or sales of securities whose
maturities at the time of acquisition were one year or less) by the monthly
average value of the securities in the portfolio during the year. High
portfolio turnover involves correspondingly greater transaction costs in the
form of dealer spreads and brokerage commission which are borne directly by
the Fund.
MANAGEMENT OF THE FUND
Directors and Officers
The Board of Directors of the Fund consists of seven individuals, five of
whom are not "interested persons" of the Fund as defined in the Investment
Company Act (the "non-interested Directors"). 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.
Information about the Directors, executive officers and the portfolio
manager of the Fund, including their ages and their principal occupations for
at least the last five years, is set forth below. Unless otherwise noted, the
address of each Director, executive officer and the portfolio manager is P.O.
Box 9011, Princeton, New Jersey 08543-9011.
Terry K. Glenn (58) -- President and Director(1)(2) -- Executive Vice
President of the Investment Adviser and Merrill Lynch Asset Management, L.P.
("MLAM") (which terms as used herein include their corporate predecessors)
since 1983; Executive Vice President and Director of Princeton Services, Inc.
("Princeton Services") since 1993; President of Princeton Funds Distributor,
Inc. ("PFD") since 1986 and Director thereof since 1991; President of
Princeton Administrators, L.P. since 1988.
James H. Bodurtha (55) -- Director(2)(3) -- 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)(3) -- 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; President, Hudson
Institute since 1997 and Trustee since 1980; Dean, Gallatin Division of New
York University from 1976 to 1993; Distinguished Fellow, Herman Kahn Chair,
Hudson Institute from 1984 to 1985; Director, Damon Corporation from 1991 to
1995; Overseer, Center for Naval Analyses from 1983 to 1993; Limited Partner,
Hypertech LP in 1996.
Robert R. Martin (71) -- Director(2)(3) -- 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.
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<PAGE>
Joseph L. May (69) -- Director(2)(3) -- 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 (46) -- Director(2)(3) -- Morgan Hall, Soldiers Field,
Boston, Massachusetts 02163. Professor, Harvard Business School since 1989 and
Associate Professor from 1983 to 1989; Trustee, The Common Fund since 1989;
Director, Quantec Limited since 1991, Gensec and TIBCO from 1994 to 1996.
Arthur Zeikel (66) -- Director(1)(2) -- 300 Woodland Avenue, Westfield, New
Jersey 07090. Chairman of the Investment Adviser and MLAM from 1997 to 1999
and President thereof from 1977 to 1997; Chairman of Princeton Services from
1997 to 1999, Director thereof from 1993 to 1999 and President thereof from
1993 to 1997; Executive Vice President of Merrill Lynch & Co., Inc. ("ML &
Co.") from 1990 to 1999.
Joseph T. Monagle, Jr. (50) -- Senior Vice President(1)(2) -- Senior Vice
President of the Investment Adviser and MLAM since 1990; Department Head of
the Global Fixed Income Division of the Investment Adviser and MLAM since
1997; Senior Vice President of Princeton Services since 1993.
Adrian Churn (34) -- Senior Vice President and Portfolio Manager(1)(2) --
Managing Director of Merrill Lynch Asset Management Hong Kong, Ltd. ("MLAM
Hong Kong") since 1998; Senior Vice President of MLAM Hong Kong from 1997 to
1998; Vice President of MLAM Hong Kong from 1994 to 1997; Director of Pacific
Capital Fund Management in 1994.
Vincent T. Lathbury, III (58) -- Senior Vice President and Portfolio
Manager(1)(2) -- First Vice President of MLAM since 1997; Vice President of
MLAM from 1982 to 1997; Portfolio Manager of the Investment Adviser and MLAM
since 1982.
Donald C. Burke (38) -- Vice President and Treasurer(1)(2) -- Senior Vice
President and Treasurer of the Investment Adviser and MLAM since 1999; Senior
Vice President and Treasurer of Princeton Services since 1999; Vice President
of PFD since 1999; First Vice President of MLAM from 1997 to 1999; Vice
President of MLAM from 1990 to 1997; Director of Taxation of MLAM since 1990.
Robert Harris (47) -- Secretary(1)(2) -- First Vice President of MLAM since
1997; Vice President of MLAM from 1984 to 1997; Secretary of PFD since 1982.
- ----------
(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 certain
other investment companies for which the Investment Adviser or MLAM acts
as the investment adviser or manager.
(3) Member of the Fund's Audit and Nominating Committee, which is responsible
for the selection of the independent auditors and the selection and
nomination of non-interested Directors.
As of April 1, 1999, the Directors and officers of the Fund as a group (12
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Director of the Fund, Mr. Glenn, a Director
and officer of the Fund, and the other officers of the Fund owned an aggregate
of less than 1% of the outstanding shares of common stock of ML & Co.
Compensation of Directors
The Fund pays each non-interested Director a fee of $5,000 per year plus
$500 per Board meeting attended. The Fund also compensates members of its
Audit and Nominating Committee (the "Committee"), which consists of all the
non-interested Directors, an annual fee of $1,000 plus $250 per Committee
meeting attended. The Fund reimburses each non-interested Director for his
out-of-pocket expenses relating to attendance to Board and Committee meetings.
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The following table shows the compensation earned by the non-interested
Directors for the year ended December 31, 1998 and the aggregate compensation
paid to them from all registered investment companies advised by the
Investment Adviser and its affiliate, MLAM ("MLAM/FAM-advised funds"), for the
year ended December 31, 1998.
<TABLE>
<CAPTION>
Aggregate
Pension or Estimated Compensation from
Retirement Benefits Annual Fund and Other
Position with Compensation Accrued as Part of Benefits upon MLAM/FAM-
Name Fund From Fund Fund Expense Retirement Advised Funds(1)
- ---- ------------- ------------ ------------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
James H. Bodurtha....... Director $9,000 None None $163,500
Herbert I. London....... Director $9,000 None None $163,500
Robert R. Martin........ Director $9,000 None None $163,500
Joseph L. May........... Director $9,000 None None $163,500
Andre F. Perold......... Director $9,000 None None $163,500
</TABLE>
- ----------
(1) The Directors serve on the boards of MLAM/FAM-advised funds as follows:
Mr. Bodurtha (28 registered investment companies consisting of 46
portfolios); Mr. London (28 registered investment companies consisting of
46 portfolios); Mr. Martin (28 registered investment companies consisting
of 46 portfolios); Mr. May (28 registered investment companies consisting
of 46 portfolios); and Mr. Perold (28 registered investment companies
consisting of 46 portfolios).
Directors of the Fund may purchase Class A shares of the Fund at net asset
value. See "Purchase of Shares--Initial Sales Charge Alternatives--Class A and
Class D Shares--Reduced Initial Sales Charges--Purchase Privilege of Certain
Persons."
Management and Advisory Arrangements
Management Services. The Investment Adviser provides the Fund with
investment advisory and management services. Subject to the supervision of the
Board of 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 responsibility for making decisions to buy, sell or hold a particular
security rests 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.
Investment Advisory Fee. The Fund has entered into a investment advisory
agreement with the Investment Adviser (the "Investment Advisory Agreement"),
pursuant to which 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. The table below sets forth information about the total
management fees paid by the Fund to the Investment Adviser for the periods
indicated.
<TABLE>
<CAPTION>
Investment
Advisory
Fiscal Year Ended December 31, Fee
------------------------------ ----------
<S> <C>
1998................................... $3,683,766
1997................................... $6,059,356
1996................................... $8,216,118
</TABLE>
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. The Investment Adviser paid no fees to MLAM U.K. for the
fiscal years ended December 31, 1997 and 1998.
Payment of Fund Expenses. 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, prospectuses and statements
of additional information, except to the extent paid by Merrill Lynch Funds
18
<PAGE>
Distributor, a division of PFD (the "Distributor"); charges of the custodian
and the transfer agent; expenses of redemption of shares; Commission fees;
expenses of registering the shares under Federal and state securities laws;
fees and expenses of unaffiliated Directors; accounting and pricing costs
(including the daily calculations 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 for the Fund by the Investment Adviser and the Fund reimburses the
Investment Adviser for its costs in connection with such services. See
"Purchase of Shares -- Distribution Plans."
Organization of the Investment Adviser. The Investment Adviser is a limited
partnership, the partners of which are ML & Co., a financial services holding
company and the parent of Merrill Lynch, and Princeton Services, which is
wholly owned by ML & Co. 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.
The following entities may be considered "controlling persons" of MLAM U.K.:
Merrill Lynch Europe PLC (MLAM U.K.'s parent), a subsidiary of Merrill Lynch
International Holdings, Inc., 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 Board of Directors of the Fund 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 or by vote of the shareholders of the Fund.
Transfer Agency Services. Financial Data Services, Inc. (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 a fee of $11.00 per Class A or Class D account and $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.
Distribution Expenses. The Fund has entered into four separate distribution
agreements with the Distributor in connection with the continuous offering of
each class of shares of the Fund (the "Distribution Agreements"). The
Distribution Agreements obligate the Distributor to pay certain expenses in
connection with the offering of each class of shares of the Fund. After the
prospectuses, statements of additional information and periodic reports have
been prepared, set in type and mailed to shareholders, the Distributor pays
for the printing and distribution of copies thereof used in connection with
the offering to dealers and investors. The Distributor also pays for other
supplementary sales literature and advertising costs. The Distribution
Agreements are subject to the same renewal requirements and termination
provisions as the Investment Advisory Agreement described above.
Code of Ethics
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-1 of the Investment Company Act which incorporates the Code of Ethics of
the Investment Adviser (together, the "Codes"). The Codes significantly
restrict the personal investing activities of all employees of the Investment
Adviser and, as described below, impose additional, more onerous, restrictions
on fund investment personnel.
19
<PAGE>
The Codes require that all employees of the Investment Adviser pre-clear any
personal securities investment (with limited exceptions, such as government
securities). The pre-clearance 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" which prohibit trading by investment personnel of
the Fund within periods of trading by the Fund in the same (or equivalent)
security (15 or 30 days depending upon the transaction).
PURCHASE OF SHARES
Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in the
Prospectus.
The Fund offers 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 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 (also known as service 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 contingent deferred sales charges ("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
Class D shares, are imposed directly against those classes and not against all
assets of the Fund and, accordingly, such charges do 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 are
calculated in the same manner at the same time and 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 Merrill Lynch Select Pricing SM System is used by more than 50
registered investment companies advised by MLAM or FAM. Funds advised by MLAM
or FAM that utilize the Merrill Lynch Select Pricing SM System are referred to
herein as "Select Pricing Funds."
