<PAGE>
PROSPECTUS
- ----------
February 28, 1994
MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.
BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
---------------
Merrill Lynch Short-Term Global Income Fund, Inc. (the "Fund") is a non-
diversified mutual fund seeking to provide shareholders with as high a level of
current income as is consistent with prudent investment management from a
global portfolio of high quality debt securities denominated in various
currencies and multi-national currency units and having remaining maturities
not exceeding three years. Under normal circumstances, the Fund will invest its
assets in debt securities denominated in at least three different currencies,
including the United States dollar. At times, the Fund may seek to hedge its
portfolio against currency risks and, to a lesser extent, interest rate risks
through the use of futures, options on futures and currency transactions.
Investment on a global basis involves special considerations. See "Special and
Risk Considerations". There can be no assurance that the investment objective
of the Fund will be realized.
---------------
The Fund offers two classes of shares which may be purchased at a price equal
to the next determined net asset value per share, plus a sales charge which, at
the election of the purchaser, may be imposed (i) at the time of purchase (the
"Class A shares") or (ii) on a deferred basis (the "Class B shares"). The
original charges to which the Class B shares are subject shall consist of a
contingent deferred sales charge which may be imposed on redemptions made
within three years of purchase and an ongoing account maintenance fee and
distribution fee. These alternatives permit an investor to choose the method of
purchasing shares that is most beneficial given the amount of the purchase, the
length of time the investor expects to hold the shares and other circumstances.
Class A shares pay an ongoing account maintenance fee at the annual rate of
0.25% of the Fund's average daily net assets attributable to Class A shares;
Class B shares pay an ongoing account maintenance fee and an ongoing
distribution fee at the annual rates of 0.25% and 0.50%, respectively, of the
Fund's average daily net assets attributable to the Class B shares. Investors
should understand that the purpose and function of the deferred sales charges
and account maintenance fee with respect to the Class B shares are the same as
those of the initial sales charge and account maintenance fee with respect to
the Class A shares. Investors should also understand that over time the
deferred sales charges related to Class B shares may exceed the initial sales
charge and ongoing account maintenance fee with respect to Class A shares. See
"Alternative Sales Arrangements" on page 3.
Each Class A share and Class B share represents an identical interest in the
investment portfolio of the Fund and has the same rights, except that Class B
shares bear the expenses of the account maintenance and distribution fees and
certain other costs resulting from the deferred sales charge arrangement, which
will cause Class B shares to have a higher expense ratio and pay lower
dividends than Class A shares, which also bear the expense of an account
maintenance fee. The two classes also have different exchange privileges.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), Box 9011, Princeton, New Jersey 08543-9011 [(609) 282-
2800], and other securities dealers which have entered into selected dealers
agreements with the Distributor, including Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000,
and the minimum subsequent purchase is $50, except that for retirement plans
the minimum initial purchase is $250, and the minimum subsequent purchase is
$1. Merrill Lynch may charge its customers a processing fee (presently $4.85)
for confirming purchases and repurchases. Purchases and redemptions directly
through the Fund's transfer agent are not subject to the processing fee. See
"Purchase of Shares" and "Redemption of Shares".
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------
This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated February 28, 1994 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission and
is available, without charge, by calling or by writing the Fund at the above
telephone number or address. The Statement of Additional Information is hereby
incorporated by reference into this Prospectus.
---------------
MERRILL LYNCH ASSET MANAGEMENT--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to Class A shares and Class B shares follows:
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
INITIAL SALES DEFERRED SALES
CHARGE CHARGE
ALTERNATIVE ALTERNATIVE
-------------- ---------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES:
Maximum Sales Charge
Imposed on Purchases
(as a percentage of
offering price)....... 3.00%(a) None
Sales Charge Imposed
on Dividend Reinvest-
ments................. None None
Deferred Sales Charge None(f)
(as a percentage of
original purchase 3.0% during the first year,
price or redemption decreasing 1.0% annually
proceeds, whichever to 0.0% after the third
is lower)............. year(b)
Exchange Fee........... None None
ANNUAL FUND OPERATING
EXPENSES (AS A PERCENT-
AGE OF AVERAGE NET AS-
SETS) FOR THE FISCAL
YEAR ENDED OCTOBER 31,
1993:
Management Fees(c)..... 0.54% 0.54%
Rule 12b-1 Fees........ 0.25% 0.75%(d)
Other Expenses
Custodial Fees....... 0.03% 0.03%
Shareholder Servicing
Costs(e)............ 0.11% 0.12%
Other................ 0.05% 0.05%
---- ----
Total Other Ex- 0.19% 0.20%
penses............ ---- ----
Total Fund Operating 0.98% 1.49%
Expenses.............. ==== ====
</TABLE>
- --------
(a) Reduced for purchases of $100,000 and over, decreasing to 0.50% for
purchases of $5,000,000 and over. Certain investors making purchases of
$5,000,000 and over may, however, pay a contingent deferred sales charge of
0.25% of amounts redeemed within the first year after purchase in lieu of
the 0.50% initial sales charge. See "Purchase of Shares--Initial Sales
Charge Alternative--Class A Shares"--page 24.
(b) See "Purchase of Shares--Deferred Sales Charge Alternative--Class B
Shares"--page 25.
(c) See "Management of the Fund--Management and Advisory Arrangements"--page
18.
(d) See "Purchase of Shares--Alternative Sales Arrangements--Distribution
Plans"--page 22. This amount represents the 0.25% account maintenance fee
and the 0.50% distribution fee applicable to Class B shares of the Fund.
(e) See "Management of the Fund--Transfer Agency Services"--page 20.
(f) Certain investors making purchases of $5,000,000 and over may, however,
pay a contingent deferred sales charge of 0.25% of amounts redeemed within
the first year after purchase in lieu of the 0.50% initial sales charge. See
"Purchase of Shares--Initial Sales Charge Alternative--Class A Shares"--page
24.
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR
THE PERIOD OF:
EXAMPLE: -------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses
on a $1,000 investment including, for Class A
shares, the maximum $30 front-end sales
charge and assuming (1) an operating expense
ratio of 0.98% for Class A shares and 1.49%
for Class B shares, (2) a 5% annual return
throughout the periods and (3) redemption at
the end of the period:
Class A....................................... $39.70 $60.28 $82.54 $146.53
Class B....................................... $45.16 $57.10 $81.32 $177.95
An investor would pay the following expenses
on the same $1,000 investment assuming no re-
demption at the end of the period:
Class A....................................... $39.70 $60.28 $82.54 $146.53
Class B....................................... $15.16 $47.10 $81.32 $177.95
</TABLE>
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Securities and Exchange Commission regulations. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF
RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN
THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. Class B shareholders who hold these
shares for an extended period of time may pay more in Rule 12b-1 distribution
fees than the economic equivalent of the maximum front-end sales charges
permitted under the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. Merrill Lynch may charge its customers a processing
fee (presently $4.85) for confirming purchases and repurchases. Purchases and
redemptions directly through the Fund's transfer agent are not subject to the
processing fee. See "Purchase of Shares" and "Redemption of Shares".
2
<PAGE>
ALTERNATIVE SALES ARRANGEMENTS
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share, plus in both cases a sales charge which, at the
election of the purchaser, may be imposed either (i) at the time of the
purchase (the "initial sales charge alternative") or (ii) on a deferred basis
(the "deferred sales charge alternative").
Class A Shares. An investor who elects the initial sales charge alternative
acquires Class A shares. Class A shares incur a sales charge when they are
purchased and are subject to an ongoing account maintenance fee at an annual
rate of 0.25% of the Fund's average daily net assets. Class A shares enjoy the
benefit, however, of not being subject to the ongoing distribution fee to which
Class B shares are subject and any sales charge when they are redeemed. Certain
purchases of Class A shares qualify for reduced initial sales charges. See
"Purchase of Shares" and "Additional Information--Organization of the Fund".
Class B Shares. An investor who elects the deferred sales charge alternative
acquires Class B shares. Class B shares do not incur a sales charge when they
are purchased, but they are subject to ongoing account maintenance and
distribution fees of 0.25% and 0.50%, respectively, of the Fund's average net
assets attributable to the Class B shares and a sales charge if they are
redeemed within three years of purchase. Class B shares provide the benefit of
permitting all of the investor's dollars to work from the time the investment
is made. The ongoing distribution fee paid by Class B shares will cause such
shares to have a higher expense ratio and to pay lower dividends than Class A
shares. Both Class A shares and Class B shares pay an ongoing account
maintenance fee. Payment of the distribution fee is subject to certain limits
as set forth under "Purchase of Shares--Deferred Sales Charge Alternative--
Class B Shares".
As an illustration, investors who qualify for significantly reduced sales
charges might elect the initial sales charge alternative because similar sales
charge reductions are not available for purchases under the deferred sales
charge alternative. Shares acquired under the initial sales charge alternative
are subject to an ongoing account maintenance fee that is lower than the sum of
the ongoing account maintenance fee and distribution fee on Class B shares.
However, because initial sales charges are deducted at the time of purchase,
such investors would not have all their funds invested initially. Investors not
qualifying for reduced initial sales charges who expect to maintain their
investment for an extended period of time might also elect the initial sales
charge alternative because over time the accumulated continuing account
maintenance and distribution fees on Class B shares may exceed the initial
sales charge and ongoing account maintenance fee on Class A shares. Again,
however, such investors must weigh this consideration against the fact that not
all their funds will be invested initially. Furthermore, the ongoing account
maintenance and distribution fees will be offset to the extent any return is
realized on the additional funds initially invested under the deferred
alternative. However, there can be no assurance as to the return, if any, which
will be realized on such additional funds. Certain other investors might
determine it to be more advantageous to have all their funds invested
initially, although remaining subject to continued account maintenance and
distribution fees and, for a three-year period of time, a contingent deferred
sales charge.
The distribution expenses incurred by Merrill Lynch Funds Distributor, Inc.
(the "Distributor") and dealers (primarily Merrill Lynch) in connection with
the sale of the shares will be paid, in the case of the Class A shares, from
the proceeds of the initial sales charge and ongoing account maintenance fee,
and in the case of the Class B shares, such distribution expenses will be paid
from the proceeds of the ongoing account maintenance and distribution fees and
the contingent deferred sales charge incurred upon redemption within
3
<PAGE>
three years of purchase. Sales personnel may receive different compensation for
selling Class A or Class B shares. Investors should understand that the purpose
and function of the deferred sales charges and account maintenance fee with
respect to the Class B shares are the same as those of the initial sales charge
and account maintenance fee with respect to the Class A shares.
Dividends paid by the Fund with respect to Class A and Class B shares, to the
extent any dividends are paid, will be calculated in the same manner at the
same time on the same day and will be in the same amount, except that account
maintenance and distribution fees and any incremental transfer agency costs
relating to Class B shares will be borne exclusively by that class, and the
account maintenance fee relating to Class A shares will be borne exclusively by
that class. See "Additional Information--Determination of Net Asset Value".
Class A and Class B shareholders of the Fund each have an exchange privilege
for Class A and Class B shares, respectively, of certain other mutual funds
sponsored by Merrill Lynch. Class A and Class B shareholders of the Fund also
may exchange their shares for shares of certain money market funds sponsored by
Merrill Lynch. See "Shareholder Services--Exchange Privilege".
The Directors of the Fund have determined that currently no conflict of
interest exists between the Class A and Class B shares. On an ongoing basis,
the Directors of the Fund, pursuant to their fiduciary duties under the
Investment Company Act of 1940, as amended (the "Investment Company Act"), and
state laws, will seek to assure that no such conflict arises.
THE ALTERNATIVE SALES ARRANGEMENTS PERMIT AN INVESTOR TO CHOOSE THE METHOD
OF PURCHASING SHARES THAT IS MOST BENEFICIAL GIVEN THE AMOUNT OF THE
PURCHASE, THE LENGTH OF TIME THE INVESTOR EXPECTS TO HOLD THE SHARES AND
OTHER CIRCUMSTANCES. INVESTORS SHOULD DETERMINE WHETHER UNDER THEIR
PARTICULAR CIRCUMSTANCES IT IS MORE ADVANTAGEOUS TO INCUR AN INITIAL SALES
CHARGE AND AN ONGOING ACCOUNT MAINTENANCE FEE OR TO HAVE THE ENTIRE
INITIAL PURCHASE PRICE INVESTED IN THE FUND WITH THE INVESTMENT THEREAFTER
BEING SUBJECT TO ONGOING ACCOUNT MAINTENANCE AND DISTRIBUTION FEES. TO
ASSIST INVESTORS IN MAKING THIS DETERMINATION, THE FEE TABLE ON PAGE 2
SETS FORTH THE CHARGES APPLICABLE TO EACH CLASS OF SHARES, AND A
DISCUSSION OF RELEVANT FACTORS IN MAKING SUCH DETERMINATION IS SET FORTH
UNDER "PURCHASE OF SHARES--ALTERNATIVE SALES ARRANGEMENTS" ON PAGE 21.
4
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in conjunction
with the annual audits of the financial statements of the Fund by Deloitte &
Touche, independent auditors. Financial statements for the fiscal year ended
October 31, 1993, and the independent auditors' report thereon are included in
the Statement of Additional Information. Further information about the
performance of the Fund is contained in the Fund's most recent annual report to
shareholders which may be obtained, without charge, by calling or by writing
the Fund at the telephone number or address on the front cover of this
Prospectus.
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
CLASS A CLASS B
---------------------------------------- -------------------------------------------------
FOR THE FOR THE FOR THE FOR THE
FOR THE PERIOD PERIOD PERIOD PERIOD
YEAR ENDED DEC. 28, AUG. 3, FOR THE YEAR ENDED DEC. 28, AUG. 3,
OCTOBER 31, 1990 TO 1990+ TO OCTOBER 31, 1990 TO 1990+ TO
----------------- OCT. 31, DEC. 27, ---------------------- OCT. 31, DEC. 27,
1993*** 1992 1991 1990 1993*** 1992 1991 1990
------- -------- -------- -------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $ 8.85 $ 9.85 $ 9.92 $ 10.00 $ 8.85 $ 9.84 $ 9.92 $ 10.00
------- -------- -------- -------- ---------- ---------- ---------- ----------
Investment income--net.. .61 .77 .82 .42 .57 .72 .77 .39
Realized and unrealized
loss on investments and
foreign currency
transactions--net...... (.19) (1.00) (.07) (.08) (.20) (.99) (.08) (.08)
------- -------- -------- -------- ---------- ---------- ---------- ----------
Total from investment
operations............. .42 (.23) .75 .34 .37 (.27) .69 .31
------- -------- -------- -------- ---------- ---------- ---------- ----------
LESS DIVIDENDS AND
DISTRIBUTIONS:
Return of capital--net.. (.61) (.77) -- -- (.57) (.72) -- --
Investment income--net.. -- -- (.82) (.42) -- -- (.77) (.39)
------- -------- -------- -------- ---------- ---------- ---------- ----------
Total dividends and
distributions.......... (.61) (.77) (.82) (.42) (.57) (.72) (.77) (.39)
------- -------- -------- -------- ---------- ---------- ---------- ----------
Net asset value, end of
period................. $ 8.66 $ 8.85 $ 9.85 $ 9.92 $ 8.65 $ 8.85 $ 9.84 $ 9.92
======= ======== ======== ======== ========== ========== ========== ==========
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share.............. 5.28% (2.60%) 7.53%++ 3.73%++ 4.63% (3.00%) 6.93%++ 3.40%++
======= ======== ======== ======== ========== ========== ========== ==========
RATIOS TO AVERAGE NET
ASSETS:
Expenses, excluding
maintenance and/or
distribution fees...... .73% .75% .76%* .75%* .74% .75% .77%* .76%*
======= ======== ======== ======== ========== ========== ========== ==========
Expenses................ .98% 1.00% .96%* .75%* 1.49% 1.50% 1.52%* 1.51%*
======= ======== ======== ======== ========== ========== ========== ==========
Investment income--net.. 7.24% 8.11% 9.70%* 10.51%* 6.73% 7.60% 9.11%* 9.75%*
======= ======== ======== ======== ========== ========== ========== ==========
SUPPLEMENTAL DATA:
Net assets, end of
period
(in thousands)......... $99,037 $188,623 $399,416 $211,006 $1,664,602 $3,182,520 $5,918,769 $2,796,301
======= ======== ======== ======== ========== ========== ========== ==========
Portfolio turnover...... 284.62% 120.77% 153.72% 19.40% 284.62% 120.77% 153.72% 19.40%
======= ======== ======== ======== ========== ========== ========== ==========
</TABLE>
- --------
+Commencement of Operations.
++Aggregate total investment returns.
*Annualized.
**Total investment returns exclude the effects of sales loads.
***On February 25, 1993, Merrill Lynch Asset Management U.K. Limited became a
sub-adviser to the Fund.
5
<PAGE>
SPECIAL AND RISK CONSIDERATIONS
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 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 which 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 will 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 more than 50% of the Fund's
total assets at the close of any taxable year consist of stock or
securities in foreign corporations. See "Distributions and Taxes--Taxes".
Foreign financial markets, while generally growing in volume, have, for
the most part, 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. The foreign markets also
have different clearance and settlement procedures, and in certain markets
there have been times when settlements have been unable to keep pace with
the volume of securities transactions, making it difficult to conduct such
transactions. Delays in settlement could result in temporary periods when
a portion of the assets of the Fund are uninvested and no return is earned
thereon. The inability of the Fund to make intended security purchases due
to settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to
settlement problems could result either in losses to the Fund due to
subsequent declines in value of the portfolio security or, if the Fund has
entered into a contract to sell the security, could result in possible
liability to the purchaser. Costs associated with transactions in foreign
securities are generally higher than costs associated 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 U.S.
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, since the expenses of the Fund, such as custodial costs, are
higher.
6
<PAGE>
The Fund may engage in various portfolio strategies to seek to hedge its
portfolio against movements in the securities markets and exchange rates
between currencies by the use of options thereon. Utilization of options
and futures transactions involves the risk of imperfect correlation in
movements in the price of options and futures and movements in the price
of the securities or currencies which are the subject of the hedge. There
can be no assurance that a liquid secondary market for options and futures
contracts will exist at any specific time. See "Investment Objective and
Policies--Hedging Techniques".
The net asset value of the Fund's shares will be affected by changes in
the general level of interest rates. When interest rates decline, the
value of a portfolio of fixed income securities can be expected to rise.
Conversely, when interest rates rise, the value of a portfolio of fixed
income securities can be expected to decline.
As a non-diversified investment company, the Fund may invest a larger
percentage of its assets in individual issuers than a diversified
investment company. In this regard, the Fund is not subject to the general
limitation that it not invest more than 5% of its total assets in the
securities of any one issuer. To the extent the Fund makes investments in
excess of 5% of its assets in a particular issuer, its exposure to credit
and market risks associated with that issuer is increased.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek to provide shareholders with
as high a level of current income as is consistent with prudent investment
management from a global portfolio of high quality debt securities denominated
in various currencies and multi-national currency units and having remaining
maturities not exceeding three years. The investment objective described in
this paragraph is a fundamental policy of the Fund and may not be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities. Under normal circumstances, the Fund will invest its assets
in debt securities denominated in at least three different currencies,
including the U.S. dollar. The Fund's investments will be rated AA or better by
Standard & Poor's Corporation ("S&P") or Aa or better by Moody's Investors
Service, Inc. ("Moody's") or A-1 or better by S&P or Prime-1 or better by
Moody's in the case of commercial paper, similarly rated by another
internationally recognized rating service, such as IBCA Ltd. ("IBCA"), or
determined by the Fund's Board of Directors and investment adviser, Merrill
Lynch Asset Management, L.P., doing business as Merrill Lynch Asset Management
(the "Investment Adviser"), to be of similar creditworthiness, or will be
issued or guaranteed by governmental or supragovernmental entities (each as
defined below). The Fund may seek to hedge its portfolio securities against
currency risks and, to a lesser extent, interest rate risks through the use of
futures, options on futures and currency transactions. There can be no
assurance that the investment objective of the Fund will be realized.
The Fund is designed for the investor who seeks a higher yield than a money
market fund and less fluctuation in net asset value than a longer-term global
bond fund. Under normal conditions, debt securities with longer maturities tend
to produce higher yields, while debt securities with shorter maturities are
subject to less market risk resulting from changes in interest rates. With a
maturity limit of three years, the Fund seeks more attractive yields than those
offered by the shorter-term money market securities in which money market funds
invest (money market funds maintain average maturities of less than 90 days).
At the same time, the three-year limitation enables the Fund to avoid the
greater market risk inherent in longer term securities.
7
<PAGE>
The Investment Adviser will seek to manage the Fund's portfolio in accordance
with a multi-market strategy. Consistent with such a strategy, the Fund may
invest in debt securities denominated in any currency or multi-national
currency unit. In addition, the Investment Adviser intends to allocate the
Fund's investments among securities denominated in the currencies of a number
of foreign countries and, within each such country, among different types of
debt securities. The Investment Adviser will adjust the Fund's exposure to
different currencies based on its perception of the most favorable markets and
issuers. In allocating the Fund's assets among multiple markets, the Investment
Adviser will assess the relative yield and anticipated direction of interest
rates in particular markets, general market and economic conditions and the
relationship of currencies of various countries to each other. In its
evaluations, the Investment Adviser will utilize its internal financial,
economic and credit analysis resources as well as information obtained from
other sources. The Fund will not invest more than 25% of its total assets in
debt securities denominated in a single currency or currency unit, except that
it may invest more than 25% of its total assets in U.S. dollar denominated
securities. In addition, the Fund will not invest in countries that are not
considered by the Investment Adviser to have stable governments or whose
currencies are not convertible into U.S. dollars. As a result of hedging
techniques, the Fund's net exposure to any one currency may be different from
that of its total assets denominated in such currency. See "Special and Risk
Considerations".
The securities in which the Fund may invest include debt obligations issued
or guaranteed by U.S. or foreign governments, political subdivisions thereof
(including states, provinces and municipalities) or their agencies and
instrumentalities ("governmental entities"), or issued or guaranteed by
international organizations designated or supported by governmental entities to
promote economic reconstruction or development ("supranational entities"), or
issued by corporations or financial institutions. Securities issued by
supranational entities may be denominated in U.S. dollars, a foreign currency
or a multi-national currency unit. Securities of corporations and financial
institutions in which the Fund may invest include corporate and commercial
obligations, such as medium-term notes and commercial paper, which may be
indexed to foreign currency exchange rates.
Indexed notes and commercial paper typically provide that the principal
amount is adjusted upwards or downwards (but not below zero) at maturity to
reflect fluctuations in the exchange rate between two currencies during the
period the obligation is outstanding, depending on the terms of the specific
security. In selecting the two currencies, the Investment Adviser will consider
the correlation and relative yields of various currencies. The Fund will
purchase an indexed obligation using the currency in which it is denominated
and, at maturity, will receive interest and principal payments thereon in that
currency. The amount of principal payable by the issuer at maturity, however,
will vary (i.e., increase or decrease) in response to the change (if any) in
the exchange rate between the two specified currencies during the period from
the date the instrument is issued to its maturity date. The potential for
realizing gains as a result of changes in foreign currency exchange rates may
enable the Fund to hedge the currency in which the obligation is denominated
(or to effect cross-hedges against other currencies) against a decline in the
U.S. dollar value of investments denominated in foreign currencies while
providing an attractive money market rate of return. The Fund will purchase
such indexed obligations to generate current income or for hedging purposes and
will not speculate in such obligations.
The obligations of foreign governmental entities have various kinds of
government support and include obligations issued or guaranteed by foreign
governmental entities with taxing powers. 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
Investment Adviser, based on its analysis of factors such as general political
or economic conditions relating to the government and the likelihood of
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expropriation, nationalization, freezes or confiscation of private property.
The Investment Adviser does not believe that the credit risk inherent in the
obligations of stable foreign governments is significantly greater than that of
U.S. Government securities. Examples of supranational entities 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 governmental 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.
As indicated above, the Fund may invest in securities denominated in a multi-
national currency unit. An illustration of a multi-national currency unit is
the European Currency Unit (the "ECU"), which is a "basket" consisting of
specified amounts of the currencies of the member states of the European
Community, a Western European economic cooperative organization that includes
France, Germany, The Netherlands and the United Kingdom. The specific amounts
of currencies comprising the ECU may be adjusted by the Council of Ministers of
the European Community to reflect changes in relative values of the underlying
currencies. The Investment Adviser does not believe that such adjustments will
adversely affect holders of ECU-denominated obligations or the marketability of
such securities. European supranational entities, in particular, issue ECU-
denominated obligations. The Fund may invest in securities denominated in the
currency of one nation although issued by a governmental entity, corporation or
financial institution of another nation. For example, the Fund may invest in a
British pound sterling-denominated obligation issued by a U.S. corporation.
Such investments involve credit risks associated with the issuer and currency
risks associated with the currency in which the obligation is denominated.
The Fund also may invest in participations in, or bonds and notes backed by,
pools of mortgage, credit card, automobile or other types of receivables with
remaining maturities of three years or less. These structured financings will
be supported by sufficient collateral and other credit enhancement, including
letters of credit, insurance, reserve funds and guarantees by third parties, to
enable such instruments to obtain a high quality rating by a nationally
recognized statistical rating agency or be of comparable quality as determined
by the Investment Adviser. Generally, the issuers of mortgage-backed and
receivable-backed bonds, notes or pass-through certificates are special purpose
entities and do not have any significant assets other than the assets securing
such obligations. Instruments backed by pools of mortgages and receivables may
be subject to unscheduled prepayments of principal prior to maturity. When the
obligations are prepaid, the Fund must reinvest the prepaid amounts in
securities the yields of which reflect interest rates prevailing at the time.
Therefore, the Fund's ability to maintain a portfolio which includes high-
yielding asset-backed securities will be adversely affected to the extent that
prepayments of principal must be reinvested in securities which have lower
yields than the prepaid obligations. Moreover, prepayments of securities
purchased at a premium could result in a realized loss. Certain asset-backed
and receivable-backed securities may be illiquid. The Fund's investments in
asset-backed and receivable-backed securities that are illiquid will be
limited, together with all other illiquid investments, to 10% of the Fund's net
assets.
To minimize the credit risk of its investments, the Fund will invest only in
high quality debt securities. A security may be deemed to be high quality if it
is issued or guaranteed by governmental entities or supranational entities
which the Investment Adviser, acting under the general supervision of the Board
of Directors, has determined to be of high creditworthiness. Securities issued
by corporations or financial institutions will be deemed to be high quality if
they are rated AA or better by S&P or Aa or better by Moody's, or A-1 or better
by S&P or Prime-1 or better by Moody's in the case of commercial paper, or
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similarly rated by another internationally recognized rating service, such as
IBCA, or obligations of issuers that the Investment Adviser, acting under the
general supervision of the Board of Directors, has determined to be of similar
creditworthiness.
Under normal conditions, a significant percentage of the shorter-term
investments in the Fund's portfolio may be money market securities. Money
market securities include short-term obligations issued or guaranteed by the
U.S. Government or foreign governments or issued by such governments'
respective agencies and instrumentalities, bank money market instruments
including certificates of deposit, bankers' acceptances and deposit notes and
certain other short-term obligations such as short-term commercial paper. With
respect to bank money market instruments, the obligations may be issued by U.S.
or foreign depository institutions, foreign branches or subsidiaries of U.S.
depository institutions ("Eurodollar" obligations), U.S. branches or
subsidiaries of foreign depository institutions ("Yankeedollar" obligations) or
foreign branches or subsidiaries of foreign depository institutions. Eurodollar
and Yankeedollar obligations and obligations of branches or subsidiaries of
foreign depository institutions may be general obligations of the parent bank
or may be limited to the issuing branch or subsidiary by the terms of the
specific obligations or by government regulation.
It is anticipated that the Fund initially will invest primarily in securities
denominated in the currencies of the United States, Japan, Canada, Western
European nations, New Zealand or Australia, as well as securities denominated
in the ECU described above. Further, it is anticipated that such securities
will be issued primarily by entities located in such countries and by
supranational entities. Under certain adverse conditions and for the duration
of such conditions, the Fund may restrict the financial markets or currencies
in which its assets are invested, and it may invest its assets solely in one
financial market or in obligations denominated in one currency.
Under normal circumstances, the Fund will invest at least 25% of its total
assets in debt instruments issued by U.S. and foreign companies engaged in the
banking industry, including bank holding companies. Such investments may
include certificates of deposit, time deposits, bankers' acceptances, and
obligations issued by bank holding companies, as well as repurchase agreements
entered into with banks. For temporary defensive purposes, however, the Fund
may reduce its investments in the banking industry to less than 25% of its
total assets. The Fund's policy as to concentrating its investments in the
banking industry is fundamental and may not be changed without the approval of
a majority of the Fund's voting securities.
The Fund's policy of concentrating its investments in the banking industry
will cause the Fund to have greater exposure to certain risks associated with
the banking industry. In particular, economic or regulatory developments in or
related to the banking industry will affect the value of and investment return
on the Fund's shares. Sustained increases in interest rates may adversely
affect the availability and cost of funds for a bank's lending activities;
deterioration in general economic conditions may increase a bank's exposure to
credit losses. The banking industry also is subject to the effects of the
concentration of loan portfolios in particular businesses that may be adversely
affected by economic conditions, such as real estate, energy, agriculture or
high technology-related companies. In addition, the banking industry is subject
to national and local regulation and competition among banks as well as with
other types of financial institutions. Also, the Fund's investments in
commercial banks located in several foreign countries are subject to additional
risks due to the combination in such banks of commercial banking and
diversified securities activities. As discussed above, however, the Fund will
seek to minimize its exposure to such risks by investing only in debt
securities which are determined by the Investment Adviser, acting under the
general supervision of the Board of Directors, to be high quality.
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The Fund may purchase securities that are not registered ("restricted
securities") under the Securities Act of 1933, as amended (the "Securities
Act"), but can be offered and sold to "qualified institutional buyers" under
Rule 144A under the Securities Act. However, the Fund will not invest more than
10% of its net assets in illiquid investments, which includes securities for
which there is no readily available market, securities subject to contractual
restrictions on resale, certain investments in asset-backed and receivable-
backed securities and restricted securities, unless the Fund's Board of
Directors continuously determines, based on the trading markets for the
specific restricted security, that it is liquid. The Board of Directors has
determined to treat as liquid Rule 144A securities which are freely tradeable
in their primary markets offshore. The Board of Directors may adopt guidelines
and delegate to the Investment Adviser the daily function of determining and
monitoring liquidity of restricted securities. The Board of Directors, however,
will retain sufficient oversight and be ultimately responsible for the
determinations.
Since it is not possible to predict with assurance exactly how this market
for restricted securities sold and offered under Rule 144A will develop, the
Board of Directors will carefully monitor the Fund's investments in these
securities, focusing on such factors, among others, as valuation, liquidity and
availability of information. This investment practice could have the effect of
increasing the level of illiquidity in the Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing these
restricted securities.
