<PAGE> 1
PROSPECTUS
MARCH 1, 1995
MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.
P.O. 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.
------------------------
Pursuant to the Merrill Lynch Select PricingSM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select PricingSM System permits an
investor to choose the method of purchasing shares that the investor believes is
most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances. As a
result of the implementation of the Select Pricing System, Class A shares of the
Fund outstanding prior to October 21, 1994, were redesignated Class D shares.
The Class A shares offered by this Prospectus differ from the Class A shares
offered prior to October 21, 1994, in many respects, including sales charges,
exchange privilege and the classes of persons to whom such shares are offered.
See "Merrill Lynch Select PricingSM System" on page 3.
------------------------
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 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 $100, and the minimum subsequent purchase is $1. Merrill
Lynch may charge its customers a processing fee (presently $4.85) for confirming
purchases and repurchases. Purchases and redemptions directly through the Fund's
transfer agent are not subject to the processing fee. See "Purchase of Shares"
and "Redemption of Shares".
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
------------------------
This Prospectus is a concise statement of information about the Fund that
is relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated March 1, 1995 (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> 2
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C CLASS D
---------- -------------------------- -------- --------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses:
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)............ 4.00%(c) None None 4.00%(c)
Sales Charge Imposed on Dividend Reinvestments... None None None None
Deferred Sales Charge (as a percentage of
original purchase price or redemption proceeds,
whichever is lower)............................ None(d) 4.0% during the first 1% for None(d)
year, decreasing 1.0% one year
annually thereafter to
0.0% after
the fourth year
Exchange Fee..................................... None None None None
Annual Fund Operating Expenses
(as a percentage of average net assets)(e)
Investment Advisory Fees(f)...................... 0.55% 0.55% 0.55% 0.55%
Rule 12b-1 Fees(g):
Account Maintenance Fees....................... None 0.25% 0.25% 0.25%
Distribution Fees.............................. None 0.50% 0.55% None
(Class B shares convert
to Class D shares
automatically after
approximately ten years
and cease being subject to
distribution fees)
Other Expenses:
Custodial Fees................................. 0.07% 0.07% 0.07% 0.07%
Shareholder Servicing Costs(h)................. 0.11% 0.12% 0.12% 0.11%
Other.......................................... 0.03% 0.03% 0.03% 0.03%
------- ----- ----- -----
Total Other Expenses......................... 0.21% 0.22% 0.22% 0.21%
------- ----- ----- -----
Total Fund Operating Expenses...................... 0.76% 1.52% 1.57% 1.01%
------- ----- ----- -----
------- ----- ----- -----
</TABLE>
- ---------------
(a) Class A shares are sold to a limited group of investors including certain
retirement plans and certain investment programs. See "Purchase of
Shares -- Initial Sales Charge Alternatives -- Class A and Class D
shares" -- page 26.
(b) Class B shares convert to Class D shares automatically approximately ten
years after initial purchase. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares" -- page 28.
(c) Reduced for purchases of $25,000 and over. Class A or Class D purchases of
$1,000,000 or more may not be subject to an initial sales charge. See
"Purchase of Shares -- Initial Sales Charge Alternatives -- Class A and
Class D Shares" -- page 26.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that purchases of $1,000,000 or more which may not
be subject to an initial sales charge may instead be subject to a CDSC of
1.0% of amounts redeemed within the first year of purchase.
(e) Information for Class B and Class D shares is stated for the fiscal year
ended October 31, 1994. Information under "Other Expenses" for Class A and
Class C shares is estimated for the fiscal year ending October 31, 1995.
(f) See "Management of the Fund -- Management and Advisory Arrangements" -- page
22.
(g) See "Purchase of Shares -- Distribution Plans" -- page 31.
(h) See "Management of the Fund -- Transfer Agency Services" -- page 23.
2
<PAGE> 3
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
-------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment including the maximum $40 initial sales
charge (Class A and Class D shares only) and assuming
(1) the Total Fund Operating Expenses for each class set
forth above, (2) a 5% annual return throughout the
periods and (3) redemption at the end of the period:
Class A.............................................. $ 47 $63 $81 $130
Class B.............................................. $ 55 $68 $83 $181
Class C.............................................. $ 26 $50 $86 $187
Class D.............................................. $ 50 $71 $94 $159
An investor would pay the following expenses on the same
$1,000 investment assuming no redemption at the end of
the period:
Class A.............................................. $ 47 $63 $81 $130
Class B.............................................. $ 15 $48 $83 $181
Class C.............................................. $ 16 $50 $86 $187
Class D.............................................. $ 50 $71 $94 $159
</TABLE>
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions 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 and Class C shareholders who
hold their shares for an extended period of time may pay more in Rule 12b-1
distribution fees than the economic equivalent of the maximum front-end sales
charges permitted under the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. (the "NASD"). Merrill Lynch may charge its customers
a processing fee (presently $4.85) for confirming purchases and redemptions.
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".
MERRILL LYNCH SELECT PRICING(SM) SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(SM) System. The shares of each class may be purchased at a price equal
to the next determined net asset value per share subject to the sales charges
and ongoing fee arrangements described below. Shares of Class A and Class D are
sold to investors choosing the initial sales charge alternatives, and shares of
Class B and Class C are sold to investors choosing the deferred sales charge
alternatives. The Merrill Lynch Select Pricing(SM) System is used by more than
50 mutual funds advised by Merrill Lynch Asset Management, L.P. ("MLAM" or the
"Investment Adviser") or an affiliate of MLAM, Fund Asset Management, L.P.
("FAM"). Funds advised by MLAM or FAM are referred to herein as "MLAM-advised
mutual funds".
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the
3
<PAGE> 4
deferred sales charge arrangements. The deferred sales charges and account
maintenance fees that are imposed on Class B and Class C shares, as well as the
account maintenance fees that are imposed on the Class D shares, are imposed
directly against those classes and not against all assets of the Fund, and,
accordingly, such charges will not affect the net asset value of any other class
or have any impact on investors choosing another sales charge option. Dividends
paid by the Fund for each class of shares will be calculated in the same manner
at the same time and will differ only to the extent that account maintenance and
distribution fees and any incremental transfer agency costs relating to a
particular class are borne exclusively by that class. Each class has different
exchange privileges. See "Shareholder Services -- Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges with respect to the Class B and Class C
shares in that the sales charges applicable to each class provide for the
financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select Pricing(SM) System that the investor
believes is the most beneficial under his particular circumstances. More
detailed information as to each class of shares is set forth under "Purchase of
Shares".
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 4.00% initial No No No
sales charge(2,3)
- -------------------------------------------------------------------------------------------------
B CDSC for a period of 4 0.25% 0.50% B shares convert to
years, D shares automatically
at a rate of 4.0% during after approximately
the first year, decreasing ten years(4)
1.0%
annually to 0.0%
- -------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.55% No
- -------------------------------------------------------------------------------------------------
D Maximum 4.00% initial 0.25% No No
sales charge(3)
- -------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. Contingent deferred sales charges ("CDSCs") are imposed
if the redemption occurs within the applicable CDSC time period. The charge
will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares -- Initial Sales
Charge Alternatives -- Class A and Class D Shares -- Eligible Class A
Investors".
(3) Reduced for purchases of $25,000 or more. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead will be subject to a 1.0% CDSC for one year. See "Class
A" and "Class D" below.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have an eight
year conversion period. If Class B shares of the Fund are exchanged for
Class B shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired.
4
<PAGE> 5
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares.
Eligible investors include certain retirement plans and participants
in certain investment programs. In addition, Class A shares will be
offered to Merrill Lynch & Co., Inc. ("ML & Co.") and its subsidiaries
(the term "subsidiaries", when used herein with respect to ML & Co.,
includes MLAM, FAM and certain other entities directly or indirectly
wholly-owned and controlled by ML & Co.) and their directors and
employees and to members of the Boards of MLAM-advised mutual funds.
The maximum initial sales charge is 4.00%, which is reduced for
purchases of $25,000 and over. Purchases of $1,000,000 or more may not
be subject to an initial sales charge, but if the initial sales charge
is waived such purchases will be subject to a 1% CDSC if the shares
are redeemed within one year after purchase. Sales charges also are
reduced under a right of accumulation which takes into account the
investor's holdings of all classes of all MLAM-advised mutual funds.
See "Purchase of Shares -- Initial Sales Charge Alternatives -- Class
A and Class D Shares".
Class B: Class B shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.50% of the Fund's average net
assets attributable to the Class B shares and a CDSC if they are
redeemed within four years of purchase. Approximately ten years after
issuance, Class B shares will convert automatically into Class D
shares of the Fund, which are subject to an account maintenance fee
but no distribution fee; Class B shares of certain other MLAM-advised
mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately eight years. If Class B
shares of the Fund are exchanged for Class B shares of another
MLAM-advised mutual fund, the conversion period applicable to the
Class B shares acquired in the exchange will apply, and the holding
period for the shares exchanged will be tacked onto the holding period
for the shares acquired. Automatic conversion of Class B shares into
Class D shares will occur at least once a month on the basis of the
relative net asset values of the shares of the two classes on the
conversion date, without the imposition of any sales load, fee or
other charge. Conversion of Class B shares to Class D shares will not
be deemed a purchase or sale of the shares for Federal income tax
purposes. Shares purchased through reinvestment of dividends on Class
B shares also will convert automatically to Class D shares. The
conversion period for dividend reinvestment shares and for certain
retirement plans is modified as described under "Purchase of
Shares -- Deferred Sales Charge Alternatives -- Class B and Class C
Shares -- Conversion of Class B Shares to Class D Shares".
Class C: Class C shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.55% of the Fund's average net
assets attributable to Class C shares. Class C shares are also subject
to a CDSC if they are redeemed within one year of purchase. Although
Class C shares are subject to a 1.0% CDSC for only one year (as
compared to four years for Class B), Class C shares have no conversion
feature and, accordingly, an investor that purchases Class C shares
will be subject to distribution fees that will be imposed on Class C
shares for an indefinite period subject to annual approval by the
Fund's Board of Directors and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. Purchases of $1,000,000 or more may not be subject
to an initial sales charge but if the initial sales charge is waived,
such purchases will be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. The schedule of initial sales
charges and reductions for Class D shares is the same as the schedule
for Class A shares. Class D shares also will be issued upon
5
<PAGE> 6
conversion of Class B shares as described above under "Class B". See
"Purchase of Shares -- Initial Sales Charge Alternatives -- Class A
and Class D Shares".
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing(SM) System that the investor believes is most beneficial under his
particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because there is an account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative particularly
attractive because similar sales charge reductions are not available with
respect to the deferred sales charges imposed in connection with purchases of
Class B or Class C shares. Investors not qualifying for reduced initial sales
charges who expect to maintain their investment for an extended period of time
also may elect to purchase Class A or Class D shares, because over time the
accumulated ongoing account maintenance and distribution fees on Class B or
Class C shares may exceed the initial sales charge and, in the case of Class D
shares, the account maintenance fee. Class A, Class B, Class C and Class D share
holdings will count toward a right of accumulation which may qualify the
investor for reduced initial sales charges on new initial sales charge
purchases. In addition, the ongoing Class B and Class C account maintenance and
distribution fees will cause Class B and Class C shares to have higher expense
ratios, pay lower dividends and have lower total returns than the initial sales
charge shares. The ongoing Class D account maintenance fees will cause Class D
shares to have a higher expense ratio, pay lower dividends and have a lower
total return than Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the benefit
of putting all of the investor's dollars to work from the time the investment is
made. The deferred sales charge alternatives may be particularly appealing to
investors who do not qualify for a reduction in initial sales charges. Both
Class B and Class C shares are subject to ongoing account maintenance fees and
distribution fees; however, the ongoing account maintenance and distribution
fees potentially may be offset to the extent any return is realized on the
additional funds initially invested in Class B or Class C shares. In addition,
Class B shares will be converted into Class D shares of the Fund after a
conversion period of approximately ten years, and thereafter investors will be
subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend to
hold their shares for an extended period of time. Investors in Class B shares
should take into account whether they intend to redeem their shares within the
CDSC period and, if not, whether they intend to remain invested until the end of
the conversion period and thereby take advantage of the reduction in ongoing
fees resulting from the conversion into Class D shares. Other investors,
however, may elect to purchase Class C shares if they determine that it is
advantageous to have all their assets invested initially and they are uncertain
as to the length of time they intend to hold their assets in MLAM-advised mutual
funds. Although Class C shareholders are subject to a shorter CDSC period at a
lower rate, they forego the Class B conversion feature, making their investment
subject to account maintenance and higher distribution fees for an indefinite
period of time. In addition, while both Class B and Class C distribution fees
are subject to the limitations on asset-based sales charges imposed by the NASD,
the Class B distribution fees are further limited under a voluntary waiver of
asset-based sales charges. See "Purchase of Shares -- Limitations on the Payment
of Deferred Charges".