The Fund or the Distributor may suspend the continuous offering of the
Fund's shares of any class at any time in response to conditions in the
securities markets or otherwise and may thereafter resume such offering from
time to time. 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 Transfer
Agent are not subject to the processing fee.
Initial Sales Charge Alternatives -- Class A and Class D Shares
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
20
<PAGE>
sales charge alternative particularly attractive because similar sales charge
reductions are not available with respect to the deferred sales charges
imposed in connection with purchases of Class B or Class C shares. Investors
not qualifying for reduced initial sales charges who expect to maintain their
investment for an extended period of time also may elect to purchase Class A
or Class D shares, because over time the accumulated ongoing account
maintenance and distribution fees on Class B or Class C shares may exceed the
initial sales charges, 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 Select
Pricing Funds, those previously purchased Class A shares, together with Class
B, Class C and Class D share holdings, will count toward a right of
accumulation which may qualify the investor for a reduced initial sales charge
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.
The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his or her spouse and their children
under the age of 21 years purchasing shares for his, her or their own account
and to single purchases by a trustee or other fiduciary purchasing shares for
a single trust estate or single fiduciary account although more than one
beneficiary is involved. The term "purchase" also includes purchases by any
"company," as that term is defined in the Investment Company Act, but does not
include purchases by any such company that 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.
Eligible Class A Investors
Class A shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares. Investors
who currently own Class A shares, including participants in the Merrill Lynch
BlueprintSM Program, are entitled to purchase additional Class A shares of the
Fund in that account. Certain Employer Sponsored Retirement or Savings Plans,
including eligible 401(k) plans, may purchase Class A shares at net asset
value provided such plans meet the required minimum number of eligible
employees or required amount of assets advised by MLAM or any of its
affiliates. Class A shares are available at net asset value to corporate
warranty insurance reserve fund programs provided that the program has $3
million or more initially invested in Select Pricing 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 certain
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. 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 are met. In addition, Class A shares of the Fund and certain other
Select Pricing Funds are offered at net asset value to shareholders of Merrill
Lynch Senior Floating Rate Fund, Inc. and, if certain conditions 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 Select
Pricing Funds.
21
<PAGE>
Class A and Class D Sales Charge Information
<TABLE>
<CAPTION>
Class A Shares
--------------------------------------------------------------------------------
For the Fiscal Year Gross Sales Sales Charges Sales Charges CDSCs Received on
Ended Charges Retained by Paid to Redemption of
December 31, Collected Distributor Merrill Lynch Load-Waived Shares
------------------- ----------- ------------- ------------- ------------------
<S> <C> <C> <C> <C>
1998 $15,505 $1,707 $13,798 0
1997 $20,949 $1,741 $19,208 0
1996 $33,553 $3,597 $29,956 0
<CAPTION>
Class D Shares
--------------------------------------------------------------------------------
For the Fiscal Year Gross Sales Sales Charges Sales Charges CDSCs Received on
Ended Charges Retained by Paid to Redemption of
December 31, Collected Distributor Merrill Lynch Load-Waived Shares
------------------- ----------- ------------- ------------- ------------------
<S> <C> <C> <C> <C>
1998 $23,760 $2,238 $21,522 0
1997 $16,997 $1,583 $15,414 0
1996 $55,055 $4,675 $50,380 0
</TABLE>
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.
Reduced Initial Sales Charges
Reinvested Dividends and Capital Gains. 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.
Right 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 any other Select Pricing 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 Intent. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A or Class D shares of the Fund or
any Select Pricing Funds made within a 13-month period starting with the first
purchase pursuant to a Letter of Intent. The Letter of Intent is available
only to investors whose accounts are established and maintained at the Fund's
Transfer Agent. The Letter of Intent is not available to employee benefit
plans for which Merrill Lynch provides plan participant recordkeeping
services. The Letter of Intent 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 Intent may be
included under a subsequent Letter of Intent 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 Select Pricing Funds presently held, at cost or maximum offering price
(whichever is higher), on the date of the first purchase under the Letter of
Intent, 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 Intent (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
22
<PAGE>
rate and the sales charge applicable to the shares actually purchased through
the Letter. Class A or Class D shares equal to at least 5.0% 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 Intent must be at least 5.0% 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
the further reduced percentage sales charge that would be applicable to a
single purchase equal to the total dollar value of the Class A or Class D
shares then being purchased under such Letter, but there will be no
retroactive reduction of the sales charge 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 Intent will be deducted
from the total purchases made under such Letter. An exchange from the Summit
Cash Reserves Fund into the Fund that creates a sales charge will count toward
completing a new or existing Letter of Intent from the Fund.
TMA SM Managed Trusts. Class A shares are offered at net asset value to
TMASM Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services.
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 investment for such accounts is $500, except that the initial
minimum investment for shares purchased for such accounts pursuant to the
Automatic Investment Program is $50.
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements. Certain employer-sponsored retirement or savings plans and
certain other arrangements may purchase Class A or Class D shares at net asset
value, based on the number of employees or number of employees eligible to
participate in the plan, the aggregate amount invested by the plan in
specified investments and/or the services provided by Merrill Lynch to the
plan. 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.
Purchase Privilege of Certain Persons. Directors of the Fund, members of the
Boards of other FAM-advised funds, ML & Co. and its subsidiaries (the term
"subsidiaries," when used herein with respect to ML & Co., includes MLAM, FAM
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. The Fund realizes economies of scale
and reduction of sales-related expenses by virtue of the familiarity of these
persons with the Fund. Employees and directors or trustees wishing to purchase
shares of the Fund must satisfy the Fund's suitability standards.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor that has a business relationship with a Financial
Consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that
it will purchase Class D shares of the Fund with proceeds from a redemption of
shares 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 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 that has a business relationship with a Merrill
Lynch Financial Consultant and that 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 that has a business relationship with a Merrill Lynch
Financial Consultant and that 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
23
<PAGE>
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; and,
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.
Closed-End Fund Investment Option. Class A shares of the Fund and certain
other Select Pricing Funds ("Eligible Class A Shares") are offered at net
asset value to shareholders of certain closed-end funds advised by FAM or MLAM
who purchased such closed-end fund shares prior to October 21, 1994 (the date
the 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 Select Pricing
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
Eligible 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 FAM or 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 eligible fund in connection with a tender offer
conducted by the eligible fund and reinvest the proceeds immediately in the
designated class of shares of the Fund. This investment option is available
only with respect to eligible shares as to which no Early Withdrawal Charge or
CDSC (each as defined in the eligible fund's prospectus) is applicable.
Purchase orders from eligible fund shareholders wishing to exercise this
investment option will be accepted only on the day that the related tender
offer terminates and will be effected at the net asset value of the designated
class of the Fund on such day.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation
with a personal holding company or a public or private investment company. The
value of the assets or company acquired in a tax-free transaction may be
adjusted in appropriate cases to reduce possible adverse tax consequences to
the Fund 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 objectives 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.
24
<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 Select Pricing 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. See "Pricing of Shares -- Determination of Net Asset Value" below.
Because no initial sales charges are deducted at the time of the 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 that do
not qualify for the 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.
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. 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. The charge will be assessed on an
amount equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed. Accordingly, no CDSC will be imposed on increases in
net asset value above the initial purchase price. In addition, no CDSC will be
assessed on shares derived from reinvestment of dividends or capital gains
distributions. It will be assumed that the redemption is first on 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.
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.
The following table sets forth the Class B CDSC:
<TABLE>
<CAPTION>
CDSC as a Percentage
of Dollar Amount
Year Since Purchase 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>
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 upon 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 plan or following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended) of a 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. The Class B CDSC also is waived on
redemptions of shares by certain eligible 401(a) and eligible 401(k) plans.
The CDSC also is waived for any Class B shares that are
25
<PAGE>
purchased by eligible 401(k) or eligible 401(a) 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 and for any Class B shares that were
acquired and held at the time of the redemption in an Employee AccessSM
Account available through employers providing eligible 401(k) plans. The Class
B CDSC also is waived for any Class B shares that are purchased by a Merrill
Lynch rollover IRA that was funded by a rollover from a terminated 401(k) plan
managed by the MLAM Private Portfolio Group and held in such account at the
time of redemption. The Class B CDSC also is waived for any Class B shares
that are purchased within qualifying Employee AccessSM Accounts. The terms of
the CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs."
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements. Certain employer-sponsored retirement or savings plans and
certain other arrangements may purchase Class B shares with a waiver of the
CDSC upon redemption, based on the number of employees or number of employees
eligible to participate in the plan, the aggregate amount invested by the plan
in specified investments and/or the services provided by Merrill Lynch to the
plan. Such Class B shares will convert into Class D shares approximately ten
years after the plan purchases the first share of any Select Pricing 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.
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 value 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 the 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.
In general, Class B shares of equity Select Pricing Funds will convert
approximately eight years after initial purchase and Class B shares of taxable
and tax-exempt fixed income Select Pricing 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 on
to the holding period for the shares acquired. The conversion period also may
be modified for investors that participate in certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs."
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.
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.
26
<PAGE>
Contingent Deferred Sales Charges -- Class C Shares
Class C shares that are redeemed within one year of purchase may be subject
to a 1.0% CDSC charged as a percentage of the dollar amount subject thereto.
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. 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. It will be
assumed that the redemption is first of shares held for over one year or
shares acquired pursuant to reinvestment of dividends 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. The Class C CDSC
may be waived in connection with involuntary termination of an account in
which Fund shares are held and withdrawals through the Merrill Lynch
Systematic Withdrawal Plan. See "Shareholder Services -- Fee-Based Programs"
and "-- Systematic Withdrawal Plan."
Class B and Class C Sales Charge Information
<TABLE>
<CAPTION>
Class B Shares*
--------------------------------------------------------------------------------
For the Fiscal Year CDSCs Received CDSCs Paid to
Ended December 31, by Distributor Merrill Lynch
------------------- -------------- -------------
<S> <C> <C>
1998 $ 393,841 $ 393,841
1997 $ 996,571 $ 996,571
1996 $1,822,022 $1,822,022
* Additional Class B CDSCs payable to the Distributor
with respect to the fiscal years ended December 31,
1997 and 1998 may have been waived or converted to
a contingent obligation in connection with a
shareholder's participation in certain fee-based
programs.
<CAPTION>
Class C Shares
--------------------------------------------------------------------------------
For the Fiscal Year CDSCs Received CDSCs Paid to
Ended December 31, by Distributor Merrill Lynch
------------------- -------------- -------------
<S> <C> <C>
1998 $ 3,091 $ 3,091
1997 $ 4,508 $ 4,508
1996 $ 5,909 $ 5,909
</TABLE>
Merrill Lynch compensates its Financial Consultants for selling Class B and
Class C shares at the time of purchase from its own funds. Proceeds from the
CDSC and the distribution fee are paid to the Distributor and are used in
whole or in part by the Distributor to defray the expenses of dealers
(including Merrill Lynch) related to providing distribution-related services
to the Fund in connection with the sale of the Class B and Class C shares,
such as the payment of compensation to financial consultants for selling Class
B and Class C shares from the dealer's 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. See "Distribution Plans" below. 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.