The return that the Fund provides to investors will be influenced by changes
in both exchange rates and prevailing interest rates. The Investment Adviser
believes that the use of foreign currency hedging techniques may help protect
against declines in the U.S. dollar value of investment income available for
distribution to shareholders and declines in the net asset value of the Fund's
shares resulting from adverse changes in currency values. In addition, changes
in market yields will affect the Fund's net asset value since the prices of
portfolio securities generally increase when interest rates decline and
decrease when interest rates rise. Prices of shorter-term securities generally
fluctuate less in response to interest rate changes than do longer-term
securities. As described under "Hedging Techniques", the Fund may enter into
hedging transactions to hedge against both interest rate and currency risks.
Non-Diversified Status. The Fund has registered as a "non-diversified"
investment company so that it will be able to invest more than 5% of the value
of its assets in the obligations of a single issuer subject to the
diversification requirements of subchapter M of the Internal Revenue Code of
1986, as amended, applicable to the Fund. To the extent the Fund invests a
relatively high percentage of its assets in obligations of a limited number of
issuers, the Fund may be more susceptible than a more widely diversified fund
to any single economic, political or regulatory occurrence or to changes in an
issuer's financial condition or in the market's assessment of the issuers.
HEDGING TECHNIQUES
The Fund may engage in various portfolio strategies to hedge its portfolio
against interest rate and currency risks. These strategies include use of
options on portfolio positions or currencies, financial and currency futures,
options on such futures and forward foreign currency transactions. The Fund may
enter into such transactions only in connection with its hedging strategies.
While the Fund's use of hedging strategies is intended to reduce the volatility
of the net asset value of its shares, the net asset value of the Fund's shares
will fluctuate. There can be no assurance that the Fund's hedging transactions
will be effective. Furthermore, the Fund may only engage in hedging activities
from time to time and may not necessarily be engaging in hedging activities
when movements in interest rates or currency exchange rates occur. Reference is
made to the Statement of Additional Information for further information
concerning these strategies.
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Although certain risks are involved in options and futures transactions (as
discussed below in "Risk Factors in Options, Futures and Currency
Transactions"), the Investment Adviser believes that, because the Fund will
only engage in these transactions for hedging purposes, the options and futures
portfolio strategies of the Fund will not subject the Fund to the risks
frequently associated with the speculative use of options and futures
transactions. Tax requirements may limit the Fund's ability to engage in the
hedging transactions and strategies described below. See "Distributions and
Taxes--Taxes".
The following is a description of the hedging instruments the Fund may
utilize with respect to interest rate and currency risks.
Hedging Interest Rate Risks. The Fund may purchase and write (i.e., sell)
call options and put options on securities and engage in transactions in
financial futures and related options, as described below.
The Fund may write covered call options with respect to securities it owns
and enter into closing purchase transactions with respect to such options. A
covered call option provides the holder of the option with the right to buy the
underlying security covered by the option at the stated exercise price until
the option expires. A covered call option is an option where the Fund, in
return for a premium, gives another party a right to buy particular securities
held by the Fund at a specified price for a certain period of time. In return
for the premium income realized from the sale of the option, the Fund gives up
the opportunity to profit from a price increase in the underlying security
above the option exercise price while the option is in effect. In addition, the
Fund's ability to sell the underlying security will be limited until the option
is closed or expires. A closing purchase transaction cancels out the Fund's
position as the writer of an option by means of an offsetting purchase of an
identical option prior to the expiration of the option it has written. The Fund
also may purchase call options on securities held in its portfolio on which it
has written call options or on securities which it intends to purchase. There
is no percentage limitation with respect to portfolio securities on which the
Fund may write call options.
The Fund may purchase put options on portfolio securities. In return for
payment of a premium, the purchase of a put option gives the holder thereof the
right to sell the security underlying the option to another party at a
specified price until the put option is closed out, expires or is exercised.
The Fund will purchase put options to seek to reduce the risk of a decline in
value of the underlying security owned by the Fund. The total return on the
security may be reduced by the amount of the premium paid for the option. The
Fund may write put options which give the holder of the option the right to
sell the underlying security to the Fund at the stated exercise price. The Fund
will receive a premium for writing a put option which increases the Fund's
return. The Fund writes only covered put options which means that so long as
the Fund is obligated as the writer of the option it will have deposited and
maintained with its custodian cash or liquid securities with a value equal to
or greater than the exercise price of the underlying securities. By writing a
put, the Fund will be obligated to purchase the underlying security at a price
that may be higher than the market value of that security at the time of
exercise for as long as the option is outstanding. The Fund may engage in
closing transactions in order to terminate put options that it has written or
purchased.
The Fund also may purchase and sell financial futures contracts ("futures
contracts") as a hedge against adverse changes in interest rates, as described
below. A futures contract is an agreement between two parties which obligates
the purchaser of the futures contract to buy and the seller of a futures
contract to sell a security for a set price on a future date. The Fund may
effect transactions in futures contracts in U.S. and foreign agency and
government securities and corporate debt securities. Transactions by the Fund
in financial futures are subject to limitation as described below under
"Restrictions on Use of Futures Transactions".
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The Fund may sell futures contracts in anticipation of an increase in the
general level of interest rates. Generally, as interest rates rise, the market
value of securities held by the Fund will fall, thus reducing the net asset
value of the shares of the Fund. As interest rates rise, however, the value of
the Fund's short position in the futures contract also will tend to increase,
thus offsetting all or a portion of the depreciation in the market value of the
Fund's investments which are being hedged. While the Fund will incur commission
expenses in selling and closing out futures positions, these commissions are
generally less than the transaction expenses which would have been incurred had
the Fund sold portfolio securities in order to reduce its exposure to increases
in interest rates.
The Fund may purchase futures contracts in anticipation of a decline in
interest rates when it is not fully invested in a particular market in which it
intends to make investments to gain market exposure that may in part or
entirely offset an increase in the cost of securities it intends to purchase.
The Fund does not consider purchases of futures contracts to be a speculative
practice under these circumstances. In a substantial majority of these
transactions, the Fund will purchase securities upon termination of the futures
contract.
The Fund also may purchase and write call and put options on futures
contracts in connection with its hedging activities. Generally, these
strategies are utilized under the same market and market sector conditions
(i.e., conditions relating to specific types of investments) in which the Fund
enters into futures transactions. The Fund may purchase put options or write
call options on futures contracts rather than selling the underlying futures
contract in anticipation of an increase in interest rates. Similarly, the Fund
may purchase call options, or write put options on futures contracts, as a
substitute for the purchase of such futures to hedge against the increased cost
resulting from a decline in interest rates of securities which the Fund intends
to purchase. Limitations on transactions in options on futures contracts are
described below.
The Fund may engage in options and futures transactions on exchanges and in
the over-the-counter ("OTC") markets. In general, exchange-traded contracts are
third-party contracts (i.e., performance of the parties' obligations is
guaranteed by an exchange or clearing corporation) with standardized strike
prices and expiration dates. OTC transactions are two-party contracts with
prices and terms negotiated by the buyer and seller. The Fund will acquire only
those OTC options for which management believes the Fund can receive on each
business day at least two independent bids or offers (one of which will be from
an entity other than a party to the option). The Fund will engage in OTC
options only with member banks of the Federal Reserve System and primary
dealers in U.S. Government securities or with affiliates of such banks or
dealers which have capital of at least $50 million or whose obligations are
guaranteed by an entity having capital of at least $50 million.
The staff of the Securities and Exchange Commission (the "Commission") has
taken the position that purchased OTC options and the assets used as cover for
written OTC options are illiquid securities. Therefore, the Fund has adopted an
investment policy pursuant to which it will not purchase or sell OTC options
(including OTC options on futures contracts) if, as a result of such
transactions, the sum of the market value of OTC options currently outstanding
which are held by the Fund, the market value of the underlying securities
covered by OTC call options currently outstanding which were sold by the Fund
and margin deposits on the Fund's existing OTC options on futures contracts
exceeds 10% of the net assets of the Fund, taken at market value, together with
all other assets of the Fund which are illiquid or are not otherwise readily
marketable. However, if an OTC option is sold by the Fund to a primary U.S.
Government securities dealer recognized by the Federal Reserve Bank of New York
and if the Fund has the unconditional contractual right to repurchase such OTC
option from the dealer at a predetermined price, then the Fund will treat as
illiquid such amount of the underlying securities as is equal to the repurchase
price less the amount by which the option is "in-the-money" (i.e., current
market value of the underlying security minus the option's strike
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price). The repurchase price with the primary dealers is typically a formula
price which is generally based on a multiple of the premium received for the
option, plus the amount by which the option is "in-the-money". This policy as
to OTC options is not a fundamental policy of the Fund and may be amended by
the Directors of the Fund without the approval of the Fund's shareholders.
However, the Fund will not change or modify this policy prior to the change or
modification by the Commission staff of its position.
Hedging Foreign Currency Risks. The Fund is authorized to deal in forward
foreign exchange between currencies of the different countries in which it will
invest and multi-national currency units as a hedge against possible variations
in the foreign exchange rates between these currencies. This is accomplished
through contractual agreements to purchase or sell one specified currency for
another currency at a specified future date and price at the time of the
contract. The Fund's dealings in forward foreign exchange will be limited to
hedging involving either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of one forward foreign currency for
another currency with respect to specific receivables or payables of the Fund
accruing in connection with the purchase and sale of its portfolio securities,
the sale and redemption of shares of the Fund or the payment of dividends and
distributions by the Fund. Position hedging is the purchase or sale of one
forward foreign currency for another currency with respect to portfolio
security positions denominated or quoted in such foreign currency to offset the
effect of an anticipated substantial appreciation or depreciation,
respectively, in the value of such currency relative to the U.S. dollar. In
this situation, the Fund also may, for example, enter into a forward contract
to sell or purchase a different foreign currency for a fixed U.S. dollar amount
where it is believed that the U.S. dollar value of the currency to be sold or
bought pursuant to the forward contract will fall or rise, as the case may be,
whenever there is a decline or increase, respectively, in the U.S. dollar value
of the currency in which portfolio securities of the Fund are denominated (this
practice being referred to as a "cross-hedge").
The Fund will not speculate in forward foreign exchange. Hedging against a
decline in the value of a currency does not eliminate fluctuations in the
prices of portfolio securities or prevent losses if the prices of such
securities decline. Such transactions also preclude the opportunity for gain if
the value of the hedged currency should rise. Moreover, it may not be possible
for the Fund to hedge against a devaluation that is so generally anticipated
that the Fund is not able to contract to sell the currency at a price above the
devaluation level it anticipates.
The Fund also is authorized to purchase or sell listed or OTC foreign
currency options, foreign currency futures and related options on foreign
currency futures as a short or long hedge against possible variations in
foreign exchange rates. Such transactions may be affected with respect to
hedges on non-U.S. dollar denominated securities (including securities
denominated in the ECU) owned by the Fund, sold by the Fund but not yet
delivered, or committed or anticipated to be purchased by the Fund. As an
illustration, the Fund may use such techniques to hedge the stated value in
U.S. dollars of an investment in a Japanese yen-denominated security. In such
circumstances, for example, the Fund may purchase a foreign currency put option
enabling it to sell a specified amount of yen for dollars at a specified price
by a future date. To the extent the hedge is successful, a loss in the value of
the dollar relative to the yen will tend to be offset by an increase in the
value of the put option. To offset, in whole or in part, the cost of acquiring
such a put option, the Fund also may sell a call option which, if exercised,
requires it to sell a specified amount of yen for dollars at a specified price
by a future date (a technique called a "straddle"). By selling such a call
option in this illustration, the Fund gives up the opportunity to profit
without limit from increases in the relative value of the yen to the dollar.
Certain differences exist between these foreign currency hedging instruments.
Foreign currency options provide the holder thereof the right to buy or to sell
a currency at a fixed price on a future date. Listed
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options are third-party contracts (i.e., performance of the parties'
obligations is guaranteed by an exchange or clearing corporation) which are
issued by a clearing corporation, traded on an exchange and have standardized
strike prices and expiration dates. OTC options are two-party contracts and
have negotiated strike prices and expiration dates. The Fund will engage in OTC
options only with member banks of the Federal Reserve System or primary dealers
in U.S. Government securities or with affiliates of such banks or dealers which
have capital of at least $50 million or whose obligations are guaranteed by an
entity having capital of at least $50 million. A futures contract on a foreign
currency is an agreement between two parties to buy and sell a specified amount
of a currency for a set price on a future date. Futures contracts and options
on futures contracts are traded on boards of trade or futures exchanges. The
Fund will not speculate in foreign currency options, futures or related
options. Accordingly, the Fund will not hedge a currency substantially in
excess of the market value of the securities denominated in such currency which
it owns, the expected acquisition price of securities which it has committed or
anticipates to purchase which are denominated in such currency, and, in the
case of securities which have been sold by the Fund but not yet delivered, the
proceeds thereof in its denominated currency. Further, the Fund will segregate
at its custodian U.S. Government or other high quality securities having a
market value substantially representing any subsequent net decrease in the
market value of such hedged positions, including net positions with respect to
cross-currency hedges. The Fund may not incur potential net liabilities with
respect to currency and securities positions, including net liabilities with
respect to cross-currency hedges, of more than 33% of its total assets from
foreign currency options, futures, related options and forward currency
transactions.
Restrictions on Use of Futures Transactions. Regulations of the Commodity
Futures Trading Commission applicable to the Fund provide that the futures
trading activities described herein will not result in the Fund being deemed a
"commodity pool" under such regulations if the Fund adheres to certain
restrictions. In particular, the Fund may purchase and sell futures contracts
and options thereon (i) for bona fide hedging purposes, and (ii) for non-
hedging purposes, if the aggregate initial margin and premiums required to
establish positions in such contracts and options does not exceed 5% of the
liquidation value of the Fund's portfolio, after taking into account unrealized
profits and unrealized losses on any such contracts and options. These
restrictions are in addition to other restrictions on the Fund's hedging
activities mentioned herein.
When the Fund purchases a futures contract, or writes a put option or
purchases a call option thereon, an amount of cash and cash equivalents will be
deposited in a segregated account with the Fund's custodian so that the amount
so segregated, plus the amount of initial and variation margin held in the
account of its broker, equals the market value of the futures contract, thereby
ensuring that the use of such futures contract is unleveraged.
An order has been obtained from the Commission which exempts the Fund from
certain provisions of the Investment Company Act in connection with
transactions involving futures contracts and options thereon.
Risk Factors in Options, Futures and Currency Transactions. Utilization of
futures transactions involves the risk of imperfect correlation in movements in
the prices of futures contracts and movements in the prices of the securities
and currencies which are subject to the hedges. If the price of a futures
contract moves more or less than the price of the security or currency, the
Fund will experience a gain or loss which will not be completely offset by
movements in the price of the debt securities which are the subject of the
hedge. There is also a risk of imperfect correlations where the securities
underlying futures contracts have different maturities than the portfolio
securities being hedged. Transactions in options on futures contracts involve
similar risks.
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The Fund intends to enter into options and futures transactions, on an
exchange or in the OTC market, only if there appears to be a liquid secondary
market for such options or futures or, in the case of OTC transactions,
management believes the Fund can receive on each business day at least two
independent bids or offers, unless a quotation from only one dealer is
available, in which case only that dealer's price will be used, or which can be
sold at a formula price provided for in the OTC option agreement. There can be
no assurance, however, that a liquid secondary market will exist at any
specific time. Thus, it may not be possible to close an options or futures
transaction. The inability to close options and futures positions also could
have an adverse impact on the Fund's ability to hedge effectively its
portfolio. There is also the risk of loss by the Fund of margin deposits or
collateral in the event of bankruptcy of a broker with whom the Fund has an
open position in an option, a futures contract or related option.
The exchanges on which options on portfolio securities and currencies are
traded have generally established limitations governing the maximum number of
call or put options on the same underlying security and currency (whether or
not covered) which may be written by a single investor, whether acting alone or
in concert with others (regardless of whether such options are written on the
same or different exchanges or are held or written on one or more accounts or
through one or more brokers). "Trading limits" are imposed on the maximum
number of contracts which any person may trade on a particular trading day. The
Investment Adviser does not believe that these trading and position limits will
have any adverse impact on the portfolio strategies for hedging the Fund's
portfolio.
OTHER INVESTMENT POLICIES AND PRACTICES
Portfolio Transactions. The securities in which the Fund invests are traded
primarily in the OTC market. Since portfolio transactions generally will not be
effected on foreign securities exchanges, the Fund generally does not expect to
incur potential settlement delays which may occur on certain of such exchanges.
Where possible, the Fund will deal directly with the dealers who make a market
in the securities involved except in those circumstances where better prices
and execution are available elsewhere. Such dealers usually are acting as
principal for their own account. On occasion, securities may be purchased
directly from the issuer. Such portfolio securities generally are traded on a
net basis and normally do not involve either brokerage commissions or transfer
taxes. Securities firms may receive brokerage commissions on certain portfolio
transactions, including options, futures and options on futures transactions
and the purchase and sale of underlying securities upon exercise of options.
The Fund has no obligation to deal with any broker in the execution of
transactions in portfolio securities. Under the Investment Company Act, persons
affiliated with the Fund, including Merrill Lynch, are prohibited from dealing
with the Fund as a principal in the purchase and sale of securities unless a
permissive order allowing such transactions is obtained from the Commission.
Affiliated persons of the Fund, and affiliated persons of such affiliated
persons, may serve as its broker in transactions conducted on an exchange and
in OTC transactions conducted on an agency basis. In addition, consistent with
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc., the Fund 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.
It is expected that the majority of the shares of the Fund will be sold by
Merrill Lynch. Costs associated with transactions in foreign securities are
generally higher than those associated with transactions in U.S. securities,
although the Fund will endeavor to achieve the best net results in effecting
such transactions.
Repurchase Agreements; Purchase and Sale Contracts. The Fund may invest in
securities pursuant to repurchase agreements or purchase and sale contracts.
Repurchase agreements may be entered into only with
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a member bank of the Federal Reserve System or a primary dealer in U.S.
Government securities. Purchase and sale contracts may be entered into only
with financial institutions which have capital of at least $50 million or whose
obligations are guaranteed by an entity having capital of at least $50 million.
Under such agreements, the other party agrees, upon entering into the contract
with the Fund, 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. A purchase and sale contract differs from a repurchase agreement
in that the contract arrangements stipulate that the securities are owned by
the Fund. If the other party were to default on its obligation under a
repurchase agreement or a purchase and sale contract, and the security were
sold for a lesser amount, the Fund would realize a loss. The Fund may not
invest more than 10% of its net assets in repurchase agreements and purchase
and sale contracts maturing in more than seven days, together with all other
illiquid securities. In all instances, the Fund takes possession of the
underlying securities when investing in repurchase agreements.
Lending of Portfolio Securities. The Fund is authorized to lend securities
from its portfolio, with a value not exceeding 33% of its total assets, to
banks, brokers and other financial institutions if it receives collateral in
cash or securities issued or guaranteed by the U.S. Government or other high
quality securities which will be maintained at all times in an amount equal to
at least 100% of the current market value of the loaned securities. During the
period of this loan, the Fund receives the income on the loaned securities and
a loan fee and may thereby increase its yield.
Investment Restrictions. The Fund's investment activities are subject to
further restrictions that are described in the Statement of Additional
Information. Investment restrictions and policies which are fundamental
policies 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 shares
represented at a meeting at which more than 50% of the outstanding shares are
represented or (ii) more than 50% of the outstanding shares). Among its
fundamental policies, the Fund may not invest in securities which cannot be
readily resold because of legal or contractual restrictions or which are not
otherwise readily marketable, including repurchase agreements and purchase and
sale contracts maturing in more than seven days, if, regarding all such
securities, more than 10% of its net assets, taken at market value would be
invested in such securities. Other fundamental policies include policies which
(i) prohibit investment of more than 25% of the Fund's total assets (taken at
market value at the time of each investment) in the securities of issuers in
any particular industry (other than securities issued or guaranteed by the U.S.
Government, or by its agencies or instrumentalities), except that, under normal
circumstances, the Fund will invest more than 25% of its total assets in
issuers in the banking industry, (ii) limit investments in securities of other
investment companies, except in connection with certain specified transactions
and with respect to investments of up to 10% of the Fund's total assets in
securities of closed-end investment companies and (iii) restrict the issuance
of senior securities and limit bank borrowings except that the Fund may borrow
amounts of up to 10% of its assets for extraordinary or emergency purposes,
including to meet redemptions or to settle securities transactions. The Fund
will not purchase securities while borrowings exceed 5% of its total assets,
except to honor prior commitments.
Although the Fund has registered as a "non-diversified" investment company
under the Investment Company Act, to qualify as a regulated investment company
under the Internal Revenue Code of 1986, as amended (the "Code"), the Fund will
be subject to certain diversification requirements of the Code. See
"Distributions and Taxes--Taxes".
17
<PAGE>
Portfolio Turnover. The Investment Adviser will effect portfolio transactions
without regard to holding period, if, in its judgment, such transactions are
advisable in light of a change in circumstance in general market, economic or
financial conditions. As a result of its investment policies, the Fund may
engage in a substantial number of portfolio transactions. Accordingly, while
the Fund anticipates that its annual portfolio turnover rate should not exceed
200% under normal conditions, it is impossible to predict portfolio turnover
rates. The portfolio turnover rate is calculated by dividing the lesser of the
Fund's annual sales or purchases of portfolio securities (exclusive of
purchases or sales of 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
commissions, which are borne directly by the Fund, and may increase the
percentage of the Fund's distributions which are taxable to shareholders as
ordinary income. See "Distributions and Taxes--Taxes".
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Board of Directors of the Fund consists of five individuals, four of whom
are not "interested persons" of the Fund as defined in the Investment Company
Act. The Board of Directors is responsible for the overall supervision of the
operations of the Fund and performs the various duties imposed on the directors
of investment companies by the Investment Company Act.
The Directors of the Fund are:
Arthur Zeikel*--President and Chief Investment Officer of the Investment
Adviser; President and Director of Princeton Services, Inc.; Executive Vice
President of Merrill Lynch & Co., Inc.; Executive Vice President of Merrill
Lynch; Director of the Distributor.
Donald Cecil--Special Limited Partner of Cumberland Partners (an investment
partnership).
Edward H. Meyer--Chairman of the Board, President and Chief Executive Officer
of Grey Advertising Inc.
Charles C. Reilly--Self-employed financial consultant; former President and
Chief Investment Officer of Verus Capital, Inc.; former Senior Vice President
of Arnhold and S. Bleichroeder, Inc.; Adjunct Professor, Columbia University
Graduate School of Business.
Richard R. West--Professor of Finance, and Dean from 1984 to 1993, New York
University Leonard N. Stern School of Business Administration.
- --------
*Interested person, as defined in the Investment Company Act, of the Fund.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Investment Adviser, Merrill Lynch Asset Management, L.P., which does
business as Merrill Lynch Asset Management, is owned and controlled by Merrill
Lynch & Co., Inc., a financial services holding company and the parent of
Merrill Lynch. The Investment Adviser provides the Fund with investment
advisory and management services. The Investment Adviser or an affiliate, Fund
Asset Management, L.P. ("FAM"), acts as the investment adviser for more than 90
other registered investment companies. The
18
<PAGE>
Investment Adviser also offers portfolio management and portfolio analysis
services to individuals and institutions. As of January 31, 1994, the
Investment Adviser and FAM had a total of approximately $167.1 billion in
investment company and other portfolio assets under management, including
accounts of certain affiliates of the Investment Adviser.
Subject to the direction 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.
Pursuant to the Fund's investment advisory agreement with the Investment
Adviser (the "Investment Advisory Agreement"), the Investment Adviser is
entitled to receive compensation at the annual rate of 0.55% of the average
daily net assets of the Fund not exceeding $2 billion, 0.525% of the average
daily net assets of the Fund in excess of $2 billion but not exceeding $4
billion, 0.50% of the average daily net assets of the Fund in excess of $4
billion but not exceeding $6 billion, 0.475% of the average daily net assets of
the Fund in excess of $6 billion but not exceeding $10 billion, 0.45% of the
average daily net assets of the Fund in excess of $10 billion but not exceeding
$15 billion, and 0.425% of the average daily net assets of the Fund in excess
of $15 billion. For the fiscal year ended October 31, 1993, the fee paid by the
Fund to the Investment Adviser was $12,966,035 (0.54% of the Fund's average net
assets) (based on average net assets of approximately $2.4 billion). At
December 31, 1993, the net assets of the Fund aggregated $1.6 billion. At this
asset level, the annual management fee would aggregate approximately
$8,738,385. Also, the Investment Adviser has entered into a sub-advisory
agreement (the "Sub-Advisory Agreement") with Merrill Lynch Asset Management
U.K. Limited ("MLAM U.K."), an indirect, wholly-owned subsidiary of Merrill
Lynch & Co., Inc. and an affiliate of the Investment Adviser, pursuant to which
the Investment Adviser pays MLAM U.K. a fee in an amount to be determined from
time to time by the Investment Adviser and MLAM U.K. but in no event in excess
of the amount that the Investment Adviser actually receives for providing
services to the Fund pursuant to the Investment Advisory Agreement. For the
fiscal year ended October 31, 1993, the Investment Adviser paid MLAM U.K. a fee
of $712,838 (0.03% of the Fund's average net assets) pursuant to the Sub-
Advisory Agreement. MLAM U.K. has offices at Ropemaker Place, 25 Ropemaker
Street, 1st Floor, London EC24 9LY, England.
The Portfolio Managers for the Fund are Alex V. Bouzakis, Edward F. Gobora,
David B. Walter and Stephen Yardley, each of whom are Vice Presidents of the
Fund. Mr. Bouzakis is a Vice President and Senior Portfolio Manager of the
Investment Adviser and has been associated with the Investment Adviser since
1982. Mr. Gobora has been a Vice President and Portfolio Manager of the
Investment Adviser since 1993, and associated therewith since 1988. Mr. Walter
has been a Vice President and Portfolio Manager of the Investment Adviser since
1984. Mr. Yardley is a Vice President and Portfolio Manager of MLAM U.K. and
has been associated with MLAM U.K. since 1992; prior thereto, he was a
Portfolio Manager at Julius Baer Investment Management, Inc. and Bankers Trust.
The Investment Advisory Agreement obligates the Fund to pay certain expenses
incurred in the Fund's operations, including, among other things, the
investment advisory fee; legal and audit fees; unaffiliated Directors' fees and
expenses; registration fees; custodian and transfer agency fees; accounting and
pricing costs; and certain of the costs of printing proxies, shareholder
reports, prospectuses and statements of
19
<PAGE>
additional information. Accounting services are provided to the Fund by the
Investment Adviser, and the Fund reimburses the Investment Adviser for its
costs in connection with such services. For the fiscal year ended October 31,
1993, the Fund reimbursed the Investment Adviser $230,453 for accounting
services. For the fiscal year ended October 31, 1993, the ratio of total
expenses to average net assets for Class A shares was 0.98%, and the ratio of
total expenses to average net assets for Class B shares was 1.49%.
TRANSFER AGENCY SERVICES
Financial Data Services, Inc. (the "Transfer Agent"), which is a wholly-owned
subsidiary of Merrill Lynch & Co., Inc., acts as the Fund's transfer agent
pursuant to a Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement (the "Transfer Agency Agreement"). Pursuant to the
Transfer Agency Agreement, the Transfer Agent is responsible for the issuance,
transfer and redemption of shares and the opening and maintenance of
shareholder accounts. Pursuant to the Transfer Agency Agreement, the Fund pays
the Transfer Agent an annual fee of $11.00 per Class A shareholder account and
$12.00 per Class B shareholder account, nominal miscellaneous fees (e.g.,
account closing fees) and is entitled to reimbursement for out-of-pocket
expenses incurred by it under the Transfer Agency Agreement. For the fiscal
year ended October 31, 1993, the fee paid by the Fund to the Transfer Agent was
$2,914,062. At December 31, 1993, the Fund had 5,864 Class A shareholder
accounts and 121,763 Class B shareholder accounts. At this level of accounts,
the annual fee payable to the Transfer Agent would aggregate approximately
$1,525,660, plus miscellaneous and out-of-pocket expenses.
PURCHASE OF SHARES
The Distributor, a subsidiary of the Investment Adviser and an affiliate of
Merrill Lynch, acts as the distributor of shares of the Fund. Shares of the
Fund may be purchased from securities dealers or by mailing a purchase order
directly to the Transfer Agent. The minimum initial purchase is $1,000, and the
minimum subsequent purchase is $50, except that for retirement plans, the
minimum initial purchase is $250, and the minimum subsequent purchase is $1.
The Fund is offering its shares at a public offering price equal to the next
determined net asset value per share plus sales charges which, at the option of
the purchaser, may be imposed either at the time of purchase (the "initial
sales charge alternative") or on a deferred basis (the "deferred sales charge
alternative"), as described below. As to purchase orders received by securities
dealers prior to 4:15 p.m., New York time, which includes orders received after
the determination of the net asset value on the previous day, the applicable
offering price will be based on the net asset value determined as of 4:15 p.m.,
New York time, on the day the orders are placed with the Distributor, provided
the orders are received by the Distributor prior to 4:30 p.m., New York time,
on that day. The applicable offering price for purchase orders is based upon
the net asset value of the Fund next determined after receipt of the purchase
orders by the Distributor. If the purchase orders are not received by the
Distributor prior to 4:30 p.m., New York time, such orders shall be deemed
received on the next business day. Any order may be rejected by the Distributor
or the Fund. The Fund or the Distributor may suspend the continuous offering of
the Fund's shares 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
20
<PAGE>
price change. Merrill Lynch may charge its customers a processing fee
(presently $4.85) to confirm a sale of shares to such customers. Purchases
directly through the Transfer Agent are not subject to the processing fee.
The Fund issues two classes of shares: Class A shares are sold to investors
choosing the initial sales charge alternative, and Class B shares are sold to
investors choosing the deferred sales charge alternative. The two classes of
shares each represent an interest in the same portfolio of investments of the
Fund, have the same rights and are identical in all respects, except that (i)
Class B shares bear the expenses of the deferred sales arrangements, any
expenses (including incremental transfer agency costs) resulting from such
sales arrangements and the expenses paid by the account maintenance fee, (ii)
Class A shares bear the expenses of the account maintenance fee, and (iii) each
Class has exclusive voting rights with respect to the Rule 12b-1 distribution
plan pursuant to which the account maintenance and distribution fees, in the
case of the Class B shares, and the account maintenance fee, in the case of the
Class A shares, is paid. The two classes also have different exchange
privileges. See "Shareholder Services--Exchange Privilege". The net income
attributable to Class B shares and the dividends payable on Class B shares will
be reduced by the amount by which the sum of the account maintenance and
distribution fees and incremental expenses associated with such account
maintenance and distribution fees exceeds the account maintenance fee
attributable to Class A shares; accordingly, the net asset value of the Class B
shares will be reduced by such amount to the extent the Fund has undistributed
net income. Sales personnel may receive different compensation for selling
Class A or Class B shares. Investors are advised that only Class A shares may
be available for purchase through securities dealers, other than Merrill Lynch,
that are eligible to sell shares.
ALTERNATIVE SALES ARRANGEMENTS
The alternative sales arrangements of the Fund permit investors to choose the
method of purchasing shares that is most beneficial given the amount of their
purchase, the length of time the investor expects to hold his shares and other
relevant circumstances. Investors should determine whether under their
particular circumstances it is more advantageous to incur an initial sales
charge and an ongoing account maintenance fee, as discussed below, or to have
the entire initial purchase price invested in the Fund with the investment
thereafter being subject to ongoing account maintenance and distribution fees.