6
<PAGE> 7
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in
conjunction with the annual audits of the financial statements of the Fund by
Deloitte & Touche LLP, independent auditors. Financial statements for the fiscal
year ended October 31, 1994, 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.
<TABLE>
<CAPTION>
CLASS A CLASS B
-------- ----------------------------------------------------------------
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
OCT. 21, DEC. 28, AUG. 3,
1994+ TO FOR THE YEAR ENDED OCTOBER 31, 1990 TO 1990+ TO
OCT. 31, ----------------------------------- OCT. 31, DEC. 27,
INCREASE (DECREASE) IN NET ASSET VALUE: 1994** 1994** 1993(1) 1992 1991 1990
-------- -------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............ $ 8.11 $ 8.65 $ 8.85 $ 9.84 $ 9.92 $ 10.00
-------- -------- ---------- ---------- ---------- ----------
Investment income--net.......................... .01 .50 .57 .72 .77 .39
Realized and unrealized loss on investments and
foreign currency transactions--net............ -- (.58) (.20) (.99) (.08) (.08)
-------- -------- ---------- ---------- ---------- ----------
Total from investment operations................ .01 (.08) .37 (.27) .69 .31
-------- -------- ---------- ---------- ---------- ----------
LESS DIVIDENDS AND DISTRIBUTIONS:
Return of capital--net.......................... (.01) (.47) (.57) (.72) -- --
Investment income--net.......................... -- -- -- -- (.77) (.39)
-------- -------- ---------- ---------- ---------- ----------
Total dividends and distributions............... (.01) (.47) (.57) (.72) (.77) (.39)
-------- -------- ---------- ---------- ---------- ----------
Net asset value, end of period.................. $ 8.11 $ 8.10 $ 8.65 $ 8.85 $ 9.84 $ 9.92
======= ======== ========= ========= ========= =========
TOTAL INVESTMENT RETURN:***
Based on net asset value per share.............. .12%# (1.02)% 4.63% (3.00)% 6.93%# 3.40%#
======= ======== ========= ========= ========= =========
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding account maintenance and/or
distribution fees............................. .97%* .77% .74% .75% .77%* .76%*
======= ======== ========= ========= ========= =========
Expenses........................................ .97%* 1.52% 1.49% 1.50% 1.52%* 1.51%*
======= ======== ========= ========= ========= =========
Investment income--net.......................... 6.28%* 5.68% 7.26% 7.60% 9.11%* 9.75%*
======= ======== ========= ========= ========= =========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)........ $ 59 $750,750 $1,664,602 $3,182,520 $5,918,769 $2,796,301
======= ======== ========= ========= ========= =========
Portfolio turnover.............................. 259.50% 259.50% 284.62% 120.77% 153.72% 19.40%
======= ======== ========= ========= ========= =========
<CAPTION>
CLASS C CLASS D
-------- ---------------------------------------------------------
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
OCT. 21, DEC. 28, AUG. 3,
1994 TO FOR THE YEAR ENDED OCTOBER 31, 1990 TO 1990 TO
OCT. 31, ------------------------------- OCT. 31, DEC. 27,
INCREASE (DECREASE) IN NET ASSET VALUE: 1994 1994 1993(1) 1992 1991 1990
-------- ------- ------- -------- -------- --------
<S> <C><C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............ $ 8.11 $ 8.66 $ 8.85 $ 9.85 $ 9.92 $ 10.00
-------- ------- ------- -------- -------- --------
Investment income--net.......................... .01 .54 .61 .77 .82 .42
Realized and unrealized loss on investments and
foreign currency transactions--net............ (.01) (.58) (.19) (1.00) (.07) (.08)
-------- ------- ------- -------- -------- --------
Total from investment operations................ -- (.04) .42 (.23) .75 .34
-------- ------- ------- -------- -------- --------
LESS DIVIDENDS AND DISTRIBUTIONS:
Return of capital--net.......................... (.01) (.51) (.61) (.77) -- --
Investment income--net.......................... -- -- -- -- (.82) (.42)
-------- ------- ------- -------- -------- --------
Total dividends and distributions............... (.01) (.51) (.61) (.77) (.82) (.42)
-------- ------- ------- -------- -------- --------
Net asset value, end of period.................. $ 8.10 $ 8.11 $ 8.66 $ 8.85 $ 9.85 $ 9.92
======= ======= ======= ======== ======== ========
TOTAL INVESTMENT RETURN:***
Based on net asset value per share.............. .00%# (.51)% 5.28% (2.60)% 7.53%# 3.73%#
======= ======= ======= ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding account maintenance and/or
distribution fees............................. 1.34%* .76% .73% .75% .76%* .75%*
======= ======= ======= ======== ======== ========
Expenses........................................ 2.14%* 1.01% .98% 1.00% .96%* .75%*
======= ======= ======= ======== ======== ========
Investment income--net.......................... 5.63%* 6.19% 7.24% 8.11% 9.70%* 10.51%*
======= ======= ======= ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)........ $ 1 $48,879 $99,037 $188,623 $399,416 $211,006
======= ======= ======= ======== ======== ========
Portfolio turnover.............................. 259.50% 259.50% 284.62% 120.77% 153.72% 19.40%
======= ======= ======= ======== ======== ========
</TABLE>
- ---------------
* Annualized.
** Based on average shares outstanding during the period.
*** Total investment returns exclude the effects of sales loads.
+ Commencement of operations or public offering.
# Aggregate total investment return.
(1) On February 25, 1993, Merrill Lynch Asset Management U.K. Limited became a
sub-adviser to the Fund.
7
<PAGE> 8
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. Because 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 because
the expenses of the Fund, such as custodial costs, are higher.
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 and futures thereon.
8
<PAGE> 9
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 Ratings Group ("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 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
options, 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.
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
9
<PAGE> 10
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.
The Fund may invest in securities whose potential investment return is
based on the change in particular measurements of value or rate (an "index"). As
an illustration, the Fund may invest in a security that pays interest and
returns principal based on the change in an index of interest rates or of the
value of a currency or basket of currencies. Interest and principal payable on a
security may also be based on relative changes among particular indices. In
addition, the Fund may invest in securities whose potential investment return is
inversely based on the change in particular indices. For example, the Fund may
invest in securities that pay a higher rate of interest and principal when a
particular index decreases and pay a lower rate of interest and principal when
the value of the index increases. To the extent that the Fund invests in such
types of securities, it will be subject to the risks associated with changes in
the particular indices, which may include reduced or eliminated interest
payments and losses of invested principal. The Fund will purchase such indexed
obligations to generate current income or for currency hedging purposes, and
will not speculate through such obligations.
Certain indexed securities, including certain inverse securities, may have
the effect of providing a degree of investment leverage, because they may
increase or decrease in value at a rate that is a multiple of the changes in
applicable indices. As a result, the market value of such securities will
generally be more volatile than the market values of fixed-rate securities. The
Fund believes that indexed securities, including inverse securities, represent
flexible portfolio management instruments that may allow the Fund to seek
potential investment rewards, hedge other portfolio positions, or vary the
degree of portfolio leverage relatively efficiently under different market
conditions.
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
10
<PAGE> 11
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 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 certain member states of the European
Union, a Western European economic cooperative organization that includes
France, Germany, The Netherlands, the United Kingdom and other countries. The
specific amounts of currencies comprising the ECU may be adjusted by the Council
of Ministers of the European Union 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 (such as S&P or Moody's) 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 15% (10% to
the extent required by certain state laws) of the Fund's total 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
11
<PAGE> 12
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
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 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
12
<PAGE> 13
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.
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
15% (10% to the extent required by certain state laws) of its total 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
13
<PAGE> 14
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.
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.
14
<PAGE> 15
The Fund also may purchase and sell financial 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
specified amount of a commodity, such as a currency or 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".
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
options transactions 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 private
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) unless a
quotation from only one dealer is available, in which case only that dealer's
price will be used, or the OTC option can be sold at a formula price provided
for in the OTC option agreement. 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,
15
<PAGE> 16
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 15% (10% to the extent required by certain state laws) of the
total 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 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
16
<PAGE> 17
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 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 private two-party contracts and have
negotiated strike prices and expiration dates. A futures contract on a foreign
currency is an agreement between two parties to buy and sell a specified amount
of the 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.
17
<PAGE> 18
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.
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.
18
<PAGE> 19
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 NASD, 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.
Under a repurchase agreements, the seller agrees, upon entering into the
contract with the Fund, to repurchase a security (typically a security issued or
guaranteed by the U.S. government) at a mutually agreed upon time and price,
thereby determining the yield during the term of the agreement. This results in
a fixed yield for the Fund insulated from fluctuations in the market value of
the underlying security during such period, although, to the extent the
repurchase agreement is not denominated in U.S. dollars, the Fund's return may
be affected by currency fluctuations. Repurchase agreements may be entered into
only with a member bank of the Federal Reserve System, a primary dealer in U.S.
government securities or an affiliate thereof. A purchase and sale contract is
similar to a repurchase agreement, but purchase and sale contracts, unlike
repurchase agreements, allocate interest on the underlying security to the
purchaser during the term of the agreement. In all instances, the Fund takes
possession of the underlying securities when investing in repurchase agreements
or purchase and sale contracts. Nevertheless, if the seller were to default on
its obligation to repurchase a security under a repurchase agreement or purchase
and sale contract and the market value of the underlying security at such time
was less than the Fund had paid to the seller, the Fund would realize a loss.
The Fund may not invest more than 15% (10% to the extent required by certain
state laws) of its total assets in repurchase agreements or purchase and sale
contracts maturing in more seven days, together with all other illiquid
securities.
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 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,
19
<PAGE> 20
but will apply to obligations of a foreign government unless the Securities
and Exchange Commission permits their exclusion.
--Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may borrow up
to an additional 5% of its total assets for temporary purposes, (iii) the
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) the Fund
may purchase securities on margin to the extent permitted by applicable
law. The Fund may not pledge its assets other than to secure such
borrowings or, to the extent permitted by the Fund's investment policies as
set forth in its Prospectus and Statement of Additional Information, as
they may be amended from time to time, in connection with hedging
transactions, short sales, when-issued and forward commitment transactions
and similar investment strategies.
In addition, the Fund has adopted non-fundamental restrictions which may be
changed by the Board of Directors. Among its non-fundamental policies, the Fund
may not:
--Invest in securities which cannot be readily resold because of legal
or contractual restrictions or which cannot otherwise be marketed, redeemed
or put to the issuer or a third party, if at the time of acquisition more
than 15% of its total assets would be invested in such securities. This
restriction shall not apply to securities which mature within seven days or
securities which the Board of Directors of the Fund has otherwise
determined to be liquid pursuant to applicable law. Notwithstanding the 15%
limitation herein, to the extent the laws of any state in which the Fund's
shares are registered or qualified for sale require a lower limitation, the
Fund will observe such limitation. As of the date hereof, therefore, the
Fund will not invest more than 10% of its total assets in securities which
are subject to this investment restriction. Securities purchased in
accordance with Rule 144A under the Securities Act (a "Rule 144A security")
and determined to be liquid by the Fund's Board of Directors are not
subject to the limitations set forth in this investment restriction.