Distribution Plans
Reference is made to "Fees and Expenses" 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
27
<PAGE>
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 Distribution Plans for Class B, Class C and Class D shares each provides
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 with respect to Class B, Class C and Class D shares.
Each of those classes has exclusive voting rights with respect to the
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).
The Distribution Plans for Class B and Class C shares each provides 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.
The Fund's Distribution Plans are subject to the provisions of Rule 12b-1
under the Investment Company Act. 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 each
related class of shareholders. Each Distribution Plan further provides that,
so long as the Distribution Plan remains in effect, the selection and
nomination of 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 reasonable likelihood that each 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 the
Distribution Plan, cast in person at a meeting called for that purpose. Rule
12b-1 further requires that the Fund preserve copies of the Distribution Plan
and any report made pursuant to such plan for a period of not less than six
years from the date of the Distribution Plan or such report, the first two
years in an easily accessible place.
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 and/or distribution fees paid to the
Distributor. 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 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.
28
<PAGE>
As of December 31, 1998, the fully allocated accrual expenses incurred by
the Distributor and Merrill Lynch for the period since the commencement of
operations of Class B shares exceeded the fully allocated accrual revenues by
approximately $5,882,000 (2.08% of Class B net assets at that date). As of
December 31, 1998, direct cash revenues for the period since the commencement
of operations of Class B shares exceeded direct cash expenses by $44,456,609
(15.71% of Class B net assets at that date). As of December 31, 1998, 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
the fully allocated accrual revenues by approximately $58,000 (1.33% of Class
C net assets at that date). As of December 31, 1998, direct cash revenues for
the period since the commencement of operations of Class C shares exceeded
direct cash expenses by $165,126 (3.78% of Class C net assets at that date).
For the fiscal year ended December 31, 1998, the Fund paid the Distributor
$3,508,375 pursuant to the Class B Distribution Plan (based on average daily
net assets subject to such Class B Distribution Plan of approximately $465.2
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, 1998, the Fund
paid the Distributor $70,640 pursuant to the Class C Distribution Plan (based
on average daily net assets subject to such Class C Distribution Plan of
approximately $8.8 million), all of which was paid to Merrill Lynch for
providing account maintenance and distribution-related activities and services
in connection with Class C shares. For the fiscal year ended December 31,
1998, the Fund paid the Distributor $30,998 pursuant to the Class D
Distribution Plan (based on average daily net assets subject to such Class D
Distribution Plan of approximately $12.3 million), all of which was paid to
Merrill Lynch for providing account maintenance activities in connection with
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 payment in excess of the amount payable under the NASD
formula will not be made.
29
<PAGE>
The following table sets forth comparative information as of December 31,
1998 with respect to the Class B 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.
<TABLE>
<CAPTION>
Data Calculated as of December 31, 1998
-------------------------------------------------------------------------------------
(in thousands)
Annual
Distribution
Allowable Amounts Fee at
Eligible Allowable Interest on Maximum Previously Aggregate Current Net
Gross Aggregate Unpaid Amount Paid to Unpaid Asset
Sales(1) Sales Charge(2) Balance(3) Payable Distributor(4) Balance Level(5)
---------- --------------- ----------- -------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Class B Shares for the
period November 18,
1991 (commencement of
operations) to December
31, 1998
Under NASD Rule as
Adopted................ $2,202,258 $137,262 $66,304 $203,566 $60,798 $142,768 $1,415
Under Distributor's
Voluntary Waiver....... $2,202,258 $137,262 $11,391 $148,653 $60,798 $ 87,855 $1,415
Class C Shares, for the
period October 21, 1994
(commencement of
operations) to December
31, 1998
Under NASD Rule as
Adopted................ $ 19,454 $ 1,214 $ 299 $ 1,513 $ 190 $ 1,323 $ 24
</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) Includes amounts attributable to exchanges from Summit Cash Reserves Fund
("Summit") which are not reflected in Eligible Gross Sales. Shares of
Summit can only be purchased by exchange from another fund (the "redeemed
fund"). Upon such an exchange, the maximum allowable sales charge payment
to the redeemed fund is reduced in accordance with the amount of the
redemption. This amount is then added to the maximum allowable sales
charge payment with respect to Summit. Upon an exchange out of Summit, the
remaining balance of this amount is deducted from the maximum allowable
sales charge payment to Summit and added to the maximum allowable sales
charge payment to the fund into which the exchange is made.
(3) 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.
(4) Consists of CDSC payments, distribution fee payments and accruals. Of the
distribution fee payments made with respect to Class B shares prior to
July 7, 1993 under the distribution plan in effect at that time, at a
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 "What are the Fund's fees and expenses?" 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 MFA SM) Program (the "MFA Program").
The CDSC is booked as a contingent obligation that may be payable if the
shareholder terminates participation in the MFA Program.
(5) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any CDSC payments) is amortizing
the unpaid balance. No assurance can be given that payments of the
distribution fee will reach either the voluntary maximum (with respect to
Class B shares) or the NASD maximum (with respect to Class B and Class C
shares).
REDEMPTION OF SHARES
Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in the
Prospectus.
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 upon
redemption all dividends reinvested through the date of redemption.
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 any period
during which trading on the NYSE is restricted as determined by the Commission
or the NYSE 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 such time.
30
<PAGE>
Redemption
A shareholder wishing to redeem shares held with the Transfer Agent may do
so without charge by tendering the shares directly to the Transfer Agent at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-
5289. Redemption requests delivered other than by mail should be delivered to
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484. 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. The redemption request in
either event requires the signature(s) of all persons in whose name(s) the
shares are registered, signed exactly as such name(s) appear(s) on the
Transfer Agent's register. The signature(s) on the redemption requests 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 "Exchange
Act"), 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 (e.g., cash, Federal funds or certified check drawn on a United
States bank) has been collected for the purchase of such Fund shares, which
will not exceed 10 days.
Repurchase
The Fund also will repurchase Fund shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase Fund
shares by wire or telephone from dealers for their customers at the net asset
value next computed after the order is placed. Shares will be priced at the
net asset value calculated on the day the request is received, provided that
the request for repurchase is submitted to the dealer prior to fifteen minutes
after the regular close of business on the NYSE (generally, the NYSE closes at
4:00 p.m., Eastern time) and such request 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 foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any
applicable CDSC). Securities firms that do not have selected dealer agreements
with the Distributor, however, may impose a transaction charge on the
shareholder for transmitting the notice of repurchase to the Fund. Merrill
Lynch may charge its customers a processing fee (presently $5.35) to confirm a
repurchase of shares to such customers. Repurchases made directly through the
Transfer Agent on accounts held at the 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 Fund shares as
set forth above.
Reinstatement Privilege -- Class A and Class D Shares
Shareholders who have redeemed their Class A or Class D shares of the Fund
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 the
Distributor. The reinstatement will be made at the net asset value per share
next determined after the notice of reinstatement is received and cannot
exceed the amount of the redemption proceeds.
31
<PAGE>
PRICING OF SHARES
Determination of Net Asset Value
Reference is made to "How Shares are Priced" in the Prospectus.
The net asset value of the shares of all classes of the Fund is determined
once daily Monday through Friday as of 15 minutes after the close of business
on the NYSE on each day the NYSE is open for trading. The NYSE generally
closes at 4:00 p.m., Eastern time. 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 NYSE is not open for trading 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.
Net asset value is computed by dividing the value of the securities held by
the Portfolio 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 Distributor, are accrued daily.
The per share net asset value of Class B, Class C and Class D shares
generally will be lower than the per share net asset value of Class A shares,
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 the Class D shares; moreover, the per share net
asset value of the Class B and Class C shares generally will be lower than the
per share net asset value of Class D shares reflecting the daily expense
accruals of the distribution fees and higher transfer agency fees applicable
with respect to Class B and Class C shares of the Fund. It is expected,
however, that the per share net asset value of the four classes will tend to
converge (although not necessarily meet) immediately after the payment of
dividends, which will differ by approximately the amount of the expense
accrual differentials between the classes.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price 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 Directors as the primary
market. Long positions in securities traded in the over-the-counter ("OTC")
market are valued at the last available bid price in the OTC market prior to
the time of valuation. Portfolio securities that are traded in both the OTC
market and on a stock exchange are valued according to the broadest and most
representative market. 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 in both 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 in the books of the Fund as an asset and an
equivalent liability. The amount of the liability is subsequently valued to
reflect the current market value of the option written, based upon the last
sale price in the case of exchange-traded options or, in the case of options
traded in the OTC market, the last asked price. Options purchased by the Fund
are valued at their last sale price in the case of exchange-traded options or,
in the case of options traded in the OTC market, the last bid price. Other
investments, including futures contracts and related options, are stated at
market value. 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, 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. During the fiscal
year ended December 31, 1998, the Fund paid $4,395 to MLSPS for such service.
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. Such valuations and procedures will be reviewed
periodically by the Directors.
32
<PAGE>
Generally, trading in non-U.S. securities, as well as U.S. Government
securities, is substantially completed each day at various times prior to the
close of business on the NYSE. The values of such securities used in computing
the net asset value of the Fund's shares are determined as of such times.
Foreign currency exchange rates are also generally determined prior to the
close of business on the NYSE.
Computation of Offering Price Per Share
An illustration of the computation of the offering price for Class A, Class
B, Class C and Class D shares of the Fund based on the value of the Fund's net
assets and number of shares outstanding on December 31, 1998 is set forth
below.
<TABLE>
<CAPTION>
Class A Class B Class C Class D
----------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Net Assets...................... $78,527,588 $283,017,682 $4,370,363 $8,147,878
=========== ============ ========== ==========
Number of Shares Outstanding.... 12,799,376 46,159,659 713,325 1,328,204
=========== ============ ========== ==========
Net Asset Value Per Share (net
assets divided by number of
shares outstanding)............ $ 6.14 $ 6.13 $ 6.13 $ 6.13
Sales Charge (for Class A and
Class D shares: 4.00% of
offering price; 4.17% of net
asset value per share)*........ .26 ** ** .26
----------- ------------ ---------- ----------
Offering Price.................. $ 6.40 $ 6.13 $ 6.13 $ 6.39
=========== ============ ========== ==========
</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 -- Contingent Deferred Sales Charges -- Class B Shares" and "--
Contingent Deferred Sales Charges -- Class C Shares" herein.