As an illustration, investors who qualify for significantly reduced sales
charges, as described below, might elect the initial sales charge alternative
because similar sales charge reductions are not available for purchases under
the deferred sales charge alternative. Moreover, shares acquired under the
initial sales charge alternative would not be subject to both an ongoing
account maintenance fee and a distribution fee, as described below, although
the shares are subject to an ongoing account maintenance fee, as discussed
below. Also, because initial sales charges are deducted at the time of
purchase, such investors would not have all their funds invested initially.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time might also elect the
initial sales charge alternative because over time the accumulated continuing
account maintenance and distribution fees related to Class B shares may exceed
the initial sales charge and ongoing account maintenance fee related to Class A
shares. Again, however, such investors must weigh this consideration against
the fact that not all their funds will be invested initially. Furthermore, the
ongoing account maintenance and distribution fees will be offset to the extent
any return is realized on the additional funds initially invested under the
deferred alternative. Another factor that may be applicable under
21
<PAGE>
certain circumstances is that the payment of the Class B distribution fee and
contingent deferred sales charge is subject to certain limits as set forth
below under "Purchase of Shares--Deferred Sales Charge Alternative--Class B
Shares".
Certain other investors might determine it to be more advantageous to have
all their funds invested initially, although remaining subject to continuing
account maintenance and distribution fees and, for a three-year period of time,
a contingent deferred sales charge as described below. For example, an investor
subject to the 3.0% initial sales charge would have to hold his investment more
than six years for the ongoing 0.25% account maintenance fee and 0.50%
distribution fee of Class B shares to exceed the initial sales charge plus the
accumulated account maintenance fee of Class A shares. This example does not
take into account the time value of money which further reduces the impact of
the ongoing 0.25% account maintenance fee and 0.50% distribution fee of Class B
shares on the investment, fluctuations in net asset value, the effect of the
return on the investment over this period of time or the effect of any limits
that may be imposed upon the payment of the distribution fee and the contingent
deferred sales charge.
Distribution Plans. Pursuant to separate distribution plans adopted by the
Fund (as of June 12, 1990, with respect to the Class A shares and as of July 7,
1993, with respect to the Class B shares) pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan"), the Fund pays the
Distributor (a) an account maintenance fee relating to Class A shares, accrued
daily and paid monthly, at the annual rate of 0.25% of the average daily net
assets of the Fund attributable to Class A shares in order to compensate the
Distributor and Merrill Lynch (pursuant to a sub-agreement) in connection with
account maintenance activities and (b) an account maintenance fee and a
distribution fee relating to Class B shares, accrued daily and paid monthly, at
the annual rates of 0.25% and 0.50%, respectively, of the average daily net
assets of the Fund attributable to Class B shares in order to compensate the
Distributor and Merrill Lynch (pursuant to a sub-agreement) for providing
account maintenance and distribution services to the Fund, with the ongoing
account maintenance fee compensating the Distributor and Merrill Lynch for
providing account maintenance services to Class B shareholders and with the
ongoing distribution fee compensating the Distributor and Merrill Lynch for
providing shareholder and distribution services, and bearing certain
distribution-related expenses of the Fund, including payments to financial
consultants for selling Class B shares of the Fund. See "Additional
Information--Organization of the Fund". The Distribution Plan related to Class
B shares is designed to permit an investor to purchase Class B shares through
dealers without the assessment of a front-end sales charge and at the same time
permit the dealer to compensate its financial consultants in connection with
the sale of the Class B shares. In this regard, the purpose and function of the
ongoing account maintenance and distribution fees and the contingent deferred
sales charge are the same as those of the initial sales charge and account
maintenance fee with respect to the Class A shares of the Fund in that the
deferred sales charges and distribution fee provide for the financing of the
distribution of the Fund's Class B shares.
Prior to July 7, 1993, the Fund paid the Distributor an ongoing distribution
fee, accrued daily and paid monthly, at the annual rate of 0.75% of average
daily net assets of the Class B shares of the Fund under a distribution plan
previously adopted by the Fund (the "Prior Class B Plan") to compensate the
Distributor and Merrill Lynch for providing account maintenance and
distribution-related activities and services to Class B shareholders. The fee
rate payable and the services provided under the Prior Class B Plan are
identical to the aggregate fee rate payable and the services provided under the
Class B Distribution Plan, the difference being that the account maintenance
and distribution services have been unbundled. For the fiscal year ended
22
<PAGE>
October 31, 1993, the Fund paid the Distributor $339,199 pursuant to the Class
A Distribution Plan (based on average net assets subject to the Class A
Distribution Plan of $136.1 million), all of which was paid to Merrill Lynch
for providing account maintenance related services. At December 31, 1993, the
net assets of the Fund subject to the Class A Distribution Plan aggregated
approximately $92.5 million. At this asset level, the annual fee payable
pursuant to the Class A Distribution Plan would aggregate approximately
$230,528. For the fiscal year ended October 31, 1993, the Fund paid the
Distributor $16,801,274 pursuant to the Prior Class B Plan and the Class B
Distribution Plan (based on average net assets subject to the Prior Class B
Plan and the Class B Distribution Plan of $2.2 billion), all of which was paid
to Merrill Lynch for providing distribution related services. At December 31,
1993, the net assets of the Fund subject to the Class B Distribution Plan
aggregated approximately $1.5 billion. At this asset level, the annual fee
payable pursuant to the Class B Distribution Plan would aggregate approximately
$11,317,344. See "Additional Information--Organization of the Fund". Both the
Class B Distribution Plan and the Prior Class B Plan were designed to permit an
investor to purchase Class B shares through dealers without the assessment of a
front-end sales load and at the same time permit the dealer to compensate its
financial consultants in connection with the sale of the Class B shares.
The payments under the Class B Distribution Plan, as was the case with the
Prior Class B Plan, are based on a percentage of average daily net assets
attributable to Class B shares regardless of the amount of expenses incurred,
and accordingly, distribution-related revenues 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 Distribution Plan. This information is presented annually as of
December 31 of each year on a "fully allocated accrual" basis and quarterly on
a "direct expense and revenue/cash" basis. On the fully allocated accrual
basis, revenues consist of the account maintenance fees, distribution fees, the
contingent deferred sales charges 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 contingent
deferred sales charges, and the expenses consist of financial consultant
compensation. As of December 31, 1992, the last date for which fully allocated
accrual data is available, the fully allocated accrual expenses for the period
since August 3, 1990 (commencement of operations) incurred by the Distributor
and Merrill Lynch exceeded fully allocated accrual revenues by approximately
$38,601,000 (1.44% of Class B net assets at that date). As of December 31,
1992, direct cash revenues for the period since August 3, 1990 (commencement of
operations) exceeded direct cash expenses by $49,209,753 (1.83% of Class B net
assets at that date).
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with the Class B and Class A shares, and there is no assurance that
the Directors of the Fund will approve the continuance of the Distribution
Plans from year to year. However, the Distributor intends to seek annual
continuation of the Distribution Plans. In their review of the Distribution
Plans, the Directors will be asked to take into consideration expenses incurred
in connection with the account maintenance and/or distribution of each Class of
shares separately. The account maintenance fee, the distribution fee and the
contingent deferred sales charges in the case of Class B shares will not be
used to subsidize the sale of Class A shares. Similarly, the initial sales
charges and account maintenance fee in the case of Class A shares will not be
used to subsidize the sale of Class B shares. Payment of the distribution fee
on Class B shares is subject to certain limits as set forth under "Deferred
Sales Charge Alternative--Class B Shares".
23
<PAGE>
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The public offering price of Class A shares for purchasers choosing the
initial sales charge alternative is the next determined net asset value plus
varying sales charges (i.e., sales loads), as set forth below.
<TABLE>
<CAPTION>
SALES CHARGE AS DISCOUNT TO SELECTED
SALES CHARGE AS PERCENTAGE* OF DEALERS AS
PERCENTAGE OF THE NET AMOUNT PERCENTAGE OF THE
AMOUNT OF PURCHASE OFFERING PRICE INVESTED OFFERING PRICE
- ------------------ --------------- --------------- --------------------
<S> <C> <C> <C>
Less than $100,000........ 3.00% 3.09% 2.75%
$100,000 but less than
$500,000................. 2.50 2.56 2.25
$500,000 but less than
$1,000,000............... 2.00 2.04 1.75
$1,000,000 but less than
$3,000,000............... 1.50 1.52 1.25
$3,000,000 but less than
$5,000,000............... 1.00 1.01 .75
$5,000,000 and over....... .50 .50 .40
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent.
The Distributor may reallow discounts to such 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 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. During the fiscal year
ended October 31, 1993, the Fund sold 987,673 Class A shares for aggregate net
proceeds of $8,606,847. The gross sales charges for the sale of these shares
were $83,097, of which $10,009 was received by the Distributor and $73,088 was
received by Merrill Lynch.
Reduced Initial Sales Charges. Sales charges are reduced under a Right of
Accumulation and a Letter of Intention. Class A shares of the Fund are offered
at net asset value to Directors of the Fund, to directors of Merrill Lynch &
Co., Inc, to directors and trustees of certain other Merrill Lynch sponsored
investment companies, to participants in certain benefit plans, to an investor
who has a business relationship with a financial consultant who joined Merrill
Lynch from another investment firm within six months prior to the date of
purchase if certain conditions set forth in the Statement of Additional
Information are met and to employees of Merrill Lynch & Co., Inc. and its
subsidiaries. Class A shares may be offered at net asset value in connection
with the acquisition of assets of other investment companies. No initial sales
charges are imposed upon Class A shares issued as a result of the automatic
reinvestment of dividends or capital gains distributions. Class A shares of
the Fund are also offered at net asset value, without sales charge, to an
investor who has a business relationship with a Merrill Lynch financial
consultant and who has invested in a mutual fund sponsored by a non-Merrill
Lynch company for which Merrill Lynch has served as a selected dealer and
where Merrill Lynch has either received or given notice that such arrangement
will be terminated if the following conditions are satisfied: first, the
investor must purchase Class A shares of the Fund with proceeds from a
redemption of shares of such other mutual fund and such fund imposed a sales
charge either at the time of purchase or on a deferred basis; second, such
purchase of Class A shares must be made within 90 days after such notice of
termination. Class A shares are offered with reduced sales charges and, in
certain circumstances, at net asset value, to participants in the Merrill
Lynch Blueprint SM Program. Class A shares are offered to TMA SM Managed
Trusts to which Merrill Lynch Trust Company provides discretionary trustee
services at net asset value plus a reduced sales charge. Class A shares are
offered at net asset value to (i) certain employer sponsored retirement or
savings plans, such as a tax qualified retirement plan under Section 401 of
the Internal Revenue Code of 1986, as amended (the "Code"), a deferred
compensation plan under
24
<PAGE>
Section 403(b) and Section 457 of the Code, other deferred compensation
arrangements, VEBA plans and non-qualified After Tax Savings and Investment
programs maintained on the Merrill Lynch Group Employee Services system,
herein referred to as "Employer Sponsored Retirement or Savings Plans",
provided such plans meet the required minimum number of eligible employees or
required amount of assets advised by the Investment Adviser or any of its
affiliates and (ii) certain Employer Sponsored Retirement or Savings Plans,
provided such plans meet the required minimum number of eligible employees or
required amount of assets advised by the Investment Adviser or any of its
affiliates. Class A shares of the Fund are also offered at net asset value to
shareholders of certain closed-end funds advised by the Investment Adviser or
FAM who wish to reinvest the net proceeds from a sale of their closed-end fund
shares of common stock in shares of the Fund, provided certain conditions are
met. For example, Class A shares of the Fund and certain other mutual funds
advised by the Investment Adviser or FAM are offered at net asset value to
shareholders of Senior Floating Rate Fund (formerly known as Merrill Lynch
Prime Fund, Inc.) who wish to reinvest the net proceeds from a sale of certain
of their shares of common stock of Senior Floating Rate Fund in shares of such
funds.
Initial sales charges will be waived for shareholders purchasing $5 million
or more in a single transaction (other than an Employer Sponsored Retirement
or Savings Plan), or a purchase by a TMA SM Managed Trust, of Class A shares
of the Fund. In addition, purchases of Class A shares of the Fund made in
connection with a single investment of $5 million or more under the Merrill
Lynch Mutual Fund Adviser Program will not be subject to an initial sales
charge. Purchases described in this paragraph will be subject to a contingent
deferred sales charge of 0.25% of the dollar amount subject to charge if the
shares are redeemed within the first year after purchase.
Additional information concerning these reduced initial sales charges is set
forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
Investors choosing the deferred sales charge alternative purchase Class B
shares at net asset value per share without the imposition of a sales charge
at the time of purchase. The Class B shares are being sold without an initial
sales charge so that the Fund will receive the full amount of the investor's
purchase payment. Merrill Lynch compensates its financial consultants for
selling Class B shares at the time of purchase from its own funds. The
proceeds of the contingent deferred sales charge and the ongoing distribution
fee discussed above are used to defray Merrill Lynch's expenses, including
compensating its financial consultants. The proceeds from the ongoing account
maintenance fee are used to compensate Merrill Lynch for providing continuing
account maintenance activities.
Proceeds from the contingent deferred sales charge 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 shares, such as the payment of compensation to financial consultants
for selling Class B shares. Payments by the Fund to the Distributor of the
distribution fee under the Distribution Plan relating to Class B shares also
may be used in whole or in part by the Distributor for this purpose. The
combination of the contingent deferred sales charge and the ongoing
distribution fee facilitates the ability of the Fund to sell the Class B
shares without a sales charge being deducted at the time of purchase. 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 contingent deferred sales charge schedule if such schedule is higher
than the deferred sales charge schedule
25
<PAGE>
relating to the Class B shares acquired as a result of the exchange. For the
fiscal year ended October 31, 1993, the Distributor received contingent
deferred sales charges of $10,977,755 with respect to redemptions of Class B
shares, all of which was paid to Merrill Lynch.
Contingent Deferred Sales Charge. Class B shares that are redeemed within
three years of purchase may be subject to a contingent deferred sales charge
at the rates set forth below charged as a percentage of the dollar amount
subject thereto. The charge will be assessed on an amount equal to the lesser
of the current market value or the cost of the shares being redeemed.
Accordingly, no sales charge will be imposed on increases in net asset value
above the initial purchase price. In addition, no charge will be assessed on
shares derived from reinvestment of dividends or capital gains distributions.
The following table sets forth the rates of the contingent deferred sales
charge:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
YEAR SINCE PURCHASE CHARGE AS A PERCENTAGE OF
PAYMENT MADE DOLLAR AMOUNT SUBJECT TO CHARGE
------------------- -------------------------------
<S> <C>
0-1......................................... 3.0%
1-2......................................... 2.0%
2-3......................................... 1.0%
3 and thereafter............................ None
</TABLE>
In determining whether a contingent deferred sales charge is applicable to a
redemption, the calculation will be determined in the manner that results in
the lowest possible rate being charged. Therefore, it will be assumed that the
redemption is first of shares held for over three years or shares acquired
pursuant to reinvestment of dividends or distributions and then of shares held
longest during the three-year period. The charge will not be applied to dollar
amounts representing an increase in the net asset value since the time of
purchase. A transfer of shares from a shareholder's account to another account
will be assumed to be made in the same order as a redemption.
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the second year after purchase, the net
asset value per share is $12 and, during such time, the investor has acquired
10 additional shares through dividend reinvestment. If at such time the
investor makes his first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to charge 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 second year after purchase).
The contingent deferred sales charge 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 Code) of a shareholder. The contingent deferred
sales charge is waived on redemptions of shares by certain eligible 401(a) and
eligible 401(k) plans and in connection with certain group plans share orders
through the Merrill Lynch Blueprint SM Program. The contingent deferred sales
charge is also waived for any Class B shares which are purchased by an
eligible 401(k) or eligible 401(a) plan and which are rolled over into a
Merrill Lynch or Merrill Lynch Trust Company custodied IRA and held in such
account at the time of redemption. Additional information concerning the
waiver of the contingent deferred sales charge is set forth in the Statement
of Additional Information.
Limitations on the Payment of Deferred Charges. The maximum sales charge
rule in the Rules of Fair Practice of the National Association of Securities
Dealers, Inc. ("NASD") imposes a limitation on certain
26
<PAGE>
asset-based sales charges such as the Fund's distribution fee and the
contingent deferred sales charge but not the account maintenance fees. As
applicable to the Fund, the maximum sales charge rule limits the aggregate of
distribution fee payments and contingent deferred sales charges payable by the
Fund to (1) 6 1/4% of eligible gross sales of Class B shares (defined to
exclude shares issued pursuant to dividend reinvestments and exchanges) plus
(2) interest on the unpaid balance 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 contingent deferred sales charge). 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") 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 and any contingent deferred sales charges will be paid to the
Fund rather than to the Distributor; however, the Fund will continue to make
payments of the account maintenance fees. In certain circumstances the amount
payable pursuant to the voluntary maximum may exceed the amount payable under
the NASD formula. In such circumstances payment in excess of the amount
payable under the NASD formula will not be made.
The following table sets forth comparative information as of October 31,
1993, with respect to the Class B shares of the Fund indicating the maximum
allowable payments that can be made under the NASD maximum sales charge rule
and the Distributor's voluntary maximum for the fiscal period August 3, 1990
(commencement of operations) to October 31, 1993.
DATA CALCULATED AS OF OCTOBER 31, 1993
<TABLE>
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
ANNUAL
ALLOWABLE AMOUNTS DISTRIBUTION
ELIGIBLE AGGREGATE INTEREST ON MAXIMUM PREVIOUSLY AGGREGATE FEE AT CURRENT
GROSS SALES UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
---------- --------- ----------- -------- -------------- --------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule As
Adopted................ $6,431,695 $401,981 $81,347(2) $483,328 $104,400 $378,928 $8,323
Under Distributor's
Voluntary Waiver....... $6,431,695 $401,981 $32,158 $434,139 $104,400 $329,739 $8,323
</TABLE>
- --------
(1)Purchase price of all eligible Class B shares sold since August 3, 1990
(commencement of operations) other than shares acquired through dividend
reinvestment and the exchange privilege.
(2)Interest is computed on a monthly basis based upon the prime rate, as
reported in the Wall Street Journal, plus 1%, as permitted under the NASD
Rule.
(3)Consists of contingent deferred sales charge payments, distribution fee
payments and accruals. Of the distribution fee payments made prior to July
7, 1993, under the Prior Class B Plan at the 0.75% rate, 0.50% of average
daily net assets has been treated as a distribution fee and 0.25% of average
daily net assets has been deemed to have been a service fee and not subject
to the NASD maximum sales charge rule.
(4)Provided to illustrate the extent to which the current level of
distribution fee payments (not including any contingent deferred sales
charge payments) is amortizing the unpaid balance. No assurance can be given
that payments of the distribution fee will reach either the voluntary
maximum or the NASD maximum.
REDEMPTION OF SHARES
The Fund is required to redeem for cash all full and fractional 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 contingent deferred
sales charge which may be applicable to Class B shares, there will be no
charge for redemption if the redemption request is sent
27
<PAGE>
directly to the Transfer Agent. Shareholders liquidating their holdings will
receive upon redemption all dividends reinvested through the date of
redemption. The value of shares at the time of redemption may be more or less
than the shareholder's cost, depending on the market value of the securities
held by the Fund at such time.
REDEMPTION
A shareholder wishing to redeem shares may do so by tendering the shares
directly to the Transfer Agent, Financial Data Services, Inc., Transfer Agency
Mutual Fund Operations, P.O. Box 45289, Jacksonville, Florida 32232-5289.
Redemption requests delivered other than by mail should be delivered to
Financial Data Services, Inc., Transfer Agency Mutual Fund Operations, 4800
Deer Lake Drive East, Jacksonville, Florida 32246-6484. 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 notice in either event requires the signatures of all persons in whose
names the shares are registered, signed exactly as their names appear on the
Transfer Agent's register or on the certificate, as the case may be. The
signature(s) on the notice must be guaranteed by an "eligible guarantor
institution" (including, for example, Merrill Lynch branch offices and certain
other financial institutions) as such term is defined in Rule 17Ad-15 under the
Securities Exchange Act of 1934, as amended, the existence and validity of
which may be verified by the Transfer Agent through the use of industry
publications. Notarized signatures are not sufficient. In certain instances,
the Transfer Agent may require additional documents, such as, but not limited
to, trust instruments, death certificates, appointments as executor or
administrator, or certificates of corporate authority. For shareholders
redeeming directly with the Transfer Agent, payment 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 U.S. bank). The Fund may delay or cause to be delayed the mailing of
a redemption check until such time as good payment has been collected for the
purchase of such shares. Normally this delay will not exceed 10 days.
REPURCHASE
The Fund also will repurchase shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the request
for repurchase is received by the dealer prior to the close of business on the
New York Stock Exchange on the day received and that such request is received
by the Fund from such dealer not later than 4:30 p.m., New York time, on the
same day. Dealers have the responsibility of submitting such repurchase
requests to the Fund not later than 4:30 p.m., New York time, in order to
obtain that day's closing price.
The repurchase arrangements are for the convenience of shareholders and do
not involve a charge by the Fund (other than the applicable contingent deferred
sales charge in the case of Class B shares); securities firms which do not have
selected dealer agreements with the Distributor, however, may impose a charge
on the shareholder for transmitting the notice of repurchase to the Fund.
Merrill Lynch may charge its customers a processing fee (presently $4.85) to
confirm a repurchase of shares of such customers. Redemptions directly through
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
28
<PAGE>
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 SHARES
Shareholders who have redeemed their Class A shares have a one-time
privilege to reinstate their accounts by purchasing Class A shares of the Fund
at net asset value without a sales charge up to the dollar amount redeemed.
The reinstatement privilege may be exercised by sending a notice of exercise
along with a check for the amount to be reinstated to the Transfer Agent
within 30 days after the date the request for redemption was accepted by the
Transfer Agent or the Distributor. The reinstatement will be made at the net
asset value per share next determined after the notice of reinstatement is
received and cannot exceed the amount of the redemption proceeds. The
reinstatement privilege is a one-time privilege and may be exercised by the
Class A shareholder only the first time such shareholder makes a redemption.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below which are designed to facilitate investment in its shares.
Certain of such services are not available to investors who place purchase
orders for the Fund's shares through the Merrill Lynch Blueprint SM Program.
Full details as to each of such services and instructions as to how to
participate in the various services or plans, or to change options with
respect thereto, can be obtained from the Fund by calling the telephone number
on the cover page hereof or from the Distributor or Merrill Lynch. Certain of
these services are available only to U.S. investors.
Investment Account. Each shareholder whose account is maintained at the
Transfer Agent has an Investment Account and will receive monthly statements
from the Transfer Agent showing any reinvestments of dividends and capital
gains distributions and any other activity in the account since the preceding
statement. Shareholders also will receive separate confirmations for each
purchase or sale transaction other than reinvestments of dividends and capital
gains distributions. A shareholder may make additions to his Investment
Account at any time by mailing a check directly to the Transfer Agent.
Shareholders also may maintain their accounts through Merrill Lynch. Upon the
transfer of shares out of a Merrill Lynch brokerage account, an Investment
Account in the transferring shareholder's name will be opened automatically,
without charge, at the Transfer Agent. Shareholders considering transferring
their Class A shares from Merrill Lynch to another brokerage firm or financial
institution should be aware that if the firm to which the Class A shares are
to be transferred will not take delivery of shares of the Fund, a shareholder
either must redeem the Class A shares so that the cash proceeds can be
transferred to the account at the new firm, or such shareholder must continue
to maintain an Investment Account at the Transfer Agent for those Class A
shares. Shareholders interested in transferring their Class B shares from
Merrill Lynch and who do not wish to have an Investment Account maintained for
such shares at the Transfer Agent may request their new brokerage firm to
maintain such shares in an account registered in the name of the brokerage
firm for the benefit of the shareholder. If the new brokerage firm is willing
to accommodate the shareholder in this manner, the shareholder must request
that he be issued certificates for his shares and then must turn the
certificates over to the new firm for re-registration as described in the
preceding sentence. Shareholders considering transferring a tax deferred
retirement account such as an individual retirement account from Merrill Lynch
to another brokerage firm or financial institution should be aware that if the
firm to which the retirement account is to be transferred will not take
delivery of shares of the Fund, a shareholder must either redeem
29
<PAGE>
the shares (paying any applicable contingent deferred sales charge) 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. Class A and Class B shareholders of the Fund each
have an exchange privilege with certain other mutual funds sponsored by Merrill
Lynch. There is currently no limitation on the number of times a shareholder
may exercise the exchange privilege. The exchange privilege may be modified or
terminated in accordance with the rules of the Commission. Class A shareholders
of the Fund may exchange their shares ("outstanding Class A shares") for Class
A shares of another fund ("new Class A shares") on the basis of relative net
asset value per Class A share, plus an amount equal to the difference, if any,
between the sales charge previously paid on the outstanding Class A shares and
the sales charge payable at the time of the exchange on the new Class A shares.
The Fund's exchange privilege is modified with respect to purchases of Class A
shares under the Merrill Lynch Mutual Fund Adviser program. First, the initial
allocation of assets is made under the program. Then, any subsequent exchange
under the program of Class A shares of a fund for Class A 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 fund and
the sales charge payable on the shares of the Fund being acquired in the
exchange under this program.
Class B shareholders of the Fund may exchange their shares ("outstanding
Class B shares") for Class B shares of another fund ("new Class B shares") on
the basis of relative net asset value per share, without the payment of any
contingent deferred sales charge that might otherwise be due on redemption of
the outstanding Class B shares. Class B shareholders of the Fund exercising the
exchange privilege will continue to be subject to the Fund's contingent
deferred sales charge schedule if such schedule is higher than the deferred
sales charge schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's contingent deferred sales charge schedule if such
schedule is higher than the deferred sales charge schedule relating to the
Class B shares of the fund from which the exchange has been made. For purposes
of computing the contingent deferred sales charge that may be payable upon a
disposition of the new Class B shares, the holding period for the outstanding
Class B shares is "tacked" to the holding period of the new Class B shares.
Class A and Class B shareholders of the Fund also may exchange their shares for
shares of certain money market funds, but in the case of an exchange from Class
B shares, the period of time that shares are held in a money market fund will
not count toward satisfaction of the holding period requirement for purposes of
reducing the contingent deferred sales charge. Exercise of the exchange
privilege is treated as a sale for Federal income tax purposes. For further
information, see "Shareholder Services--Exchange Privilege" in the Statement of
Additional Information.
Automatic Reinvestment of Dividends and Distributions. All dividends and
capital gains distributions are reinvested automatically in full and fractional
shares of the Fund, without a sales charge, at the net asset value per share at
the close of business on the monthly payment date for such dividends and
distributions. A shareholder may at any time, by written notification to
Merrill Lynch if the shareholder's account is maintained with Merrill Lynch or
by written notification or telephone call (1-800-MER-FUND) to the Transfer
Agent if the shareholder's account is maintained with the Transfer Agent, elect
to have subsequent dividends, or both dividends and capital gains distributions
paid in cash, rather than reinvested, in which event payment will be mailed
monthly. No contingent deferred sales charge will be imposed on redemption of
shares issued as a result of the automatic reinvestment of dividends or capital
gains distributions. The
30
<PAGE>
Automatic Investment Program is not available to shareholders whose shares are
held in a brokerage account with Merrill Lynch other than a CMA(R) account.
Systematic Withdrawal and Automatic Investment Plans. A Class A shareholder
may elect to receive systematic withdrawal payments from his Investment Account
in the form of payments by check or through automatic payment by direct deposit
to his bank account on either a monthly or quarterly basis. A Class A
shareholder whose shares are held within a CMA(R), CBA(R) or Retirement Account
may elect to have shares redeemed on a monthly, bimonthly, quarterly,
semiannual or annual basis through the Systematic Redemption Program, subject
to certain conditions. Regular additions of Class A shares may be made to an
investor's Investment Account by pre-arranged charges of $50 or more to his
regular bank account. Investors who maintain CMA accounts may arrange to have
periodic investments made in the Fund in their CMA accounts or in certain
related accounts in amounts of $250 or more through the CMA Automatic
Investment Program. The Automatic Investment Program is not available to
shareholders whose shares are held in a brokerage account with Merrill Lynch
(other than a CMA account).
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
The net investment income of the Fund is declared as dividends as of the
close of trading on the New York Stock Exchange (currently 4:00 p.m., New York
time) prior to the determination of the net asset value on that day. The net
investment income of the Fund for dividend purposes consists of interest earned
on portfolio securities, less expenses, in each case computed since the most
recent determination of the net asset value. Expenses of the Fund, including
the investment advisory fees, distribution and account maintenance fees with
respect to Class B shares, and account maintenance fees with respect to Class A
shares, are accrued daily. Dividends of net investment income are declared
daily and reinvested monthly in the form of additional full and fractional
shares of the Fund at net asset value unless the shareholder elects to receive
such dividends in cash. Shares will accrue dividends as long as they are issued
and outstanding. Shares are issued and outstanding from the settlement date of
a purchase order to the day prior to settlement date of a redemption order.
All net realized long- or short-term capital gains, if any, are declared and
distributed to the Fund's shareholders annually. Capital gains distributions
will be reinvested automatically in shares unless the shareholder elects to
receive such distributions in cash.
The per share dividends and distributions on Class B shares will be lower
than the per share dividends and distributions on Class A shares as a result of
the effect of the distribution and higher transfer agency fees applicable with
respect to the Class B shares. See "Additional Information--Determination of
Net Asset Value".
See "Shareholder Services" for information as to how to elect either dividend
reinvestment or cash payments. Portions of dividends and distributions which
are taxable to shareholders as described below are subject to income tax
whether they are reinvested in shares of the Fund or received in cash.
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (the "Code"). If it so qualifies,
31
<PAGE>
in any taxable year in which it distributes at least 90% of its taxable net
income, the Fund (but not its shareholders) will not be subject to Federal
income tax on the part of its net ordinary income and net realized capital
gains which it distributes to Class A and Class B shareholders (together, the
"shareholders"). The Fund intends to distribute substantially all of such
income.
Dividends paid by the Fund from its ordinary income and distributions of the
Fund's net realized short-term capital gains (together referred to hereafter as
"ordinary income dividends") are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
(including long-term gains from certain transactions in futures and options)
("capital gain dividends") are taxable to shareholders as long-term capital
gains, regardless of the length of time the shareholder has owned Fund shares.