Notwithstanding the fact that the Board may determine that a Rule 144A
security is liquid and not subject to limitations set forth in this
investment restriction, the State of Ohio does not recognize Rule 144A
securities as securities that are free or restrictions as to resale. To the
extent required by Ohio law, the Fund will not invest more than 50% of its
total assets and securities of issuers that are restricted as to this
position, including Rule 144A securities.
--Notwithstanding the fundamental investment restriction regarding
borrowing noted above, 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.)
20
<PAGE> 21
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".
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 400% 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 six individuals, five 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 ML & Co.; 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.
EDWARD D. ZINBARG -- Former Executive Vice President of The Prudential
Insurance Company of America.
- ---------------
* Interested person, as defined in the Investment Company Act, of the Fund.
21
<PAGE> 22
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 ML & Co.,
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, FAM, acts as the investment
adviser for more than 130 other registered investment companies. The Investment
Adviser also offers portfolio management and portfolio analysis services to
individuals and institutions. As of January 31, 1995, the Investment Adviser and
FAM had a total of approximately $166.5 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, 1994, the fee paid by the
Fund to the Investment Adviser was $6,995,186 (0.55% of the Fund's average net
assets) (based on average net assets of approximately $1.3 billion). At January
31, 1995, the net assets of the Fund aggregated $640.1 million. At this asset
level, the annual management fee would aggregate approximately $3.5 million.
Also, the Investment Adviser has entered into a sub-advisory agreement (the
"Sub-Advisory Agreement") with Merrill Lynch Asset Management U.K. Limited
("MLAM U.K."), an indirect, wholly-owned subsidiary of ML & Co. and an affiliate
of the Investment Adviser, pursuant to which the Investment Adviser pays MLAM
U.K. a fee 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,
1994, the Investment Adviser paid MLAM U.K. a fee of $633,170 (0.05% 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 following persons associated with the Investment Adviser and MLAM U.K.
are primarily responsible for the day-to-day management of the Fund's portfolio
(the length of time that such persons have been so responsible is indicated
following each person's name): Alex V. Bouzakis (since 1992), Edward F. Gobora
(since 1993), David B. Walter (since 1990) and Stephen Yardley (since 1992).
Each of these persons is a Vice President 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.
22
<PAGE> 23
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 its 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 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, 1994, the Fund reimbursed the
Investment Adviser $65,501 for accounting services. For the fiscal year or
period ended October 31, 1994, the ratio of total expenses to average net assets
for each class of shares was as follows: Class A, 0.97% (annualized) (for the
period October 21, 1994 (commencement of public offering) to October 31, 1994);
Class B, 1.52% (for the fiscal year); Class C, 2.14% (annualized) (for the
period October 21, 1994 (commencement of public offering) to October 31, 1994);
and Class D, 1.01% (for the fiscal year and giving effect to the October 21,
1994, redesignation of outstanding Class A shares as Class D shares).
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-1 of the Investment Company Act which incorporates the Code of Ethics of the
Investment Adviser (together, the "Codes"). The Codes significantly restrict the
personal investing activities of all employees of the Investment Adviser and, as
described below, impose additional, more onerous, restrictions on fund
investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are designed
to identify any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Investment Adviser include a ban on acquiring any securities in a "hot" initial
public offering and a prohibition from profiting on short-term trading in
securities. In addition, no employee may purchase or sell any security which at
the time is being purchased or sold (as the case may be), or to the knowledge of
the employee is being considered for purchase or sale, by any fund advised by
the Investment Adviser. Furthermore, the Codes provide for trading "blackout
periods" which prohibit trading by investment personnel of the Fund within
periods of trading by the Fund in the same (or equivalent) security (15 or 30
days depending upon the transaction).
TRANSFER AGENCY SERVICES
Financial Data Services, Inc. (the "Transfer Agent"), which is a
wholly-owned subsidiary of ML & Co., acts as the Fund's transfer agent pursuant
to a Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing
Agency Agreement (the "Transfer Agency Agreement"). Pursuant to the Transfer
Agency Agreement, the Transfer Agent is responsible for the issuance, transfer
and redemption of shares and the opening and maintenance of shareholder
accounts. Pursuant to the Transfer Agency Agreement, the Fund pays the Transfer
Agent an annual fee of $11.00 per Class A or Class D shareholder account and
$14.00 per Class B or Class C shareholder account, nominal miscellaneous fees
(e.g., account closing fees) and is entitled
23
<PAGE> 24
to reimbursement for out-of-pocket expenses incurred by it under the Transfer
Agency Agreement. For the fiscal year ended October 31, 1994, the fee paid by
the Fund to the Transfer Agent was $1,593,507. At January 31, 1995, the Fund had
15 Class A shareholder accounts, 67,232 Class B shareholder accounts, 6 Class C
shareholder accounts and 3,624 Class D shareholder accounts. At this level of
accounts, the annual fee payable to the Transfer Agent would aggregate
approximately $981,361, plus miscellaneous and out-of-pocket expenses.
PURCHASE OF SHARES
The Distributor, an affiliate of both the Investment Adviser and of Merrill
Lynch, acts as the distributor of the shares of the Fund. Shares of the Fund are
offered continuously for sale by the Distributor and other eligible securities
dealers (including Merrill Lynch). Shares of the Fund may be purchased from
securities dealers or by mailing a purchase order directly to the Transfer
Agent. The minimum initial purchase is $1,000, and the minimum subsequent
purchase is $50, except that for retirement plans, the minimum initial purchase
is $100, and the minimum subsequent purchase is $1.
The Fund is offering its shares in four classes at a public offering price
equal to the next determined net asset value per share plus sales charges
imposed either at the time of purchase or on a deferred basis depending upon
the class of shares selected by the investor under the Merrill Lynch Select
Pricing(SM) System, as described below. The applicable offering price for
purchase orders is based upon the net asset value of the Fund next determined
after receipt of the purchase orders by the Distributor. As to purchase
orders received by securities dealers prior to the close of business on the New
York Stock Exchange (generally, 4:00 p.m. New York time), which includes orders
received after the close of business on the previous day, the applicable
offering price will be based on the net asset value determined as of 15 minutes
after the close of business on the New York Stock Exchange, on that day,
provided the Distributor in turn receives the order from the securities dealer
prior to 30 minutes after the close of business on the New York Stock Exchange
on that day. If the purchase orders are not received prior to 30 minutes after
the close of business on the New York Stock Exchange, such orders shall be
deemed received on the next business day. The Fund or the Distributor may
suspend the continuous offering of the Fund's shares of any class at any time
in response to conditions in the securities markets or otherwise and may
thereafter resume such offering from time to time. Any order may be rejected by
the Distributor or the Fund. Neither the Distributor nor the dealers are
permitted to withhold placing orders to benefit themselves by a price change.
Merrill Lynch may charge its customers a processing fee (presently $4.85) to
confirm a sale of shares to such customers. Purchases directly through the
Transfer Agent are not subject to the processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(SM) System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. Shares of Class A and Class D are sold
to investors choosing the initial sales charge alternatives, and shares of
Class B and Class C are sold to investors choosing the deferred sales charge
alternatives. Investors should determine whether under their particular
circumstances it is more advantageous to incur an initial sales charge or to
have the entire initial purchase price invested in the Fund with the investment
thereafter being subject to a contingent deferred sales charge and ongoing
distribution fees. A discussion of the factors that investors should consider
in determining the method of purchasing shares under
24
<PAGE> 25
the Merrill Lynch Select PricingSM System is set forth under "Merrill Lynch
Select PricingSM System" on page 3.
Each Class A, Class B, Class C and Class D share of the Fund represents
identical interests in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
deferred sales charges and account maintenance fees that are imposed on Class B
and Class C shares, as well as the account maintenance fees that are imposed on
Class D shares, will be imposed directly against those classes and not against
all assets of the Fund and, accordingly, such charges will not affect the net
asset value of any other class or have any impact on investors choosing another
sales charge option. Dividends paid by the Fund for each class of shares will be
calculated in the same manner at the same time and will differ only to the
extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Class B, Class C and Class D shares each have exclusive voting
rights with respect to the Rule 12b-1 distribution plan adopted with respect to
such class pursuant to which account maintenance and/or distribution fees are
paid. See "Distribution Plans" below. Each class has different exchange
privileges. See "Shareholder Services -- Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges with respect to Class B and Class C shares in that
the sales charges applicable to each class provide for the financing of the
distribution of the shares of the Fund. The distribution-related revenues paid
with respect to a class will not be used to finance the distribution
expenditures of another class. Sales personnel may receive different
compensation for selling different classes of shares. Investors are advised that
only Class A and Class D shares may be available for purchase through securities
dealers, other than Merrill Lynch, which are eligible to sell shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select PricingSM System.
<TABLE>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
- -------------------------------------------------------------------------------------------------
A Maximum 4.00% initial No No No
sales charge(2,3)
- -------------------------------------------------------------------------------------------------
B CDSC for a period of 4 0.25% 0.50% B shares convert to
years, D shares automatically
at a rate of 4.0% during after approximately
the first year, decreasing ten years(4)
1.0%
annually to 0.0%
- -------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.55% No
- -------------------------------------------------------------------------------------------------
D Maximum 4.00% initial 0.25% No No
sales charge(3)
- -------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs may be imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(footnotes continued on next page)
25
<PAGE> 26
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives -- Class A and Class D Shares -- Eligible Class A Investors".
(3) Reduced for purchases of $25,000 or more. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead will be subject to a 1.0% CDSC for one year.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have an eight
year conversion period. If Class B shares of the Fund are exchanged for
Class B shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired.
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible
to purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternatives is the next determined net asset
value plus varying sales charges (i.e., sales loads), as set forth below.
<TABLE>
<CAPTION>
SALES LOAD AS DISCOUNT TO
SALES LOAD PERCENTAGE* OF SELECTED DEALERS
AS PERCENTAGE THE NET AS PERCENTAGE OF
AMOUNT OF PURCHASE OF OFFERING PRICE AMOUNT INVESTED THE OFFERING PRICE
- ------------------------------------------------ ------------------ --------------- -------------------
<S> <C> <C> <C>
Less than $25,000............................... 4.00% 4.17% 3.75%
$25,000 but less than $50,000................... 3.75 3.90 3.50
$50,000 but less than $100,000.................. 3.25 3.36 3.00
$100,000 but less than $250,000................. 2.50 2.56 2.25
$250,000 but less than $1,000,000............... 1.50 1.52 1.25
$1,000,000 and over**........................... 0.00 0.00 0.00
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more made on or after October 21, 1994. If the sales charge is
waived, such purchases will be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. Class A purchases made prior to
October 21, 1994, are subject to a CDSC of 0.25% if the shares are redeemed
within one year of purchase if such shares were sold subject to a CDSC
instead of an initial sales charge (i.e., purchases of $5 million or more in
a single transaction (other than an Employer Sponsored Retirement or Savings
Plan), a purchase by a TMASM Managed Trust, or a single investment of $5
million or more under the Merrill Lynch Mutual Fund Adviser Program). The
charge will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. A sales charge of 0.75%
will be charged on purchases of $1 million or more of Class A or Class D
shares by certain Employer Sponsored Retirement or Savings Plans.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act of 1933.
As noted above, as a result of the implementation of the Merrill Lynch
Select PricingSM System, Class A shares of the Fund outstanding prior to October
21, 1994, were redesignated Class D shares. The Class A shares offered by this
Prospectus differ from the Class A shares offered prior to October 21, 1994, in
many
26
<PAGE> 27
respects, including sales charges, exchange privilege and the classes of persons
to whom such shares are offered.