PORTFOLIO TRANSACTIONS
Transactions in Portfolio Securities
Subject to policies established by the Board of Directors, the Investment
Adviser is primarily responsible for the execution of the Fund's portfolio
transactions. The Fund has no obligation to deal with any dealer or group of
dealers in the execution of transactions in portfolio securities of the Fund.
Where possible, the Fund deals directly with the dealers who make a market in
the securities involved except in those circumstances where better prices and
execution are available elsewhere. It is the policy of the Fund to obtain the
best results in conducting portfolio transactions for the Fund, taking into
account such factors as price (including the applicable dealer spread or
commission), the size, type and difficulty of the transaction involved, the
firm's general execution and operations facilities and the firm's risk in
positioning the securities involved. The portfolio securities of the Fund
generally are traded on a principal basis and normally do not involve either
brokerage commissions or transfer taxes. The cost of portfolio securities
transactions of the Fund primarily consists of dealer or underwriter spreads.
While reasonable competitive spreads or commissions are sought, the Fund will
not necessarily be paying the lowest spread or commission available.
Subject to obtaining the best net results, dealers who provide supplemental
investment research (such as information concerning tax-exempt securities,
economic data and market forecasts) to the Investment Adviser 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 its Investment Advisory Agreement and the expense of
the Investment Adviser will not necessarily be reduced as a result of the
receipt of such supplemental information. Supplemental investment research
obtained from such dealers might be used by the Investment Adviser in
servicing all of its accounts and all such research might not be used by the
Investment Adviser in connection with the Fund. Consistent with the Conduct
Rules of the NASD and policies established by the Directors of the Fund, the
Investment Adviser may consider sales of shares of the Fund as a factor in the
selection of brokers or dealers to execute portfolio transactions for the
Fund.
33
<PAGE>
Information about the brokerage commissions paid by the Fund including
commissions paid to Merrill Lynch, is set forth in the following table:
<TABLE>
<CAPTION>
Aggregate Paid to
Fiscal Year Ended December 31, Commissions Paid Merrill Lynch
------------------------------ ---------------- -------------
<S> <C> <C>
1998...................................... $ 27,373 $ 553
1997...................................... $200,854 $57,158
1996...................................... $149,805 $52,913
</TABLE>
For the fiscal year ended December 31, 1998, the brokerage commissions paid
to Merrill Lynch represented 2.02% of the aggregate brokerage commissions paid
and involved 0.78% of the Fund's dollar amount of transactions involving
payment of commissions during the year.
Under the Investment Company Act, persons affiliated with the Fund and
persons who are affiliated with such persons are prohibited from dealing with
the Fund as principal in the purchase and sale of securities unless a
permissive order allowing such transactions is obtained from the Commission.
Since transactions in the over-the-counter market usually involve transactions
with dealers acting as principal for their own accounts, affiliated persons of
the Fund, including Merrill Lynch and any of its affiliates, will not serve as
the Fund's dealer in such transactions. However, affiliated persons of the
Fund may serve as its broker in listed or over-the-counter transactions
conducted on an agency basis provided that, among other things, the fee or
commission received by such affiliated broker is reasonable and fair compared
to the fee or commission received by non-affiliated brokers in connection with
comparable transactions. In addition, the Fund may not purchase securities
during the existence of any underwriting syndicate for such securities of
which Merrill Lynch is a member or in a private placement in which Merrill
Lynch serves as placement agent except pursuant to procedures adopted by the
Board of Directors of the Fund that either comply with rules adopted by the
Commission or with interpretations of the Commission staff.
Certain court decisions have raised questions as to the extent to which
investment companies should seek exemptions under the Investment Company Act
in order to seek to recapture underwriting and dealer spreads from affiliated
entities. The Directors have considered all factors deemed relevant and have
made a determination not to seek such recapture at this time. The Directors
will reconsider this matter from time to time.
Section 11(a) of the Exchange Act generally prohibits members of the U.S.
national securities exchanges from executing exchange transactions for their
affiliates and institutional accounts that 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
setting forth 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. Securities may be held by, or be appropriate investments for, the
Fund as well as other funds or investment advisory clients of the Investment
Adviser or MLAM.
Because of different objectives or other factors, a particular security may
be bought for one or more clients of the Investment Adviser or an affiliate
when one or more clients of the Investment Adviser or an affiliate are selling
the same security. If purchases or sales of securities arise for consideration
at or about the same time that would involve the Fund or other clients or
funds for which the Investment Adviser or an affiliate act as manager,
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 an affiliate 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.
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 of such services, copies of the various plans
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 by
calling the telephone number on the cover page hereof, or from the Distributor
or Merrill Lynch. Certain of these services are available only to U.S.
investors.
34
<PAGE>
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. The statements will also show any other activity in the account
since the preceding statement. Shareholders will also receive separate
confirmations for each purchase or sale transaction other than automatic
investment purchases and the reinvestment of ordinary income dividends. A
shareholder with an account held at the Transfer Agent may make additions to
his or her Investment Account at any time by mailing a check directly to the
Transfer Agent. A shareholder may also maintain an account through Merrill
Lynch. Upon the transfer of shares out of a Merrill Lynch brokerage account,
an Investment Account in the transferring shareholder's name may be opened
automatically at the Transfer Agent.
Share certificates are issued only for full shares and only upon the
specific request of a shareholder who has an Investment Account. 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 may transfer their Fund shares from Merrill Lynch to another
securities dealer that has entered into a selected dealer agreement with
Merrill Lynch. All shareholder services will be available for the transferred
shares. After the transfer, the shareholder may purchase additional shares of
funds owned before the transfer and all future trading of these assets must be
coordinated by the new firm. If a shareholder wishes to transfer his or her
shares to a securities dealer that has not entered into a selected dealer
agreement with Merrill Lynch, the shareholder must either (i) redeem his or
her shares, paying any applicable CDSC or (ii) continue to maintain an
Investment Account at the Transfer Agent for those shares. The shareholder may
also request the new securities dealer to maintain the shares in an account at
the Transfer Agent registered in the name of the securities dealer for the
benefit of the shareholder whether the securities dealer has entered into a
selected dealer agreement or not.
Shareholders considering transferring a tax-deferred retirement account,
such as an individual retirement account, from Merrill Lynch to another
securities dealer 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 Select Pricing Funds and Summit Cash Reserves
Fund ("Summit"), a series of Financial Institutions Series Trust, which is a
Merrill Lynch-sponsored money market fund specifically designated for exchange
by holders of Class A, Class B, Class C and Class D shares of Select Pricing
Funds. 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. Before effecting an
exchange, shareholders should obtain a currently effective prospectus of the
fund into which the exchange is to be 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.
Exchanges of Class A and Class D Shares. Class A shareholders may exchange
Class A shares of the Fund for Class A shares of a second Select Pricing Fund
if the shareholder holds any Class A shares of the second fund in his or her
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 Select
Pricing 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 Select Pricing 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 D
shares are exchangeable with shares of the same class of other Select Pricing
Funds.
35
<PAGE>
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of other Select Pricing Funds
or for Class A shares of Summit ("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 or 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
generally may be exchanged into the Class A or Class D shares, respectively,
of the other funds with a reduced sales charge or without a sales charge.
Exchanges of Class B and Class C Shares. Certain Select Pricing Funds with
Class B or Class C shares outstanding ("outstanding Class B or Class C
shares") offer to exchange their Class B or Class C shares for Class B or
Class C shares, respectively, of certain other Select Pricing Funds or for
Class B shares of Summit ("new Class B or Class C shares") on the basis of
relative net asset value per Class B or Class C share, without the payment of
any CDSC that might otherwise be due on redemption of the outstanding shares.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares acquired through use
of the exchange privilege. In addition, Class B shares of the fund acquired
through use of the exchange privilege will be subject to the Fund's CDSC
schedule if such schedule is higher than the CDSC schedule relating to the
Class B or Class C shares of the fund from which the exchange has been made.
For purposes of computing the CDSC 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 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
Fund 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.
Exchanges for Shares of a Money Market Fund. Class A and Class D shares are
exchangeable for Class A shares of Summit and Class B and Class C shares are
exchangeable for Class B shares of Summit. Class A shares of Summit have an
exchange privilege back into Class A or Class D shares of Select Pricing
Funds; Class B shares of Summit have an exchange privilege back into Class B
or Class C shares of Select Pricing Funds and, in the event of such an
exchange, the period of time that Class B shares of Summit are held will count
toward satisfaction of the holding period requirement for purposes of reducing
any CDSC and toward satisfaction of any Conversion Period with respect to
Class B shares. Class B shares of Summit will be subject to a distribution fee
at an annual rate of 0.75% of average daily net assets of such Class B shares.
This exchange privilege does not apply with respect to certain Merrill Lynch
fee-based programs for which alternative exchange arrangements may exist.
Please see your Merrill Lynch Financial Consultant for further information.
Prior to October 12, 1998, exchanges from the Fund and other Select Pricing
Funds into a money market fund were directed to certain Merrill Lynch-
sponsored money market funds other than Summit. Shareholders who exchanged
Select Pricing Fund shares for shares of such other money market funds and
subsequently wish to exchange those money market fund shares for shares of the
Fund will be subject to the CDSC schedule applicable to such Fund shares, if
any. The holding period for the money market fund shares will not count toward
satisfaction of the holding period requirement for reduction of the CDSC
imposed on such shares, if any, and, with respect to Class B shares, toward
satisfaction of the Conversion Period. However, the holding period for Class
36
<PAGE>
B or Class C shares received in exchange for such money market fund shares
will be aggregated with the holding period for the original shares for
purposes of reducing the CDSC or satisfying the Conversion Period.
Exchanges by Participants in the MFA Program. The exchange privilege is
modified with respect to certain retirement plans which participate in the MFA
Program. Such retirement plans may exchange Class B, Class C or Class D shares
that have been held for at least one year for Class A shares of the same fund
on the basis of relative net asset values in connection with the commencement
of participation in the MFA Program, i.e., no CDSC will apply. The one year
holding period does not apply to shares acquired through reinvestment of
dividends. Upon termination of participation in the MFA Program, Class A
shares will be re-exchanged for the class of shares originally held. For
purposes of computing any CDSC that may be payable upon redemption of Class B
or Class C shares so reacquired, or the Conversion Period for Class B shares
so reacquired, the holding period for the Class A shares will be "tacked" to
the holding period for the Class B or Class C shares originally held. The
Fund's exchange privilege is also modified with respect to purchases of Class
A and Class D shares by non-retirement plan investors under the MFA Program.