Distributions in excess of the Fund's earnings and profits will first reduce
the adjusted tax basis of a holder's shares and, after such adjusted tax basis
is reduced to zero, will constitute capital gains to such holder (assuming the
shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. Distributions by the Fund, whether from ordinary income or capital
gains, will not be eligible for the dividends received deduction allowed to
corporations under the Code. If the Fund pays a dividend in January which was
declared in the previous October, November or December to shareholders of
record on a specified date in one of such months, then such dividend will be
treated for tax purposes as being paid by the Fund and received by its
shareholders on December 31 of the year in which such dividend was declared.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% U.S.
withholding tax under existing provisions of the Code applicable to foreign
individuals and entities unless a reduced rate of withholding or a withholding
exemption is provided under applicable treaty law. Nonresident shareholders are
urged to consult their own tax advisers concerning the applicability of the
U.S. 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 U.S. 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. If more than 50% in value of the Fund's total
assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible, and intends, to file an election with
the Internal Revenue Service pursuant to which shareholders of the Fund will be
required to include their proportionate share of such withholding taxes in
their U.S. income tax returns as gross income, treat such proportionate share
as taxes paid by them, and deduct such proportionate share in computing their
taxable incomes or, alternatively, use them as foreign tax credits against
their U.S. income taxes. No deductions for foreign taxes, however, may be
claimed by noncorporate shareholders who do not itemize deductions. A
shareholder that is a nonresident alien individual or a foreign corporation may
be subject to 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.
32
<PAGE>
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
Under Code Section 988, foreign currency gains or losses from certain forward
contracts, from futures contracts that are not "regulated futures contracts",
and from unlisted options generally will be treated as ordinary income or loss.
Such Code Section 988 gains or losses will generally increase or decrease the
amount of the Fund's investment company taxable income available to be
distributed to shareholders as ordinary income. Additionally, if Code Section
988 losses exceed other investment company taxable income during a taxable
year, the Fund would not be able to make any ordinary dividend distributions,
and any distributions made before the losses were realized but in the same
taxable year would be recharacterized as a return of capital to shareholders,
thereby reducing the basis of each shareholder's Fund shares.
If a Class A shareholder exercises the 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 the sales charge
paid to the Fund reduces any sales charge the shareholder would have owed upon
purchase of the new Class A shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new Class
A shares.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action
either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs which
are derived from interest on U.S. Government obligations. State law varies as
to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
PERFORMANCE DATA
From time to time, the Fund may include its average annual total return and
yield for various specified time periods in advertisements or information
furnished to present or prospective shareholders. Average annual total return
and yield are computed separately for Class A and Class B shares in accordance
with formulas specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital
33
<PAGE>
gains or losses on portfolio investments over such periods) that would equate
the initial amount invested to the redeemable value of such investment at the
end of each period. Average annual total return will be computed assuming all
dividends and distributions are reinvested and taking into account all
applicable recurring and nonrecurring expenses, including the maximum sales
charge in the case of Class A shares and the contingent deferred sales charge
that would be applicable to a complete redemption of the investment at the end
of the specified period in the case of Class B shares. Dividends paid by the
Fund with respect to Class A and Class B shares, to the extent any dividends
are paid, will be calculated in the same manner at the same time on the same
day and will be in the same amount, except that account maintenance and
distribution fees and any incremental transfer agency costs relating to Class B
shares will be borne exclusively by Class B shares, and the account maintenance
fee relating to Class A shares will be borne exclusively by Class A shares. The
Fund will include performance data for both Class A and Class B shares of the
Fund in any advertisement or information including performance data of the
Fund.
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return
calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return, and (2) the maximum applicable sales
charges will not be included with respect to annual or annualized rates of
return calculations. Aside from the 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 annual rates of return reflect compounding;
aggregate total return data generally will be higher than average annual total
return data since the aggregate rates of return reflect compounding over longer
periods of time. In advertisements distributed to investors whose purchases are
subject to reduced sales charges in the case of Class A shares or waiver of the
contingent deferred sales charge in the case of Class B shares (such as
investors in certain retirement plans), the performance data may take into
account the reduced, and not the maximum, sales charge or may not take into
account the contingent deferred sales charge and therefore may reflect greater
total return since, due to the reduced sales charges or waiver of the
contingent deferred sales charge, a lower amount of expenses is deducted. See
"Purchase of Shares". The Fund's total return may be expressed either as a
percentage or as a dollar amount in order to illustrate such total return on a
hypothetical $1,000 investment in the Fund at the beginning of each specified
period.
Yield quotations will be computed based on a 30-day period by dividing (a)
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. The yield for the 30-day period ending
October 31, 1993, was 5.34% for Class A shares and 5.00% for Class B shares.
Total return and yield figures are based on the Fund's historical performance
and are not intended to indicate future performance. The Fund's total return
and yield will vary depending on market conditions, the securities comprising
the Fund's portfolio, the Fund's operating expenses and the amount of realized
and unrealized net capital gain or losses during the period. The value of an
investment in the Fund will fluctuate, and an investor's shares, when redeemed,
may be worth more or less than their original cost.
On occasion, the Fund may compare its performance to the Standard & Poor's
500 Composite Stock Price Index, the Dow Jones Industrial Average, or to
performance data published by Lipper Analytical Services, Inc., Morningstar
Publications, Inc., Money Magazine, U.S. News & World Report, Business Week,
34
<PAGE>
CDA Investment Technology, Inc., Forbes Magazine, Fortune Magazine or other
industry publications. In addition, from time to time the Fund may include the
Fund's risk-adjusted performance ratings assigned by Morningstar Publications,
Inc. in advertising or supplemental sales literature. As with other performance
data, performance comparisons should not be considered representative of the
Fund's relative performance for any future period.
ADDITIONAL INFORMATION
DETERMINATION OF NET ASSET VALUE
The net asset value of the Fund is determined by the Investment Adviser once
daily as of 4:15 p.m., New York time, on each day during which the New York
Stock Exchange is open for trading. The net asset value per share is computed
by dividing the sum of the value of the securities held by the Fund plus any
cash or other assets minus all liabilities by the total number of shares
outstanding at such time, rounded to the nearest cent. Expenses, including the
fees payable to the Investment Adviser and the Distributor, are accrued daily.
The net asset value per share of the Class A and Class B shares are expected
to be equivalent. Under certain circumstances, however, the per share net asset
value of the Class B shares may be lower than the per share net asset value of
the Class A shares reflecting the higher sum of account maintenance,
distribution and higher transfer agency fees applicable with respect to the
Class B shares, as compared with the account maintenance fee applicable to the
Class A shares. Even under those circumstances, the per share net asset value
of the two classes eventually will tend to converge immediately after the
payment of dividends, which will differ by approximately the amount of the
expense accrual differential between the classes.
ORGANIZATION OF THE FUND
The Fund was incorporated under Maryland law on April 18, 1990. It has
authorized capital of 2,000,000,000 shares of Common Stock, par value $0.10 per
share, divided into two classes, designated Class A and Class B Common Stock,
each of which consists of 1,000,000,000 shares. Both Class A and Class B shares
represent an interest in the same assets of the Fund and have identical voting,
dividend, liquidation and other rights and the same terms and conditions except
that expenses related to the account maintenance fee related to the Class A
shares and the account maintenance fee and distribution fee related to the
Class B shares are borne solely by each respective class, and Class A and Class
B shares have respective exclusive voting rights with respect to matters
relating to such account maintenance and/or distribution expenditures. See
"Purchase of Shares". The Fund has received an order from the Commission
permitting the issuance and sale of two classes of shares, and the issuance and
sale of any additional classes would require an additional order from the
Commission. There is no assurance that such an additional order would be
granted.
Shareholders are entitled to one vote for each full share held and to
fractional votes for fractional shares held in the election of Directors (to
the extent hereafter provided) and on other matters submitted to the vote of
shareholders. All shares of the Fund have equal voting rights, except, as noted
above, a class of shares will have exclusive voting rights with respect to
matters relating to the distribution expenses being borne solely by such class.
There normally will be no meeting of shareholders for the purpose of electing
Directors unless and until such time as less than a majority of the Directors
holding office have been elected by the shareholders, at which time the
Directors then in office will call a shareholders' meeting for the election of
35
<PAGE>
Directors. Shareholders may, in accordance with the terms of the Articles of
Incorporation, cause a meeting of shareholders to be held for the purpose of
voting on the removal of Directors. Also, the Fund will be required to call a
special meeting of shareholders in accordance with the requirements of the
Investment Company Act to seek approval of new management and advisory
arrangements, of a material increase in distribution or account maintenance
fees or of a change in fundamental policies, objective or restrictions. Except
as set forth above, the Directors shall continue to hold office and appoint
successor Directors. Each issued and outstanding share is entitled to
participate equally in dividends and distributions declared and in net assets
upon liquidation or dissolution remaining after satisfaction of outstanding
liabilities except that, as noted above, expenses related to the distribution
of the shares of a class will be borne solely by such class. Shares issued are
fully-paid and nonassessable by the Fund.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communications for each of the shareholder's
related accounts, the shareholder should notify in writing:
Financial Data Services,
Inc. Attn: Document
Evaluation Unit P.O. Box
45290 Jacksonville, FL
32232-5290
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this,
please call your Merrill Lynch financial consultant or Financial Data Services,
Inc. at 1-800-637-3863.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
PENDING LITIGATION
The Fund, the Investment Adviser and the Distributor, and certain of their
affiliates have been named as defendants in an amended complaint filed in
September 1993 in an action pending in the United States District Court for the
Southern District of California. The action was filed as a purported class
action on behalf of investors who purchased shares of the Fund during the
period from September 15, 1990, through October 31, 1992. The plaintiffs
allege, among other matters, that the defendants made material
misrepresentations and omitted material facts concerning the risks involved in
investing in the Fund and that the Investment Adviser negligently invested the
assets of the Fund. The plaintiffs seek damages from the various defendants
aggregating in excess of $600 million and other specified relief.
The Fund believes that the allegations against it are totally without merit,
and it intends to contest the action. The Investment Adviser has agreed to
indemnify the Fund for any liability or expense that it may incur in connection
with this litigation.
36
<PAGE>
MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.--AUTHORIZATION FORM
- -------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINT SM PROGRAM. YOU MAY REQUEST AN APPLICATION FOR PURCHASES THROUGH THE
MERRILL LYNCH BLUEPRINT SM PROGRAM BY CALLING (800) 637-2434.
- -------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase ...... Class A shares or ......
Class B shares (choose one) of Merrill Lynch Short-Term Global Income Fund,
Inc. and establish an Investment Account as described in the Prospectus.
Basis for establishing an Investment Account:
A. I enclose a check for $... payable to Financial Data Services, Inc., as an
initial investment (minimum $1,000) (subsequent investments $50 or more). I
understand that this purchase will be executed at the applicable offering
price next to be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information:
1. ............................. 4. .............................
2. ............................. 5. .............................
3. ............................. 6. .............................
(Please list all Funds. Use a separate sheet of paper if necessary.)
Until you are notified by me in writing, the following options with respect
to dividends and distributions are elected:
Distribution Elect /_/ reinvest dividends Elect /_/ reinvest gains
Options One /_/ pay dividends in cash One /_/ pay gains in cash
If no election is made, dividends and capital gains will be reinvested
automatically at net asset value without a sales charge.
----------------
(Please Print)
Name ................................ [_][_][_][_][_][_][_][_][_]
First Name Initial Last Name Social Security No.
or Taxpayer
Name of Co-Owner Identification No.
(if any) ...........................
First Name Initial Last Name .............. 19.....
Address.............................. Date
.....................................
(Zip Code) Name and address of employer.........
Occupation........................... .....................................
.....................................
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security No. or Taxpayer Identification No. and (2) that I
am not subject to backup withholding (as discussed in the Prospectus under
"Distributions and Taxes--Taxes") either because I have not been notified that
I am subject thereto as a result of a failure to report all interest or
dividends, or the Internal Revenue Service ("IRS") has notified me that I am
no longer subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDER REPORTING AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS
BEEN TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS
CERTIFICATION TO OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
Signature of Owner................... Signature of Co-Owner (if any).......
In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.
- -------------------------------------------------------------------------------
2. LETTER OF INTENTION--CLASS A SHARES ONLY (SEE TERMS AND CONDITIONS IN THE
STATEMENT OF ADDITIONAL INFORMATION)
................. 19.....
Date of Initial Purchase
Gentlemen:
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Short-Term Global Income Fund, Inc. or any other investment company with
an initial sales charge or deferred sales charge for which Merrill Lynch Funds
Distributor, Inc. acts as distributor over the next 13-month period which will
equal or exceed:
/_/ $100,000 /_/ $500,000 /_/ $1,000,000 /_/ $3,000,000 /_/ $5,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch Short-Term Global
Income Fund, Inc. prospectus.
I agree to the terms and conditions of the Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc. my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Short-Term Global Income Fund, Inc. held as
security.
By................................... .......................................
Signature of Owner Signature of Co-Owner (If registered
in joint names, both must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name............................. (2) Name.............................
37
<PAGE>
MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.--AUTHORIZATION FORM
- -------------------------------------------------------------------------------
3. SYSTEMATIC WITHDRAWAL PLAN--CLASS A SHARES ONLY (See terms and conditions
in the Statement of Additional Information)
Minimum Requirements: $10,000 for monthly disbursements, $5,000 for quarterly,
of shares in Merrill Lynch Short-Term Global Income Fund, Inc., at cost or
current offering price. Begin systematic withdrawal on ... 19. . Withdrawals to
be made either (check one) [_] Monthly [_] Quarterly*
[Date]
*Quarterly withdrawals are made on the 24th day of March, June,
September and December.
Specify withdrawal amount (check one): [_] $...... or [_] .....% of the current
value of Class A shares in the account.
Specify withdrawal method: [_] check or [_] direct deposit to bank account
(check one and complete part (a) or (b) below):
- -------------------------------------------------------------------------------
(A) I HEREBY AUTHORIZE PAYMENT BY (B) I HEREBY AUTHORIZE PAYMENT BY
CHECK DIRECT DEPOSIT TO BANK ACCOUNT AND
(IF NECESSARY) DEBIT ENTRIES AND
Draw checks payable ADJUSTMENTS FOR ANY CREDIT ENTRIES
MADE IN ERROR TO MY ACCOUNT.
(check one)
Specify type of account (check
[_] as indicated in Item 1. one): [_] checking [_] savings
I agree that this authorization will
[_] to the order of ........... remain in effect until I provide
written notification to Financial
Mail to (check one) Data Services, Inc. amending or
terminating this service.
Name on your Account.............
Bank.............................
[_] the address indicated in Item
1. Bank #........ Account #.........
Bank Address.....................
Signature of Depositor...........
[_] Name (Please Print)........
Date..
Signature of Depositor (if joint
account).........................
Address.......................... NOTE: If Automatic Direct Deposit is
elected, your blank, unsigned check
marked "VOID" or a deposit slip from
your savings account should accompany
this Application.
Signature of Owner...............
Signature of Co-Owner (if any)...
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
4. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Financial Data Services, Inc. draw a check or an
automated clearing house ("ACH") debit on my checking account described below
each month to purchase ......... Class A shares or ......... Class B shares
(choose one) of Merrill Lynch Short-Term Global Income Fund, Inc., subject to
the terms set forth below.
- -------------------------------------------------------------------------------
FINANCIAL DATA SERVICES, INC. AUTHORIZATION TO HONOR CHECKS OR ACH
DEBITS DRAWN BY FINANCIAL DATA
You are hereby authorized to draw a SERVICES, INC.
check or an ACH debit each month on
my bank account for investment in To .............................. Bank
Merrill Lynch Short-Term Global
Income Fund, Inc., as indicated (Investor's Bank)
below: Bank Address .........................
Amount of each check or ACH debit
$ ................................ City ..... State...... Zip.....
As a convenience to me, I hereby
Account No. ...................... request and authorize you to pay and
charge to my account checks or ACH
Please date and invest checks or debits drawn on my account by and
draw ACH debits on the 20th of payable to Financial Data Services,
each month beginning ............. Inc., Transfer Agency Mutual Fund
Operations, Jacksonville, Florida
(Month) 32232-5289. I agree that your rights
or as soon thereafter as possible. in respect to each such check or
debit shall be the same as if it were
I agree that you are preparing these a check drawn on you and signed
checks or drawing these debits personally by me. This authority is
voluntarily at my request and that to remain in effect until revoked
you shall not be liable for any loss personally by me in writing. Until
arising from any delay in preparing you receive such notice, you shall be
or failure to prepare any such check fully protected in honoring any such
or debit. If I change banks or desire check or debit. I further agree that
to terminate or suspend this program, if any such check or debit be
I agree to notify you promptly in dishonored, whether with or without
writing. cause and whether intentionally or
I further agree that if a check or inadvertently, you shall be under no
debit is not honored upon liability.
presentation, Financial Data
Services, Inc. is authorized to ......................................
discontinue immediately the Automatic Date Signature of Depositor
Investment Plan and to liquidate
sufficient shares held in my account ......................................
to offset the purchase made with the Bank Account Number Signature of
returned check or dishonored debit. Depositor
(If joint account both must sign)
......................................
Date Signature of Depositor
...................................... NOTE: IF AUTOMATIC INVESTMENT PLAN IS
Signature of Depositor ELECTED, YOUR BLANK, UNSIGNED CHECK
(If joint account, both must sign) MARKED "VOID" SHOULD ACCOMPANY THIS
APPLICATION.
- -------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp We hereby authorize Merrill
Lynch Funds Distributor, Inc.
to act as our agent in
connection with transactions
under this authorization form
and agree to notify the
Distributor of any purchases
made under a Letter of
Intention or Systematic
Withdrawal Plan. We guarantee
the shareholder's signature.
- - -
- -
-
................................
Dealer Name and Address
By .............................
Authorized Signature of Dealer
.........
[_][_][_] [_][_][_][_]
Branch-Code F/C No. F/C Last Name
This form when completed should [_][_][_] [_][_][_][_][_]
be mailed to:
Merrill Lynch Short-Term Global Dealer's Customer A/C No.
Income Fund, Inc.c/o Financial
Data Services, Inc.
Transfer Agency
Mutual Fund Operations
P.O. Box 45289
Jacksonville, Florida 32232-5289
<PAGE>
INVESTMENT ADVISER
Merrill Lynch Asset Management
Administrative Offices: 800 Scudders Mill Road Plainsboro, New Jersey 08536
Mailing Address: Box 9011 Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices: 800 Scudders Mill Road Plainsboro, New Jersey 08536
Mailing Address: Box 9011 Princeton, New Jersey 08543-9011
TRANSFER AGENT
Financial Data Services, Inc. Administrative Offices: Transfer Agency Mutual
Fund Operations 4800 Deer Lake Drive East Jacksonville, Florida 32246-6484
Mailing Address: P.O. Box 45289 Jacksonville, Florida 32232-5289
CUSTODIAN
The Chase Manhattan Bank, N.A. Global Securities Services Chase MetroTech
Center Brooklyn, New York 11245
INDEPENDENT AUDITORS
Deloitte & Touche 117 Campus Drive Princeton, New Jersey 08540
COUNSEL
Brown & Wood One World Trade Center New York, New York 10048-0557
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUND, THE INVESTMENT ADVISER OR THE DISTRIBUTOR. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING
MAY NOT LAWFULLY BE MADE.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table.................................................................. 2
Alternative Sales Arrangements............................................. 3
Financial Highlights....................................................... 5
Special and Risk Considerations............................................ 6
Investment Objective and Policies.......................................... 7
Management of the Fund..................................................... 18
Board of Directors........................................................ 18
Management and Advisory Arrangements...................................... 18
Transfer Agency Services.................................................. 20
Purchase of Shares......................................................... 20
Alternative Sales Arrangements............................................ 21
Initial Sales Charge Alternative--Class A Shares.......................... 24
Deferred Sales Charge Alternative--Class B Shares......................... 25
Redemption of Shares....................................................... 27
Redemption................................................................ 28
Repurchase................................................................ 28
Reinstatement Privilege--Class A Shares................................... 29
Shareholder Services....................................................... 29
Distributions and Taxes.................................................... 31
Performance Data........................................................... 33
Additional Information..................................................... 35
Determination of Net Asset Value.......................................... 35
Organization of the Fund.................................................. 35
Shareholder Reports....................................................... 36
Shareholder Inquiries..................................................... 36
Pending Litigation........................................................ 36
Authorization Form......................................................... 37
</TABLE>
Code # 11099
Prospectus
[ARTWORK]
- --------------------------------------------------------------------------------
MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.
February 28, 1994 Distributor: Merrill Lynch Funds Distributor, Inc. This
prospectus should be retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
- -----------------------------------
MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.
BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
----------------
Merrill Lynch Short-Term Global Income Fund, Inc. (the "Fund") is a non-
diversified mutual fund seeking to provide shareholders with as high a level of
current income as is consistent with prudent investment management from a
global portfolio of high quality debt securities denominated in various
currencies and multi-national currency units and having remaining maturities
not exceeding three years. Under normal circumstances, the Fund will invest its
assets in debt securities denominated in at least three different currencies,
including the U.S. dollar. At times, the Fund may seek to hedge its portfolio
against interest rate and currency risks through the use of futures, options on
futures and currency transactions. There can be no assurance that the
investment objective of the Fund will be realized.
The Fund offers two classes of shares which may be purchased at a price equal
to the next determined net asset value per share, plus in both cases a sales
charge which, at the election of the purchaser, may be imposed (i) at the time
of purchase (the "Class A shares") or (ii) on a deferred basis (the "Class B
shares"). These alternatives permit an investor to choose the method of
purchasing shares that is most beneficial given the amount of the purchase, the
length of time the investor expects to hold the shares and other circumstances.
Investors should understand that the purpose and function of the deferred sales
charges and ongoing account maintenance fee with respect to the Class B shares
are the same as those of the initial sales charge and the ongoing account
maintenance fee with respect to the Class A shares. See "General Information--
Description of Shares". Each Class A share and Class B share represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B shares bear the expenses of the account maintenance
and distribution fees and certain other costs resulting from the deferred sales
charge arrangement and Class A shares bear the expenses of the account
maintenance fee. The two classes also have different exchange privileges.
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 February
28, 1994 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission and can be obtained, without charge, by calling or by
writing the Fund at the above telephone number or address. This Statement of
Additional Information has been incorporated by reference into the Prospectus.
----------------
MERRILL LYNCH ASSET MANAGEMENT--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
----------------
The date of this Statement of Additional Information is February 28, 1994.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek to provide shareholders with
as high a level of current income as is consistent with prudent investment
management from a global portfolio of high quality debt securities denominated
in various currencies and multi-national currency units and having remaining
maturities not exceeding three years. Under normal circumstances, the Fund will
invest its assets in debt securities denominated in at least three different
currencies, including the U.S. dollar. There can be no assurance that the
investment objective of the Fund will be realized. Reference is made to
"Investment Objective and Policies" in the Prospectus for a discussion of the
investment objective and policies of the Fund.
The Fund will effect portfolio transactions without regard to holding period
if, in the judgment of the Fund's investment adviser, Merrill Lynch Asset
Management, L.P., doing business as Merrill Lynch Asset Management (the
"Investment Adviser"), such transactions are advisable in light of a change in
circumstances of a particular issuer or within a particular industry or in
general market, economic or financial conditions. Accordingly, while the Fund
anticipates that its annual turnover rate should not exceed 200% under normal
conditions, it is impossible to predict portfolio turnover rates. The portfolio
turnover rate is calculated by dividing the lesser of the Fund's annual sales
or purchases of portfolio securities (exclusive of purchases or sales of all
securities whose maturities at the time of acquisition were one year or less)
by the monthly average value of the securities in the portfolio during the
year. For the fiscal years ended October 31, 1992 and 1993, the Fund's
portfolio turnover rates were 120.77% and 284.62%, respectively.
The U.S. Government has from time to time in the past imposed restrictions,
through taxation and otherwise, on foreign investments by U.S. investors such
as the Fund. If such restrictions should be reinstituted, it might become
necessary for the Fund to invest all or substantially all of its assets in U.S.
securities. In such an event, the Fund would review its investment objective
and investment policies to determine whether changes are appropriate. Any
changes in the investment objective or fundamental policies set forth under
"Investment Restrictions" below would require the approval of the holders of a
majority of the Fund's outstanding voting securities.
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 Fund does not believe that these considerations will have any
significant effect on its portfolio strategy, although there can be no
assurance in this regard.
HEDGING TECHNIQUES
Reference is made to the discussion concerning hedging techniques under the
caption "Hedging Techniques" in the Prospectus.
The Fund may engage in various portfolio strategies to hedge its portfolio
against interest rate and currency risks. These strategies include use of
options on its portfolio securities, financial and currency futures and options
on such futures and forward foreign currency transactions. While the Fund's use
of hedging strategies is intended to reduce the volatility of the net asset
value of its shares, the net asset value of the Fund's shares will fluctuate.
2
<PAGE>
Although certain risks are involved in options and futures transactions (as
discussed below in "Risk Factors in Options and Futures Transactions"), the
Investment Adviser believes that, because the Fund will engage in these
transactions only for hedging purposes, the options and futures portfolio
strategies of the Fund will not subject the Fund to the risks frequently
associated with the speculative use of options and futures transactions.
The following information relates to the hedging instruments that the Fund
may utilize with respect to interest rate and currency risks.
The Fund may purchase and write (i.e., sell) call options and put options on
securities, enter into closing purchase transactions with respect to such
options and engage in transactions in financial futures as described below.
Writing Options. The Fund will receive a premium from writing a call option,
which increases the Fund's return on the underlying security in the event the
option expires unexercised or is closed out at a profit. The amount of the
premium will reflect, among other factors, the current market price of the
underlying security, the relationship of the exercise price to the market
price, interest rates and the time period until the expiration of the option.
By writing a call, the Fund limits its opportunity to profit from an increase
in the market value of the underlying security above the exercise price of the
option for as long as the Fund's obligation as a writer continues. Thus, in
some periods the Fund will receive less total return and in other periods
greater total return from its hedged positions than it would have received from
its underlying securities unhedged. To facilitate closing transactions, as
described below, the Fund will ordinarily write only options for which a
secondary market exists.
The Fund may engage in closing transactions in order to terminate outstanding
exchange-traded options that it has written. To effect a closing transaction,
the Fund purchases, prior to the exercise of an outstanding option that it has
written, an option of the same series as that on which it desires to terminate
its obligation. Profit or loss from a closing purchase transaction will depend
on whether the cost of such transaction is more or less than the premium
received on the sale of the option plus the related transaction costs.
The Fund may also enter into over-the-counter ("OTC") put and call option
transactions, which are two party contracts with prices and terms negotiated
between the buyer and seller. The Fund will enter into OTC option transactions
only with respect to portfolio securities for which management believes the
Fund can receive on each business day at least two independent bids or offers
(one of which will be from an entity other than a party to the option).
Purchase of Put Options. The Fund may purchase put options in connection with
its hedging activities. By buying a put, the Fund has the right to sell the
underlying securities at the exercise price, thus limiting the Fund's risk of
loss through a decline in the market value of the security until the put
expires.
Futures Contracts. The Fund may purchase and sell financial futures contracts
("futures contracts") as a hedge against adverse changes in interest rates. A
futures contract is an agreement between two parties to buy and sell a
security, respectively, for a set price on a future date. The Fund may effect
transactions in futures contracts in U.S. and foreign agency and government
securities and corporate debt securities traded on U.S. and foreign exchanges,
as well as on OTC markets.
The Fund may sell futures contracts in anticipation of an increase in the
general level of interest rates. Generally, as interest rates rise, the market
value of the securities held by the Fund will fall, thus reducing
3
<PAGE>
the net asset value of the Fund. This interest rate risk can be reduced without
employing futures as a hedge by selling long-term securities and either
reinvesting the proceeds in securities with shorter maturities or by holding
assets in cash. This strategy, however, entails increased transaction costs in
the form of dealer spreads and brokerage commissions and typically would reduce
the Fund's average yield as a result of the shortening of maturities.
The sale of futures contracts provides an alternative means of hedging
against rising interest rates. As rates increase the value of the Fund's short
position in the futures contracts will also tend to increase, thus offsetting
all or a portion of the depreciation in the market value of the Fund's
investments which are being hedged. While the Fund will incur commission
expenses in selling and closing out futures positions (which is done by taking
an opposite position which operates to terminate the position in the futures
contract), commissions on futures transactions are lower than transaction costs
incurred in the purchase and sale of portfolio securities.
The Fund may purchase futures contracts in anticipation of a decline in
interest rates when it is not fully invested in order to gain rapid market
exposure that may in part or entirely offset an increase in the cost of long-
term securities it intends to purchase. As such purchases are made, an
equivalent amount of futures contracts will be closed out. In a substantial
majority of these transactions, the Fund will purchase securities upon
termination of the futures contracts. Due to changing market conditions and
interest rate forecasts, however, a futures position may be terminated without
a corresponding purchase of securities.
Options on Financial Futures. The Fund may purchase and write call and put
options on futures contracts in connection with its hedging activities.
Generally, these strategies would be employed under the same market and market
sector conditions in which the Fund entered into futures contracts. The Fund
may purchase put options or write call options on futures contracts rather than
selling the underlying futures contracts in anticipation of an increase in
interest rates. Similarly, the Fund may purchase call options or write put
options on futures contracts as a substitute for the purchase of such futures
to hedge against the increased cost resulting from a decline in interest rates
of securities which the Fund intends to purchase.
RISK FACTORS IN OPTIONS AND FUTURES TRANSACTIONS
Utilization of futures transactions involves the risk of imperfect
correlation in movements in the price of futures contracts and movements in the
price of the securities which are the subject of the hedge. If the price of the
futures contract moves more or less than the price of the security, the Fund
will experience a gain or loss which will not be completely offset by movements
in the price of the debt securities which are the subject of the hedge. There
is also a risk of imperfect correlation when the securities underlying futures
contracts have different maturities than the portfolio securities being hedged.
Transactions in currency futures and options on interest rate and currency
futures contracts involve similar risks.
Prior to exercise or expiration, an exchange-traded option position can only
be terminated by entering into a closing purchase or sale transaction. This
requires a secondary market on an exchange for call or put options of the same
series. Similarly, positions in interest rate and currency futures may be
closed out only on an exchange which provides a secondary market for such
futures. The Fund will enter into an option or futures transaction on an
exchange only if there appears to be a liquid secondary market for such options
or futures. However, there can be no assurance that a liquid secondary market
will exist for any particular call or put option or futures contract at any
specific time. Thus, it may not be possible to close an option or futures
position. The Fund will acquire only OTC options for which management believes
the Fund can receive on each business day at least two independent bids or
offers (one of which will be from an entity
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other than a party to the option), unless there is only one dealer, in which
case such dealer's price will be used or which can be sold at a formula price
provided for in the over-the-counter option agreement. In the case of a futures
position or an option on a futures position written by the Fund, in the event
of adverse price movements, the Fund will continue to be required to make daily
cash payments of variation margin. In such situations, if the Fund has
insufficient cash, it may have to sell portfolio securities to meet daily
variation margin requirements at a time when it may be disadvantageous to do
so. In addition, the Fund may be required to take or make delivery of the
instruments or currencies underlying futures contracts it holds. The inability
to close options and futures positions also could have an adverse impact on the
Fund's ability effectively to hedge its portfolio. There is also the risk of
loss by the Fund of margin deposits in the event of bankruptcy of a broker with
whom the Fund has an open position in a futures contract or related option. The
risk of loss from investing in futures transactions is theoretically unlimited.
The exchanges on which the Fund intends to conduct options transactions
generally have established limitations governing the maximum number of call or
put options on the same underlying security (whether or not covered) which may
be written by a single investor, whether acting alone or in concert with others
(regardless of whether such options are written on the same or different
exchanges or are held or written on one or more accounts or through one or more
brokers). "Trading Limits" are imposed on the maximum number of contracts which
any person may trade on a particular trading day. An exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions. The Investment Adviser does not believe
that these trading and position limits will have any adverse impact on the
portfolio strategies for hedging the Fund's portfolio.