During the fiscal period October 21, 1994 (commencement of public offering)
through October 31, 1994, the Fund sold 14,261 of its new Class A shares for
aggregate net proceeds to the Fund of $115,671. The Distributor and Merrill
Lynch did not receive sales charges for the sale of such Class A shares for such
period. During such period, the Distributor received no CDSCs with respect to
redemptions within one year after purchase of the Class A shares purchased
subject to front-end sales charge waivers.
During the fiscal year ended October 31, 1994, the Fund sold 377,878 of its
Class D shares (including redesignated Class A shares) for aggregate net
proceeds to the Fund of $3,322,360. The gross sales charges for the sale of its
Class D shares for the period were $11,788, of which $1,110 and $10,678 were
received by the Distributor and Merrill Lynch, respectively. During such period,
the Distributor received no CDSCs with respect to redemptions within one year
after purchase of the former Class A shares purchased subject to front-end sales
charge waivers.
Eligible Class A Investors. Class A shares are offered to a limited
group of investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Certain employer sponsored retirement or savings
plans, including eligible 401(k) plans, may purchase Class A shares at net
asset value provided such plans meet the required minimum number of eligible
employees or required amount of assets advised by MLAM or any of its
affiliates. Class A shares are available at net asset value to corporate
warranty insurance reserve fund programs provided that the program has $3
million or more initially invested in MLAM-advised mutual funds. Also eligible
to purchase Class A shares at net asset value are participants in certain
investment programs including TMA(SM) Managed Trusts to which Merrill Lynch
Trust Company provides discretionary trustee services and certain purchases
made in connection with the Merrill Lynch Mutual Fund Adviser program. In
addition, Class A shares are offered at net asset value to ML & Co. and its
subsidiaries and their directors and employees and to members of the Boards of
MLAM-advised investment companies, including the Fund. Certain persons who
acquired shares of certain MLAM-advised closed-end funds who wish to reinvest
the net proceeds from a sale of their closed-end fund shares of common stock in
shares of the Fund also may purchase Class A shares of the Fund if certain
conditions set forth in the Statement of Additional Information are met. For
example, Class A shares of the Fund and certain other MLAM-advised mutual funds
are offered at net asset value to shareholders of Merrill Lynch Senior Floating
Rate Fund, Inc. who wish to reinvest the net proceeds from a sale of certain of
their shares of common stock of Merrill Lynch Senior Floating Rate Fund, Inc.
in shares of such funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges may
also be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are also offered at net asset value to certain eligible
Class A investors as set forth above under "Eligible Class A Investors".
Class D shares are offered at net asset value without sales charge to an
investor who has a business relationship with a Merrill Lynch financial
consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
27
<PAGE> 28
Additional information concerning these reduced initial sales charges,
including information regarding investments by Employee Sponsored Retirement or
Savings Plans, is set forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES -- CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four year CDSC,
while Class C shares are subject only to a one year 1.0% CDSC. On the other
hand, approximately ten years after Class B shares are issued, such Class B
shares, together with shares issued upon dividend reinvestment with respect to
those shares, are automatically converted into Class D shares of the Fund and
thereafter will be subject to lower continuing fees. See "Conversion of Class B
Shares to Class D Shares" below. Both Class B and Class C shares are subject to
an account maintenance fee of 0.25% of net assets and a distribution fee, 0.50%
of Class B net assets and 0.55% of Class C net assets, as discussed below under
"Distribution Plans". The proceeds from the account maintenance fees are used to
compensate Merrill Lynch for providing continuing account maintenance
activities.
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of the Class B and Class C
shares, such as the payment of compensation to financial consultants for selling
Class B and Class C shares, from its own funds. The combination of the CDSC and
the ongoing distribution fee facilitates the ability of the Fund to sell the
Class B and Class C shares without a sales charge being deducted at the time of
purchase. Approximately ten years after issuance, Class B shares will convert
automatically into Class D shares of the Fund, which are subject to an account
maintenance fee but no distribution fee; Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately eight years. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange will
apply, and the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See "Limitations on
the Payment of Deferred Charges" below. The proceeds from the ongoing account
maintenance fee are used to compensate Merrill Lynch for providing continuing
account maintenance activities. Class B shareholders of the Fund exercising the
exchange privilege described under "Shareholder Services -- Exchange Privilege"
will continue to be subject to the Fund's CDSC schedule if such schedule is
higher than the CDSC schedule relating to the Class B shares acquired as a
result of the exchange.
28
<PAGE> 29
Contingent Deferred Sales Charges -- Class B Shares. Class B shares which
are redeemed within four years of purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. Accordingly, no CDSC will
be imposed on increases in net asset value above the initial purchase price. In
addition, no CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
The following table sets forth the rates of the Class B CDSC for Class B
shares purchased after October 21, 1994:
<TABLE>
<CAPTION>
CLASS B CDSC
YEAR SINCE AS A PERCENTAGE OF
PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
--------------------------------------------------------------------- -------------------
<S> <C>
0-1.................................................................. 4.00%
1-2.................................................................. 3.00%
2-3.................................................................. 2.00%
3-4.................................................................. 1.00%
4 and thereafter..................................................... 0.00%
</TABLE>
Class B shares purchased prior to October 21, 1994, and redeemed within
three years of purchase are subject to a CDSC at the rates set forth below:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
YEAR SINCE PERCENTAGE OF
PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
-------------------------------------------------------------------- --------------------
<S> <C>
0-1................................................................. 3.00%
1-2................................................................. 2.00%
2-3................................................................. 1.00%
3 and thereafter.................................................... None
</TABLE>
For the fiscal year ended October 31, 1994, the Distributor received CDSCs
of $2,449,809 with respect to the redemption of Class B shares, all of which was
paid to Merrill Lynch. For the fiscal period October 21, 1994 (commencement of
public offering) to October 31, 1994, the Distributor received no CDSCs with
respect to the redemption of Class C shares.
In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over four years or shares acquired pursuant to reinvestment
of dividends or distributions and then of shares held longest during the
four-year period. The charge will not be applied to dollar amounts representing
an increase in the net asset value since the time of purchase. A transfer of
shares from the shareholder's account to another account will be assumed to be
made in the same order as a redemption.
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares through dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to a CDSC because of dividend
29
<PAGE> 30
reinvestment. With respect to the remaining 40 shares, the CDSC is applied only
to the original cost of $10 per share and not to the increase in net asset value
of $2 per share. Therefore, $400 of the $600 redemption proceeds will be charged
at a rate of 2.0% (the applicable rate in the third year after purchase for
shares purchased after October 21, 1994).
The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended) of a shareholder. The
CDSC also is waived on redemptions of shares by certain eligible 401(a) and
eligible 401(k) plans. The CDSC also is waived for any Class B shares which are
purchased by eligible 401(k) or eligible 401(a) plans 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. The Class B CDSC also is waived for any Class
B shares which are purchased by a Merrill Lynch rollover IRA that was funded by
a rollover from a terminated 401(k) plan managed by the MLAM Private Portfolio
Group and held in such account at the time of redemption. Additional information
concerning the waiver of the Class B CDSC is set forth in the Statement of
Additional Information.
Contingent Deferred Sales Charges -- Class C Shares. Class C Shares which
are redeemed within one year of purchase may be subject to a 1.0% CDSC charged
as a percentage of the dollar amount subject thereto. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed
on increases in net asset value above the initial purchase price. In addition,
no Class C CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over one year or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the one-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.
Conversion of Class B Shares to Class D Shares. After approximately ten
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
"Conversion Date") on the basis of the relative net asset values of the shares
of the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class D
shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
30
<PAGE> 31
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event that such certificates are not received
by the Transfer Agent at least one week prior to the Conversion Date, the
related Class B shares will convert to Class D shares on the next scheduled
Conversion Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert approximately
ten years after initial purchase. If, during the Conversion Period, a
shareholder exchanges Class B shares with an eight-year Conversion Period for
Class B shares with a ten-year Conversion Period, or vice versa, the Conversion
Period applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the CDSC
normally imposed on purchases of Class B shares ("Class B Retirement Plans").
When the first share of any MLAM-advised mutual fund purchased by a Class B
Retirement Plan has been held for ten years (i.e., ten years from the date the
relationship between MLAM-advised mutual funds and the Class B Retirement Plan
was established), all Class B shares of all MLAM-advised mutual funds held in
that Class B Retirement Plan will be converted into Class D shares of the
appropriate funds. Subsequent to such conversion, that Class B Retirement Plan
will be sold Class D shares of the appropriate funds at net asset value.
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or distribution
fees paid by the Fund to the Distributor with respect to such classes. The Class
B and Class C Distribution Plans provide for the payment of account maintenance
fees and distribution fees, and the Class D Distribution Plan provides for the
payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual rate
of 0.25% of the average daily net assets of the Fund attributable to shares of
the relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) in connection with account maintenance activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rates of 0.50%,
with respect to Class B shares, and 0.55% with respect to Class C shares, of the
average daily net assets of the Fund attributable to the shares of the relevant
class in order to compensate the Distributor and Merrill Lynch (pursuant to a
sub-agreement) for providing shareholder and distribution services, and bearing
certain distribution-related expenses of the Fund, including payments to
financial consultants for selling Class B and Class C shares of the Fund. The
Distribution Plans relating to Class B and Class C shares are designed to permit
an investor to purchase Class B and Class C shares through dealers without the
assessment of an initial sales charge and at the same time permit the dealer to
compensate its
31
<PAGE> 32
financial consultants in connection with the sale of the Class B and Class C
shares. In this regard, the purpose and function of the ongoing distribution
fees and the CDSC are the same as those of the initial sales charge with respect
to the Class A and Class D shares of the Fund in that the deferred sales charges
provide for the financing of the distribution of the Fund's Class B and Class C
shares.
For the fiscal year ended October 31, 1994, the Fund paid the Distributor
$9,169,467 pursuant to the Class B Plan (based on average net assets subject to
the Class B Plan of approximately $1.2 billion), all of which was paid to
Merrill Lynch for providing account maintenance and distribution-related
activities and services in connection with Class B shares. During the fiscal
period October 21, 1994 (commencement of public offering) to October 31, 1994,
the Fund had not yet begun to pay the Distributor pursuant to the Class C Plan.
For the fiscal year ended October 31, 1994, the Fund paid the Distributor
$187,449 pursuant to the Distribution Plan relating to the Class D shares
(including the redesignated Class A shares) (based on average net assets subject
to such Distribution Plan of approximately $74 million), all of which was paid
to Merrill Lynch for providing account maintenance services in connection with
such shares. At January 31, 1995, the net assets of the Fund subject to the
Class B Distribution Plan aggregated approximately $600 million. At this asset
level, the annual fee payable pursuant to the Class B Distribution Plan would
aggregate approximately $4.5 million. At January 31, 1995, the net assets of the
Fund subject to the Class C Distribution Plan aggregated approximately $130,689.
At this asset level, the annual fee payable pursuant to the Class C Distribution
Plan would aggregate approximately $1,046. At January 31, 1995, the net assets
of the Fund subject to the Class D Distribution Plan aggregated approximately
$40.0 million. At this asset level, the annual fee payable pursuant to the Class
D Distribution Plan would aggregate approximately $99,932.