First, the initial allocation of assets is made under the MFA Program. Then,
any subsequent exchange under the MFA Program of Class A or Class D shares of
a Select Pricing Fund for Class A or Class D shares of the Fund will be made
solely on the basis of the relative net asset values of the shares being
exchanged. Therefore, there will not be a charge for any difference between
the sales charge previously paid on the shares of the other Select Pricing
Fund and the sales charge payable on the shares of the Fund being acquired in
the exchange under the MFA Program.
Exercise of the Exchange Privilege. 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 Select Pricing 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 to the general public at any time and may thereafter 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. It is
contemplated that the exchange privilege may be applicable to other new mutual
funds whose shares may be distributed by the Distributor.
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 which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of
shares held therein or the automatic exchange thereof to another class at net
asset value, which may be shares of a money market fund. In addition, upon
termination of participation in a Program, shares that have been held for less
than specified periods within such Program may be subject to a fee based upon
the current value of such shares. These Programs also generally prohibit such
shares from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance
fees) in order for the investment not to be subject to Program fees.
Additional information regarding a specific Program (including charges and
limitations on transferability applicable to shares that may be held in such
Program) is available in such Program's client agreement and from the Transfer
Agent at 1-800-MER-FUND or 1-800-637-3863.
Retirement Plans
Individual retirement accounts and other retirement plans are available from
Merrill Lynch. Under these plans, investments may be made in the Fund and
certain of the other mutual funds sponsored by Merrill Lynch as
37
<PAGE>
well as in other securities. Merrill Lynch charges an initial establishment
fee and an annual custodial fee for each account. Information with respect to
these plans is available on request from Merrill Lynch. The minimum initial
purchase to establish any such plan is $100, and the minimum subsequent
purchase is $1.
Automatic Investment Plans
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor) or
Class B, Class C or Class D shares at the applicable public offering price.
These purchases may be made 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. The Fund would be authorized,
on a regular basis, to provide systematic additions to the Investment Account
of such shareholder through charges of $50 or more to the regular bank account
of the shareholder by either pre-authorized checks or automated clearing house
debits. For investors who buy shares of the Fund through BlueprintSM, no
minimum charge to the investor's bank account is required. Alternatively, an
investor that maintains a CMA(R) or CBA(R) account may arrange to have
periodic investments made in the Fund in amounts of $100 or more ($1 for
retirement accounts) through the CMA(R) or CBA(R) Automated Investment
Program.
Automatic Dividend Reinvestment Plan
Unless specific instructions are given as to the method of payment,
dividends will be automatically reinvested, without sales charge, in
additional full and fractional 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 NYSE on the monthly payment date for such dividends. No CDSC will be
imposed upon redemption of shares issued as a result of the automatic
reinvestment of dividends.
Shareholders may, at any time, by written notification to Merrill Lynch if
their account is maintained with Merrill Lynch, or by written notification or
by telephone (1-800-MER-FUND) to the Transfer Agent, if their account is
maintained with the Transfer Agent elect to have subsequent dividends, paid in
cash, rather than reinvested in shares of the Fund or vice versa (provided
that, in the event that a payment on an account maintained at the Transfer
Agent would amount to $10.00 or less, a shareholder will not receive such
payment in cash and such payment will automatically be reinvested in
additional shares). 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 dividend
checks. Cash payments can also be directly deposited to the shareholder's bank
account.
Systematic Withdrawal Plan
A shareholder may elect to receive systematic withdrawals from his or her
Investment Account by check or through automatic payment by direct deposit to
his or her bank account on either a monthly or quarterly basis as provided
below. Quarterly withdrawals are available for shareholders that 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 Class A, Class B, Class C
or Class D shares are redeemed from those on deposit in the shareholder's
account to provide the withdrawal payment specified by the shareholder. The
shareholder may specify the dollar amount and the 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, the NYSE closes at 4:00
p.m., Eastern time) on the 24th day of each month or the 24th day of the last
month of each quarter, whichever is applicable. If the NYSE is not open for
business on such date, the shares will be redeemed at the net asset value
determined 15 minutes after the close of business on the NYSE on the following
business day. The check for the withdrawal payment will be mailed, or the
direct deposit of the withdrawal payment will be made, on the next business
day following redemption. When a shareholder is making systematic withdrawals,
dividends
38
<PAGE>
on all shares in the Investment Account are reinvested automatically in Fund
shares. 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.
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."
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 be applied thereafter to Class D shares if the
shareholder so elects. If an investor wishes to change the amount being
withdrawn in a systematic withdrawal plan the investor should contact his or
her Financial Consultant.
Withdrawal payments should not be considered as dividends. 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 that maintain a Systematic Withdrawal Plan unless
such purchase is equal to at least one year's scheduled withdrawals or $1,200,
whichever is greater. Automatic 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)
Account 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. A shareholder may elect
to have his or her shares redeemed 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 CMA(R) or CBA(R) Systematic Redemption Program is
not available if Fund shares are being purchased within the account pursuant
to the Automated Investment Program. For more information on the CMA(R) or
CBA(R) Systematic Redemption Program, eligible shareholders should contact
their Merrill Lynch Financial Consultant.
DIVIDENDS AND TAXES
Dividends
It is the Fund's intention to distribute all of its net investment income.
Dividends from such investment income are declared daily and paid monthly. All
net realized capital gains, if any, are distributed to the Fund's shareholders
at least annually. Premiums from expired call options written by the Fund and
net gains from closing purchase transactions are treated as short-term capital
gains for Federal income tax purposes. Shareholders may elect in writing to
receive any such dividends in cash. See "Shareholder Services --Automatic
Dividend Reinvestment Plan" for information concerning the manner in which
dividends may be reinvested automatically in shares of the Fund. Dividends are
taxable to shareholders, as described below, whether they are invested in
shares of the Fund or received in cash. The per share dividends on Class B and
Class C shares will be lower than the per share dividends on Class A and Class
D shares as a result of the account maintenance, distribution and higher
transfer agency fees applicable with respect to the Class B and Class C
shares; similarly, the per share dividends on Class D shares will be lower
than the per share dividends on Class A shares as a result of the account
maintenance fees applicable with respect to the Class D shares. See "Pricing
of Shares --Determination of Net Asset Value."
39
<PAGE>
Taxes
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (the "Code"). As long as the Fund 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.
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.
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 options and futures) ("capital gain dividends") are
taxable to shareholders as long-term 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). Certain categories of capital gains are
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 capital gain dividends, as well as any
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 that was declared in the previous October,
November or December to shareholders of record on a specified date in one of
such months, then such dividend will be treated for tax purposes as being paid
by the Fund and received by its shareholders on December 31 of the year in
which such dividend was declared.
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 of 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 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.
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
40
<PAGE>
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 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 U.S. 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. The Fund also must meet these holding requirements, and
if the Fund fails to do so, it will not be able to "pass through" to
shareholders the ability to claim a credit or a deduction for the related
foreign taxes paid by the Fund. If the Fund satisfies the holding period
requirements and if more than 50% in value of its 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 U.S. 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 U.S. income
taxes. 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 U.S.
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
U.S. 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 the 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.
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.
The Fund may invest in securities rated in the medium to lower rating
categories of nationally recognized rating organizations, and in unrated
securities ("high yield/high risk securities"), as previously described. 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.
The Fund may make investments that produce taxable income that is not
matched by a corresponding receipt of cash or an offsetting loss deduction.
Such investments would include obligations that have original issue discount,
that accrue discount and obligations which are subordinated in the mortgage-
backed securities structure. Such taxable income would be treated as income
earned by the Fund and would be subject to the distribution requirements of
the Code. Because such income may not be matched by a corresponding receipt of
cash by the Fund or an offsetting deduction, the Fund may be required to
borrow money or dispose of other securities to be able to make distributions
to shareholders. The Fund intends to make sufficient and timely distributions
to shareholders so as to qualify for treatment as a RIC at all times.
41
<PAGE>
Tax Treatment of Options, Futures and Forward Foreign Exchange Transactions
The Fund may write, purchase or sell options, futures and forward foreign
exchange contracts. In general, unless an election is available to the Fund or
an exception applies, 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), gain or loss attributable to
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 rates with respect to its investments.
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The
Fund may, nonetheless, elect to treat the gain or loss from certain forward
foreign exchange contracts as capital. In this case, gain or loss realized in
connection with a forward foreign exchange contract that is a Section 1256
contract will be characterized as 60% long-term and 40% short-term capital
gain or loss.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in options,
futures and forward foreign exchange contracts. Under Section 1092, the Fund
may be required to postpone recognition for tax purposes of losses incurred in
certain sales of securities and 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 exchange 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 U.S. dollar). In
general, foreign currency gains or losses from certain debt instruments, from
certain forward contracts, from future 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.
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.
42
<PAGE>
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 United States Government obligations. State
law varies as to whether dividend income attributable to United States
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 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. Total return and yield
figures are based on the Fund's historical performance and are 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 annual and annualized total return
and aggregate total return performance data for various periods other than
those noted below. Such data will be computed as described above, except that
(1) as required by the periods of the quotations, actual annual, annualized or
aggregate data, rather than average annual data, may be quoted and (2) the
maximum applicable sales charges will not be included with respect to annual
or annualized rates of return calculations. Aside from the impact 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 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. 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 or Class C shares applicable to
certain investors, as described under "Purchase of Shares" 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. The Fund's total return may be expressed
either as a percentage or as a dollar amount in order to illustrate such total
return on a hypothetical $1,000 investment in the Fund at the beginning of
each specified period.
Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield of each security earned during the period by
(b) the average daily number of shares outstanding during the period that were
entitled to receive dividends multiplied by (c) the maximum offering price per
share on the last day of the period.
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.
43
<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
----------------------------------- -----------------------------------
Expressed as Redeemable Value Expressed as Redeemable Value
a percentage of a hypothetical a percentage of a hypothetical
based on a $1,000 investment based on a $1,000 investment
hypothetical at the end of hypothetical at the end of
Period $1,000 investment the period $1,000 investment the period
- ------ ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Average Annual Total Return
(including maximum applicable sales charges)
One Year Ended December
31, 1998............... (26.49)% $ 735.10 (26.87)% $ 731.30
Five Years Ended Decem-
ber 31, 1998........... (0.83)% $ 959.30 (0.81)% $ 960.10
Ten Years Ended December
31, 1998............... 5.34% $1,792.40 -- --
Inception (November 18,
1991) to December 31,
1998................... -- -- 2.16% $ 1,164.30
Annual Total Return
(excluding maximum applicable sales charges)
Year Ended December 31,
1998.................... (23.43)% $ 765.70 (24.15)% $ 758.50
1997.................... 6.15% $1,061.50 5.34% $ 1,053.40
1996.................... 11.09% $1,110.90 10.25% $ 1,102.50
1995.................... 15.35% $1,153.50 14.61% $ 1,146.10
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 -- --
Inception (November 18,
1991) to December 31,
1991................... -- -- 1.64% $ 1,016.40
1990*................... 10.03% $1,100.30 -- --
1989*................... 6.91% $1,069.10 -- --
Aggregate Total Return
(including maximum applicable sales charges)
Inception (September 29,
1988*) to December 31,
1998................... 79.24% $1,792.40 -- --
Inception (November 18,
1991) to December 31,
1998................... -- -- 16.43% $ 1,164.30
Yield
30 Days Ended December
31, 1998............... 9.30% -- 8.91% --
</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.