FORWARD FOREIGN EXCHANGE TRANSACTIONS
Generally, the foreign exchange transactions of the Fund will be conducted on
a spot, i.e., cash, basis at the spot rate for purchasing or selling currency
prevailing in the foreign exchange market. This rate under normal market
conditions differs from the prevailing exchange rate in an amount generally
less than one-tenth of one percent due to the costs of converting from one
currency to another. However, the Fund has authority to deal in forward foreign
exchange between currencies of the different countries in whose securities it
will invest as a hedge against possible variations in the foreign exchange
rates between these currencies. This is accomplished through contractual
agreements to purchase or sell a specified currency at a specified future date
and price set at the time of the contract. The Fund's dealings in forward
foreign exchange will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or
sale of forward foreign currency with respect to specific receivables or
payables of the Fund accruing in connection with the purchase and sale of its
portfolio securities, the sale and redemption of shares of the Fund or the
payment of dividends and distributions by the Fund. Position hedging is the
sale of forward foreign currency with respect to portfolio security positions
denominated or quoted in such foreign currency. The Fund will not speculate in
forward foreign exchange. The Fund may not position hedge with respect to the
currency of a particular country to an extent greater than the aggregate market
value (at the time of making such sale) of the securities held in its portfolio
denominated or quoted in that particular foreign currency. If the Fund enters
into a position hedging transaction, its custodian bank will place cash or
liquid securities in a separate account of the Fund in an amount equal to the
value of the Fund's total assets committed to the consummation of such forward
contract. If the value of the securities placed in the separate account
declines, additional cash or securities will be placed in the account so that
the value of the account will equal the amount of the Fund's commitment with
respect to such contracts. The Fund will not enter into a forward contract with
a term of more than one year.
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Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the
currency at a price above the devaluation level it anticipates. The cost to the
Fund of engaging in foreign currency transactions varies with such factors as
the currency involved, the length of the contract period and the market
conditions then prevailing. Since transactions in foreign currency exchange are
usually conducted on a principal basis, no fees or commissions are involved.
OTHER INVESTMENT POLICIES AND PRACTICES
Repurchase Agreements and Purchase and Sale Contracts. The Fund may invest in
securities pursuant to repurchase agreements or purchase and sale contracts.
Repurchase agreements may be entered into only with a member bank of the
Federal Reserve System or a primary dealer in U.S. Government securities.
Purchase and sale contracts may be entered into only with financial
institutions which have capital of at least $50 million or whose obligations
are guaranteed by an entity having capital of at least $50 million. Under such
agreements, the other party agrees, upon entering into the contract with the
Fund, 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, the Fund
will require the seller to provide additional collateral if the market value of
the securities falls below the repurchase price at any time during the term of
the repurchase agreement; the Fund does not have the right to seek additional
collateral in the case of purchase and sale contracts. In the event of default
by the seller under a repurchase agreement construed to be a collateralized
loan, the underlying securities are not owned by the Fund but only constitute
collateral for the seller's obligation to pay the repurchase price. Therefore,
the Fund may suffer time delays and incur costs or possible losses in
connection with the disposition of the collateral. A purchase and sale contract
differs from a repurchase agreement in that the contract arrangements stipulate
that the securities are owned by the Fund. In the event of a default under such
a repurchase agreement or under a purchase and sale contract, instead of the
contractual fixed rate of return, the rate of return to the Fund would depend
on intervening fluctuations of the market values of such securities and the
accrued interest on the securities. In such an 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. The Fund may not invest more than 10% of its net assets in repurchase
agreements or purchase and sale contracts maturing in more than seven days,
together with all other illiquid investments. While the substance of purchase
and sale contracts is similar to repurchase agreements, because of the
different treatment with respect to accrued interest and additional collateral,
management believes that purchase and sale contracts are not repurchase
agreements as such term is understood in the banking and brokerage community.
Lending of Portfolio Securities. Subject to investment restriction (8) below,
the Fund may lend securities from its portfolio to approved borrowers and
receive therefor collateral in cash or securities issued or guaranteed by the
U.S. Government which are maintained at all times in an amount equal to at
least 100%
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of the current market value of the loaned securities. The purpose of such loans
is to permit the borrower to use such securities for delivery to purchasers
when such borrower has sold short. If cash collateral is received by the Fund,
it is invested in short-term money market securities, and a portion of the
yield received in respect of such investment is retained by the Fund.
Alternatively, if securities are delivered to the Fund as collateral, the Fund
and the borrower negotiate a rate for the loan premium to be received by the
Fund for lending its portfolio securities. In either event, the total yield on
the Fund's portfolio is increased by loans of its portfolio securities. The
Fund will have the right to regain record ownership of loaned securities to
exercise beneficial rights such as voting rights, subscription rights and
rights to dividends, interest or other distributions. Such loans are terminable
at any time. The Fund may pay reasonable finder's, administrative and custodial
fees in connection with such loans. With respect to the lending of portfolio
securities, there is the risk of failure by the borrower to return the
securities involved in such transactions.
INVESTMENT RESTRICTIONS
The Fund has adopted a number of restrictions and policies relating to the
investment of its assets and its activities which are fundamental policies and
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities (which for this purpose and under the
Investment Company Act of 1940, as amended (the "Investment Company Act"),
means the lesser of (i) 67% of the Fund's shares 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 total assets (taken at market value at the time of each
investment) in the securities of issuers in any particular industry except
that, under normal circumstances, the Fund will invest more than 25% of its
total assets in issuers in the banking industry. This restriction will not
apply to securities issued or guaranteed by the U.S. Government or by its
agencies or instrumentalities, but will apply to obligations of a foreign
government unless the Securities and Exchange Commission permits their
exclusion; (2) invest more than 5% of its total assets (taken at market value
at the time of each investment) in unsecured securities of corporate issuers
which, including predecessors, controlling persons, general partners and
guarantors, have a record of less than three years' continuous business
operation or relevant business experience (provided that such restriction shall
not apply to issuers of mortgage-backed and receivable backed bonds, notes or
passthrough certificates); (3) make investments for the purpose of exercising
control or management; (4) purchase securities of other investment companies,
except in connection with a merger, consolidation, acquisition or
reorganization or by purchase of securities of closed-end investment companies
and only if immediately thereafter not more than (i) 3% of the total
outstanding voting stock of any one such company is owned by the Fund, (ii) 5%
of the Fund's total assets, taken at market value, would be invested in any one
such company, or (iii) 10% of the Fund's total assets, taken at market value,
would be invested in such companies' securities. Investments by the Fund in
wholly-owned investment entities created under the laws of certain countries
for purposes of investing in such countries will not be deemed an investment in
other investment companies; (5) purchase or sell real estate (provided that
such restriction shall not apply to securities secured by real estate or
interest therein or issued by companies which invest in real estate or
interests therein), commodities or commodity contracts (except that the Fund
may deal in forward foreign exchange between currencies and the Fund may
purchase and sell interest rate and currency options, futures contracts and
related options and indexed notes and commercial paper), or interests or leases
in oil, gas or other mineral exploration or development programs (provided that
such restriction shall not apply to securities issued by companies which invest
in oil, gas or other mineral exploration or development programs); (6) purchase
any securities on margin, except for use of short-term credit necessary for
clearance of purchases and sales of portfolio securities (the deposit or
payment by the Fund of initial or variation margin
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<PAGE>
in connection with futures contracts or options transactions is not considered
the purchase of a security on margin); (7) make short sales of securities or
maintain a short position or invest in put, call, straddle or spread options
(this restriction does not apply to interest rate and currency options and
options on futures contracts); (8) make loans to other persons, provided that
the purchase of a portion of an issue of bonds, debentures or other debt
securities and investment in governmental and supranational obligations, short-
term commercial paper, certificates of deposit, bankers' acceptances and
repurchase agreements and purchase and sale contracts shall not be deemed to be
the making of a loan; (9) borrow amounts in excess of 10% of its total assets
taken at market value (including the amount borrowed), and then only from banks
as a temporary measure for extraordinary or emergency purposes, including to
meet redemptions or to settle securities transactions. Usually only "leveraged"
investment companies may borrow in excess of 5% of their assets; however, the
Fund will not borrow to increase income but only to meet redemption requests or
to settle securities transactions which might otherwise require untimely
disposition of portfolio securities. The Fund will not purchase securities
while borrowings exceed 5% of total assets except to honor prior commitments.
(For the purpose of this restriction, collateral arrangements with respect to
the writing of options, and, if applicable, futures contracts, options on
futures contracts, and collateral arrangements with respect to initial and
variation margin are not deemed to be a pledge of assets and neither such
arrangements nor the purchase or sale of futures or related options are deemed
to be the issuance of a senior security); (10) mortgage, pledge, hypothecate or
in any manner transfer as security for indebtedness any securities owned or
held by the Fund except as may be necessary in connection with borrowings
mentioned in (9) above, and then such mortgaging, pledging or hypothecating may
not exceed 10% of its total assets, taken at market value, or except as may be
necessary in connection with options, futures and related options transactions;
(11) invest in securities which cannot be readily resold or are illiquid
because of legal or contractual restrictions or are not otherwise readily
marketable if, regarding all such securities, more than 10% of its net assets
(taken at market value), would be invested in such securities; and (12) act as
an underwriter of securities, except to the extent that the Fund may
technically be deemed an underwriter when engaged in the activities described
in (11) above or insofar as the Fund may be deemed an underwriter by virtue of
selling portfolio securities.
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. To comply with tax requirements for qualification as a "regulated
investment company", however, the Fund's investments will be limited in a
manner such that, at the close of each quarter of each fiscal year, (a) no more
than 25% of the Fund's total assets are invested in the securities of a single
issuer, and (b) with regard to at least 50% of the Fund's total assets, no more
than 5% of its total assets are invested in the securities of a single issuer.
For purposes of this restriction, the Fund will regard each country and each
political subdivision, agency or instrumentality of such country and each
multi-national agency of which such country is a member and each public
authority which issues securities on behalf of a private entity as a separate
issuer, except that if the security is backed only by the assets and revenues
of a non-government entity, then the entity with the ultimate responsibility
for the payment of interest and principal may be regarded as the sole issuer.
In addition, the Fund will regard the issuer of participations in, or bonds and
notes backed by, pools of mortgage, credit card, automobile or other types of
receivables as being the limited purpose corporation or trust issuing the
participation certificates, bonds or notes as well as any other entity that is
or may be responsible for providing full payment on the underlying obligations
in the pool. These tax-related limitations may be changed by the Board of
Directors of the Fund to the extent necessary to comply with changes to the
Federal tax requirements. A fund which elects to be classified as "diversified"
under the Investment Company Act must satisfy the foregoing 5% and 10%
requirements with respect to 75% of its
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<PAGE>
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.
The staff of the Securities and Exchange Commission (the "Commission") has
taken the position that purchased OTC options and the assets used as cover for
written OTC options are illiquid securities. Therefore, the Fund has adopted an
investment policy pursuant to which it will not purchase or sell OTC options
if, as a result of such transaction, the sum of the market value of OTC options
currently outstanding which are held by the Fund, the market value of the
underlying securities covered by OTC call options currently outstanding which
were sold by the Fund and margin deposits on the Fund's existing OTC options on
futures contracts exceeds 10% of the net assets of the Fund, taken at market
value, together with all other assets of the Fund which are illiquid or are not
otherwise readily marketable. However, if the OTC option is sold by the Fund to
a primary U.S. Government securities dealer recognized by the Federal Reserve
Bank of New York and if the Fund has the unconditional contractual right to
repurchase such OTC option from the dealer at a predetermined price, then the
Fund will treat as illiquid such amount of the underlying securities as is
equal to the repurchase price less the amount by which the option is "in-the-
money" (i.e., current market value of the underlying securities minus the
option's strike price). The repurchase price with the primary dealers is
typically a formula price which is generally based on a multiple of the premium
received for the option, plus the amount by which the option is "in-the-money".
This policy as to OTC options is not a fundamental policy of the Fund and may
be amended by the Directors of the Fund without the approval of the Fund's
shareholders. However, the Fund will not change or modify this policy prior to
the change or modification by the Commission staff of its position.
The Directors have established the policy that the Fund will not purchase or
retain the securities of any issuer, if those individual officers and directors
of the Fund, the officers and general partner of the Investment Adviser, the
directors of such general partner or the directors and officers of the
Distributor each owning beneficially more than one-half of 1% of the securities
of each issuer own in the aggregate more than 5% of the securities of such
issuer. Portfolio securities of the Fund generally may not be purchased from,
sold or loaned to the Investment Adviser or its affiliates or any of their
directors, general partners, officers, or employees, acting as principal,
unless pursuant to a rule or exemptive order under the Investment Company Act.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Fund, the Fund is prohibited from
engaging in certain transactions involving such firm or its affiliates except
for brokerage transactions permitted under the Investment Company Act involving
only usual and customary commissions or transactions pursuant to an exemptive
order under the Investment Company Act. Included among such restricted
transactions will be purchases from or sales to Merrill Lynch of securities in
transactions in which it acts as principal. See "Portfolio Transactions and
Brokerage". Without such an exemptive order, the Fund would be prohibited from
engaging in portfolio transactions with Merrill Lynch or its affiliates acting
as principal and from purchasing securities in public offerings which are not
registered under the Securities Act of 1933, as amended (the "Securities Act"),
in which such firm or any of its affiliates participates as an underwriter or
dealer.
9
<PAGE>
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of each Director and executive officer is Box
9011, Princeton, New Jersey 08543-9011.
Arthur Zeikel--President and Director(1)(2)--President of the Investment
Adviser and its predecessor since 1977 and Chief Investment Officer of the
Investment Adviser and its predecessor since 1976; President of Fund Asset
Management, L.P. ("FAM") and its predecessor since 1977 and Chief Investment
Officer since 1976; President and Director of Princeton Services, Inc.
("Princeton Services") since 1993; Executive Vice President of Merrill Lynch
since 1990 and a Senior Vice President thereof from 1985 to 1990; Executive
Vice President of Merrill Lynch & Co., Inc. since 1990; Director of the
Distributor.
Donald Cecil--Director(2)--1114 Avenue of the Americas, New York, New York
10036. Special Limited Partner of Cumberland Partners (investment partnership)
since 1982; Member of Institute of Chartered Financial Analysts; Member and
Chairman of Westchester County (N.Y.) Board of Transportation.
Edward H. Meyer--Director(2)--777 Third Avenue, New York, New York 10017.
President of Grey Advertising Inc. since 1968, Chief Executive Officer since
1970 and Chairman of the Board of Directors since 1972; Director of The May
Department Stores Company, Bowne & Co., Inc. (financial printers), Ethan Allen
Interiors Inc. and Harman International Industries, Inc.
Charles C. Reilly--Director(2)--9 Hampton Harbor Road, Hampton Bays, N.Y.
11946. Self-employed financial consultant since 1990; President and Chief
Investment Officer of Verus Capital, Inc. from 1979 to 1990; former Senior Vice
President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business since 1990; Adjunct
Professor, Wharton School, University of Pennsylvania, 1990; Director, Harvard
Business School Alumni Association.
Richard R. West--Director(2)--482 Tepi Drive, Southbury, Connecticut 06488.
Professor of Finance since 1984, and Dean from 1984 to 1993, of New York
University Leonard N. Stern School of Business Administration; Director of
Bowne & Co., Inc. (financial printers), Vornado, Inc. (real estate holding
company), Smith-Corona Corporation (manufacturer of typewriters and word
processors) and Alexander's, Inc.
Terry K. Glenn--Executive Vice President(1)(2)--Executive Vice President of
the Investment Adviser and FAM and their predecessors since 1983; Executive
Vice President and Director of Princeton Services since 1993; President and
Director of the Distributor since 1986.
Joseph T. Monagle, Jr.--Senior Vice President(1)(2)--Senior Vice President
and Department Head of the Global Short-Term Fixed Income Division of the
Investment Adviser and its predecessor and associated therewith since 1977;
Senior Vice President of Princeton Services since 1993.
Alex V. Bouzakis--Vice President(1)(2)--Vice President and Senior Portfolio
Manager of the Investment Adviser and its predecessor and associated therewith
since 1982.
David B. Walter--Vice President(1)(2)--Vice President and Portfolio Manager
of the Investment Adviser and its predecessor since 1984.
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<PAGE>
Stephen Yardley--Vice President(1)(2)--Vice President and Portfolio Manager
of Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") and associated
therewith since 1992; Portfolio Manager at Julius Baer Investment Management,
Inc. and Bankers Trust prior thereto.
Donald C. Burke--Vice President(1)(2)--Vice President and Director of
Taxation of the Investment Adviser and its predecessor since 1990; employee of
Deloitte & Touche from 1982 to 1990.
Edward F. Gobora--Vice President(1)--Vice President and Portfolio Manager of
the Investment Adviser since 1993, and associated therewith and with its
predecessor since 1988.
Gerald M. Richard--Treasurer(1)(2)--Senior Vice President and Treasurer of
the Investment Adviser and FAM and their predecessors since 1984; Senior Vice
President and Treasurer of Princeton Services since 1993; Vice President of the
Distributor since 1981 and Treasurer since 1984.
Mark B. Goldfus--Secretary(1)(2)--Vice President of the Investment Adviser
and FAM and their predecessors since 1985.
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(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 its subsidiary, FAM,
acts as investment adviser or manager.
At January 31, 1994, the Directors and officers of the Fund as a group (14
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, and the other officers
of the Fund owned less than 1% of the outstanding shares of common stock of
Merrill Lynch & Co., Inc.
The Fund pays each Director not affiliated with the Investment Adviser a fee
of $3,500 per year plus $500 per meeting attended, together with such
Director's actual out-of-pocket expenses relating to attendance at meetings.
The Fund also compensates members of its Audit and Nominating Committee, which
consists of all the non-affiliated Directors at a rate of $500 per meeting
attended. The Chairman of the Audit and Nominating Committee receives an
additional fee of $250 per meeting attended. For the fiscal year ended October
31, 1993, fees and expenses paid to such nonaffiliated Directors aggregated
$30,737.
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Fund--Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities may be held by, or be appropriate investments for, the Fund as
well as other funds or investment advisory clients of the Investment Adviser or
its affiliates. Because of different objectives or other factors, a particular
security may be bought for one or more clients when one or more clients are
selling the same security. If the Investment Adviser purchases or sells
securities for the Fund or other funds for which it acts as investment adviser
or for its other advisory clients, and such purchases or sales arise for
consideration at or about the same time, transactions in such securities will
be made, insofar as feasible, for the respective funds and clients in a manner
deemed equitable to all. To the extent that transactions on behalf of more than
one client of the Investment Adviser or its affiliates during the same period
may increase the demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price.
Pursuant to an investment advisory agreement between the Fund and the
Investment Adviser (the "Investment Advisory Agreement"), the Investment
Adviser receives for its services to the Fund monthly compensation at the
annual rate of 0.55% of the average daily net assets of the Fund not exceeding
$2 billion,
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<PAGE>
0.525% of the average daily net assets of the Fund in excess of $2 billion but
not exceeding $4 billion, 0.50% of the average daily net assets of the Fund in
excess of $4 billion but not exceeding $6 billion, 0.475% of the average daily
net assets of the Fund in excess of $6 billion but not exceeding $10 billion,
0.45% of the average daily net assets of the Fund in excess of $10 billion but
not exceeding $15 billion, and 0.425% of the average daily net assets of the
Fund in excess of $15 billion. For the fiscal period August 3, 1990
(commencement of operations) to December 27, 1990, the total investment
advisory fees paid by the Fund to the Investment Adviser aggregated $4,874,812.
For the fiscal period December 28, 1990, to October 31, 1991, the total
investment advisory fees paid by the Fund to the Investment Adviser aggregated
$22,482,527. For the fiscal year ended October 31, 1992, the total investment
advisory fees paid by the Fund to the Investment Adviser aggregated
$30,132,076. For the fiscal year ended October 31, 1993, the total investment
advisory fees paid by the Fund to the Investment Adviser aggregated
$12,966,035.
The Investment Adviser has also entered into a sub-advisory agreement with
MLAM U.K., a wholly-owned, indirect subsidiary of Merrill Lynch & Co., Inc. and
an affiliate of the Investment Adviser, pursuant to which the Investment
Adviser pays MLAM U.K. a fee in an amount to be determined from time to time by
the Investment Adviser and MLAM U.K. but in no event in excess of the amount
that the Investment Adviser actually receives for providing services to the
Fund pursuant to the Investment Advisory Agreement. For the fiscal year ended
October 31, 1993, the Investment Adviser paid MLAM U.K. a fee of $712,838
pursuant to the sub-advisory agreement.
California imposes limitations on the expenses of the Fund. These annual
expense limitations require that the Investment Adviser reimburse the Fund in
an amount necessary to prevent the aggregate ordinary operating expenses
(excluding interest, taxes, brokerage fees and commissions, distribution fees
and extraordinary charges such as litigation costs) from exceeding in any
fiscal year 2.5% of the Fund's first $30 million of average daily net assets,
2.0% of the next $70 million of average daily net assets and 1.5% of the
remaining average daily net assets. To date such reimbursement has not been
required. The Investment Adviser's obligation to reimburse the Fund is limited
to the amount of the investment advisory fee. No fee payment will be made to
the Investment Adviser during any fiscal year which will cause such expenses to
exceed expense limitations at the time of such payment.
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 Merrill
Lynch & Co., Inc. or any of its subsidiaries. The Fund pays all other expenses
incurred in its operation including, among other things, redemption expenses,
expenses of portfolio transactions, expenses of registering the shares under
Federal and state securities laws, pricing costs (including the daily
calculation of net asset value), expenses of printing shareholder reports,
prospectuses and statements of additional information (except to the extent
paid by the Distributor as described below), fees for legal and auditing
services, Commission fees, interest, certain taxes, fees and expenses of
unaffiliated Directors, state franchise taxes, costs of printing proxies and
other expenses related to shareholder meetings, and other expenses properly
payable by the Fund. The organizational expenses of the Fund will be paid by
the Fund. Accounting services are provided to the Fund by the Investment
Adviser and the Fund reimburses the Investment Adviser for its costs in
connection with such services. For the fiscal period August 3, 1990
(commencement of operations) to December 27, 1990, the amount of such
reimbursement was $25,000. For the period December 28, 1990, to October 31,
1991, the amount of such reimbursement was $108,518. For the fiscal year ended
October 31, 1992, the amount of
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<PAGE>
such reimbursement was $378,904. For the fiscal year ended October 31, 1993,
the amount of such reimbursement was $230,453. As required by the Fund's
distribution agreements, the Distributor will pay certain promotional expenses
of the Fund incurred in connection with the offering of its shares. Certain
expenses in connection with the account maintenance and/or distribution of
Class A and Class B shares will be financed by the Fund pursuant to separate
distribution plans in compliance with Rule 12b-1 under the Investment Company
Act. See "Purchase of Shares--Alternative Sales Arrangements--Distribution
Plans".
Merrill Lynch & Co., Inc., Merrill Lynch Investment Management, Inc. and
Princeton Services, Inc. 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.
Duration and Termination. Unless earlier terminated as described below, the
Investment Advisory Agreement and the sub-advisory agreement will remain in
effect from year to year if approved annually (a) by the 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 contracts or interested persons (as
defined in the Investment Company Act) of any such party. Such contracts are
not assignable and may be terminated without penalty on 60 days' written notice
at the option of either party thereto or by vote of the shareholders of the
Fund.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
ALTERNATIVE SALES ARRANGEMENTS
The Fund issues two classes of shares: Class A shares are sold to investors
choosing the initial sales charge alternative, and Class B shares are sold to
investors choosing the deferred sales charge alternative. The two classes of
shares each represent interests in the same portfolio of investments of the
Fund, have the same rights and are identical in all respects, except that (i)
Class B shares bear the expenses of the deferred sales arrangements, any
expenses (including incremental transfer agency costs) resulting from such
sales arrangements, and the expenses paid by the account maintenance fee and
(ii) that the Class A shares bear the expenses of the ongoing account
maintenance fee, and (iii) each class has exclusive voting rights with respect
to the Rule 12b-1 distribution plan pursuant to which the account maintenance
and distribution fees, in the case of the Class B shares, and the account
maintenance fee, in the case of the Class A shares, is paid. The two classes
also have different exchange privileges. See "Shareholder Services--Exchange
Privilege".
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offering of Class A and Class B
shares of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the
offering of the Class A and Class B 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 and sub-advisory agreement described above.
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<PAGE>
Distribution Plans. Reference is made to "Purchase of Shares--Alternative
Sales Arrangements--Distribution Plans" in the Prospectus for certain
information with respect to the Distribution Plans of the Fund.
The payment of the account maintenance fee and distribution fee with respect
to Class B shares and the account maintenance fee with respect to Class A
shares is subject to the provisions of Rule 12b-1 under the Investment Company
Act. See "General Information--Description of Shares". 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. In their consideration of the
Distribution Plans, the Directors must consider all factors they deem relevant,
including information as to the benefits of the Distribution Plans to the Fund
and its shareholders. Each Distribution Plan further provides that, so long as
the Distribution Plan remains in effect, the selection and nomination of
Directors who are not "interested persons" of the Fund, as defined in the
Investment Company Act (the "Independent Directors"), shall be committed to the
discretion of the Independent Directors then in office. In approving each
Distribution Plan in accordance with Rule 12b-1, the Independent Directors
concluded that there is reasonable likelihood that the Distribution Plan will
benefit the Fund and its respective 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 Class A or Class B voting securities of the Fund voting separately
by Class. Each Distribution Plan cannot be amended to increase materially the
amount to be spent by the Fund without approval by 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 Plans and any reports made
pursuant to such plans for a period of not less than six years from the date of
the Distribution Plans or such report, the first two years in an easily
accessible place.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
For the period August 3, 1990 (commencement of operations) to December 27,
1990, $4,201,213 was received by the Distributor as sales charges on Class A
shares sold, of which $4,108,675 was paid to Merrill Lynch as selected dealer.
The gross sales charges for the sale of Class A shares for the period December
28, 1990, to October 31, 1991, were $3,424,069, of which the Distributor
received $379,419 and Merrill Lynch received $3,044,650. The gross sales
charges for the sale of Class A shares for the fiscal year ended October 31,
1992, were $816,657, of which the Distributor received $59,176 and Merrill
Lynch received $757,481. The gross sales charges for the sale of Class A shares
for the fiscal year ended October 31, 1993, were $83,097, of which the
Distributor received $10,009 and Merrill Lynch received $73,088. For
information as to brokerage commissions received by Merrill Lynch, see
"Portfolio Transactions and Brokerage".
The term "purchase" as used in the Prospectus and this Statement of
Additional Information refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his spouse and their children under the
age of 21 years purchasing shares for his or their own account and to single
purchases by a trustee or other fiduciary purchasing shares for a single trust
estate or single fiduciary account (including a pension, profit-sharing or
other employee benefit trust created pursuant to a plan qualified under Section
401 of the Internal Revenue Code of 1986, as amended (the "Code")) although
more than one beneficiary is involved. The term "purchase" also includes
purchases by any "company", as that term is defined in the Investment Company
Act, but does not include purchases by any such company which has not been in
existence for at least six months or which has no
14
<PAGE>
purpose other than the purchase of shares of the Fund or shares of other
registered investment companies at a discount.The term "purchase" shall not
include purchases by any group of individuals whose sole organizational nexus
is that the participants therein are credit cardholders of a company,
policyholders of an insurance company, customers of either a bank or broker-
dealer or clients of an investment adviser. The term "purchase" also includes
purchases by employee benefit plans not qualified under Section 401 of the
Code, including purchases by employees or by employers on behalf of employees,
by means of a payroll deduction plan or otherwise, of shares of the Fund.
Purchases by such a company or non-qualified employee benefit plan will qualify
for the quantity discounts discussed above only if the Fund and the Distributor
are able to realize economies of scale in sales effort and sales related
expense by means of the company, employer or plan making the Fund's Prospectus
available to individual investors or employees and forwarding investments by
such persons to the Fund and by any such employer or plan bearing the expense
of any payroll deduction plan.
REDUCED INITIAL SALES CHARGES--CLASS A SHARES
Right of Accumulation. Reduced sales charges are applicable through a right
of accumulation under which eligible investors are permitted to purchase Class
A shares of the Fund at the offering price applicable to the total of (a) the
dollar amount 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 the Class A shares and Class B shares of the Fund and of any other
investment company with a sales charge for which the Distributor acts as the
distributor. 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.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $100,000 or more of Class A shares of the Fund or any other
investment company with an initial sales charge or a deferred sales charge for
which the Distributor acts as the distributor made within a thirteen-month
period starting with the first purchase pursuant to a Letter of Intention in
the form provided in the Prospectus. The Letter of Intention is available only
to investors whose accounts are maintained at the Fund's transfer agent. The
Letter of Intention is not available to employee benefit plans for which
Merrill Lynch provides plan-participant record-keeping services. The Letter of
Intention is not a binding obligation to purchase any amount of Class A shares;
however, its execution will result in the purchaser paying a lower sales charge
at the appropriate quantity purchase level. A purchase not originally made
pursuant to a Letter of Intention may be included under a subsequent Letter of
Intention executed within 90 days of such purchase if the Distributor is
informed in writing of this intent within such 90-day period. The value of
Class A shares of the Fund and of other investment companies with a sales
charge for which the Distributor acts as the distributor presently held, at
cost or maximum offering price (whichever is higher), on the date of the first
purchase under the Letter of Intention, may be included as a credit toward the
completion of such Letter, but the reduced sales charge applicable to the
amount covered by such Letter will be applied only to new purchases. If the
total amount of shares purchased does not equal the amount stated in the Letter
of Intention (minimum of $100,000), 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 shares purchased at the reduced rate and the sales
charge applicable to the shares actually purchased through the Letter. Class A
shares equal to five percent of the intended amount will be held in escrow
during the thirteen-month period (while remaining registered in the name of the
purchaser) for this purpose. The first purchase under the Letter of Intention
must be at least five percent of the dollar amount of such Letter. If a
purchase during the term of such Letter would otherwise be subject to
15
<PAGE>
a further reduced sales charge based on the right of accumulation, the
purchaser will be entitled on that purchase and subsequent purchases to the
reduced percentage sales charge which would be applicable to a single purchase
equal to the total dollar value of the Class A shares then being purchased
under such Letter, but there will be no retroactive reduction of the sales
charges on any previous purchase.
The value of any shares redeemed or otherwise disposed of by the purchaser
prior to termination or completion of the Letter of Intention will be deducted
from the total purchases made under such Letter. An exchange from Merrill
Lynch U.S. Treasury Money Fund, Merrill Lynch Ready Assets Trust, Merrill
Lynch Retirement Reserves Money Fund or Merrill Lynch U.S.A. Government
Reserves into the Fund that creates a sales charge will count toward
completing a new or existing Letter of Intention from the Fund.
Merrill Lynch BlueprintSM Program. Class A shares of the Fund are offered to
participants in the Merrill Lynch Blueprint SM Program ("Blueprint").