The payments under the Distribution Plans are based upon a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred and, accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Directors for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information is presented annually as of December 31 of each year on
a "fully allocated accrual" basis and quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated accrual basis, revenues consist of
the account maintenance fees, the distribution fees, the CDSCs and certain other
related revenues, and expenses consist of financial consultant compensation,
branch office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing expenses, corporate
overhead and interest expense. On the direct expense and revenue/cash basis,
revenues consist of the account maintenance fees, distribution fees and CDSCs
and the expenses consist of financial consultant compensation. As of December
31, 1993, the last date for which fully allocated accrual data is available, for
Class B shares, 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 $21,654,000
(1.43% of Class B net assets at that date). As of December 31, 1994, for Class B
shares, direct cash revenues for the period since August 3, 1990 (commencement
of operations) exceeded direct cash expenses by $79,101,716 (12.36% of Class B
net assets at that date). During the fiscal period October 21, 1994
(commencement of public offering) to October 31, 1994, the Fund had not yet
begun to pay the Distributor pursuant to the Class C Plan.
------------------------
32
<PAGE> 33
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Directors of the Fund will approve the continuance of the Distribution
Plans from year to year. However, the Distributor intends to seek annual
continuation of the Distribution Plans. In their review of the Distribution
Plans, the Directors will be asked to take into consideration expenses incurred
in connection with the account maintenance and/or distribution of each class of
shares separately. The initial sales charges, the account maintenance fee, the
distribution fee and/or the CDSCs received with respect to one class will not be
used to subsidize the sale of shares of another class. Payments of the
distribution fee on Class B shares will terminate upon conversion of those Class
B shares into Class D shares as set forth under "Deferred Sales Charge
Alternatives -- Class B and Class C Shares -- Conversion of Class B Shares to
Class D Shares".
LIMITATIONS ON THE PAYMENT OF DEFERRED CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the NASD
imposes a limitation on certain asset-based sales charges such as the
distribution fee and the CDSC borne by the Class B and Class C shares but not
the account maintenance fee. The maximum sales charge rule is applied separately
to each class. As applicable to the Fund, the maximum sales charge rule limits
the aggregate of distribution fee payments and CDSCs payable by the Fund to (1)
6.25% of eligible gross sales of Class B shares and Class C shares, computed
separately (defined to exclude shares issued pursuant to dividend reinvestments
and exchanges) plus (2) interest on the unpaid balance for the respective class,
computed separately, at the prime rate plus 1% (the unpaid balance being the
maximum amount payable minus amounts received from the payment of the
distribution fee and the CDSC). In connection with the Class B shares, the
Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any time.
To the extent payments would exceed the voluntary maximum, the Fund will not
make further payments of the distribution fee with respect to Class B shares,
and any CDSCs will be paid to the Fund rather than to the Distributor; however,
the Fund will continue to make payments of the account maintenance 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.
REDEMPTION OF SHARES
The Fund is required to redeem for cash all shares of the Fund upon receipt
of a written request in proper form. The redemption price is the net asset value
per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC which may be applicable, there will be no charge
for redemption if the redemption request is sent directly to the Transfer Agent.
Shareholders liquidating their holdings will receive 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.
33
<PAGE> 34
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 Department, 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
Department, 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 "Exchange Act"), the existence and
validity of which may be verified by the Transfer Agent through the use of
industry publications. Notarized signatures are not sufficient. In certain
instances, the Transfer Agent may require additional documents, such as, but not
limited to, trust instruments, death certificates, appointments as executor or
administrator, or certificates of corporate authority. For shareholders
redeeming directly with the Transfer Agent, 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 30 minutes after the close of business on
the New York Stock Exchange (generally, 4:00 p.m., New York time) on the same
day. Dealers have the responsibility of submitting such repurchase requests to
the Fund not later than 30 minutes after the close of business on the New York
Stock Exchange in order to obtain that day's closing price.
The repurchase arrangements are for the convenience of shareholders and do
not involve a charge by the Fund (other than any applicable CDSC); 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 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.
34
<PAGE> 35
REINSTATEMENT PRIVILEGE -- CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a
one-time privilege to reinstate their accounts by purchasing Class A or Class D
shares, as the case may be, of the Fund at net asset value without a sales
charge up to the dollar amount redeemed. The reinstatement privilege may be
exercised by sending a notice of exercise along with a check for the amount to
be reinstated to the Transfer Agent within 30 days after the date the request
for redemption was accepted by the Transfer Agent or the Distributor. The
reinstatement will be made at the net asset value per share next determined
after the notice of reinstatement is received and cannot exceed the amount of
the redemption proceeds. The reinstatement privilege is a one-time privilege and
may be exercised by the Class A or Class D shareholder only the first time such
shareholder makes a redemption.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below which are designed to facilitate investment in shares of the
Fund. 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 statements, at least
quarterly, from the Transfer Agent. These statements will serve as transaction
confirmations for automatic investment purchases and the reinvestment of
ordinary income dividends and long-term capital gain distributions. These
statements will also show any other activity in the account since the preceding
statement. Shareholders will receive separate transaction confirmations for each
purchase or sale transaction other than automatic investment purchases and the
reinvestment of ordinary income dividends and long-term capital gain
distributions. A shareholder may make additions to his Investment Account at any
time by mailing a check directly to the Transfer Agent. 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 or Class D shares
from Merrill Lynch to another brokerage firm or financial institution should be
aware that if the firm to which the Class A or Class D shares are to be
transferred will not take delivery of shares of the Fund, a shareholder either
must redeem the Class A or Class D shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm, or such
shareholder must continue to maintain an Investment Account at the Transfer
Agent for those Class A or Class D shares. Shareholders interested in
transferring their Class B or Class C shares from Merrill Lynch and who do not
wish to have an Investment Account maintained for such shares at the Transfer
Agent may request their new brokerage firm to maintain such shares in an account
registered in the name of the brokerage firm for the benefit of the shareholder.
Shareholders considering transferring a tax deferred retirement account such as
an individual retirement account from Merrill Lynch to another brokerage firm or
financial institution should be aware that if the firm to which the retirement
account is to be transferred will not take delivery of shares of the Fund, a
shareholder must either redeem the shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to
35
<PAGE> 36
the account at the new firm, or such shareholder must continue to maintain a
retirement account at Merrill Lynch for those shares.
Exchange Privilege. Shareholders of each class of shares of the Fund have
an exchange privilege with certain other MLAM-advised mutual funds. There is
currently no limitation on the number of times a shareholder may exercise the
exchange privilege. The exchange privilege may be modified or terminated in
accordance with the rules of the Securities and Exchange Commission.
Under the Merrill Lynch Select Pricing(SM) System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund in
his account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second MLAM-advised
mutual fund, and the shareholder does not hold Class A shares of the second fund
in his account at the time of the exchange and is not otherwise eligible to
acquire Class A shares of the second fund, the shareholder will receive Class D
shares of the second fund as a result of the exchange. Class D shares also may
be exchanged for Class A shares of a second MLAM-advised mutual fund at any time
as long as, at the time of the exchange, the shareholder holds Class A shares of
the second fund in the account in which the exchange is made or is otherwise
eligible to purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the
same class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC are exchangeable on the
basis of relative net asset value per share without the payment of any CDSC that
might otherwise be due upon redemption of the shares of the Fund. For purposes
of computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares of
the Fund is "tacked" to the holding period of the newly acquired shares of the
other Fund.
Class A, Class B, Class C and Class D shares also are exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for reduction of any CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
36
<PAGE> 37
Exercise of the exchange privilege is treated as a sale for Federal income
tax purposes. For further information, see "Shareholder Services -- Exchange
Privilege" in the Statement of Additional Information.
The Fund's exchange privilege is modified with respect to purchases of
Class A and Class D shares under the Merrill Lynch Mutual Fund Adviser ("MFA")
program. First, the initial allocation of assets is made under the MFA program.
Then, any subsequent exchange under the MFA program of Class A or Class D shares
of a MLAM-advised mutual fund for Class A or Class D shares of the Fund will be
made solely on the basis of the relative net asset values of the shares being
exchanged. Therefore, there will not be a charge for any difference between the
sales charge previously paid on the shares of the other MLAM-advised mutual fund
and the sales charge payable on the shares of the Fund being acquired in the
exchange under the MFA program.
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.
Cash payments can also be directly deposited to the shareholder's bank account.
No CDSC will be imposed on redemption of shares issued as a result of the
automatic reinvestment of dividends or capital gains distributions. 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.
Systematic Withdrawal Plans. A Class A or Class D 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 or Class D shareholder
whose shares are held within a CMA(R), CBA(R) or Retirement Account may elect to
have shares redeemed on a monthly, bimonthly, quarterly, semiannual or annual
basis through the CMA(R)/CBA(R) Systematic Redemption Program, subject to
certain conditions.
Automatic Investment Plans. Regular additions of Class A, Class B, Class C
and Class D 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(R) or CBA(R) accounts may arrange to have periodic investments made
in the Fund in their CMA(R) or CBA(R) accounts or in certain related accounts in
amounts of $100 or more through the CMA(R)/CBA(R) Automated Investment Program.
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
The net investment income of the Fund is declared as dividends daily prior
to the determination of the net asset value which is calculated 15 minutes after
the close of business on the New York Stock Exchange (generally, 4:00 p.m., New
York time) 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,
37
<PAGE> 38
distribution and/or account maintenance fees, 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 each class of shares will be
reduced as a result of any account maintenance, distribution and transfer agency
fees applicable to that class. 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, the Fund (but not its
shareholders) will not be subject to Federal income tax on the part of its net
ordinary income and net realized capital gains which it distributes to Class A,
Class B, Class C and Class D shareholders (together, the "shareholders"). The
Fund intends to distribute substantially all of such income.
Dividends paid by the Fund from its ordinary income 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
38
<PAGE> 39
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 shares of such withholding taxes in
their U.S. income tax returns as gross income, treat such proportionate shares
as taxes paid by them, and deduct such proportionate shares in computing their
taxable incomes or, alternatively, use them as foreign tax credits against their
U.S. income taxes. No deductions for foreign taxes, 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.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
Under Code Section 988, foreign currency gains or losses from certain debt
instruments, from 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
income 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 and resulting in a capital gain for any shareholder who received a
distribution greater than the shareholder's tax basis in Fund shares (assuming
the shares were held as a capital asset).
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent the sales charge
paid to the Fund reduces any sales charge the shareholder would have owed upon
purchase of the new
39
<PAGE> 40
shares in the absence of the exchange privilege. Instead, such sales charge will
be treated as an amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action either
prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on U.S. Government obligations. State law varies
as to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
PERFORMANCE DATA
From time to time, the Fund may include its average annual total return and
yield for various specified time periods in advertisements or information
furnished to present or prospective shareholders. Average annual total return
and yield are computed separately for Class A, Class B, Class C and Class D
shares in accordance with formulas specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including the maximum sales charge in the case of
Class A and Class D shares and the CDSC that would be applicable to a complete
redemption of the investment at the end of the specified period such as in the
case of Class B and Class C shares. Dividends paid by the Fund with respect to
all shares, to the extent any dividends are paid, will be calculated in the same
manner at the same time on the same day and will be in the same amount, except
that account maintenance fees and distribution fees and any incremental transfer
agency costs relating to each class of shares will be borne exclusively by that
class. The Fund will include performance data for all classes of shares of the
Fund in any advertisement or information including performance data of the Fund.
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return calculated
will not be average annual rates, but rather, actual annual, annualized or
aggregate rates of return,
40
<PAGE> 41
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 waiver of
the CDSC in the case of Class B shares (such as investors in certain retirement
plans) or to reduced sales charges in the case of Class A and Class D shares,
performance data may take into account the reduced, and not the maximum, sales
charges or may not take into account the CDSC and therefore may reflect greater
total return since, due to the reduced sales charges or waiver of the CDSC, a
lower amount of expenses may be 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 the effect of 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 yields for the 30-day period ending
October 31, 1994, were 5.75% for Class B shares and 6.03% for Class D shares
(including redesignated Class A shares). The yields for the 30-day period ending
December 31, 1994, were as follows: Class A shares, 6.54%; Class B shares,
6.02%; Class C shares, 5.24%; and Class D shares, 6.30%.