44
<PAGE>
<TABLE>
<CAPTION>
Class C Shares Class D Shares
----------------------------------- -----------------------------------
Expressed as Redeemable Value Expressed as Redeemable Value
a percentage of a hypothetical a percentage of a hypothetical
based on a $1,000 investment based on a $1,000 investment
hypothetical at the end of hypothetical at the end of
Period $1,000 investment the period $1,000 investment the period
- ------ ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Average Annual Total Return
(including maximum applicable sales charges)
One Year Ended December
31, 1998............... (24.79)% $ 752.10 (26.80)% $ 732.00
Inception (October 21,
1994) to December 31,
1998................... (0.12)% $ 994.90 (0.54)% $ 977.50
Annual Total Return
(excluding maximum applicable sales charges)
Year Ended December 31,
1998.................... (24.11)% $ 758.90 (23.75)% $ 762.50
1997.................... 5.28 % $1,052.80 5.88 % $1,058.80
1996.................... 10.19 % $1,101.90 10.82 % $1,108.20
1995.................... 14.38 % $1,143.80 15.06 % $1,150.60
Inception (October 21,
1994) to December 31,
1994................... (1.20)% $ 988.00 (1.09)% $ 989.10
Aggregate Total Return
(including maximum applicable sales charges)
Inception (October 21,
1994) to December 31,
1998................... (0.51)% $ 994.90 (2.25)% $ 977.50
Yield
30 Days Ended December
31, 1998............... 8.84% -- 9.07% --
</TABLE>
On occasion, the Fund may compare its performance to that of the Financial
Times/Standard & Poor's-Actuaries World Index, the Dow Jones Industrial
Average or performance data published by Lipper Analytical Services, Inc.,
Morningstar Publications, Inc. ("Morningstar"), CDA Investment Technology,
Inc., Money Magazine, U.S. News & World Report, Business Week, Forbes Magazine
and Fortune Magazine or other industry publications. When comparing its
performance to a market index, the Fund may refer to various statistical
measures derived from the historic performance of the Fund and the index, such
as standard deviation and beta. As with other performance data, performance
comparisons should not be considered indicative of the Fund's relative
performance for any future period. In addition, from time to time the Fund may
include its 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.
The Fund's total return 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.
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
45
<PAGE>
expenses related to the account maintenance and/or distribution of such shares
and have exclusive voting rights with respect to matters relating to such
account maintenance and/or distribution 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 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 on 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 auditors. In addition, the by-laws of the Fund require that a
special meeting of shareholders be held on the written request of at least 10%
of the outstanding shares of the Fund entitled to vote at the meeting, if such
request is in compliance with applicable Maryland law. 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 is entitled to participate
equally in dividends and distributions declared by the Fund and in the net
assets of the Fund on liquidation or dissolution after satisfaction of
outstanding liabilities. Stock certificates are issued by the transfer agent
only on specific request. Certificates for fractional shares are not issued in
any case.
Independent Auditors
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540-6400,
has been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to approval by the non-interested 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 (the "Custodian"), acts as 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 investments.
Transfer Agent
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, acts as the Fund's Transfer Agent. The Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the
opening, maintenance and servicing of shareholder accounts. See "How to Buy,
Sell, Transfer and Exchange Shares -- Through the Transfer Agent" in the
Prospectus.
Legal Counsel
Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
Reports to Shareholders
The fiscal year of the Fund ends on December 31 of each year. The Fund sends
to its shareholders, at least semi-annually, reports showing the Fund's
portfolio and other information. An annual report, containing financial
statements audited by independent auditors, is sent to shareholders each year.
After the end of each year, shareholders will receive Federal income tax
information regarding dividends and capital gains distributions.
Shareholder Inquiries
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Statement of Additional
Information.
46
<PAGE>
Additional Information
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act and the Investment
Company Act, to which reference is hereby made.
To the knowledge of the Fund, the following entity owned beneficially 5% or
more of a class of the Fund's shares as of April 1 , 1999:
<TABLE>
<CAPTION>
Percent of
Name Address Class
------------------------------- -------------------------- ---------------
<S> <C> <C>
Louis F. Bantle and Virginia C.
Bantle
Charitable Foundation Inc..... 1 Centre Street, 2nd Floor 5.2% of Class D
Darien, Connecticut 06820
</TABLE>
FINANCIAL STATEMENTS
The Fund's audited financial statements are incorporated in this Statement
of Additional Information by reference to its 1998 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling (800) 456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m. on any
business day.
47
<PAGE>
[This page intentionally left blank]
48
<PAGE>
APPENDIX I
RATINGS OF FIXED INCOME SECURITIES
Description of Moody's Investors Service, Inc.'s ("Moody's") Corporate Ratings
Aaa Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt 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 risks appear somewhat larger than in "Aaa" securities.
A Bonds which are rated "A" possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated "Baa" are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments 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.
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 makes no
representation that rated bank or insurance company obligations are exempt
from registration under the
I-1
<PAGE>
Securities Act of 1933 or issued in conformity with any other applicable law
or regulation. Nor does Moody's represent that any specific bank or insurance
company obligation is legally enforceable or a valid senior obligation of a
rated issuer. Moody's employs the following three designations, all judged to
be investment grade, to indicate the relative repayment ability 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 obligations. The
effect of industry characteristics and market compositions 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 the parenthesis
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 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.
Moody's ratings are opinions, not recommendations to buy or sell, and their
accuracy is not guaranteed. A rating should be weighed 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 our familiar 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.
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aa An issue which is rated "aa" is considered to be a high-grade preferred
stock. This rating indicates that there is a reasonable assurance the
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" classification, 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 dividends
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
payments.
c This is the lowest rated class of preferred or preference stock. Issues
so rated can thus be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification; the modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking and the modifier 3 indicates that the issuer ranks in the lower end of
its generic rating category.
Description of Standard & Poor's ("Standard & Poor's") Corporate Debt Ratings
A Standard & Poor's corporate or municipal debt 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 financial
program. It takes into consideration the creditworthiness of guarantors,
insurers, or other forms of credit enhancement on the obligation.
The debt 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.
The 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 any 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.
The ratings are based, in varying degrees, on the following considerations:
I. 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;
II. Nature of and provisions of the obligation; and
III. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the
laws of bankruptcy and other laws affecting creditors' rights.
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AAA Debt 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.
AA Debt rated "AA" differs from the highest rated obligations only in small
degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A Debt rated "A" is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher
rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB Debt 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.
Debt 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 debt will likely have
some quality and protective characteristics, these may be outweighed by
large uncertainties or major exposures to adverse conditions.
BB Debt rated "BB" is less vulnerable to non-payment 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 Debt rated "B" is more vulnerable to non-payment 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 commitments on the obligation.
CCC Debt rated "CCC" is currently vulnerable to non-payment, 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
obligator is not likely to have the capacity to meet its financial
commitment on the obligation.
CC The rating "CC" is currently highly vulnerable to non-payment.
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 The "D" rating, unlike other ratings, is not prospective; rather, it is
used only where a default has actually occurred -- and not where a
default is only expected. Standard & Poor's changes ratings to "D"
either.
. On the day an interest and/or principal payment is due and is not
paid. An exception is made if there is a grace period and Standard &
Poor's believes that a payment will be made, in which case the rating
can be maintained; or
. Upon voluntary bankruptcy filing or similar action. An exception is
made if Standard & Poor's expects that debt service payments will
continue to be made on a specific issue. In the absence of a payment
default or bankruptcy filing, a technical default (i.e., covenant
violation) is not sufficient for assigning a "D" rating.
An issuer credit rating (also known as a corporate credit rating,
counterparty credit rating, natural rating, senior implied rating, or
default risk rating) is changed to "N.M." (for "not meaningful") upon:
. The first occurrence of a payment default on any financial obligation,
rated or unrated, other than a financial obligation subject to a bona
fide commercial dispute. (In this context, preferred stock is not
considered to be a financial obligation. Thus, a missed preferred
stock dividend does not necessarily mean that the issuer credit rating
is changed to "N.M.");
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. A voluntary bankruptcy filing by the issuer, or similar action -- even
if the issuer continues debt service payments on some financial
obligations; or
. Seizure of a rated bank by a regulator or placement of an insurer
under regulatory supervision owing to its financial condition. Such
regulatory actions imply substantial uncertainty about the issuer's
ability to continue meeting financial obligations. (An insurer's
claims-paying ability rating would go to "R" if the insurer were
placed under regulatory supervision because of its financial
condition.)
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
rating categories.
N.R. indicates not rated.
Debt obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into
account currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories ("AAA", "AA", "A", "BBB", commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. Also, the
laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks,
trust companies, insurance companies and fiduciaries in general.
Description of Standard & Poor's Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into several categories, ranging from "A"
for the highest-quality obligations to "D" for the lowest. These categories
are as follows:
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 obligation.
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 Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due, even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during such
grace period.
A commercial paper rating is not a recommendation to purchase, 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
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furnished to Standard & Poor's by the issuer or obtained by Standard & Poor's
from other sources it considers reliable. Standard & Poor's does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as
a result of changes in, or unavailability of, such information or based on
other circumstances.
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 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.
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 or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
The ratings are based on the following considerations:
I. Likelihood of payment-capacity and willingness of the issuer to meet
the timely payment of preferred stock dividends and any applicable
sinking fund requirements in accordance with the terms of the
obligation;
II. Nature of, and provisions of, the issue;
III. Relative position of the issue in the event of bankruptcy,
reorganization, or other 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.
BB Preferred stock rated BB, B, and CCC are regarded, on balance, as
B predominantly speculative with respect to the issuer's capacity to pay
CCC 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 that is in arrears
on dividends or sinking fund payments, but that is currently paying.
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C A preferred stock rated C is a nonpaying issue.
D A preferred stock rated D is a nonpaying 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.