Blueprint is directed to small investors, group IRAs and participants in
certain affinity groups such as credit unions and trade associations.
Investors placing orders to purchase Class A shares of the Fund through
Blueprint will acquire the Class A shares at net asset value plus a sales
charge calculated in accordance with the Blueprint sales charge schedule
(i.e., up to $5,000 at 2.75% and $5,000.01 or more at the standard sales
charge rates disclosed in the Prospectus). In addition, Class A shares of the
Fund are being offered at net asset value plus a sales charge of 1/2 of 1% for
corporate or group IRA programs placing orders to purchase their Class A
shares through Blueprint. Services, including the exchange privilege,
available to Class A investors through Blueprint, however, may differ from
those available to other investors in Class A shares.
Class A shares are offered at net asset value, with a waiver of the front-
end sales charge, to Blueprint participants through the Merrill Lynch Directed
IRA Rollover Program ("IRA Rollover Program") available from Merrill Lynch
Business Financial Services, a business unit of Merrill Lynch. The IRA
Rollover Program is available to custodian rollover assets from Eligible
Retirement Plans (as defined below) whose Trustee and/or Plan Sponsor offers
the Merrill Lynch Directed IRA Rollover Program. Eligible Retirement Plans
include (a) plans qualified under Section 401(k) of the Code with a salary
reduction feature offering a menu of investments to plan participants,
provided such plan initially has 1,000 or more employees eligible to
participate in the plan (employees eligible to participate in retirement plans
of the same sponsoring employer or its affiliates may be aggregated); or (b)
tax qualified retirement plans within the meaning of Section 401(a) of the
Code or deferred compensation plans within the meaning of Section 403(b) of
the Code, provided the plan (i) initially invested $5 million or more in
existing plan assets in portfolios, mutual funds or trusts advised by the
Manager or its subsidiaries or (ii) has accumulated $5 million or more in
existing plan assets invested in mutual funds advised by the Investment
Adviser or its subsidiaries, which charge a front-end sales charge or
contingent deferred sales charge (assets of retirement plans with the same
sponsor or an affiliated sponsor may be aggregated).
Orders for purchases and redemptions of Class A shares of the Fund may be
grouped for execution purposes which, in some circumstances, may involve the
execution of such orders two business days following the day such orders are
placed. The minimum initial purchase price is $100, with a $50 minimum for
subsequent purchases through Blueprint. There are no minimum initial or
subsequent purchase requirements for participants who are part of an automatic
investment plan. Additional information concerning purchases through
Blueprint, including any annual fees and transaction charges, is available
from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint SM
Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
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<PAGE>
TMA/SM/Managed Trusts. Class A shares are offered to TMA/SM/ Managed Trusts to
which Merrill Lynch Trust Company provides discretionary trustee services at net
asset value plus a reduced sales charge of 0.50% of the offering price, which is
0.50% of the net amount invested.
Employer Sponsored Retirement and Savings Plans. Class A shares are offered
at net asset value to employer sponsored retirement or savings plans, such as
tax qualified retirement plans within the meaning of Section 401(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), deferred compensation
plans within the meaning of Sections 403(b) and 457 of the Code, other
deferred compensation arrangements, VEBA plans, and non-qualified After Tax
Savings and Investment programs, maintained on the Merrill Lynch Group
Employee Services system, herein referred to as "Employer Sponsored Retirement
or Savings Plans", provided the plan has $5 million or more in existing plan
assets initially invested in portfolios, mutual funds or trusts advised by the
Investment Adviser either directly or through an affiliate. Class A shares may
also be offered at net asset value to Employer Sponsored Retirement or Savings
Plans, provided the plan has accumulated $5 million or more in existing plan
assets invested in mutual funds advised by the Investment Adviser charging a
front-end sales charge or contingent deferred sales charge. Assets of Employer
Sponsored Retirement or Savings Plans sponsored by the same sponsor or an
affiliated sponsor may be aggregated. The Class A share reduced load
breakpoints also apply to these aggregated assets. Class A shares may be
offered at net asset value to multiple plans sponsored by the same sponsor or
an affiliated sponsor provided that the addition of one or more of the
multiple plans results in aggregate assets of $5 million or more invested in
portfolios, mutual funds or trusts advised by the Investment Adviser either
directly or through an affiliate. Employer Sponsored Retirement or Savings
Plans are also offered Class A shares at net asset value, provided such plan
initially has 1,000 or more employees eligible to participate in the plan.
Employees eligible to participate in Employer Sponsored Retirement or Savings
Plans of the same sponsoring employer or its affiliates may be aggregated. Tax
qualified retirement plans within the meaning of Section 401(a) of the Code
meeting any of the foregoing requirements and which are provided specialized
services (e.g., plans whose participants may direct on a daily basis their
plan allocations among a wide range of investments including individual
corporate equities and other securities in addition to mutual fund shares) by
the Merrill Lynch BlueprintSM Program, are offered Class A shares at a price
equal to net asset value per share plus a reduced sales charge of 0.50%. Any
Employer Sponsored Retirement or Savings Plan which does not meet the above
described qualifications to purchase Class A shares at net asset value has the
option of purchasing Class A shares at the sales charge schedule disclosed in
the Prospectus, or if the Employer Sponsored Retirement or Savings Plan is a
qualified retirement plan and meets the specified requirements, then it may
purchase Class B shares with a waiver of the contingent deferred sales charge
upon redemption. The minimum initial and subsequent purchase requirements are
waived in connection with all the above referenced Employer Sponsored
Retirement or Savings Plans.
Purchase Privilege of Certain Persons. Directors of the Fund, directors and
trustees of certain other Merrill Lynch sponsored investment companies,
directors of Merrill Lynch & Co., Inc., employees of Merrill Lynch & Co., Inc.
and its subsidiaries and any trust, pension, profit-sharing or other benefit
plan for such persons may purchase Class A shares of the Fund at net asset
value.
Class A shares of the Fund will be offered at net asset value, without a
sales charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor if the following
conditions are satisfied. First, the investor must purchase Class A 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 imposed a sales
charge either at the time of purchase or on a deferred basis. Second, such
redemption must have been made within 60 days
17
<PAGE>
prior to the investment in the Fund, and the proceeds from the redemption must
have been maintained in the interim in cash or a money market fund.
Class A shares of the Fund are offered at net asset value to shareholders of
Senior Floating Rate Fund (formerly known as Merrill Lynch Prime Fund, Inc.)
who wish to reinvest the net proceeds from a sale of certain of their shares of
common stock of Senior Floating Rate Fund in shares of the Fund. In order to
exercise this investment option, Senior Floating Rate Fund shareholders must
sell their Senior Floating Rate Fund shares to Senior Floating Rate Fund in
connection with a tender offer conducted by Senior Floating Rate Fund and
reinvest the proceeds immediately in the Fund. This investment option is
available only with respect to the proceeds of Senior Floating Rate Fund shares
as to which no Early Withdrawal Charge (as defined in the Senior Floating Rate
Fund prospectus) is applicable. Purchase orders from Senior Floating Rate Fund
shareholders wishing to exercise this investment option will be accepted only
on the day that the related Senior Floating Rate Fund tender offer terminates
and will be effected at the net asset value of the Fund at such day.
Class A shares of the Fund are offered at net asset value to shareholders of
certain closed-end funds advised by the Investment Adviser or FAM who wish to
reinvest the net proceeds from a sale of their closed-end fund shares of common
stock in shares of the Fund. In order to exercise this investment option,
closed-end fund shareholders must (i) sell their closed-end fund shares through
Merrill Lynch and reinvest the proceeds immediately in the Fund, (ii) have
acquired the shares in the closed-end fund's initial public offering or through
reinvestment of dividends earned on shares purchased in such offering, (iii)
have maintained their closed-end fund shares continuously in a Merrill Lynch
account, and (iv) purchase a minimum of $250 worth of Fund shares.
Class A shares of the Fund are also offered at net asset value, without sales
charge, to an investor who has a business relationship with a Merrill Lynch
financial consultant and who has invested in a mutual fund sponsored by a non-
Merrill Lynch company for which Merrill Lynch has served as a selected dealer
and where Merrill Lynch has either received or given notice that such
arrangement will be terminated, if the following conditions are satisfied:
first, the investor must purchase Class A shares of the Fund with proceeds from
a redemption of shares of such other mutual fund and such fund imposed a sales
charge either at the time of purchase or on a deferred basis; second, such
purchase of Class A shares must be made within 90 days after such notice of
termination.
Acquisition of Certain Investment Companies. The public offering price of
Class A shares may be reduced to the net asset value per Class A share in
connection with the acquisition of the assets of or merger or consolidation
with a public or private investment company. The value of the assets or company
acquired in a tax-free transaction may be adjusted in appropriate cases to
reduce possible adverse tax consequences to the Fund which might result from an
acquisition of assets having net unrealized appreciation which is
disproportionately higher at the time of acquisition than the realized or
unrealized appreciation of the Fund.
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.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
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<PAGE>
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended only for any period during which trading on the
New York Stock Exchange is restricted as determined by the Commission or such
Exchange is closed (other than customary weekend and holiday closings), for
any period during which an emergency exists as defined by the Commission as a
result of which disposal of portfolio securities or determination of the net
asset value of the Fund is not reasonably practicable, and for such other
periods as the Commission may by order permit for the protection of
shareholders of the Fund.
CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
As discussed in the Prospectus under "Purchase of Shares--Deferred Sales
Charge Alternative--Class B Shares", while Class B shares redeemed within
three years of purchase are subject to a contingent deferred sales charge
under most circumstances, the charge is waived on redemptions of Class B
shares in connection with certain postretirement withdrawals from an
Individual Retirement Account ("IRA") or other retirement plan or following
the death or disability of a Class B shareholder. Redemptions for which the
waiver applies are: (a) any partial or complete redemption in connection with
a tax-free distribution following retirement under a tax-deferred retirement
plan or attaining age 59 in the case of an IRA or other retirement plan, or
any redemption resulting from the tax-free return of an excess contribution to
an IRA; or (b) any partial or complete redemption following the death or
disability (as defined in the Code) of a Class B shareholder (including one
who owns the Class B shares as joint tenant with his or her spouse), provided
the redemption is requested within one year of the death or initial
determination of disability. For the fiscal period August 3, 1990
(commencement of operations) to December 27, 1990, the Distributor received
contingent deferred sales charges of $583,227, all of which was paid to
Merrill Lynch. For the fiscal period December 28, 1990, to October 31, 1991,
the Distributor received contingent deferred sales charges of $4,933,486, all
of which was paid to Merrill Lynch. For the fiscal year ended October 31,
1992, the Distributor received contingent deferred sales charges of
$26,204,557 with respect to redemptions of Class B shares, all of which was
paid to Merrill Lynch. For the fiscal year ended October 31, 1993, the
Distributor received contingent deferred sales charges of $10,977,755 with
respect to redemptions of Class B shares, all of which was paid to Merrill
Lynch.
Merrill Lynch Blueprint Program/SM/. Class B shares are offered to certain
participants in the Merrill Lynch Blueprint Program ("Blueprint"). Blueprint
is directed to small investors, group IRAs and participants in certain
affinity groups such as trade associations and credit unions. Class B shares
of the Fund are offered through Blueprint only to members of certain affinity
groups. The contingent deferred sales charge is waived in connection with
purchase orders placed through Blueprint. Services, including the exchange
privilege, available to Class B investors through Blueprint, however, may
differ from those available to other investors in Class B shares. Orders for
purchases and redemptions of Class B shares of the Fund will be grouped for
execution purposes which, in some circumstances, may involve the execution of
such orders two business days following the day such orders are placed. The
minimum initial purchase price is $100, with a $50 minimum for subsequent
purchases through Blueprint. There is no minimum initial or subsequent
purchase requirement for investors who are part of the Blueprint automatic
investment plan. Additional information concerning these Blueprint programs,
including any annual fees or transaction charges, is available from Merrill
Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint Program/SM/, P.O. Box
30441, New Brunswick, New Jersey 08989-0441.
Retirement Plans. Any Retirement Plan which does not meet the qualifications
to purchase Class A shares at net asset value has the option of purchasing
Class A shares at the sales charge schedule disclosed in the Prospectus, or if
the Retirement Plan meets the following requirements, then it may purchase
Class B shares with a waiver of the contingent deferred sales charge upon
redemption. The contingent deferred sales
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<PAGE>
charge is waived for any Eligible 401(k) Plan redeeming Class B shares. The
contingent deferred sales charge is also waived for redemptions from a 401(a)
plan qualified under the Code, provided, however, that each such plan has the
same or an affiliated sponsoring employer as an Eligible 401(k) Plan purchasing
Class B shares of a mutual fund advised by the Investment Adviser or FAM
("Eligible 401(a) Plan"). The contingent deferred sales charge is waived for
any Class B shares which are purchased by an Eligible 401(k) Plan or Eligible
401(a) Plan and are rolled over into a Merrill Lynch or Merrill Lynch Trust
Company custodied IRA and held in such account at the time of redemption. The
minimum initial and subsequent purchase requirements are waived in connection
with all the above referenced Retirement Plans.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Reference is made to "Investment Objective and Policies--Other Investment
Policies and Practices--Portfolio Transactions" in the Prospectus.
Subject to policies established by the Directors of the Fund, the Investment
Adviser is primarily responsible for the execution of the Fund's portfolio
transactions. In executing such transactions, the Investment Adviser seeks to
obtain the best net results for the Fund, taking into account such factors as
price (including the applicable brokerage commission or dealer spread), size of
order, difficulty of execution and operational facilities of the firm involved
and the firm's risk in positioning a block of securities. Subject to obtaining
the best price and execution, brokers who provide supplemental investment
research 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 the
Investment Advisory Agreement, and the expenses of the Investment Adviser will
not necessarily be reduced as a result of the receipt of such supplemental
information. Consistent with the Rules of Fair Practice of the National
Association of Securities Dealers, Inc., 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. It is possible that certain of
the supplementary investment research so received will primarily benefit one or
more other investment companies or other accounts for which investment
discretion is exercised. Conversely, the Fund may be the primary beneficiary of
the research or services received as a result of portfolio transactions
effected for such other accounts or investment companies.
The Directors have considered the possibilities of seeking to recapture for
the benefit of the Fund brokerage commissions and other expenses of possible
portfolio transactions by conducting portfolio transactions through affiliated
entities. For example, brokerage commissions received by affiliated brokers
could be offset against the investment advisory fee paid by the Fund. After
considering all factors deemed relevant, the Directors made a determination not
to seek such recapture. The Directors will reconsider this matter from time to
time.
DETERMINATION OF NET ASSET VALUE
The net asset value of the Fund is determined by the Investment Adviser once
daily, Monday through Friday, as of 4:15 p.m., New York time, on each day
during which the New York Stock Exchange is open for trading. The New York
Stock Exchange is not open on New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Net asset value per share is computed by dividing the sum of the value of the
securities held by the Fund plus any cash or other assets minus all liabilities
by the total number of shares outstanding at such time, rounded to the
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<PAGE>
nearest cent. Expenses, including the fees payable to the Investment Adviser
and Distributor, are accrued daily. The net asset value per share of the Class
A and Class B shares is expected to be equivalent. Under certain circumstances,
however, the per share net asset value of the Class B shares may be lower than
the per share net asset value of the Class A shares reflecting the higher daily
expense accruals of the distribution and higher transfer agency fees applicable
with respect to the Class B shares. Even under those circumstances, the per
share net asset value of the two classes eventually will tend to converge
immediately after the payment of dividends, which will differ by approximately
the amount of the expense accrual differential between the classes.
Securities traded in the OTC market are valued at the last available bid
price or yield equivalents obtained from one or more dealers in the OTC market
prior to the time of valuation. When the Fund writes a call option, the amount
of the premium received is recorded on the books of the Fund as an asset and an
equivalent liability. The amount of the liability is subsequently valued to
reflect the current market value of the option written, based on the last asked
price in the case of exchange-traded options or, in the case of options traded
in the OTC market, the average of the last asked price as obtained from one or
more dealers. Options purchased by the Fund are valued at their last bid price
in the case of exchange-traded options or, in the case of options traded in the
OTC market, the average of the last bid price as obtained from two or more
dealers unless there is only one dealer, in which case that dealer's price is
used. Portfolio securities which are traded on stock exchanges are valued at
the last sale price on the principal market on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. Other investments,
including futures contracts and related options, are stated at market value or
otherwise at the fair value at which it is expected they may be resold, as
determined in good faith by or under the direction of the Board of Directors.
Any assets or liabilities expressed in terms of foreign currencies are
translated into U.S. dollars at the prevailing market rates as obtained from
one or more dealers.
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.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designed to facilitate investment in shares of the Fund. Full details as to
each of such services can be obtained from the Fund, the Distributor or Merrill
Lynch. Certain of these services are available only to U.S. investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the transfer agent has an
Investment Account and will receive monthly statements from the transfer agent
showing any reinvestment of dividends and capital gain distributions activity
in the account since the previous statement. Shareholders also will receive
separate confirmations for each purchase or sale transaction other than
reinvestment of dividends and capital gains distributions. Shareholders may
make additions to their Investment Account at any time by mailing a check
directly to the transfer agent.
Share certificates are issued only for full shares and only upon the specific
request of 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.
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AUTOMATIC INVESTMENT PLAN
A shareholder may make additions to an Investment Account at any time by
purchasing Class A or Class B shares at the applicable public offering price
either through the shareholder's securities dealer or by mail directly to the
Fund's transfer agent, acting as agent for such securities dealers. Voluntary
accumulation also can be made through a service known as the Automatic
Investment Plan whereby the Fund is authorized through pre-authorized checks of
$50 or more to charge the regular bank account of the shareholder on a regular
basis to provide systematic additions to the Investment Account of such
shareholder. An investor whose shares of the Fund are held within a CMA (R)
account may arrange to have periodic investments made in the Fund in amounts of
$250 or more through the CMA Automatic Investment Program. The Automatic
Investment Program is not available to shareholders whose shares are held in a
brokerage account with Merrill Lynch other than a CMA (R) account.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions to the contrary are given as to the method of
payment of dividends and capital gains distributions, dividends and
distributions will be reinvested automatically in additional shares of the
Fund. Such reinvestment will be at the net asset value of the shares of the
Fund, without sales charges, as of the close of business on the monthly payment
date for such dividends and distributions. Shareholders may elect in writing to
receive either their dividends or capital gains distributions, or both, in
cash, in which event payment will be mailed on or about the payment date.
Shareholders may, at any time, notify the transfer agent in writing or by
telephone (1-800-MER-FUND) that they no longer wish to have their dividends
and/or distributions reinvested in shares of the Fund or vice versa, and
commencing ten days after receipt by the transfer agent of such notice, those
instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS--CLASS A SHARES
A Class A shareholder may elect to make withdrawals from an Investment
Account on either a monthly or quarterly basis as provided below. Quarterly
withdrawals are available for shareholders who have acquired Class A shares of
the Fund having a value, based on cost or the current offering price, of $5,000
or more, and monthly withdrawals are available for shareholders with Class A
shares with such a value of $10,000 or more.
At the time of each withdrawal payment, sufficient Class A shares are
redeemed from those on deposit in the shareholder's account to provide the
withdrawal payment specified by the shareholder. The shareholder may specify
either a dollar amount or a percentage of the value of his Class A shares.
Redemptions will be made at net asset value as determined at the close of
business of the New York Stock Exchange on the 24th day of each month or the
24th day of the last month of each quarter, whichever is applicable. If the
exchange is not open for business on such date, the Class A shares will be
redeemed at the close of business on the following business day. The check for
the withdrawal payment will be mailed, or the direct deposit of withdrawal
payment will be made, on the next business day following redemption. When a
shareholder is making systematic withdrawals, dividends and distributions on
all Class A shares in the Investment Account are reinvested automatically in
Fund Class A 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.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original
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investment may be reduced correspondingly. Purchases of additional Class A
shares concurrent with withdrawals are ordinarily disadvantageous to the
shareholder because of sales charges and tax liabilities. The Fund will not
knowingly accept purchase orders for Class A shares of the Fund from investors
who maintain a Systematic Withdrawal Plan unless such purchase is equal to at
least one year's scheduled withdrawals or $1,200, whichever is greater.
Periodic investments may not be made into an Investment Account in which the
shareholder has elected to make systematic withdrawals.
A Class A shareholder whose shares are held within a CMA(R), CBA(R) or
Retirement Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the Systematic Redemption
Program. The minimum fixed dollar amount redeemable is $25. The proceeds of
systematic redemptions will be posted to the shareholder's account five
business days after the date the shares are redeemed. Monthly systematic
redemptions will be made at net asset value on the first Monday of each month,
bimonthly systematic redemptions will be made at net asset value on the first
Monday of every other month, and quarterly, semiannual or annual redemptions
are made at net asset value on the first Monday of months selected at the
shareholder's option. If the first Monday of the month is a holiday, the
redemption will be processed at net asset value on the next business day. The
Systematic Redemption Program is not available if Fund shares are being
purchased within the account pursuant to the Automatic Investment Program. For
more information on the Systematic Redemption Program, eligible shareholders
should contact their Financial Consultant.
EXCHANGE PRIVILEGE
U.S. Class A and Class B shareholders of the Fund may exchange their Class A
or Class B shares of the Fund for shares of the same class of Merrill Lynch
Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income Fund,
Inc., Merrill Lynch Arizona Limited Maturity Municipal Bond Fund, Merrill Lynch
Arizona Municipal Bond Fund, Merrill Lynch Balanced Fund for Investment and
Retirement, Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California
Insured Municipal Bond Fund, Merrill Lynch California Limited Maturity
Municipal Bond Fund, Merrill Lynch California Municipal Bond Fund, Merrill
Lynch Capital Fund, Inc., Merrill Lynch Colorado Municipal Bond Fund, Merrill
Lynch Corporate Bond Fund, Inc., Merrill Lynch Developing Capital Markets Fund,
Inc. (shares of which are deemed Class A shares for purposes of the exchange
privilege), Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill
Lynch Federal Securities Trust, Merrill Lynch Florida Limited Maturity
Municipal Bond Fund, Merrill Lynch Florida Municipal Bond Fund, Merrill Lynch
Fund For Tomorrow, Inc., Merrill Lynch Fundamental Growth Fund, Inc., Merrill
Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for
Investment and Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill
Lynch Global Holdings (residents of Arizona must meet investor suitability
standards), Merrill Lynch Global Resources Trust, Merrill Lynch Global Utility
Fund, Inc., Merrill Lynch Growth Fund for Investment and Retirement, Merrill
Lynch Healthcare Fund, Inc. (residents of Wisconsin must meet investor
suitability standards), Merrill Lynch International Equity Fund, Merrill Lynch
Latin America Fund, Inc., Merrill Lynch Maryland Municipal Bond Fund, Merrill
Lynch Massachusetts Limited Maturity Municipal Bond Fund, Merrill Lynch
Massachusetts Municipal Bond Fund, Merrill Lynch Michigan Limited Maturity
Municipal Bond Fund, Merrill Lynch Michigan Municipal Bond Fund, Merrill Lynch
Minnesota Municipal Bond Fund, Merrill Lynch Municipal Bond Fund, Inc., Merrill
Lynch Municipal Intermediate Term Fund, Merrill Lynch New Jersey Limited
Maturity Municipal Bond Fund, Merrill Lynch New Jersey Municipal Bond Fund,
Merrill Lynch New York Limited Maturity Municipal Bond Fund, Merrill Lynch New
York Municipal Bond Fund, Merrill Lynch North Carolina Municipal Bond Fund,
Merrill Lynch Ohio Municipal Bond Fund, Merrill
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Lynch Oregon Municipal Bond Fund, Merrill Lynch Pacific Fund, Inc., Merrill
Lynch Pennsylvania Limited Maturity Municipal Bond Fund, Merrill Lynch
Pennsylvania Municipal Bond Fund, Merrill Lynch Phoenix Fund, Inc., Merrill
Lynch Special Value Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill
Lynch Technology Fund, Inc., Merrill Lynch Texas Municipal Bond Fund, Merrill
Lynch Utility Income Fund, Inc. and Merrill Lynch World Income Fund, Inc. on
the basis described below. In addition, Class A shareholders of the Fund may
exchange their Class A shares for shares of Merrill Lynch U.S.A. Government
Reserves, Merrill Lynch U.S. Treasury Money Fund and Merrill Lynch Ready
Assets Trust (or Merrill Lynch Retirement Reserves Money Fund if the exchange
occurs within certain retirement plans) (together, the "Class A money market
funds"), and Class B shareholders of the Fund may exchange their Class B
shares for shares of Merrill Lynch Government Fund, Merrill Lynch
Institutional Fund, Merrill Lynch Treasury Fund and Merrill Lynch
Institutional Tax-Exempt Fund (together, the "Class B money market funds") on
the basis described below. Shares with a net asset value of at least $250 are
required to qualify for the exchange privilege, and any shares utilized in an
exchange must have been held by the shareholder for 15 days. Certain funds
into which exchanges may be made may impose a redemption fee (not in excess of
2.00% of the amount redeemed) on shares purchased through the exchange
privilege when such shares are subsequently redeemed, including redemption
through subsequent exchanges. Such redemption fee would be in addition to any
contingent deferred sales charge otherwise applicable to a redemption of Class
B shares. It is contemplated that the exchange privilege may be applicable to
other new mutual funds whose shares may be distributed by the Distributor. The
exchange privilege available to participants in the Merrill Lynch Blueprint SM
Program may be different from that available to other investors.
Under the exchange privilege, each of the funds with Class A shares
outstanding offers to exchange its Class A shares ("new Class A shares") for
Class A shares ("outstanding Class A shares") of any of the other funds, on
the basis of relative net asset value per Class A share, plus an amount equal
to the difference, if any, between the sales charge previously paid on the
outstanding Class A shares and the sales charge payable at the time of the
exchange on the new Class A shares. With respect to outstanding Class A 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 shares in the initial purchase and any subsequent exchange. Class
A shares issued pursuant to dividend reinvestment are sold on a no-load basis
in each of the funds offering Class A shares. For purposes of the exchange
privilege, Class A 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 shares on which the dividend was paid. Based on
this formula, Class A shares of the Fund generally may be exchanged into the
Class A shares of the other funds or into shares of the Class A money market
funds with a reduced or without a sales charge.
In addition, each of the funds with Class B shares outstanding offers to
exchange its Class B shares ("new Class B shares") for Class B shares
("outstanding Class B shares") of any of the other funds on the basis of
relative net asset value per Class B share, without the payment of any
contingent deferred sales charge 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 contingent
deferred sales charge schedule if such schedule is higher than the deferred
sales charge 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 contingent
deferred sales charge schedule if such schedule is higher than the deferred
sales charge schedule relating to the Class B shares of the fund from which
the exchange has been made. For purposes of computing the sales charge that
may be payable on a disposition of the new Class B shares, the holding period
for the outstanding Class B shares is "tacked" to the holding
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<PAGE>
period of the new Class B shares. For example, an investor may exchange Class B
shares of the Fund for those of Merrill Lynch Global Resources Trust (formerly
Merrill Lynch Natural Resources Trust) after having held the Fund's Class B
shares for two and a half years. The 1% sales charge 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 Merrill Lynch Global Resources Trust
and receive cash. There will be no contingent deferred sales charge due on this
redemption, since by "tacking" the two and a half year holding period of the
Fund's Class B shares to the three year holding period for the Merrill Lynch
Global Resources Trust Class B shares, the investor will be deemed to have held
the new Class B shares for more than five years.
Shareholders also may exchange Class A shares and Class B shares from any of
the funds into shares of the Class A money market funds and Class B money
market funds, respectively, but the period of time that Class B shares are held
in a Class B money market fund will not count towards satisfaction of the
holding period requirement for purposes of reducing the contingent deferred
sales charge. However, shares of a Class B money market fund which were
acquired as a result of an exchange for Class B shares of a fund may, in turn,
be exchanged back into Class B shares of any fund offering such shares, in
which event the holding period for Class B shares of the fund will be
aggregated with previous holding periods for purposes of reducing the
contingent deferred sales charge. Thus, for example, an investor may exchange
Class B shares of the Fund for shares of Merrill Lynch Institutional Fund after
having held the Class B shares for two and a half years and three years later
decide to redeem the shares of Merrill Lynch Institutional Fund for cash. At
the time of this redemption, the 1% contingent deferred sales charge that would
have been due had the Class B shares of the Fund been redeemed for cash rather
than exchanged for shares of Merrill Lynch Institutional Fund will be payable.
If, instead of such redemption the shareholder exchanged such shares for Class
B shares of a fund which the shareholder continues to hold for an additional
two and a half years, any subsequent redemption will not incur a contingent
deferred sales charge.
Below is a description of the investment objectives of the other funds into
which exchanges can be made:
Merrill Lynch Adjustable
Rate Securities Fund, Inc.
............................ High current income consistent with a policy
of limiting the degree of fluctuation in net
asset value by investing primarily in a
portfolio of adjustable rate securities,
consisting principally of mortgage-backed
and asset-backed securities.
Merrill Lynch Americas
Income Fund, Inc. ......... A high level of current income, consistent
with prudent investment risk, by investing
primarily in debt securities denominated in
a currency of a country located in the
Western Hemisphere (i.e., North and South
America and the surrounding waters).
Merrill Lynch Arizona
Limited Maturity Municipal
Bond Fund................... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and Arizona income taxes as is
consistent with prudent investment
management through investment in a portfolio
primarily of intermediate-term investment
grade Arizona Municipal Bonds.
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Merrill Lynch Arizona
Municipal Bond Fund......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide investors with as
high a level of income exempt from Federal
and Arizona income taxes as is consistent
with prudent investment management.
Merrill Lynch Balanced Fund
for Investment and
Retirement.................. As high a level of total investment return as
is consistent with reasonable risk by
investing in common stocks and other types
of securities, including fixed income
securities and convertible securities.
Merrill Lynch Basic Value
Fund, Inc. ................. Capital appreciation and, secondarily, income
through investment in securities, primarily
equities, that are undervalued and therefore
represent basic investment value.
Merrill Lynch California
Insured Municipal Bond
Fund........................ A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund whose
objective is to provide shareholders with as
high a level of income exempt from Federal
and California income taxes as is consistent
with prudent investment management through
investment in a portfolio consisting
primarily of insured California Municipal
Bonds.
Merrill Lynch California
Municipal Bond Fund......... A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund whose
objective is to provide investors with as
high a level of income exempt from Federal
and California income taxes as is consistent
with prudent investment management.
Merrill Lynch California
Limited Maturity Municipal
Bond Fund................... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
shareholders with as high a level of income
exempt from Federal and California income
taxes as is consistent with prudent
investment management through investment in
a portfolio primarily of intermediate-term
investment grade California Municipal Bonds.
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Merrill Lynch Capital Fund,
Inc. ....................... The highest total investment return
consistent with prudent risk through a fully
managed investment policy utilizing equity,
debt and convertible securities.
Merrill Lynch Colorado
Municipal Bond Fund......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is as high a level of income
exempt from Federal and Colorado income
taxes as is consistent with prudent
investment management.
Merrill Lynch Corporate Bond
Fund, Inc. ................. Current income from three separate
diversified portfolios of fixed income
securities.
Merrill Lynch Developing
Capital Markets Fund, Inc.