Total return and yield figures are based on the Fund's historical
performance and are not intended to indicate future performance. The Fund's
total return and yield will vary depending on market conditions, the securities
comprising the Fund's portfolio, the Fund's operating expenses and the amount of
realized and unrealized net capital gains or losses during the period. The value
of an investment in the Fund will fluctuate, and an investor's shares, when
redeemed, may be worth more or less than their original cost.
On occasion, the Fund may compare its performance to 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, 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 indicative of the Fund's
relative performance for any future period.
ADDITIONAL INFORMATION
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of the Fund is determined
once daily as of 15 minutes after the close of business on the New York Stock
Exchange (generally 4:00 p.m., New York time) on each day during which the New
York Stock Exchange is open for trading. The net asset value 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
41
<PAGE> 42
total number of shares outstanding at such time, rounded to the nearest cent.
Expenses, including the fees payable to the Investment Adviser and any account
maintenance and/or distribution fees payable to the Distributor, are accrued
daily.
The per share net asset value of Class A shares generally will be higher
than the per share net asset value of shares of the other classes, reflecting
the daily expense accruals of the account maintenance, distribution and higher
transfer agency fees applicable with respect to Class B and Class C shares and
the daily expense accruals of the account maintenance fees applicable with
respect to Class D shares; moreover, the per share net asset value of Class D
shares generally will be higher than the per share net asset value of Class B
and Class C shares, reflecting the daily expense accruals of the distribution
and higher transfer agency fees applicable with respect to Class B and Class C
shares. Since the distribution fees borne by the Class C shares are higher than
the distribution fees borne by the Class B shares, the per share net asset value
of the Class B shares generally will be higher than the per share net asset
value of the Class C shares. It is expected, however, that the per share net
asset value of the classes will tend to converge (although not necessarily meet)
immediately after the payment of dividends or distributions which will differ by
approximately the amount of the expense accrual differentials between the
classes.
Securities traded in the OTC market are valued at the last available bid
price 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 sale price in the case of exchange-traded options or, in the
case of options traded in the OTC market, the last asked price. Options
purchased by the Fund are valued at their last bid price in the case of
exchange-traded options or, in the case of options traded in the OTC market, the
last bid price. Portfolio securities which are traded on stock exchanges are
valued at the last sale price (regular way) on the exchange on which such
securities are traded, as of the close of business on the day the securities are
being valued or, lacking any sales, at the last available bid price. 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 initially expressed in terms of non-U.S.
dollar currencies are translated into U.S. dollars at the prevailing market
rates as quoted by one or more banks or dealers on the day of valuation.
ORGANIZATION OF THE FUND
The Fund was incorporated under Maryland law on April 18, 1990. It has
authorized capital of 2,600,000,000 shares of Common Stock, par value $0.10 per
share, divided into four classes, designated Class A, Class B, Class C and Class
D Common Stock as follows: Class A Common Stock -- 1,000,000,000 shares; Class B
Common Stock -- 1,000,000,000 shares; Class C Common Stock -- 300,000,000
shares; and Class D Common Stock -- 300,000,000 shares. Shares of Class A, Class
B, Class C and Class D Common Stock represent an interest in the same assets of
the Fund and are identical in all respects except that Class B, Class C and
Class D shares bear certain expenses related to the account maintenance fee
relating to such shares, and Class B and Class C shares bear certain expenses
related to the distribution of such shares. Each class has exclusive voting
rights with respect to matters relating to account maintenance and distribution
expenditures, as applicable. See "Purchase of Shares". The Fund has received an
order from the Commission
42
<PAGE> 43
permitting the issuance and sale of multiple classes of shares. The Directors of
the Fund may classify and reclassify the shares of the Fund into additional
classes of Common Stock at a future date.
Shareholders are entitled to one vote for each 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 account maintenance and/or 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 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 and/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, the Class B, Class C and Class D shares
bear certain additional expenses. Shares issued are fully-paid and nonassessable
and have no preemptive rights. Shares have the conversion rights described in
this Prospectus.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communications for each of the shareholder's
related accounts, the shareholder should notify in writing:
FINANCIAL DATA SERVICES, INC.
ATTN: TAMFO
P.O. BOX 45289
JACKSONVILLE, FL 32232-5289
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this,
please call your Merrill Lynch financial consultant or 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.
43
<PAGE> 44
PENDING LITIGATION
In June 1993, a putative class action complaint was filed in the United
States District Court for the Southern District of California by several
shareholders of the Merrill Lynch Short-Term World Income Portfolio (the "World
Fund"), a fund organized under the laws of the Cayman Islands for investment
solely by non-United States persons, that has similar investment objectives to
the Fund. The complaint named the World Fund, the Investment Adviser and certain
of their affiliates as defendants. Plaintiffs sought damages in excess of $86
million stemming from alleged misrepresentations and omissions in the marketing
and offering materials associated with the World Fund. The complaint alleged,
among other things, that the World Fund prospectus did not contain risk
disclosures included in the Fund's prospectus.
Thereafter, in September 1993, a First Amended Complaint was filed, among
other things, adding two plaintiffs who purchased shares in the Fund, and adding
the Fund and the Distributor as defendants. In the Amended Complaint, plaintiffs
seek compensatory and punitive damages in excess of $600 million, purportedly on
behalf of Fund investors who purchased shares between September 15, 1990, and
October 31, 1992, and on behalf of World Fund investors who purchased shares
between June 9, 1990, and October 31, 1992. The Amended Complaint alleges
violations of Section 10(b) and Section 20 of the Securities Exchange Act,
Section 12(2) and Section 15 of the Securities Act, and various common law
claims, including portfolio mismanagement. In essence, plaintiffs allege that
these funds' sales materials did not contain adequate risk disclosures and
further allege oral point of sale misrepresentations regarding the safety of
investing in these funds.
After plaintiffs voluntarily dismissed the action as to two Merrill Lynch
affiliates, the remaining defendants, with the exception of the World Fund,
moved to dismiss the Amended Complaint on the grounds, among others, that (1)
the prospectuses adequately disclosed the risks associated with investing in
these funds, thus defeating plaintiffs' securities claims as a matter of law;
and (2) plaintiffs failed to comply with the statute of limitations. In
addition, all defendants, with the exception of the World Fund, moved to
transfer venue to the District of New Jersey. At the same time, the World Fund
moved to dismiss the Amended Complaint for insufficiency of process and lack of
personal jurisdiction.
In April 1994, the Court granted defendants' motion to transfer the action
to the District of New Jersey. Plaintiffs then moved for reconsideration. On
reconsideration, the court ruled that the World Fund was subject to jurisdiction
in the United States, and then reaffirmed its decision transferring the action
to the District of New Jersey. In September 1994, the plaintiffs filed a
petition for a writ of mandamus with the United States Court of Appeals for the
Ninth Circuit seeking, in essence, a reversal of the decision granting transfer
of venue. That petition was denied by the Ninth Circuit on October 20, 1994. The
remaining motions to dismiss remain under consideration.
On February 1, 1995, plaintiffs moved in the United States District Court
for the District of New Jersey for permission to file a Second Amended
Complaint. The proposed Second Amended Complaint alleges, among other things,
that the Fund and the World Fund improperly "speculated" in "high risk
'derivatives"' and that this was not disclosed to the shareholders of either
fund in its offering materials. Plaintiffs reassert causes of action under
Section 12(2) of the Securities Act and Section 10(b) of the Exchange Act, as
well as various common law claims. The Second Amended Complaint also alleges
that defendants violated Section 12(1) of the Securities Act and Section 7(d) of
the Investment Company Act by selling shares of the World Fund within the United
States without registering with the Securities and Exchange Commission. It
44
<PAGE> 45
also asserts a new cause of action under Section 13(a)(3) of the Investment
Company Act, alleging that the Fund and the World Fund improperly deviated from
their stated investment policies. The proposed pleading adds David Walter, the
Funds' portfolio manager, as a defendant.
The proposed Second Amended Complaint purports to be brought on behalf of
all persons and entities who purchased World Fund shares between June 9, 1990
and October 31, 1992 and who purchased Fund shares between September 15, 1990
and October 31, 1992. Plaintiffs further seek certification of a new "sub-
class", consisting of all persons who purchased shares of the World Fund during
June 9, 1990 through June 10, 1994, the period of time during which plaintiffs
allege that World Fund shares were unlawfully sold as unregistered investments.
Plaintiffs now claim losses of approximately $700 million and seek punitive
damages in connection with their common law fraud claim.
The defendants believe that the allegations are totally without merit, and
will continue to vigorously contest the action. The Investment Adviser has
agreed to indemnify these funds for any liabilities or expenses they may incur
in connection with this litigation.
45
<PAGE> 46
[THIS PAGE IS INTENTIONALLY LEFT BLANK]
46
<PAGE> 47
MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC. -- AUTHORIZATION FORM (PART 1)
- --------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
/ / Class A shares / / Class B shares
/ / Class C shares / / Class D shares
of Merrill Lynch Short-Term Global Income Fund, Inc. and establish an Investment
Account as described in the Prospectus. In the event that I am not eligible to
purchase Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $.......... payable to Financial Data Services,
Inc. as an initial investment (minimum $1,000). I understand that this
purchase will be executed at the applicable offering price next to be
determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of paper
if necessary.)
<TABLE>
<S> <C>
1. .......................................................... 4. ..........................................................
2. .......................................................... 5. ..........................................................
3. .......................................................... 6. ..........................................................
</TABLE>
Name............................................................................
First Name Initial Last Name
Name of Co-Owner (if any).......................................................
First Name Initial Last Name
Address.........................................................................
.................................................................. Date.......
(Zip Code)
<TABLE>
<S> <C>
Occupation ......................................... Name and Address of Employer.................................................
.............................................................................
.............................................................................
................................................... .............................................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
(In the case of co-owner, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- --------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
<TABLE>
<S> <C> <C>
Ordinary Income Dividends Long-term Capital Gains
--------------------------------- ---------------------------------
SELECT / / Reinvest SELECT / / Reinvest
ONE: / / Cash ONE: / / Cash
--------------------------------- ---------------------------------
</TABLE>
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU:
/ / Check or / / Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch Short-Term Global Income Fund, Inc. Authorization
Form.
SPECIFY TYPE OF ACCOUNT (check one): / / checking / / savings
Name on your account............................................................
Bank Name.......................................................................
Bank Number ............................ Account Number.........................
Bank Address....................................................................
I agree that this authorization will remain in effect until I provide written
notification to Financial Data Services, Inc. amending or terminating this
service.
Signature of Depositor..........................................................
Signature of Depositor ....................................Date.................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS
APPLICATION.
47
<PAGE> 48
MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC. -- AUTHORIZATION FORM
(PART 1) -- (CONTINUED)
- --------------------------------------------------------------------------------
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
--------------------------------------------------------
--------------------------------------------------------
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is my
correct Social Security Number or Taxpayer Identification Number and (2) that I
am not subject to backup withholding (as discussed in the Prospectus under
"Dividends, Distributions and Taxes -- Federal Income 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.
<TABLE>
<S> <C>
............................................................. ............................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
- --------------------------------------------------------------------------------
4. LETTER OF INTENTION -- CLASS A AND D SHARES ONLY (See terms and conditions in
the Statement of Additional Information)
<TABLE>
<S> <C>
......................, 19......
Dear Sir/Madam: Date of initial purchase
</TABLE>
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch 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:
/ / $25,000 / / $50,000 / / $100,000 / / $250,000 / / $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch Short-Term Global
Income Fund, Inc. Prospectus.
I agree to the terms and conditions of this Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Short-Term Global Income Fund, Inc. held as
security.
<TABLE>
<S> <C>
By:.............................................................. ...............................................................
Signature of Owner Signature of Co-Owner
(If registered in joint names, both must sign)
</TABLE>
In making purchases under this letter, the following are the related accounts
on which reduced offering prices are to apply:
<TABLE>
<S> <C>
(1) Name ................................................... (2) Name....................................................