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CODE #: 16103-04-99
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PART C. OTHER INFORMATION
Item 23. Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1(a) --Articles of Amendment and Restatement of the Registrant, dated
November 8, 1991.(d)
(b) --Articles of Amendment to the Articles of Incorporation of the
Registrant, dated October 19, 1994.(d)
(c) --Articles Supplementary to the Articles of Incorporation of the
Registrant, dated October 21, 1994.(d)
2 --Revised By-Laws of the Registrant.(d)
3 --Copies of instruments defining the rights of shareholders, including
the relevant portions of the Articles of Incorporation, as amended,
and By-Laws of Registrant.(a)
4(a) --Investment Advisory Agreement between the Registrant and Fund Asset
Management, L.P.(d)
(b) --Sub-Advisory Agreement between Merrill Lynch Asset Management, L.P.
and Merrill Lynch Asset Management U.K. Limited.(f)
(c) --Supplement to Investment Advisory Agreement between the Registrant
and Merrill Lynch Asset Management, L.P., dated January 3, 1994.(b)
5(a) --Revised Class A Shares Distribution Agreement between the Registrant
and Princeton Funds Distributor, Inc. (formerly known as Merrill
Lynch Funds Distributor, Inc.) (the "Distributor")(c)
(b) --Class B Shares Distribution Agreement between the Registrant and the
Distributor.(d)
(c) --Form of Class C Shares Distribution Agreement between the Registrant
and the Distributor.(c)
(d) --Form of Class D Shares Distribution Agreement between the Registrant
and the Distributor.(c)
6 --None.
7 --Custody Agreement between the Registrant and State Street Bank and
Trust Company.(d)
8 --Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between the Registrant and Merrill Lynch
Financial Data Services, Inc. (now known as Financial Data Services,
Inc.)(d)
9(a) --Opinion of Brown & Wood LLP, counsel to the Registrant.(h)
(b) --Consent of Brown & Wood LLP.
10 --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
11 --None.
12 --Certificate of Fund Asset Management, L.P.(h)
13(a) --Amended and Restated Class B Distribution Plan and Class B
Distribution Plan Sub-Agreement of the Registrant.(d)
(b) --Form of Class C Distribution Plan and Class C Distribution Plan Sub-
Agreement of the Registrant.(f)
(c) --Form of Class D Distribution Plan and Class D Distribution Plan Sub-
Agreement of the Registrant.(f)
14(a) --Financial Data Schedule for Class A shares.(g)
(b) --Financial Data Schedule for Class B shares.(g)
(c) --Financial Data Schedule for Class C shares.(g)
(d) --Financial Data Schedule for Class D shares.(g)
15 --Merrill Lynch Select PricingSM System Plan pursuant to Rule
18f-3.(e)
</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.
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(e) Incorporated by reference to Exhibit 18 Post-Effective Amendment No. 13 to
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.
(g) Filed on February 26, 1999 as an Exhibit to Post-Effective Amendment No. 9
to the Registration Statement.
(h) Previously filed as an exhibit to the Registration Statement.
Item 24. Persons Controlled by or under Common Control with Registrant.
The Registrant is not controlled by or under common control with any other
person.
Item 25. Indemnification.
Reference is made to Article VI of the Registrant's Articles of
Incorporation, Article VI of the Registrant's By-Laws, Section 2-418 of the
Maryland General Corporation Law and Section 9 of the Distribution Agreements.
Article VI of the By-Laws provides that each officer and director of the
Registrant shall be indemnified by the Registrant to the full extent permitted
under the General Laws of the State of Maryland, except that such indemnity
shall not protect any such person against any liability to the Registrant or
any stockholder thereof to which such person would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office. Absent a court
determination that an officer or director seeking indemnification was not
liable on the merits or guilty of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office, the decision by the Registrant to indemnify such person must be based
upon the reasonable determination of independent counsel or non-party
independent directors, after review of the facts, that such officer or
director is not guilty of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
The Registrant may purchase insurance on behalf of an officer or director
protecting such person to the full extent permitted under the General Laws of
the State of Maryland from liability arising from his activities as officer or
director of the Registrant. The Registrant, however, may not purchase
insurance on behalf of any officer or director of the Registrant that protects
or purports to protect such person from liability to the Registrant or to its
stockholders to which such officer or director would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
Insofar as the conditional advancing of indemnification moneys for actions
based upon the Investment Company Act of 1940, as amended (the "1940 Act"),
may be concerned, such payments will be made only on the following conditions:
(i) the advances must be limited to amounts used, or to be used, for the
preparation or presentation of a defense to the action, including costs
connected with the preparation of a settlement; (ii) advances may be made only
upon 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 he or she is entitled to receive from the Registrant by reason of
indemnification; and (iii)(a) such promise must be secured by a surety bond,
other suitable insurance or an equivalent form of security which assures that
any repayments may be obtained by the Registrant without delay or litigation,
which bond, insurance or other form of security must be provided by the
recipient of the advance, or (b) a majority of a quorum of the Registrant's
disinterested, non-party Directors, or an independent legal counsel in a
written opinion, shall determine, based upon a review of readily available
facts, that the recipient of the advance ultimately will be found entitled to
indemnification.
In Section 9 of the Distribution Agreements relating to the securities being
offered hereby, the Registrant agrees to indemnify the Distributor and each
person, if any, who controls the Distributor within the meaning of the
Securities Act of 1933, as amended (the "1933 Act"), against certain types of
civil liabilities arising in connection with the Registration Statement, the
Prospectus or the Statement of Additional Information.
Insofar as indemnification for liabilities arising under the 1933 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 1933 Act and is, therefore, unenforceable. In the event
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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 1933 Act and will be governed by the final adjudication of
such issue.
Item 26. Business and Other Connections of Investment Adviser.
Fund Asset Management, L.P. (the "Investment Adviser" or "FAM") 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
Corporate High Yield 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 for 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., Debt Strategies
Fund III, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities
Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund, Inc., MuniAssets Fund,
Inc., MuniEnhanced Fund, Inc., MuniHoldings Fund, Inc., MuniHoldings Fund II,
Inc., MuniHoldings California Insured Fund, Inc., MuniHoldings California
Insured Fund II, Inc., MuniHoldings California Insured Fund III, Inc.,
MuniHoldings California Insured Fund IV, Inc., MuniHoldings Florida Insured
Fund, MuniHoldings Florida Insured Fund II, MuniHoldings Florida Insured Fund
III, MuniHoldings Florida Insured Fund IV, MuniHoldings Insured Fund, Inc.,
MuniHoldings Insured Fund II, Inc., MuniHoldings Michigan Insured Fund, Inc.,
MuniHoldings New Jersey Insured Fund, Inc., MuniHoldings New Jersey Insured
Fund II, Inc., MuniHoldings New Jersey Insured Fund III, Inc., MuniHoldings
New York Fund, Inc., MuniHoldings New York Insured Fund, Inc., MuniHoldings
New York Insured Fund II, Inc., MuniHoldings New York Insured Fund III, Inc.,
MuniHoldings Pennsylvania Insured Fund, 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.
Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliate of the
Investment Adviser, 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 Global Bond Fund for Investment
and Retirement, 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 Technology 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
C-3
<PAGE>
Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc., Merrill
Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill
Lynch U.S. Treasury Money Fund, Merrill Lynch U.S.A. Government Reserves,
Merrill Lynch Utility Income Fund, Inc., Merrill Lynch Variable Series Funds,
Inc. and Hotchkis and Wiley Funds (advised by Hotchkis and Wiley, a division
of MLAM); and for 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-adviser to Merrill Lynch World
Strategy Portfolio and Merrill Lynch Basic Value Equity Portfolio, two
investment portfolios of EQ Advisors Trust.
The address of each of these registered 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-
2665. The address of the Manager, FAM, Princeton Services, Inc. ("Princeton
Services") and Princeton Administrators, L.P. ("Princeton Administrators") is
also P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of Princeton
Funds Distributor, Inc. ("PFD") and of Merrill Lynch Funds Distributor
("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 10281-1201. The address of the Fund's
transfer agent, Financial Data Services, Inc. ("FDS"), is 4800 Deer Lake Drive
East, Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or
employment of a substantial nature in which each such person or entity has
been engaged since January 1, 1997 for his, her or its own account or in the
capacity of director, officer, partner or trustee. In addition, Mr. Glenn is
President and Mr. Burke is Vice President and Treasurer of all or
substantially all of the investment companies described in the first two
paragraphs of this Item 26, and Messrs. Giordano and Monagle are officers of
one or more of such companies.
<TABLE>
<CAPTION>
Position(s) with the Other Substantial Business,
Name Investment Adviser Profession, Vocation or Employment
- ---- -------------------- ----------------------------------
<S> <C> <C>
ML & Co. ............... Limited Partner Financial Services Holding Company; Limited
Partner of MLAM
Princeton Services...... General Partner General Partner of MLAM
Jeffrey M. Peek......... President President of MLAM; President and Director of
Princeton Services; Executive Vice President
of ML & Co.; Managing Director and Co-Head
of the Investment Banking Division of
Merrill Lynch in 1997; Senior Vice President
and Director of the Global Securities and
Economics Division of Merrill Lynch from
1995 to 1997
Terry K. Glenn.......... Executive Vice Executive Vice President of MLAM; Executive
President Vice President and Director of Princeton
Services; President and Director of PFD;
Director of FDS; President of Princeton
Administrators
Donald C. Burke......... Senior Vice Senior Vice President, Treasurer and
President and Director of Taxation of MLAM; Senior Vice
Treasurer President and Treasurer of Princeton
Services; Vice President of PFD; First Vice
President of MLAM from 1997 to 1999; Vice
President of MLAM from 1990 to 1997
Michael G. Clark........ Senior Vice Senior Vice President of MLAM; Senior Vice
President President of Princeton Services; Treasurer
and Director of PFD; First Vice President of
MLAM from 1997 to 1999; Vice President of
MLAM from 1996 to 1997
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
Position(s) with the Other Substantial Business,
Name Investment Adviser Profession, Vocation or Employment
- ---- -------------------- ----------------------------------
<S> <C> <C>
Mark A. Desario......... Senior Vice Senior Vice President of MLAM; Senior Vice
President President of Princeton Services
Linda L. Federici....... Senior Vice Senior Vice President of MLAM; Senior Vice
President President of Princeton Services
Vincent R. Giordano..... Senior Vice Senior Vice President of MLAM; Senior Vice
President President of Princeton Services
Michael J. Hennewinkel.. Senior Vice Senior Vice President, Secretary and General
President, Secretary Counsel of MLAM; Senior Vice President of
and General Counsel Princeton Services
Philip L. Kirstein...... Senior Vice Senior Vice President of MLAM; Senior Vice
President President, General Counsel, Director and
Secretary of Princeton Services
Ronald M. Kloss......... Senior Vice Senior Vice President of MLAM; Senior Vice
President President of Princeton Services
Debra W. Senior Vice Senior Vice President of MLAM; Senior Vice
Landsman-Yaros......... President President of Princeton Services; Vice
President of PFD
Joseph T. Monagle, Jr... Senior Vice Senior Vice President of MLAM; Senior Vice
President President of Princeton Services
Brian A. Murdock........ Senior Vice Senior Vice President of MLAM; Senior Vice
President President of Princeton Services
Gregory D. Upah......... Senior Vice Senior Vice President of MLAM; Senior Vice
President 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: The Corporate Fund
Accumulation Program, 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., Debt Strategies 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 Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund,
Inc., Merrill Lynch Basic Value Fund, Inc., Merrill Lynch Capital Fund, Inc.,
Merrill Lynch Consults International Portfolio, Merrill Lynch Convertible
Fund, Inc., Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Corporate
High Yield Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc.,
Merrill Lynch Dragon Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc.,
Merrill Lynch EuroFund, Merrill Lynch Global Allocation Fund, Inc., Merrill
Lynch Global Bond Fund for Investment and Retirement, 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 Technology 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 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 Senior