............................ Long-term appreciation through investment in
securities, principally equities, of issuers
in countries having smaller capital markets.
Merrill Lynch Dragon Fund,
Inc. ....................... Capital appreciation primarily through
investment in equity and debt securities of
issuers domiciled in developing countries
located in Asia and the Pacific Basin, other
than Japan, Australia and New Zealand.
Merrill Lynch EuroFund....... Capital appreciation primarily through
investment in equity securities of
corporations domiciled in Europe.
Merrill Lynch Federal
Securities Trust............ High current return through investments in
U.S. Government and Government agency
securities, including GNMA mortgage-backed
certificates and other mortgage-backed
Government securities.
Merrill Lynch Florida
Limited Maturity Municipal
Bond Fund................... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is as high a
level of income exempt from Federal income
taxes as is consistent with prudent
investment management while serving to offer
shareholders the opportunity to own
securities exempt from Florida intangible
personal property taxes through investment
in a portfolio primarily of intermediate-
term investment grade Florida Municipal
Bonds.
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Merrill Lynch Florida
Municipal Bond Fund......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is as high a level of income
exempt from Federal income taxes as is
consistent with prudent investment
management while seeking to offer
shareholders the opportunity to own
securities exempt from Florida intangible
personal property taxes.
Merrill Lynch Fund For
Tomorrow, Inc. ............. Long-term growth through investment in a
portfolio of good quality securities,
primarily common stock, potentially
positioned to benefit from demographic and
cultural changes as they affect consumer
markets.
Merrill Lynch Fundamental
Growth Fund, Inc. .......... Long-term growth through investment in a
diversified portfolio of equity securities
placing particular emphasis on companies
that have exhibited above-average growth
rate in earnings.
Merrill Lynch Global
Allocation Fund, Inc. ...... High total return consistent with prudent
risk, through a fully managed investment
policy utilizing United States and foreign
equity, debt and money market securities,
the combination of which will be varied from
time to time both with respect to the types
of securities and markets in response to
changing market and economic trends.
Merrill Lynch Global Bond
Fund for Investment and
Retirement.................. High total investment return from investment
in a global portfolio of debt instruments
denominated in various currencies and multi-
national currency units.
Merrill Lynch Global
Convertible Fund, Inc. ..... High total return from investment primarily
in an internationally diversified portfolio
of convertible debt securities, convertible
preferred stock and "synthetic" convertible
securities consisting of a combination of
debt securities or preferred stock and
warrants or options.
Merrill Lynch Global
Holdings (residents of
Arizona must meet investor
suitability standards)...... The highest total investment return
consistent with prudent risk through
worldwide investment in an internationally
diversified portfolio of securities.
Merrill Lynch Global
Resources Trust............. Long-term growth and protection of capital
from investment in securities of domestic
and foreign companies that possess
substantial natural resource assets.
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Merrill Lynch Global Utility
Fund, Inc. ................. Capital appreciation and current income
through investment of at least 65% of its
total assets in equity and debt securities
issued by domestic and foreign companies
which are primarily engaged in the ownership
or operation of facilities used to generate,
transmit or distribute electricity,
telecommunications, gas or water.
Merrill Lynch Government
Fund........................ A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
consistent with liquidity and security of
principal from investment in securities
issued or guaranteed by the U.S. Government,
its agencies and instrumentalities and in
repurchase agreements secured by such
obligations.
Merrill Lynch Growth Fund
for Investment and
Retirement.................. Growth of capital and, secondarily, income
from investment in a diversified portfolio
of equity securities placing principal
emphasis on those securities which
management of the fund believes to be
undervalued.
Merrill Lynch Healthcare
Fund, Inc. (residents of
Wisconsin must meet
investor suitability
standards).................. Capital appreciation through worldwide
investment in equity securities of companies
that derive or are expected to derive a
substantial portion of their sales from
products and services in healthcare.
Merrill Lynch Institutional
Fund........................ A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide maximum current
income consistent with liquidity and the
maintenance of a high quality portfolio of
money market securities.
Merrill Lynch Institutional
Tax-Exempt Fund............. A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
exempt from Federal income taxes,
preservation of capital and liquidity
available from investing in a diversified
portfolio of short-term, high quality
municipal bonds.
Merrill Lynch International
Equity Fund................. Capital appreciation and, secondarily, income
by investing in a diversified portfolio of
equity securities of issuers located in
countries other than the United States.
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Merrill Lynch Latin America
Fund, Inc. ................. Capital appreciation by investing primarily
in Latin American equity and debt
securities.
Merrill Lynch Maryland
Municipal Bond Fund......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is as high a level of income
exempt from Federal and Maryland income
taxes as is consistent with prudent
investment management.
Merrill Lynch Massachusetts
Limited Maturity Municipal
Bond Fund................... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is as high a
level of income exempt from Federal and
Massachusetts income taxes as is consistent
with prudent investment management through
investment in a portfolio primarily of
intermediate-term investment grade
Massachusetts Municipal Bonds.
Merrill Lynch Massachusetts
Municipal Bond Fund......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is as high a level of income
exempt from Federal and Massachusetts income
taxes as is consistent with prudent
investment management.
Merrill Lynch Michigan
Limited Maturity Municipal
Bond Fund................... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is as high a
level of income exempt from Federal and
Michigan income taxes as is consistent with
prudent investment management through
investment in a portfolio primarily of
intermediate-term grade Michigan Municipal
Bonds.
Merrill Lynch Michigan
Municipal Bond Fund......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is as high a level of income
exempt from Federal and Michigan income
taxes as is consistent with prudent
investment management.
Merrill Lynch Minnesota
Municipal Bond Fund......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is as high a level of income
exempt from Federal and Minnesota income
taxes as is consistent with prudent
investment management.
Merrill Lynch Municipal Bond
Fund, Inc. ................. Tax-exempt income from three separate
diversified portfolios of municipal bonds.
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Merrill Lynch Municipal
Intermediate Term Fund...... Currently the only portfolio of Merrill Lynch
Municipal Series Trust, a series fund, whose
objective is to provide as high a level as
possible of income exempt from Federal
income taxes by investing in investment
grade obligations with a dollar weighted
average maturity of five to twelve years.
Merrill Lynch New Jersey
Limited Maturity Municipal
Bond Fund................... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is as high a
level of income exempt from Federal and New
Jersey income taxes as is consistent with
prudent investment management through a
portfolio primarily of intermediate-term
investment grade New Jersey Municipal Bonds.
Merrill Lynch New Jersey
Municipal Bond Fund......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is as high a level of income
exempt from Federal and New Jersey income
taxes as is consistent with prudent
investment management.
Merrill Lynch New York
Limited Maturity Municipal
Bond Fund................... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is as high a
level of income exempt from Federal, New
York State and New York City income taxes as
is consistent with prudent investment
management through investment in a portfolio
primarily of intermediate-term investment
grade New York Municipal Bonds.
Merrill Lynch New York
Municipal Bond Fund......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is as high a level of income
exempt from Federal, New York State and New
York City income taxes as is consistent with
prudent investment management.
Merrill Lynch North Carolina
Municipal Bond Fund......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is as high a level of income
exempt from Federal and North Carolina
income taxes as is consistent with prudent
investment management.
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Merrill Lynch Ohio Municipal
Bond Fund................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is as high a level of income
exempt from Federal and Ohio income taxes as
is consistent with prudent investment
management.
Merrill Lynch Oregon
Municipal Bond Fund......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is as high a level of income
exempt from Federal and Oregon income taxes
as is consistent with prudent investment
management.
Merrill Lynch Pacific Fund,
Inc. ....................... Capital appreciation by investing in equity
securities of corporations domiciled in Far
Eastern and Western Pacific countries,
including Japan, Australia, Hong Kong,
Singapore and the Philippines.
Merrill Lynch Pennsylvania
Limited Maturity Municipal
Bond Fund................... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and Pennsylvania income taxes as is
consistent with prudent investment
management through investment in a portfolio
of intermediate-term investment grade
Pennsylvania Municipal Bonds.
Merrill Lynch Pennsylvania
Municipal Bond Fund......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is as high a level of income
exempt from Federal and Pennsylvania income
taxes as is consistent with prudent
investment management.
Merrill Lynch Phoenix Fund,
Inc. ....................... Long-term growth of capital by investing in
equity and fixed income securities,
including tax-exempt securities, of issuers
in weak financial condition or experiencing
poor operating results believed to be
undervalued relative to the current or
prospective condition of such issuer.
Merrill Lynch Ready Assets
Trust....................... Preservation of capital, liquidity and the
highest possible current income consistent
with the foregoing objectives from the
short-term money market securities in which
the Trust invests.
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Merrill Lynch Retirement
Reserves Money Fund
(available only if the
exchange occurs within
certain retirement plans)... Currently the only portfolio of Merrill Lynch
Retirement Series Trust, a series fund,
whose objectives are current income,
preservation of capital and liquidity
available from investing in a diversified
portfolio of short-term money market
securities.
Merrill Lynch Special Value
Fund, Inc. ................. Long-term growth of capital from investments
in securities, primarily common stocks, of
relatively small companies believed to have
special investment value and emerging growth
companies regardless of size.
Merrill Lynch Strategic
Dividend Fund............... Long-term total return from investment in
dividend paying common stocks which yield
more than Standard & Poor's 500 Composite
Stock Price Index.
Merrill Lynch Technology
Fund, Inc. ................. Capital appreciation through worldwide
investment in equity securities of companies
that derive or are expected to derive a
substantial portion of their sales from
products and services in technology.
Merrill Lynch Texas
Municipal Bond Fund......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is as high a level of income
exempt from Federal income taxes as is
consistent with prudent investment
management by investing primarily in a
portfolio of long-term, investment grade
obligations issued by the State of Texas,
its political subdivisions, agencies and
instrumentalities.
Merrill Lynch Treasury Fund.. A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
consistent with liquidity and security of
principal from investment in direct
obligations of the U.S. Treasury and up to
10% of its total assets in repurchase
agreements secured by such obligations.
Merrill Lynch U.S.A.
Government Reserves......... Preservation of capital, current income and
liquidity available from investing in direct
obligations of the U.S. Government and
repurchase agreements relating to such
securities.
33
<PAGE>
Merrill Lynch U.S. Treasury
Money Fund..................
Preservation of capital, liquidity and
current income through investment
exclusively in a diversified portfolio of
short-term marketable securities which are
direct obligations of the U.S. Treasury.
Merrill Lynch Utility Income
Fund, Inc. ............
High current income through investment in
equity and debt securities issued by
companies which are primarily engaged in the
ownership or operation of facilities used to
generate, transmit or distribute
electricity, telecommunications, gas or
water.
Merrill Lynch World Income
Fund, Inc. .................
High current income by investing in a global
portfolio of fixed income securities
denominated in various currencies, including
multinational currencies.
Before effecting an exchange, shareholders of the Fund 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 for Federal
income tax purposes and, depending on the circumstances, a short- or long-term
capital gain or loss may be realized. In addition, a shareholder exchanging
shares of any of the funds may be subject to a backup withholding tax unless
such shareholder certifies under penalty of perjury that the taxpayer
identification number on file with any such fund is correct and that such
shareholder is not otherwise subject to backup withholding. See "Distributions
and Taxes" below.
To exercise the exchange privilege, shareholders should contact their Merrill
Lynch financial consultant, who will advise the Fund of the exchange, or if the
exchange does not involve a money market fund, shareholders may write to the
transfer agent requesting that the exchange be effected. Such letter must be
signed exactly as the account is registered with signatures guaranteed by an
"eligible guarantor institution" (including, for example, Merrill Lynch branch
offices and certain other financial institutions) as such is defined in Rule
17Ad-15 under the Securities Exchange Act of 1934, as amended, the existence
and validity of which may be verified by the transfer agent through the use of
industry publications. Shareholders of the Fund, and shareholders of the other
funds described above with shares for which certificates have not been issued,
may exercise the exchange privilege by wire through their securities dealers.
The Fund reserves the right to require a properly completed Exchange
Application. This exchange privilege may be modified or terminated in
accordance with the rules of the Commission. The Fund reserves the right to
limit the number of times an investor may exercise the exchange privilege.
Certain funds may suspend the continuous offering of their shares 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.
DISTRIBUTIONS AND TAXES
The Fund intends to continue to qualify the Fund for the special tax
treatment afforded regulated investment companies ("RICs") under the Internal
Revenue Code of 1986, as amended (the "Code"). If it so qualifies, the Fund
(but not its shareholders) will not be subject to Federal income tax on the
part of its net
34
<PAGE>
ordinary income and net realized capital gains which it distributes to Class A
and Class B shareholders (together, the "shareholders"). The Fund intends to
distribute substantially all of such income.
Dividends paid by the Fund from its ordinary income and distributions of the
Fund's net realized short-term capital gains (together referred to hereafter as
"ordinary income dividends") are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
(including long-term gains from certain transactions in futures and options)
("capital gain dividends") are taxable to shareholders as long-term capital
gains, regardless of the length of time the shareholder has owned Fund shares.
Distributions in excess of the Fund's earnings and profits will first reduce
the adjusted tax basis of a holder's shares and, after such adjusted tax basis
is reduced to zero, will constitute capital gains to such holder (assuming the
shares are held as a capital asset). 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.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. Distributions by the Fund, whether from ordinary income or capital
gains, will not be eligible for the dividends received deduction allowed to
corporations under the Code. If the Fund pays a dividend in January which was
declared in the previous October, November or December to shareholders of
record on a specified day in one of such months, then such dividend will be
treated for tax purposes as being paid by the Fund and received by its
shareholders on December 31 of the year in which such dividend was declared.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% U.S.
withholding tax under existing provisions of the Code applicable to foreign
individuals and entities unless a reduced rate of withholding or a withholding
exemption is provided under applicable treaty law. Nonresident shareholders are
urged to consult their own tax advisers concerning the applicability of the
U.S. withholding tax.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom a certified taxpayer identification
number is not on file with the Fund or who, to the Fund's knowledge, have
furnished an incorrect number. When establishing an account, an investor must
certify under penalty of perjury that such number is correct and that such
investor is not otherwise subject to backup withholding.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. 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. If more than 50% in value of the Fund's total
assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible, and intends, to file an election with
the Internal Revenue Service pursuant to which shareholders of the Fund will be
required to include their proportionate share of such withholding taxes in
their U.S. income tax returns as gross income, treat such proportionate share
as taxes paid by them, and deduct such proportionate share in computing their
taxable incomes or, alternatively, use them as foreign tax credits against
their U.S. income taxes. No deductions for foreign taxes, however, may be
claimed by noncorporate shareholders who do not itemize deductions. A
shareholder that is a nonresident alien individual or a foreign
35
<PAGE>
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. For this purpose,
the Fund will allocate foreign taxes and foreign source income between the
Class A and Class B shareholders according to a method (which it believes is
consistent with the Securities and Exchange Commission's exemptive order
permitting the issuance and sale of two classes of stock) that is based on the
gross income allocable to Class A and Class B shareholders during the taxable
year, or such other method as the Internal Revenue Service may prescribe.
If a Class A shareholder exercises the 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 the sales charge
paid to the Fund reduces any sales charge the shareholder would have owed upon
purchase of the new Class A shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new Class
A shares.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income
and capital gains in the manner necessary to avoid imposition of the 4% excise
tax, there can be no assurance that sufficient amounts of the Fund's taxable
income and capital gains will be distributed to avoid entirely the imposition
of the tax. In such event, the Fund will be liable for the tax only on the
amount by which it does not meet the foregoing distribution requirements.
TAX TREATMENT OF OPTIONS, FUTURES AND FORWARD FOREIGN EXCHANGE TRANSACTIONS
The Fund may write, purchase or sell options, futures or forward foreign
exchange contracts. Options and futures contracts that are "Section 1256
contracts" will be "marked to market" for Federal income tax purposes at the
end of each taxable year, i.e., each such option or futures contract will be
treated as sold for its fair market value on the last day of the taxable year.
Unless such contract is a non-equity option or a regulated futures contract for
a non-U.S. currency and the Fund elects to have gain or loss in connection with
the contract treated as ordinary gain or loss under Code Section 988 (as
described below), gain or loss from Section 1256 contracts will be 60% long-
term and 40% short-term capital gain or loss. The mark-to-market rules outlined
above, however, will not apply to certain transactions entered into by the Fund
solely to reduce the risk of changes in price or interest or currency exchange
rates with respect to its investments.
A forward foreign exchange contract that is a Section 1256 contract will be
market to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The
Fund may, nonetheless, elect to treat the gain or loss from certain forward
foreign exchange contracts as capital. In this case, gain or loss realized in
connection with a forward foreign exchange contract that is a Section 1256
contract will be characterized as 60% long-term and 40% short-term capital gain
or loss.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's transactions in options and futures contracts. Under
Section 1092, the Fund may be required to postpone recognition for tax purposes
of losses incurred in certain closing transactions in options and futures
contracts.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income must be derived from gains from the sale or other
disposition of securities held for less than three months.
36
<PAGE>
Accordingly, the Fund may be restricted in effecting closing transactions
within three months after entering into an options or futures contract.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether the Fund qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options, foreign currency
futures, and forward foreign exchange contracts will be valued for purposes of
the RIC diversification requirements applicable to the Fund. The Fund may
request a private letter ruling from the Internal Revenue Service on some or
all of these issues.
Under Code Section 988, special rules are provided for certain transactions
in a foreign 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 futures contracts that are not "regulated
futures contracts" and from unlisted options will be treated as ordinary income
or loss under Code Section 988. In certain circumstances, the Fund may elect
capital gain or loss treatment for such transactions. Regulated futures
contracts, as described above, will be taxed under Code Section 1256 unless
application of Section 988 is elected by the Fund. In general, however, Code
Section 988 gains or losses will increase or decrease the amount of the Fund's
investment company taxable income available to be distributed to shareholders
as ordinary income. Additionally, if Code Section 988 losses exceed other
investment company taxable income during a taxable year, the Fund would not be
able to make any ordinary dividend distributions, and any distributions made
before the losses were realized but in the same taxable year would be
recharacterized as a return of capital to shareholders, thereby reducing the
basis of each shareholder's Fund shares. 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 or administrative action
either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs which
are derived from interest on U.S. Government obligations. State law varies as
to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
PERFORMANCE DATA
From time to time, the Fund may include its average annual total return and
other total return data, as well as yield, in advertisements or information
furnished to present or prospective shareholders. 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 and Class B shares in accordance with
formulas specified by the Commission.
37
<PAGE>
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 shares and the contingent deferred sales charge that would be
applicable to a complete redemption of the investment at the end of the
specified period in the case of the Class B shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (1) as required by the 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
annual rates of return reflect compounding; aggregate total return data
generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over longer periods of time.
Set forth below is total return information for the Class A and Class B
shares of the Fund for the periods indicated.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
----------------------------------- -----------------------------------
REDEEMABLE REDEEMABLE
VALUE OF A VALUE OF A
EXPRESSED AS A HYPOTHETICAL EXPRESSED AS A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END OF ON A HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
------ ----------------- ----------------- ----------------- -----------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended October
31, 1993............... 2.12 % $1,021.20 1.70 % $1,017.00
August 3, 1990
(Inception) to October
31, 1993.............. 3.25 % $1,109.40 3.62 % $1,122.30
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended October
31, 1993............... 5.28 % $1,052.80 4.63 % $1,046.30
One Year Ended October
31, 1992............... (2.60)% $ 974.00 (3.00)% $ 970.00
One Year Ended October
31, 1991............... 9.36 % $1,093.60 8.58 % $1,085.80
August 3, 1990
(Inception) to October
31, 1990.............. 1.99 % $1,019.90 1.83 % $1,018.30
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
August 3, 1990
(Inception) to October
31, 1993.............. 10.94 % $1,109.40 12.23 % $1,122.30
</TABLE>
38
<PAGE>
In order to reflect the reduced sales charges in the case of Class A shares,
or the waiver of the contingent deferred sales charge, in the case of Class B
shares applicable to certain investors, as described under "Purchase of Shares"
and "Redemption of Shares", respectively, the total return data quoted by the
Fund in advertisements directed to such investors may take into account the
reduced, and not the maximum, sales charges or may not take into account the
contingent deferred sales charge and therefore may reflect greater total return
since, due to the reduced sales charges or the waiver of sales charges, a lower
amount of expenses is deducted.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund was incorporated under Maryland law on April 18, 1990. It has an
authorized capital of 2,000,000,000 shares of Common Stock, par value $0.10 per
share, divided into two classes, designated Class A and Class B Common Stock,
each of which consists of 1,000,000,000 shares. Both Class A and Class B shares
represent an interest in the same assets of the Fund and have identical voting,
dividend, liquidation and other rights and the same terms and conditions except
that expenses related to the account maintenance fee of the Class A shares and
the account maintenance and distribution fees of the Class B shares are borne
solely by each respective Class, and Class A and Class B shares have respective
exclusive voting rights with respect to matters relating to such account
maintenance and/or distribution expenditures. See "Purchase of Shares". The
Fund has received an order from the Commission permitting the issuance and sale
of two classes of Common Stock, and the issuance and sale of any additional
classes would require an additional order from the Commission. There is no
assurance that such an additional order would be granted.
All shares of the Fund have equal voting rights, except that as noted above,
each class of shares will have exclusive voting rights with respect to matters
relating to the distribution and/or account maintenance expenses being borne
solely by such class. Each issued and outstanding share is entitled to one vote
and to participate equally in dividends and distributions declared by the Fund
and in the net assets of the Fund remaining after satisfaction of outstanding
liabilities upon liquidation or dissolution. There normally will be no meetings
of shareholders for the purpose of electing Directors unless and until such
time as less than a majority of the Directors holding office have been elected
by shareholders, at which time the Directors then in office will call a
shareholders' meeting for the election of Directors. Shareholders may, in
accordance with the terms of the Articles of Incorporation, cause a meeting of
shareholders to be held for the purpose of voting on the removal of Directors.
Also, the Fund will be required to call a special meeting of shareholders in
accordance with the requirements of the Investment Company Act to seek approval
of new management and advisory arrangements, of a material increase in
distribution or account maintenance fees or of a change in the fundamental
policies, objective or restrictions of the Fund.
Shares issued are fully paid and nonassessable, have no preference,
preemptive, conversion, exchange or similar rights, and are freely
transferable. Holders of shares are entitled to redeem their shares as set
forth elsewhere herein and in the Prospectus. Shares do not have cumulative
voting rights, and the holders of more than 50% of the shares of the Fund
voting for the election of Directors can elect all of the Directors if they
choose to do so, and in such event the holders of the remaining shares would
not be able to elect any Directors. No amendments may be made to the Articles
of Incorporation without the affirmative vote of a majority of the outstanding
shares of the Fund.
The Investment Adviser provided the initial capital for the Fund by
purchasing 10,000 shares of the Fund for $100,000. Such shares were acquired
for investment and can only be disposed of by redemption.
39
<PAGE>
The organizational expenses of the Fund were paid by the Fund and will be
amortized over a period not exceeding five years. The proceeds realized by the
Investment Adviser upon the redemption of any of the shares initially purchased
by it will be reduced by the proportionate amount of unamortized organizational
expenses which the number of shares redeemed bears to the number of shares
initially purchased.
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class A and
Class B shares of the Fund based on the value of the Fund's net assets on
October 31, 1993, and its shares outstanding on that date is as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B
----------- --------------
<S> <C> <C>
Net Assets.......................................... $99,036,733 $1,664,602,279
=========== ==============
Number of Shares Outstanding........................ 11,442,594 192,366,028
=========== ==============
Net Asset Value Per Share (net assets divided by
number of shares outstanding)...................... $ 8.66 $ 8.65
Sales Charge (for Class A shares: 3.00% of offering $ .27 **
price (3.09% of net amount invested))*............. ----------- --------------
Offering Price...................................... $ 8.93 $ 8.65
=========== ==============
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge
is applicable.
** Class B shares are not subject to an initial sales charge but may be subject
to a contingent deferred sales charge which may be imposed on redemptions
made within three years of purchase. See "Purchase of Shares--Deferred Sales
Charge Alternative--Class B Shares" in the Prospectus and "Redemption of
Shares--Contingent Deferred Sales Charge--Class B Shares" herein.
INDEPENDENT AUDITORS
Deloitte & Touche, 117 Campus Drive, Princeton, New Jersey 08540, has been
selected as the independent auditors of the Fund. The selection of independent
auditors is subject to ratification by the shareholders of the Fund. The
independent auditors are responsible for auditing the annual financial
statements of the Fund.
CUSTODIAN
The Chase Manhattan Bank, N.A., Global Securities Services, Chase MetroTech
Center, Brooklyn, New York 11245 (the "Custodian"), acts as the custodian of
the Fund's assets.The Custodian is responsible for safeguarding and controlling
the Fund's cash and securities, handling the delivery of securities and
collecting interest on the Fund's investments.
TRANSFER AGENT
Financial Data Services, Inc., Transfer Agency Mutual Fund Operations, 4800
Deer Lake Drive East, Jacksonville, Florida 32246-6484, acts as the Fund's
transfer agent (the "Transfer Agent"). The Transfer Agent is responsible for
the issuance, transfer and redemption of shares and the opening, maintenance
and servicing of shareholder accounts. See "Management of the Fund--Transfer
Agency Services" in the Prospectus.
40
<PAGE>
LEGAL COUNSEL
Brown & Wood, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on October 31 of each year. The Fund sends
to its shareholders at least semi-annually reports showing the Fund's portfolio
and other information. An annual report, containing financial statements
audited by independent auditors, is sent to shareholders each year. After the
end of each year shareholders will receive Federal income tax information
regarding dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act and the Investment
Company Act, to which reference is hereby made.
Under a separate agreement, Merrill Lynch has granted the Fund the right to
use the "Merrill Lynch" name and has reserved the right to withdraw its consent
to the use of such name by the Fund at any time or to grant the use of such
name to any other company, and the Fund has granted Merrill Lynch, under
certain conditions, the use of any other name it might assume in the future,
with respect to any corporation organized by Merrill Lynch.
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's shares on January 31, 1994.
41
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Short-Term Global Income Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Short-Term Global Income Fund,
Inc. as of October 31, 1993, the related statements of operations for the year
then ended and changes in net assets for each of the years in the two-year
period then ended, and the financial highlights for the periods presented.
These financial statements and the financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at October
31, 1993 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Short-Term Global Income Fund, Inc. as of October 31, 1993, the results of its
operations, the changes in its net assets, and the financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche
Princeton, New Jersey
December 10, 1993
42
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Maturity Interest Value Percent of
COUNTRIES Face Amount Date Issue Rate++ (Note 1a) Net Assets
<S> <S> <C> <C> <S> <C> <C> <C>
Australia A$ 67,500,000 3/14/95 Queensland Treasury Corp., Global Notes (3) 8.00% $ 46,697,006 2.65%
64,000,000 3/01/96 New South Wales Treasury Corp. (3) 8.50 45,390,515 2.57
Total Investments in Australia (Cost--$93,105,281) 92,087,521 5.22
Canada C$ 140,946,000 2/01/96 Canadian Government Bonds (1) 6.00 108,407,682 6.15
122,500,000 6/01/96 Canadian Government Bonds (1) 8.75 100,065,326 5.67
168,000,000 8/01/96 Canadian Government Bonds (1) 6.50 131,124,744 7.44
Total Investments in Canada (Cost--$337,093,599) 339,597,752 19.26
Denmark Dkr 400,000,000 2/10/95 Government of Denmark (1) 9.75 61,281,800 3.47
142,000,000 8/10/95 Government of Denmark (1) 9.25 22,039,570 1.25
150,000,000 11/15/95 Government of Denmark (1) 9.00 23,399,234 1.33
Total Investments in Denmark (Cost--$112,574,158) 106,720,604 6.05
European ECU 25,000,000 1/24/95 United Kingdom Treasury Bond (1) 8.25 29,124,025 1.65
Currency 18,500,000 3/18/96 Kingdom of Belgium (1) 9.125 22,438,336 1.27
Unit 40,000,000 5/22/96 Kingdom of Spain (1) 9.00 48,583,780 2.76
Total Investments in European Currency Unit
(Cost--$101,444,972) 100,146,141 5.68
Finland Fim 100,000,000 9/15/96 Finnish Government Bond (1) 6.50 17,515,835 1.00
Total Investments in Finland (Cost--$17,485,693) 17,515,835 1.00
France Ffr 108,000,000 10/12/95 French Government "B-TAN" (1) 5.50 18,455,102 1.05
147,999,960 4/25/96 French Government "OAT" STRIPS (1) 6.53++++ 22,138,806 1.25
140,000,000 10/25/96 French Government "OAT" STRIPS (1) 5.34++++ 20,330,548 1.15
Total Investments in France (Cost--$62,851,484) 60,924,456 3.45
Italy Lit 29,200,000,000 9/07/94 A/S Eksport Finans (Indexed to Lit/Ffr) (a) (1) 8.00 17,829,882 1.01
55,000,000,000 1/01/96 Buoni Poliennali del Tesoro
(Italian Government Bond) (1) 12.00 35,720,917 2.02
10,000,000,000 5/01/96 Buoni Poliennali del Tesoro
(Italian Government Bond) (1) 11.50 6,502,091 0.37
58,000,000,000 6/01/96 Buoni Poliennali del Tesoro
(Italian Government Bond) (1) 11.00 37,409,001 2.12
39,900,000,000 8/01/96 Buoni Poliennali del Tesoro
(Italian Government Bond) (1) 10.00 22,845,856 1.30
45,000,000,000 10/01/96 Buoni Poliennali del Tesoro
(Italian Government Bond) (1) 9.00 28,019,860 1.59
Total Investments in Italy (Cost--$151,681,257) 148,327,607 8.41
Mexico MxN 4,727,583 1/20/94 Mexican Treasury Bills (1) 9.25++++ 14,687,576 0.83
7,432,332 1/27/94 Mexican Treasury Bills (1) 9.22++++ 22,965,739 1.30
4,855,990 3/03/94 Mexican Treasury Bills (1) 9.10++++ 14,810,536 0.84
Total Investments in Mexico (Cost--$52,439,503) 52,463,851 2.97
</TABLE>
43
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Maturity Interest Value Percent of
COUNTRIES Face Amount Date Issue Rate++ (Note 1a) Net Assets
<S> <S> <C> <C> <S> <C> <C> <C>
New NZ$ 74,178,000 2/15/95 New Zealand Government Bonds (1) 10.00% $ 43,403,009 2.46%
Zealand 114,285,000 11/15/95 New Zealand Government Bonds (1) 8.00 66,346,625 3.76
113,650,000 6/15/96 New Zealand Electric Corp. (3) 10.00 69,179,607 3.93
Total Investments in New Zealand
(Cost--$175,014,656) 178,929,241 10.15
Spain Pta 10,800,000,000 7/15/95 Bonos del Estado (Spanish Government Bonds) (1) 11.40 84,137,756 4.77
3,000,000,000 4/15/96 Bonos del Estado (Spanish Government Bonds) (1) 13.45 24,856,504 1.41
2,500,000,000 7/15/96 Bonos del Estado (Spanish Government Bonds) (1) 11.90 20,225,494 1.15
3,000,000,000 8/30/96 Bonos del Estado (Spanish Government Bonds) (1) 11.85 24,413,716 1.38
Total Investments in Spain (Cost--$158,791,175) 153,633,470 8.71
Sweden Skr 625,000,000 9/01/95 Kingdom of Sweden (1) 11.50 83,281,002 4.72
Total Investments in Sweden (Cost--$86,279,463) 83,281,002 4.72
United Pound 10,000,000 6/27/94 Swiss Bank Corporation, Medium-Term Notes (2) 10.45 15,272,191 0.87
Kingdom Sterling 3,000,000 11/17/94 European Investment Bank (2) 9.50 4,631,371 0.26
14,000,000 7/21/95 Treasury Gilt (1) 10.25 22,445,336 1.27
Total Investments in the United Kingdom
(Cost--$45,318,175) 42,348,898 2.40
United US$ 50,000,000 11/01/93 First Boston Corp. (The),
States Repurchase Agreement* purchased on 10/29/93 (2) 2.93 50,000,000 2.84
67,664,809 11/01/93 Lehman Brothers,
Repurchase Agreement* purchased on 10/29/93 (2) 3.00 67,664,809 3.84
45,000,000 12/17/93 CEO Capital Corp., Ltd. (2)+++ 5.25 45,000,000 2.55
89,000,000 10/15/94 PESO Linked Notes (2)+++ 7.35 89,667,500 5.08
Total Investments in the United States
(Cost--$251,643,658) 252,332,309 14.31
Total Investments (Cost--$1,645,723,074) 1,628,308,687 92.33
Call Options Written (Premium Received--$117,877)** (96,433) (0.01)
Put Options Written (Premiums Received--$451,290)*** (502,700) (0.03)
Unrealized Appreciation on Forward Foreign Exchange Contracts**** 10,902,015 0.62
Other Assets Less Liabilities 125,027,443 7.09
-------------- ------
Net Assets $1,763,639,012 100.00%
============== ======
<FN>
++Certain Commercial Paper, US Treasury and Foreign Treasury Obligations are traded on a discount basis; the interest rates shown
represent the yield-to-maturity at the time of purchase by the Fund. Other securities bear interest at the rates shown, payable at
fixed dates or upon maturity. Interest rates on floating rate securities are adjusted periodically based on appropriate indexes.