Account Number ............................................ Account Number..............................................
</TABLE>
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp
This form when completed should be mailed to:
Merrill Lynch Short-Term Global Income Fund, Inc.
c/o Financial Data Services, Inc.
Transfer Agency Mutual Fund Operations
P.O. Box 45289
Jacksonville, Florida 32232-5289
We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our agent in
connection with transactions under this authorization form and agree to notify
the Distributor of any purchases 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
<TABLE>
<S> <C> <C>
- ------------ ------------
..............................
- ------------ ------------ F/C Last Name
Branch Code F/C No.
- --------- ---------------
- --------- ---------------
Dealer's Customer A/C No.
</TABLE>
48
<PAGE> 49
MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC. -- AUTHORIZATION FORM (PART 2)
- --------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OF AUTOMATIC
INVESTMENT PLANS ONLY.
- --------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
<TABLE>
<S> <C>
(PLEASE PRINT) ------------------------------------
Name of Owner.......................................................................
First Name Initial Last Name -----------------------------------
Social Security No.
or Taxpayer Identification No.
Name of Co-Owner (if any)...........................................................
First Name Initial Last Name
Address.............................................................................
.................................................................................... Account Number...........................
(Zip Code) (if existing account)
</TABLE>
- --------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN -- CLASS A AND D SHARES ONLY (See terms and
conditions in the Statement of Additional Information)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of / / Class A or / / Class D shares in Merrill Lynch Short-Term
Global Income Fund, Inc. at cost or current offering price. Withdrawals to be
made either (check one) / / Monthly on the 24th day of each month, or / /
Quarterly on the 24th day of March, June, September and December. If the 24th
falls on a weekend or holiday, the next succeeding business day will be
utilized. Begin systematic withdrawals on _____________ (month), or as soon as
possible thereafter.
SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE): / / $_______
or / / $____% of the current value of / / Class A or / / Class D shares in the
account.
SPECIFY WITHDRAWAL METHOD: / / check or / / direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a) I hereby authorize payment by check
/ / as indicated in Item 1.
/ / to the order of..........................................................
Mail to (check one)
/ / the address indicated in Item 1.
/ / Name (please print)......................................................
Address.........................................................................
......................................................................
Signature of Owner.........................................Date.................
Signature of Co-Owner (if any)..................................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO FINANCIAL DATA SERVICES, INC. AMENDING OR TERMINATING
THIS SERVICE.
Specify type of account (check one): / / checking / / savings
Name on your Account............................................................
Bank Name.......................................................................
Bank Number .............................Account Number.........................
Bank Address....................................................................
..............................................................
Signature of Depositor....................................Date..................
Signature of Depositor..........................................................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID" OR
A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHALL ACCOMPANY THIS APPLICATION.
49
<PAGE> 50
MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC. -- AUTHORIZATION FORM
(PART 2) -- (CONTINUED)
- --------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Financial Data Services, Inc. draw an automated
clearing house ("ACH") debit on my checking account as described below each
month to purchase: (choose one)
<TABLE>
<S> <C> <C> <C>
/ / Class A shares / / Class B shares / / Class C shares / / Class D shares
</TABLE>
of Merrill Lynch Short-Term Global Income Fund, Inc. subject to the terms set
forth below. In the event that I am not eligible to purchase Class A shares, I
understand that Class D shares will be purchased.
FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw an ACH debit each month on my bank account for
investment in Merrill Lynch Short-Term Global Income Fund, Inc., as indicated
below:
Amount of each check or ACH debit $..............................
Account Number...................................................
Please date and invest ACH debits on the 20th of each month
beginning _____________ or as soon as thereafter as possible.
(month)
I agree that you are drawing these ACH debits voluntarily at my request and
that you shall not be liable for any loss arising from any delay in preparing or
failure to prepare any such debit. If I change banks or desire to terminate or
suspend this program, I agree to notify you promptly in writing. I hereby
authorize you to take any action to correct erroneous ACH debits of my bank
account or purchases of fund shares including liquidating shares of the Fund and
crediting my bank account. I further agree that if a debit is not honored upon
presentation, Financial Data Services, Inc. is authorized to discontinue
immediately the Automatic Investment Plan and to liquidate sufficient shares
held in my account to offset the purchase made with the dishonored debit.
................. .......................................
Date Signature of Depositor
.......................................
Signature of Depositor
(If joint account, both must sign)
AUTHORIZATION TO HONOR ACH DEBITS
DRAWN BY FINANCIAL DATA SERVICES, INC.
To..........................................................................Bank
(Investor's Bank)
Bank Address....................................................................
City .......... State .......... Zip............................................
As a convenience to me, I hereby request and authorize you to pay and charge to
my account ACH debits drawn on my account by and payable to Financial Data
Services, Inc., I agree that your rights in respect to each such debit shall be
the same as if it were a check drawn on you and signed personally by me. This
authority is to remain in effect until revoked by me in writing. Until you
receive such notice, you shall be fully protected in honoring any such debit. I
further agree that if any such debit be dishonored, whether with or without
cause and whether intentionally or inadvertently, you shall be under no
liability.
................. .......................................
Date Signature of Depositor
................. .......................................
Bank Account Signature of Depositor
Number (If joint account, both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED
"VOID" SHOULD ACCOMPANY THIS APPLICATION.
50
<PAGE> 51
INVESTMENT ADVISER
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 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
4 Chase MetroTech Center,
18th Floor
Brooklyn, New York 11245
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
COUNSEL
Brown & Wood
One World Trade Center
New York, New York 10048-0557
<PAGE> 52
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
Merrill Lynch Select PricingSM
System.............................. 3
Financial Highlights.................. 7
Special and Risk Considerations....... 8
Investment Objective and Policies..... 9
Management of the Fund................ 21
Board of Directors.................. 21
Management and Advisory
Arrangements..................... 22
Code of Ethics...................... 23
Transfer Agency Services............ 23
Purchase of Shares.................... 24
Initial Sales Charge
Alternatives --
Class A and Class D Shares....... 26
Deferred Sales Charge
Alternatives --
Class B and Class C Shares....... 28
Distribution Plans.................. 31
Limitations on the Payment of
Deferred Charges................. 33
Redemption of Shares.................. 33
Redemption.......................... 34
Repurchase.......................... 34
Reinstatement Privilege -- Class A
and Class D Shares............... 35
Shareholder Services.................. 35
Distributions and Taxes............... 37
Performance Data...................... 40
Additional Information................ 41
Determination of Net Asset Value.... 41
Organization of the Fund............ 42
Shareholder Reports................. 43
Shareholder Inquiries............... 43
Pending Litigation.................. 44
Authorization Form.................... 47
Code # 11099-0295
</TABLE>
[LOGO]
MERRILL LYNCH
SHORT-TERM GLOBAL
INCOME FUND, INC.
ART WORK
PROSPECTUS
March 1, 1995
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE> 53
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.
P.O. 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.
Pursuant to the Merrill Lynch Select PricingSM System, the Fund offers four
classes of shares each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select PricingSM System permits an
investor to choose the method of purchasing shares that the investor believes is
most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances.
-------------------------
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the prospectus of the Fund, dated March
1, 1995 (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 March 1, 1995.
<PAGE> 54
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 400% 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, 1993 and 1994, the Fund's portfolio
turnover rates were 284.62% and 259.50%, 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> 55
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 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 the net asset
value of the Fund. This interest rate risk can be reduced without employing
futures as a hedge by
3
<PAGE> 56
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
4
<PAGE> 57
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), 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
5
<PAGE> 58
commitment with respect to such contracts. The Fund will not enter into a
forward contract with a term of more than one year.
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 or an affiliate
thereof. 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,
often less than one week. Repurchase agreements may be construed to be
collateralized loans by the purchaser to the seller secured by the securities
transferred to the purchaser. In the case of a repurchase agreement, as a
purchaser, the Fund will require the seller to provide additional collateral if
the market value of the securities falls below the repurchase price at any time
during the term of the repurchase agreement; the Fund does not have the right to
seek additional collateral in the case of purchase and sale contracts. In the
event of default by the seller under a repurchase agreement construed to be a
collateralized loan, the underlying securities are not owned by the Fund but
constitute only 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 event, the Fund would have
rights against the seller for breach of contract with respect to any losses
resulting from market fluctuations following the failure of the seller to
perform. The Fund may not invest more than 15% (10% to the extent required by
certain state laws) of its total 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 the substance of 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.
6
<PAGE> 59
Lending of Portfolio Securities. Subject to the investment restrictions
stated 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% 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 fundamental and non-fundamental
restrictions and policies relating to the investment of its assets and its
activities. The fundamental policies set forth below may not be changed without
the approval of the holders of a majority of the Fund's outstanding voting
securities (which for this purpose and under the Investment Company Act of 1940,
as amended (the "Investment Company Act"), means the lesser of (i) 67% of the
Fund's shares 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).
Under the fundamental investment restrictions, 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. Make investments for the purpose of exercising control or
management.
3. Purchase or sell real estate, except that, to the extent permitted
by applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
4. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time to
time.
7
<PAGE> 60
5. Issue senior securities to the extent such issuance would violate
applicable law.
6. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may borrow up
to an additional 5% of its total assets for temporary purposes, (iii) the
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) the Fund
may purchase securities on margin to the extent permitted by applicable
law. The Fund may not pledge its assets other than to secure such
borrowings or, to the extent permitted by the Fund's investment policies as
set forth in its Prospectus and Statement of Additional Information, as
they may be amended from time to time, in connection with hedging
transactions, short sales, when-issued and forward commitment transactions
and similar investment strategies.
7. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the "Securities Act"), in selling portfolio securities.
8. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
In addition, the Fund has adopted non-fundamental restrictions which may be
changed by the Board of Directors. Under the non-fundamental investment
restrictions, the Fund may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law.
b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. The Fund currently does not
intend to engage in short sales, except short sales "against the box".
c. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Directors of the Fund
has otherwise determined to be liquid pursuant to applicable law.
Notwithstanding the 15% limitation herein, to the extent the laws of any
state in which the Fund's shares are registered or qualified for sale
require a lower limitation, the Fund will observe such limitation. As of
the date hereof, therefore, the Fund will not invest more than 10% of its
total assets in securities which are subject to this investment restriction
(c). Securities purchased in accordance with Rule 144A under the Securities
Act (a "Rule 144A security") and determined to be liquid by the Fund's
Board of Directors are not subject to the limitations set forth in this
investment restriction (c). Notwithstanding the fact that the Board may
determine that a Rule 144A security is liquid and not subject to
limitations set forth in this investment restriction (c), the State of Ohio
does not recognize Rule 144A securities as securities that are free of
restrictions as to resale. To the extent required by Ohio law, the Fund
will not invest more than 50% of its total assets in securities of issuers
that are restricted as to disposition, including Rule 144A securities.
8
<PAGE> 61
d. Invest in warrants if, at the time of acquisition, its investments
in warrants, valued at the lower of cost or market value, would exceed 5%
of the Fund's net assets; included within such limitation, but not to
exceed 2% of the Fund's net assets, are warrants which are not listed on
the New York Stock Exchange or American Stock Exchange or a major foreign
exchange. For purposes of this restriction, warrants acquired by the Fund
in units or attached to securities may be deemed to be without value.
e. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more
than 5% of the Fund's total assets would be invested in such securities.
This restriction shall not apply to mortgage-backed securities,
asset-backed securities or obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
f. Purchase or retain the securities of any issuer, if those
individual officers and directors of the Fund, the officers and general
partner of the Investment Adviser, the directors of such general partner or
the officers and directors of any subsidiary thereof each owning
beneficially more than one-half of one percent of the securities of such
issuer own in the aggregate more than 5% of the securities of such issuer.
g. Invest in real estate limited partnership interests or interests in
oil, gas or other mineral leases, or exploration or development programs,
except that the Fund may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or development activities.
h. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Fund's
Prospectus and Statement of Additional Information, as they may be amended
from time to time.
i. Notwithstanding fundamental investment restriction (6) above,
borrow amounts in excess of 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).