Floating Rate Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc.,
Merrill Lynch Special Value Fund, Inc., Merrill Lynch Strategic Dividend Fund,
Merrill Lynch Technology Fund, Inc., Merrill Lynch Utility Income Fund, Inc.,
Merrill Lynch Variable Series Funds, Inc., Merrill Lynch World Income Fund,
Inc., The Municipal Fund Accumulation Program, Inc. and Worldwide DollarVest
Fund, Inc. The address of each of these registered investment companies is
P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of MLAM U.K. is
33 King William Street, London EC4R 9AF, England.
C-5
<PAGE>
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,
1997, for his or her own account or in the capacity of director, officer,
partner or trustee. In addition, Messrs. Glenn, Burke and Albert are officers
of one or more of the registered investment companies listed in the first two
paragraphs of this Item 26:
<TABLE>
<CAPTION>
Other Substantial Business,
Name Positions with MLAM U.K. Profession, Vocation or Employment
- ---- ------------------------ ----------------------------------
<S> <C> <C>
Terry K. Glenn.......... Director and Chairman Executive Vice President of MLAM and
FAM; Executive Vice President of
Princeton Services; President and
Director of PFD; President of Princeton
Administrators, L.P.
Alan J. Albert.......... Senior Managing Director Managing Director of Prime Investment
Management of Merrill Lynch Mercury
Asset Management since 1997; Senior
Managing Director of Merrill Lynch Asset
Management U.K. Limited from 1995 to
1997; Vice President of MLAM
Nicholas C.D. Hall...... Director Director of Merrill Lynch Europe PLC;
General Counsel of Merrill Lynch Mercury
Asset Management Group
Donald C. Burke......... Treasurer Senior Vice President and Treasurer of
MLAM and FAM; Director of Taxation of
MLAM; Senior Vice President and
Treasurer of Princeton Services; Vice
President of PFD; First Vice President
of MLAM from 1997 to 1999; Vice
President of MLAM from 1990 to 1997
Carol Ann Langham....... Company Secretary None
Debra Anne Searle....... Assistant Company Secretary None
</TABLE>
Item 27. Principal Underwriters.
(a) MLFD, a division of PFD, acts as the principal underwriter for the
Registrant and for each of the open-end registered investment companies
referred to in the first two paragraphs of Item 26 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. and The Municipal Fund Accumulation Program, Inc. MLFD also acts
as the principal underwriter for the following closed-end registered
investment companies: Merrill Lynch High Income Municipal Bond Fund, Inc.,
Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch Senior Floating
Rate Fund, Inc. A separate division of PFD acts as the principal underwriter
of a number of other investment companies.
C-6
<PAGE>
(b) Set forth below is information concerning each director and officer of
PFD. The principal business address of each such person is P.O. Box 9081,
Princeton, New Jersey 08543-9081, except that the address of Messrs. Breen,
Crook, Fatseas and Wasel is One Financial Center, 23rd Floor, Boston,
Massachusetts 02111-2665.
<TABLE>
<CAPTION>
Position(s) and Office(s) Position(s) and Office(s)
Name with PFD with Registrant
- ---- ------------------------- -------------------------
<S> <C> <C>
Terry K. Glenn............. President and Director President and
Director
Michael G. Clark........... Treasurer and Director None
Thomas J. Verage........... Director None
Robert W. Crook............ Senior Vice President None
Michael J. Brady........... Vice President None
William M. Breen........... Vice President None
Donald C. Burke............ Vice President Vice President and
Treasurer
James T. Fatseas........... Vice President None
Debra W. Landsman-Yaros.... Vice President None
Michelle T. Lau............ Vice President None
Salvatore Venezia.......... Vice President None
William Wasel.............. Vice President None
Robert Harris.............. Secretary Secretary
</TABLE>
(c) Not applicable.
Item 28. Location of Accounts and Records.
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the rules thereunder are maintained at the offices
of the Registrant (800 Scudders Mill Road, Plainsboro, New Jersey 08536), and
its transfer agent, Financial Data Services, Inc. (4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484).
Item 29. Management Services.
Other than as set forth under the caption "Management of the Fund -- Fund
Asset Management" 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, the Registrant is not a party to any
management-related service contract.
Item 30. Undertakings.
Not applicable.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment
Company Act, the Registrant certifies that it meets all the requirements for
effectiveness of this Post-Effective Amendment to the Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the Township of Plainsboro, and the State of New
Jersey, on the 26th day of April, 1999.
Merrill Lynch World Income Fund, Inc.
(Registrant)
/s/ Terry K. Glenn
By: __________________________________
(Terry K. Glenn, President)
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following person in the capacities and
on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Terry K. Glenn President and Director April 26, 1999
______________________________________ (Principal Executive
(Terry K. Glenn) Officer)
Donald C. Burke* Treasurer and Vice
______________________________________ President (Principal
(Donald C. Burke) Financial and Accounting
Officer)
James H. Bodurtha* Director
______________________________________
(James H. Bodurtha)
Herbert I. London* Director
______________________________________
(Herbert I. London)
Robert R. Martin* Director
______________________________________
(Robert R. Martin)
Joseph L. May* Director
______________________________________
(Joseph L. May)
Andre F. Perold* Director
______________________________________
(Andre F. Perold)
Arthur Zeikel* Director
______________________________________
(Arthur Zeikel)
/s/ Terry K. Glenn April 26, 1999
*By: _________________________________
(Terry K. Glenn, Attorney-in-Fact)
</TABLE>
C-8
<PAGE>
POWER OF ATTORNEY
The undersigned Directors/Trustees and officers of each of the registered
investment companies listed below hereby authorize Terry K. Glenn, Donald C.
Burke and Joseph T. Monagle, Jr., or any of them, as attorney-in-fact, to sign
on his or her behalf in the capacities indicated any Registration Statement or
amendment thereto (including post-effective amendments) for each of the
following registered investment companies and to file the same, with all
exhibits thereto, with the Securities and Exchange Commission: Merrill Lynch
California Municipal Series Trust, Merrill Lynch Multi-State Municipal Series
Trust, Merrill Lynch Multi-State Limited Maturity Municipal Series Trust,
Merrill Lynch Convertible Fund, Inc., Merrill Lynch Consults International
Portfolio, Merrill Lynch Growth Fund, Merrill Lynch World Income Fund, Inc.,
MuniEnhanced Fund, Inc., MuniHoldings California Insured Fund II, Inc.,
MuniHoldings Florida Insured Fund III, MuniHoldings Michigan Insured Fund,
Inc., MuniHoldings New York Fund, Inc., MuniHoldings New York Insured Fund II,
Inc., MuniHoldings New York Insured Fund III, Inc., MuniHoldings Pennsylvania
Insured Fund, MuniVest Pennsylvania Insured Fund, MuniYield Fund, Inc.,
MuniYield Arizona Fund, Inc., MuniYield California Fund, Inc., MuniYield
California Insured Fund, Inc., MuniYield California Insured Fund II, Inc.,
MuniYield Florida Fund, MuniYield Michigan Fund, Inc., MuniYield New Jersey
Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New York Insured
Fund II, Inc., MuniYield Quality Fund, Inc. and MuniYield Quality Fund II,
Inc.
Dated: April 7, 1999
<TABLE>
<S> <C>
/s/ Terry K. Glenn /s/ Joseph L. May
___________________________________________ ___________________________________________
Terry K. Glenn Joseph L. May
(President/Principal Executive (Director/Trustee)
Officer/Director/Trustee)
/s/ James H. Bodurtha /s/ Andre F. Perold
___________________________________________ ___________________________________________
James H. Bodurtha Andre F. Perold
(Director/Trustee) (Director/Trustee)
/s/ Herbert I. London /s/ Arthur Zeikel
___________________________________________ ___________________________________________
Herbert I. London Arthur Zeikel
(Director/Trustee) (Director/Trustee)
/s/ Robert R. Martin /s/ Donald C. Burke
___________________________________________ ___________________________________________
Robert R. Martin Donald C. Burke
(Director/Trustee) (Vice President/Treasurer/Principal
Financial and
Accounting Officer)
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
9(b) Consent of Brown & Wood LLP, counsel to the Registrant.
10 Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
</TABLE>
<PAGE>
BROWN & WOOD LLP
ONE WORLD TRADE CENTER
New York, N.Y. 10048-0057
TELEPHONE: 212-839-5300
FACSIMILE: 212-839-5599
April 27, 1999
Merrill Lynch World Income Fund, Inc.
800 Scudders Mill Road
Plainsboro, New Jersey
Ladies and Gentlemen:
We consent to the incorporation by reference in this Post-Effective Amendment
No. 10 to the Registration Statement on Form N-1A (File Nos. 33-42681 and 811-
5603) of our opinion dated November 15, 1991 filed on November 15, 1991 as an
Exhibit to Pre-Effective Amendment No. 1 to such Registration Statement and to
the use of our name in the prospectus and statement of additional information
constituting parts thereof.
Very truly yours,
/s/ Brown & Wood LLP
<PAGE>
Exhibit 10
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch World Income Fund, Inc.:
We consent to the incorporation by reference in this Post-Effective
Amendment No. 10 to Registration Statement No. 33-42681 of our report dated
February 22, 1999 appearing in the annual report to shareholders of Merrill
Lynch World Income Fund, Inc. for the year ended December 31, 1998, and to the
reference to us under the caption "Financial Highlights" in the Prospectus,
which is a part of such Registration Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
April 22, 1999