The interest rates shown are those in effect at October 31, 1993.
++++Represents the yield-to-maturity on this zero coupon issue.
Corresponding industry groups for securities (percent of net assets):
(1) Sovereign Government Obligations--67.74%
(2) Financial Services--15.44%
(3) Sovereign/Regional Government Obligations--Agency--9.15%
****Forward Foreign Exchange Contracts as of October 31, 1993 are as follows:
Unrealized
Appreciation
Expiration (Depreciation)
Date (Note 1c)
Foreign Currency Purchased
C$ 117,512,600 November 1993 $ (342,584)
DM 879,312,346 November 1993 (10,323,632)
Dkr 141,295,000 November 1993 (123,030)
Pta 4,869,723,836 November 1993 12,188
Lit 33,087,318,095 December 1993 (420,417)
</TABLE>
44
<PAGE>
*Repurchase Agreements are fully collateralized by US Government &
Agency Obligations.
**Call Options Written as of October 31, 1993 are as follows:
<TABLE>
<CAPTION>
Par Value Premiums (Value)
Subject to Call Issue Received (Notes 1a & 1d)
<C> <S> <C> <C>
$44,900,000 C$ currency call option, strike
price 1.3090, expiring 11/02/93 $ 49,390 $ (35,920)
22,400,000 C$ currency call option, strike
price 1.31, expiring 11/03/93 32,480 (20,160)
22,400,000 C$ currency call option, strike
price 1.31, expiring 11/04/93 24,640 (38,080)
22,733,062 DM currency call option, strike
price DM1.6585, expiring
11/01/93 11,367 (2,273)
Total Call Options Written $117,877 $ (96,433)
======== =============
***Put Options Written as of October 31, 1993 are as follows:
Par Value Premiums (Value)
Subject to Put Issue Received (Notes 1a & 1d)
$22,400,000 A$ currency put option, strike
price .6575, expiring 11/03/93 $ 22,400 $ (13,440)
22,400,000 A$ currency put option, strike
price .6585, expiring 11/03/93 20,160 (15,680)
22,400,000 C$ currency put option, strike
price 1.3360, expiring 11/03/93 17,920 (17,920)
22,400,000 DM currency put option, strike
price DM 1.69, expiring 11/01/93 10,080 (48,160)
22,400,000 DM currency put option, strike
price DM 1.69, expiring 11/02/93 76,160 (78,400)
22,400,000 DM currency put option, strike
price DM 1.70, expiring 11/01/93 31,360 (6,720)
22,400,000 Lit currency put option, strike
price Lit 1640, expiring 11/03/93 69,440 (174,720)
22,400,000 Lit currency put option, strike
price Lit 1635, expiring 11/02/93 56,000 (73,920)
22,400,000 NZ$ currency put option, strike
price .5500, expiring 11/02/93 29,120 (11,200)
26,900,000 NZ$ currency put option, strike
price .5500, expiring 11/03/93 34,970 (16,140)
17,600,000 NZ$ currency put option, strike
price .5500, expiring 11/03/93 29,920 (10,560)
22,400,000 NZ$ currency put option, strike
price .5510, expiring 11/04/93 17,920 (26,880)
22,400,000 Pound Sterling currency put option,
strike price 1.46, expiring
11/02/93 35,840 (8,960)
Total Put Options Written $451,290 $ (502,700)
======== ============
</TABLE>
<TABLE>
<S> <C> <C> <C>
Yen 9,594,175,110 November 1993 (3,052,951)
Skr 259,055,496 November 1993 (970,677)
Total (US$ Commitment--$826,183,871) $(15,221,103)
------------
Foreign Currency Sold
A$ 51,806,249 November 1993 (63,962)
A$ 100,074,349 December 1993 429,819
C$ 336,668,895 November 1993 (1,171,532)
C$ 192,571,121 December 1993 296,884
DM 670,164,598 November 1993 11,893,991
DM 36,616,500 December 1993 704,211
Dkr 605,981,864 November 1993 1,713,814
Dkr 302,847,500 December 1993 229,378
ECU 24,482,713 November 1993 1,017,036
ECU 61,287,400 December 1993 1,896,938
Pta 26,487,208,594 November 1993 1,949,956
Fim 100,726,438 November 1993 130,888
Frf 376,703,798 November 1993 1,802,884
Lit 109,777,625,324 November 1993 1,091,001
Lit 171,522,091,100 December 1993 2,360,108
Yen 9,914,032,500 November 1993 1,699,118
Nlg 93,611,118 December 1993 (165,477)
NZ$ 134,622,386 November 1993 239,279
NZ$ 254,388,074 December 1993 (1,025,399)
Skr 928,738,681 November 1993 771,192
Pound Sterling 31,023,236 November 1993 322,991
Total (US$ Commitment--$2,148,000,999) $ 26,123,118
------------
Total Unrealized Appreciation--Net, on
Forward Foreign Exchange Contracts $ 10,902,015
============
+++Restricted security as to resale. The value of the Fund's investment in
restricted securities represents 7.6% of net assets.
Issue Acquisition Date Cost Value
CEO Capital Corp. Ltd. 8/06/93 $ 44,978,850 $ 45,000,000
PESO Linked Notes 3/29/93 89,000,000 89,667,500
Total $133,978,850 $134,667,500
============ ============
(a) Indexed Instrument for which the principal amount due at maturity is
affected by the relative value of the foreign reference rates.
See Notes to Financial Statements.
</TABLE>
45
<PAGE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of October 31, 1993
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$1,645,723,074) (Notes 1a & 1b) $1,628,308,687
Unrealized appreciation on forward foreign exchange contracts (Note 1c) 10,902,015
Foreign demand deposits (Note 1c) 1,030,454
Cash 479
Receivables:
Securities sold $ 118,282,243
Interest 40,574,459
Capital shares sold 487,535
Options written 57,287 159,401,524
--------------
Deferred organization expenses (Note 1h) 31,137
Prepaid registration fees and other assets (Note 1h) 164,449
--------------
Total assets 1,799,838,745
--------------
Liabilities: Put options written, at value (premiums received--$451,290)
(Notes 1a & 1d) 502,700
Call options written, at value (premiums received--$117,877)
(Notes 1a & 1d) 96,433
Payables:
Capital shares redeemed 14,727,171
Securities purchased 9,581,566
Forward foreign exchange contracts (Note 1c) 4,918,893
Distributions to shareholders (Note 1i) 3,178,868
Distributor (Note 2) 1,111,336
Investment adviser (Note 2) 847,991 34,365,825
--------------
Accrued expenses and other liabilities 1,234,775
--------------
Total liabilities 36,199,733
--------------
Net Assets: Net assets $1,763,639,012
==============
Net Assets Class A Shares of Common Stock, $.10 par value, 1,000,000,000
Consist of: shares authorized $ 1,144,259
Class B Shares of Common Stock, $.10 par value, 1,000,000,000
shares authorized 19,236,603
Paid-in capital in excess of par 1,805,627,632
Accumulated realized capital losses from investments and
foreign currency transactions--net (Note 5) (55,233,511)
Unrealized appreciation on investments and foreign currency
transactions--net (7,135,971)
--------------
Net assets $1,763,639,012
==============
Net Asset Class A--Based on net assets of $99,036,733 and 11,442,594
Value: shares outstanding $ 8.66
==============
Class B--Based on net assets of $1,664,602,279 and 192,366,028
shares outstanding $ 8.65
==============
See Notes to Financial Statements.
</TABLE>
46
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended October 31, 1993
<S> <S> <C> <C>
Investment Income Interest and discount earned (net of $1,214,411
(Notes 1f & 1g): foreign withholding tax)
$ 195,128,812
Expenses: Distribution fees--Class B (Note 2) 16,801,274
Investment advisory fees (Note 2) 12,966,035
Transfer agent fees--Class B (Note 2) 2,759,173
Custodian fees 760,748
Maintenance fees--Class A (Note 2) 339,199
Printing and shareholder reports 294,872
Accounting services (Note 2) 230,453
Transfer agent fees--Class A (Note 2) 154,889
Professional fees 123,391
Registration fees (Note 1h) 84,127
Directors' fees and expenses 30,737
Amortization of organization expenses (Note 1h) 17,792
Pricing fees 1,912
Other 44,691
--------------
Total expenses 34,609,293
--------------
Investment income--net 160,519,519
--------------
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net $ 10,889,978
(Loss) on Foreign currency transactions (264,132,709) (253,242,731)
Investments & --------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net 133,845,886
(Notes 1c, 1g & 3): Foreign currency transactions 54,939,062 188,784,948
--------------
Net realized and unrealized loss on investments and foreign
currency transactions (64,457,783)
--------------
Net Increase in Net Assets Resulting from Operations $ 96,061,736
==============
See Notes to Financial Statements.
</TABLE>
47
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended October 31,
Increase (Decrease) in Net Assets: 1993 1992
<S> <S> <C> <C>
Operations: Investment income--net $ 160,519,519 $ 438,570,229
Realized loss on investments and foreign currency transactions--net (253,242,731) (431,545,207)
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net 188,784,948 (156,068,275)
-------------- --------------
Net increase (decrease) in net assets resulting from operations 96,061,736 (149,043,253)
-------------- --------------
Distributions to Return of capital--net:
Shareholders Class A (9,820,087) (26,610,439)
(Note 1i): Class B (150,699,432) (411,959,790)
-------------- --------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (160,519,519) (438,570,229)
-------------- --------------
Capital Share Net decrease in net assets derived from capital share transactions (1,543,047,053) (2,359,427,543)
Transactions -------------- --------------
(Note 4):
Net Assets: Total decrease in net assets (1,607,504,836) (2,947,041,025)
Beginning of year 3,371,143,848 6,318,184,873
-------------- --------------
End of year $1,763,639,012 $3,371,143,848
============== ==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Class A
For the For the
Period Period
The following per share data and ratios have been derived Dec. 28, Aug. 3,
from information provided in the financial statements. For the Year Ended 1990 to 1990++ to
October 31, Oct. 31, Dec. 27,
Increase (Decrease) in Net Asset Value: 1993 1992 1991 1990
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 8.85 $ 9.85 $ 9.92 $ 10.00
Operating ---------- ---------- ---------- ----------
Performance: Investment income--net .61 .77 .82 .42
Realized and unrealized loss on investments
and foreign currency
transactions--net (.19) (1.00) (.07) (.08)
---------- ---------- ---------- ----------
Total from investment operations .42 (.23) .75 .34
---------- ---------- ---------- ----------
Less dividends and distributions:
Return of capital--net (.61) (.77) -- --
Investment income--net -- -- (.82) (.42)
---------- ---------- ---------- ----------
</TABLE>
48
<PAGE>
<TABLE>
<S> <S> <C> <C> <C> <C>
Total dividends and distributions (.61) (.77) (.82) (.42)
---------- ---------- ---------- ----------
Net asset value, end of period $ 8.66 $ 8.85 $ 9.85 $ 9.92
========== ========== ========== ==========
Total Investment Based on net asset value per share 5.28% (2.60%) 7.53%+++ 3.73%+++
Return:** ========== ========== ========== ==========
Ratios to Average Expenses, excluding maintenance fees .73% .75% .76%* .75%*
Net Assets: ========== ========== ========== ==========
Expenses .98% 1.00% .96%* .75%*
========== ========== ========== ==========
Investment income--net 7.24% 8.11% 9.70%* 10.51%*
========== ========== ========== ==========
Supplemental Net assets, end of period (in thousands) $ 99,037 $ 188,623 $ 399,416 $ 211,006
Data: ========== ========== ========== ==========
Portfolio turnover 284.62% 120.77% 153.72% 19.40%
========== ========== ========== ==========
<CAPTION>
Class B
For the For the
Period Period
The following per share data and ratios have been derived Dec. 28, Aug. 3,
from information provided in the financial statements. For the Year Ended 1990 to 1990++ to
October 31, Oct. 31, Dec. 27,
Increase (Decrease) in Net Asset Value: 1993 1992 1991 1990
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 8.85 $ 9.84 $ 9.92 $ 10.00
Operating ---------- ---------- ---------- ----------
Performance: Investment income--net .57 .72 .77 .39
Realized and unrealized loss on investments and
foreign currency
transactions--net (.20) (.99) (.08) (.08)
---------- ---------- ---------- ----------
Total from investment operations .37 (.27) .69 .31
---------- ---------- ---------- ----------
Less dividends and distributions:
Return of capital--net (.57) (.72) -- --
Investment income--net -- -- (.77) (.39)
---------- ---------- ---------- ----------
Total dividends and distributions (.57) (.72) (.77) (.39)
---------- ---------- ---------- ----------
Net asset value, end of period $ 8.65 $ 8.85 $ 9.84 $ 9.92
========== ========== ========== ==========
Total Investment Based on net asset value per share 4.63% (3.00%) 6.93%+++ 3.40%+++
Return:** ========== ========== ========== ==========
Ratios to Average Expenses, excluding maintenance and distribution fees .74% .75% .77%* .76%*
Net Assets: ========== ========== ========== ==========
Expenses 1.49% 1.50% 1.52%* 1.51%*
========== ========== ========== ==========
Investment income--net 6.73% 7.60% 9.11%* 9.75%*
========== ========== ========== ==========
Supplemental Net assets, end of period (in thousands) $1,664,602 $3,182,520 $5,918,769 $2,796,301
Data: ========== ========== ========== ==========
Portfolio turnover 284.62% 120.77% 153.72% 19.40%
========== ========== ========== ==========
<FN>
++Commencement of Operations.
+++Aggregate total investment returns.
*Annualized.
**Total investment returns exclude the effects of sales loads.
See Notes to Financial Statements.
</TABLE>
49
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Short-Term Global Income Fund, Inc. (the "Fund")
is registered under the Investment Company Act of 1940 as a non-
diversified, open-end management investment company. The Fund
offers both Class A and Class B Shares. Class A Shares are sold
with a front-end sales charge. Class B Shares may be subject to a
contingent deferred sales charge. Both classes of shares have
identical voting, dividend, liquidation and other rights and the same
terms and conditions, except that Class A Shares bear the expenses
of the ongoing account maintenance fee and Class B Shares bear
certain expenses related to the distribution of such shares and
have exclusive voting rights with respect to matters relating to
such distribution expenditures. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of securities--Securities traded in the over-the-
counter market are valued at the last available bid price or
yield equivalents obtained from one or more dealers in the over-
the-counter market prior to the time of valuation. Portfolio
securities which are traded on stock exchanges are valued at the
last sale price on the principal market on which such securities
are traded, as of the close of business on the day the securities
are being valued or, lacking any sales, at the last available
bid price. Options traded on exchanges are valued at the last bid
price for options purchased and the last asked price as obtained
from one or more dealers for options written. Options traded in
the over-the-counter market are valued at the average of the last
asked price for options written and the average of the last bid price
as obtained from two or more dealers for options purchased. Other
investments, including futures contracts and related options, are
stated at market value or otherwise at the fair value at which it
is expected they may be resold, as determined in good faith by or
under the direction of the Board of Directors. 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 Fund's Board of Directors.
(b) Repurchase agreements--The Fund invests in US Government
securities pursuant to repurchase agreements with a member bank
of the Federal Reserve System or a primary dealer in US Govern-
ment securities. Under such agreements, the bank or primary
dealer agrees to repurchase the security at a mutually agreed
upon time and price. The Fund takes possession of the underlying
securities, marks to market such securities and, if necessary,
receives additions to such securities daily to ensure that the
contract is fully collateralized.
(f) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its taxable income
to its shareholders. Therefore, no Federal income tax provision
is required. Under the applicable foreign tax law, a withholding
tax may be imposed on interest and capital gains at various rates.
(g) Security transactions and investment income--Security trans-
actions are recorded on the dates the transactions are entered
into (the trade dates). Interest income (including amortization of
discount) is recognized on the accrual basis. Realized gains and
losses on security transactions are determined on the identified
cost basis.
(h) Deferred organization expenses and prepaid registration
fees--Deferred organization expenses are charged to expense over
a five-year period. Prepaid registration fees are charged to
expense as the related shares are issued.
(i) Dividends and distributions--Dividends from net investment
income, excluding transaction gains/losses, are declared daily
and paid monthly. Distributions of capital gains are recorded on
the ex-dividend dates. Distributions that are Return of Capital
for income tax purposes have been reclassified.
(j) Reclassifications--Certain 1992 amounts have been reclassified
to conform to the 1993 presentation. Accumulated investment loss--
net, has been reclassified to paid in capital and accumulated
realized losses, as appropriate.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management ("MLAM"). MLAM is the name under
which Merrill Lynch Investment Management, Inc. ("MLIM") does
business. MLIM is an indirect wholly-owned subsidiary of
Merrill Lynch & Co., Inc. The Fund has also entered into a
Distribution Agreement with Merrill Lynch Funds Distributor, Inc.
("MLFD" or "Distributor"), a wholly-owned subsidiary of MLIM.
MLAM is responsible for the management of the Fund's portfolio
and provides the necessary personnel, facilities, equipment and
certain other services necessary to the operations of the Fund.
For such services, the Fund pays a monthly fee based upon the average
daily value of the Fund's net assets, at the following annual rates:
0.55% of the Fund's average daily net assets not exceeding $2
billion; 0.525% of average daily net assets in excess of $2
billion but not exceeding $4 billion; 0.50% of average daily net
assets in excess of $4 billion but not exceeding $6 billion;
0.475% of average daily net
50
<PAGE>
(c) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing
when recognized. Assets and liabilities denominated in foreign
currencies are valued at the exchange rate at the end of the period.
Foreign currency transactions are the result of settling (realized)
or valuing (unrealized) such transactions expressed in foreign
currencies into US dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on
investments.
The Fund is authorized to enter into forward foreign exchange
contracts as a hedge against either specific transactions or
portfolio positions. Such contracts are not entered on the Fund's
records. However, the effect on operations is recorded from the
date the Fund enters into such contracts. Premium or discount is
amortized over the life of the contracts.
(d) Options--When the Fund sells an option, an amount equal to
the premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current value of the option
written. When a security is sold through an exercise of an option,
the related premium received is deducted from the basis of the
security sold. When an option expires (or the Fund enters into a
closing transaction), the Fund realizes a gain or loss on the option
to the extent of the premiums received (or gain or loss to the
extent the cost of the closing transaction is less than or exceeds
the premium received).
Written and purchased options are non-income producing investments.
(e) Financial futures contracts--The Fund may purchase or sell financial
futures contracts and options on such futures contracts as a hedge
against adverse changes in the interest rate. A futures contract is
an agreement between two parties to buy and sell a security, respectively,
for a set price on a future date. Upon entering into a contract, the
Fund deposits and maintains as collateral such initial margin as
required by the exchange on which the transaction is effected. Pursuant
to the contract, the Fund agrees to receive from or pay to the broker
an amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payment are known as variation margin
and are recorded by the Fund as unrealized gains or losses. When
the contract is closed, the Fund records a realized gain or loss equal
to the difference between the value of the contract at the time it was
opened and the value at the time it was closed.
assets in excess of $6 billion but not exceeding $10 billion; 0.45% of average
daily net assets in excess of $10 billion but not exceeding $15 billion; and
0.425% of average daily net assets in excess of $15 billion. The most
restrictive annual expense limitation requires that the Investment Adviser
reimburse the Fund to the extent the Fund's expenses (excluding interest,
taxes, distribution fees, brokerage fees and commissions, and extraordinary
items) exceed 2.5% of the Fund's first $30 million of average daily net assets,
2.0% of the next $70 million of average daily net assets, and 1.5% of the
average daily net assets in excess thereof. The Investment Adviser's obligation
to reimburse the Fund is limited to the amount of the investment advisory fee.
No fee payment will be made to the Investment Adviser during any fiscal year
which will cause such expenses to exceed expense limitations at the time of such
payment.
The Fund has adopted separate Plans of Distribution (the
"Distribution Plans") pursuant to Rule 12b-1 under the
Investment Company Act of 1940 pursuant to which MLFD receives
from the Fund at the end of each month (a) an account maintenance
fee at an annual rate of 0.25% of the average daily net assets of
the Fund's Class A Shares in order to compensate the Distributor
in connection with account maintenance activities, and (b) a
distribution fee at an annual rate of 0.75% of the average daily
net assets of the Fund's Class B Shares in order to compensate
the Distributor for the services it provides and the expenses
borne by the Distributor under the Distribution Agreement. As
authorized by the Distribution Plans, the Distributor has entered
into an agreement with Merrill Lynch, Pierce, Fenner & Smith Inc.
("MLPF&S") which provides for the compensation of MLPF&S in
connection with account maintenance activities for Class A Shares
and for providing distribution-related services to the Fund for
Class B Shares. For the year ended October 31, 1993, MLFD earned
$339,199 and $16,801,274 for Class A and Class B Shares,
respectively, under the Distribution Plans, all of which was paid
to MLPF&S pursuant to the agreement.
For the year ended October 31, 1993, MLFD earned underwriting
discounts of $10,009, and MLPF&S earned dealer concessions of
$73,088 on sales of Class A Shares of the Fund. MLPF&S also
received contingent deferred sales charges of $10,977,755
relating to Class B Share transactions.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary
of Merrill Lynch & Co., Inc., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLIM, MLPF&S, FDS, MLFD, and/or Merrill Lynch & Co.,
Inc.
51
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
3. Investments:
Purchases and sales of investments, excluding short-term
securities, for the year ended October 31, 1993 were
$5,652,829,538 and $6,593,936,943, respectively.
Net realized and unrealized gains (losses) as of October 31, 1993
were as follows:
Realized Unrealized
Gains (Losses) Gains (Losses)
Investments:
Long-term $ 11,934,350 $ (17,438,736)
Short-term (1,044,372) 24,349
---------------- ----------------
Total investments 10,889,978 (17,414,387)
---------------- ----------------
Currency Transactions:
Options written 6,919,285 (29,966)
Options purchased (3,435,364) --
Foreign currency transactions (276,096,406) (593,633)
Forward foreign exchange contracts 8,479,776 10,902,015
---------------- ----------------
Total currency transactions (264,132,709) 10,278,416
---------------- ----------------
Total $ (253,242,731) $ (7,135,971)
================ ================
Transactions in call options purchased for the year ended
October 31, 1993 were as follows:
Call Options Purchased Par Value Premiums Paid
Outstanding call options purchased at
beginning of year $ 46,428,571 $ 1,124,037
Options purchased 112,300,000 458,160
Options expired (158,728,571) (1,582,197)
---------------- ----------------
Outstanding call options purchased at
end of year $ -- $ --
================ ================
Transactions in put options purchased for the year ended
October 31, 1993 were as follows:
Put Options Purchased Par Value Premiums Paid
Outstanding put options purchased at
beginning of year $ -- $ --
Options purchased 484,400,000 2,309,986
Options exercised (201,900,000) (1,022,960)
Options expired (282,500,000) (1,287,026)
---------------- ----------------
Outstanding put options purchased at
end of year $ -- $ --
================ ================
Transactions in call options written for the year ended
October 31, 1993 were as follows:
As of October 31, 1993, net unrealized depreciation for Federal
income tax purposes aggregated $20,678,774, of which $8,436,559
related to appreciated securities and $29,115,333 related to
depreciated securities. The aggregate cost of investments at
October 31, 1993 for Federal income tax purposes was $1,648,987,461.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions
was $1,543,047,053 and $2,359,427,543 for the year ended October 31, 1993
and the year ended October 31, 1992, respectively.
Transactions in capital shares for Class A and Class B Shares
were as follows:
Class A Shares for the Year Dollar
Ended October 31, 1993 Shares Amount
Shares sold 987,673 $ 8,606,847
Shares issued to shareholders in
reinvestment of dividends
and distributions 637,595 5,555,072
---------------- ---------------
Total issued 1,625,268 14,161,919
Shares redeemed (11,493,409) (100,105,091)
---------------- ---------------
Net decrease (9,868,141) $ (85,943,172)
================ ===============
Class A Shares for the Year Dollar
Ended October 31, 1992 Shares Amount
Shares sold 11,051,269 $ 105,460,370
Shares issued to shareholders in
reinvestment of dividends
and distributions 1,599,215 15,271,961
---------------- ---------------
Total issued 12,650,484 120,732,331
Shares redeemed (31,902,417) (296,545,190)
---------------- ---------------
Net decrease (19,251,933) $ (175,812,859)
================ ===============
Class B Shares for the Year Dollar
Ended October 31, 1993 Shares Amount
Shares sold 7,412,975 $ 64,618,337
Shares issued to shareholders in
reinvestment of dividends
and distributions 9,259,655 80,642,973
---------------- ---------------
Total issued 16,672,630 145,261,310
Shares redeemed (183,937,694) (1,602,365,191)
---------------- ---------------
Net decrease (167,265,064) $(1,457,103,881)
================ ===============
52
<PAGE>
Par Value
Covered by Premiums
Call Options Written Written Options Received
Outstanding call options written at
beginning of year $ -- $ --
Options written 79,872,557,962 15,285,795
Options repurchased (137,822,222) (489,682)
Options exercised (1,598,800,000) (2,953,850)
Options closed (78,023,502,678) (11,724,386)
---------------- ---------------
Outstanding call options written at
end of year $ 112,433,062 $ 117,877
================ ===============
Transactions in put options written for the year ended
October 31, 1993 were as follows:
Par Value
Covered by Premiums
Put Options Written Written Options Received
Outstanding put options written at
beginning of year $ 57,000,000 $ 621,300
Options written 11,163,638,044 20,350,536
Options repurchased (260,000,000) (1,642,050)
Options exercised (2,101,845,061) (3,950,931)
Options closed (8,567,892,983) (14,927,565)
---------------- ---------------
Outstanding put options written at
end of period $ 290,900,000 $ 451,290
================ ===============
Class B Shares for the Year Dollar
Ended October 31, 1992 Shares Amount
Shares sold 76,062,499 $ 730,651,534
Shares issued to shareholders in
reinvestment of dividends
and distributions 23,764,335 226,726,222
---------------- ---------------
Total issued 99,826,834 957,377,756
Shares redeemed (341,451,358) (3,140,992,440)
---------------- ---------------
Net decrease (241,624,524) $(2,183,614,684)
================ ===============
5. Capital Loss Carryforward:
At October 31, 1993, the Fund had a capital loss carryforward of
approximately $32,232,000, all of which expires in 2000 and will
be available to offset like amounts of any future taxable gains.
6. Subsequent Event:
On November 1, 1993, the Fund's Board of Directors declared an
ordinary income dividend to Common Stock shareholders in the
amount of $0.04 per share, payable on November 19, 1993 to
shareholders of record as of November 17, 1993.
53
<PAGE>
APPENDIX I
BOND AND COMMERCIAL PAPER RATINGS
STANDARD & POOR'S BOND RATINGS
A Standard & Poor's corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. Debt
rated AAA has the highest rating assigned by Standard & Poor's. Capacity to pay
interest and repay principal is extremely strong. Debt rated AA has a very
strong capacity to pay interest and repay principal and differs from the
highest rated issues only in small degree.
The AA rating may be modified by the addition of a plus or minus sign to show
relative standing within that major rating category.
MOODY'S BOND RATINGS
Excerpts from Moody's description of its corporate bond ratings: Aaa--judged
to be of the best quality, carry the smallest degree of investment risk; and
Aa--judged to be of high quality by all standards.
IBCA'S CORPORATE BOND RATINGS
Bonds rated AAA are obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic, or financial
conditions may increase investment risk albeit not very significantly. Bonds
rated AA are obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions may lead
to increased investment risk.
"+" or "-" may be appended to a long-term rating to denote relative status
within major rating categories.
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. The highest category is as follows:
A-1 This highest category indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted
with a plus sign (+) designation.
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information.
MOODY'S COMMERCIAL PAPER RATINGS
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following designations, judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
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
I-1
<PAGE>
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.
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.
IBCA'S COMMERCIAL PAPER RATINGS
Commercial paper rated A1+ are obligations supported by the highest capacity
for timely repayment. Commercial paper rated A1 are obligations supported by a
very strong capacity for timely repayment. Commercial paper rated A2 are
obligations supported by a strong capacity for timely repayment, although such
capacity may be susceptible to adverse changes in business, economic, or
financial conditions.
I-2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies.......................................... 2
Management of the Fund..................................................... 10
Directors and Officers.................................................... 10
Management and Advisory Arrangements...................................... 11
Purchase of Shares......................................................... 13
Redemption of Shares....................................................... 18
Portfolio Transactions and Brokerage....................................... 20
Determination of Net Asset Value........................................... 20
Shareholder Services....................................................... 21
Distributions and Taxes.................................................... 34
Performance Data........................................................... 37
General Information........................................................ 39
Independent Auditors' Report............................................... 42
Financial Statements....................................................... 43
Appendix I--Bond and Commercial Paper Ratings.............................. I-1
</TABLE>
Code #11100
Statement of Additional Information
[ARTWORK]
- --------------------------------------------------------------------------------
MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.
February 28, 1994
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission File due to ASCII-incompatibility and
cross-references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
---------------------- -------------------
Montage of currencies ................. Back cover of Prospectus and
back cover of Statement of
Additional Information