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
9
<PAGE> 62
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 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 15% (10% to the extent required by certain state laws)
of the total 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.
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.
10
<PAGE> 63
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Directors and executive officers of the Fund, their ages 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
P.O. Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (62) -- President and Director(1)(2) -- President of the
Investment Adviser (which term as used herein includes its corporate
predecessors) since 1977 and Chief Investment Officer since 1976; President of
Fund Asset Management, L.P. ("FAM") (which term as used herein includes its
corporate predecessors) 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. ("ML & Co.") since 1990; Director of the Distributor.
DONALD CECIL (68) -- Director(2) -- 1114 Avenue of the Americas, New York,
New York 10036. Special Limited Partner of Cumberland Partners (an 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 (68) -- 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 (63) -- Director(2) -- 9 Hampton Harbor Road, Hampton
Bays, New York 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 (57) -- Director(2) -- 482 Tepi Drive, Southbury,
Connecticut 06488. Professor of Finance since 1984, and Dean from 1984 to 1993,
New York University Leonard N. Stern School of Business Administration; Director
of Re Capital Corp. (reinsurance holding company), Bowne & Co., Inc. (financial
printers), Vornado, Inc. (real estate holding company), Smith-Corona Corporation
(manufacturer of typewriters and word processors) and Alexander's Inc. (real
estate company).
EDWARD D. ZINBARG (60) -- Director(2) -- 5 Hardwell Road, Short Hills, New
Jersey 07078-2117. Former Executive Vice President of The Prudential Insurance
Company of America from 1988 to 1994; former Director of Prudential Reinsurance
Company and former Trustee of the Prudential Foundation.
TERRY K. GLENN (54) -- Executive Vice President(1)(2) -- Executive Vice
President of the Investment Adviser and FAM since 1983; Executive Vice President
and Director of Princeton Services since 1993; President and Director of the
Distributor since 1986.
11
<PAGE> 64
JOSEPH T. MONAGLE, JR. (46) -- Senior Vice President(1)(2) -- Senior Vice
President and Department Head of the Global Short-Term Fixed Income Division of
the Investment Adviser and associated therewith since 1977; Senior Vice
President of Princeton Services since 1993.
ALEX V. BOUZAKIS (37) -- Vice President(1)(2) -- Vice President and Senior
Portfolio Manager of the Investment Adviser and associated therewith since 1982.
DAVID B. WALTER (49) -- Vice President(1)(2) -- Vice President and
Portfolio Manager of the Investment Adviser since 1984.
STEPHEN YARDLEY (37) -- 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 (34) -- Vice President(1)(2) -- Vice President and Director
of Taxation of the Investment Adviser since 1990; employee of Deloitte & Touche
LLP from 1982 to 1990.
EDWARD F. GOBORA (34) -- Vice President(1) -- Vice President and Portfolio
Manager of the Investment Adviser since 1993, and associated therewith since
1988.
GERALD M. RICHARD (45) -- Treasurer(1)(2) -- Senior Vice President and
Treasurer of the Investment Adviser and FAM 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 (48) -- Secretary(1)(2) -- Vice President of the Investment
Adviser and FAM since 1985.
- ---------------
(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, 1995, the Directors and officers of the Fund as a group (15
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 ML &
Co.
COMPENSATION OF DIRECTORS
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, 1994, fees and expenses paid to such non-affiliated Directors aggregated
$35,029*.
- ---------------
*During most of the fiscal year ended October 31, 1994, the Board consisted
of five Directors, four of whom were non-interested.
12
<PAGE> 65
The following table sets forth for the fiscal year ended October 31, 1994,
compensation paid by the Fund to the non-interested Directors and for the
calendar year ending December 31, 1994, the aggregate compensation paid by all
investment companies advised by the Investment Adviser and its affiliate, FAM
("MLAM/FAM Advised Funds") to the non-interested Directors.
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
PENSION OR FROM FUND AND
AGGREGATE RETIREMENT BENEFITS MLAM/FAM ADVISED
COMPENSATION ACCRUED AS PART FUNDS PAID TO
NAME OF DIRECTOR FROM FUND OF FUND EXPENSES DIRECTORS(1)
- ----------------------------------------------- ------------ ------------------- -----------------
<S> <C> <C> <C>
Donald Cecil................................... $ 9,750 None $ 276,350
Edward H. Meyer................................ $ 8,500 None $ 251,600
Charles C. Reilly.............................. $ 8,500 None $ 276,900
Richard R. West................................ $ 8,500 None $ 300,900
Edward D. Zinbarg*............................. $ 8,500 None $ 121,500
</TABLE>
- ---------------
* Projected annual compensation for the Fund's current fiscal year. Mr.
Zinbarg was elected to the Fund's Board of Directors effective October 25,
1994.
(1) In addition to the Fund, the Directors serve on the boards of other MLAM/FAM
Advised Funds as follows: Mr. Cecil (34 boards); Mr. Meyer (34 boards); Mr.
Reilly (40 boards); Mr. West (40 boards); and Mr. Zinbarg (16 boards).
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,
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, 1992, the
total investment advisory fees paid by the Fund to the Investment Adviser
aggregated $30,132,076. For the fiscal
13
<PAGE> 66
year ended October 31, 1993, the total investment advisory fees paid by the Fund
to the Investment Adviser aggregated $12,966,035. For the fiscal year ended
October 31, 1994, the total investment advisory fees paid by the Fund to the
Investment Adviser aggregated $6,995,186.
The Investment Adviser has also entered into a sub-advisory agreement with
MLAM U.K., a wholly-owned, indirect subsidiary of ML & Co., 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 years ended October 31, 1993 and
1994, the Investment Adviser paid MLAM U.K. fees of $712,838 and $633,170,
respectively, 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 ML&Co. 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; 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 year
ended October 31, 1992, the amount of such reimbursement was $378,904. For the
fiscal year ended October 31, 1993, the amount of such reimbursement was
$230,453. For the fiscal year ended October 31, 1994, the amount of such
reimbursement was $65,501. 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 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 -- Distribution Plans".
ML & Co. 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.
14
<PAGE> 67
Duration and Termination. Unless earlier terminated as described herein,
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. The Fund issues four classes of
shares under the Merrill Lynch Select Pricing(SM) System: shares of Class A and
Class D are sold to investors choosing the initial sales charge alternatives,
and shares of Class B and Class C are sold to investors choosing the deferred
sales charge alternatives. Each Class A, Class B, Class C and Class D share of
the Fund represents identical interests in the investment portfolio of the Fund
and has the same rights, except that Class B, Class C and Class D shares bear
the expenses of the ongoing account maintenance fees, and Class B and Class C
shares bear the expenses of the ongoing distribution fees and the additional
incremental transfer agency costs resulting from the deferred sales charge
arrangements. Class B, Class C and Class D shares each have exclusive voting
rights with respect to the Rule 12b-1 distribution plan adopted with respect to
such class pursuant to which account maintenance and/or distribution fees are
paid. Each class has different exchange privileges. See "Shareholder
Service -- Exchange Privilege".
The Merrill Lynch Select Pricing(SM) System is used by more than 50 mutual
funds advised by the Investment Adviser or its affiliate, FAM. Funds advised by
the Investment Adviser or FAM are referred to herein as "MLAM-advised mutual
funds".
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offerings of each class of shares
of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the offering
of each class of shares of the Fund. After the prospectuses, statements of
additional information and periodic reports have been prepared, set in type and
mailed to shareholders, the Distributor pays for the printing and distribution
of copies thereof used in connection with the offering to dealers and investors.
The Distributor also pays for other supplementary sales literature and
advertising costs. The Distribution Agreements are subject to the same renewal
requirements and termination provisions as the Investment Advisory Agreement and
sub-advisory agreement described above.
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
As a result of the implementation of the Merrill Lynch Select Pricing(SM)
System, Class A shares of the Fund outstanding prior to October 21, 1994, were
redesignated Class D shares. The Class A shares currently being offered differ
from the Class A shares offered prior to October 21, 1994, in many respects,
including sales charges, exchange privilege and the classes of persons to whom
such shares are offered. The gross sales charges for the sale of its former
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 its former Class A shares for the fiscal
year ended October 31, 1993, were $83,097, of which the
15
<PAGE> 68
Distributor received $10,009 and Merrill Lynch received $73,088. The gross sales
charges for the sale of its Class D shares (including redesignated Class A
shares) for the fiscal year ended October 31, 1994, were $11,788, of which the
Distributor received $1,110 and Merrill Lynch received $10,678. The Distributor
and Merrill Lynch received no sales charges for the sale of its new Class A
shares for the fiscal period October 21, 1994 (commencement of public offering)
to October 31, 1994. During such periods, the Distributor received no contingent
deferred sales charges with respect to redemptions within one year after
purchase of Class A or Class D shares purchased subject to front-end sales
charge waivers. 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 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.
Closed-End Fund Investment Option. Class A shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class A Shares") are offered at net asset
value to shareholders of certain closed-end funds advised by MLAM or the
Investment Adviser who purchased such closed-end fund shares prior to October
21, 1994 (the date the Merrill Lynch Select Pricing System commenced operations)
and wish to reinvest the net proceeds from a sale of their closed-end fund
shares of common stock in Eligible Class A Shares, if the conditions set forth
below are satisfied. Alternatively, closed-end fund shareholders who purchased
such shares on or after October 21, 1994, and wish to reinvest the net proceeds
from a sale of their closed-end fund shares are offered Class A shares (if
eligible to buy Class A shares) or Class D shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class D Shares"), if the following
conditions are met. First, the sale of the closed-end fund shares must be made
through Merrill Lynch, and the net proceeds therefrom must be immediately
reinvested in Eligible Class A or Class D Shares. Second, the closed-end fund
shares must either have been acquired in the initial public offering or be
shares representing dividends from shares of common stock acquired in such
offering. Third, the closed-end fund shares must have been continuously
maintained in a Merrill Lynch securities account. Fourth, there must be a
minimum purchase of $250 to be eligible for the investment option. Class A
shares of the Fund are offered at net asset value to
16
<PAGE> 69
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. ("Senior Floating
Rate Fund") 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 the Senior
Floating Rate Fund in connection with a tender offer conducted by the 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.
REDUCED INITIAL SALES CHARGES
Right of Accumulation. Reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
shares of the Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the shares then
being purchased plus (b) an amount equal to the then current net asset value or
cost, whichever is higher, of the purchaser's combined holdings of all classes
of shares of the Fund and of other MLAM-advised mutual funds. For any such right
of accumulation to be made available, the Distributor must be provided at the
time of purchase, by the purchaser or the purchaser's securities dealer, with
sufficient information to permit confirmation of qualification. Acceptance of
the purchase order is subject to such confirmation. The right of accumulation
may be amended or terminated at any time. Shares held in the name of a nominee
or custodian under pension, profit-sharing, or other employee benefit plans may
not be combined with other shares to qualify for the right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of Class A or Class D shares of the Fund or any
other MLAM-advised mutual funds made within a 13-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 or Class D shares; however,
its execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intention may be included under a subsequent Letter of Intention
executed within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of Class A and Class
D shares of the Fund and of other MLAM-advised mutual funds, presently held, at
cost or maximum offering price (whichever is higher), on the date of the first
purchase under the Letter of Intention, may be included as a credit toward the
completion of such Letter, but the reduced sales charge applicable to the amount
covered by such Letter will be applied only to new purchases. If the total
amount of shares purchased does not equal the amount stated in the Letter of
Intention (minimum of $25,000), the investor will be notified and must pay,
within 20 days of the expiration of such Letter, the difference between the
sales charge on the Class A or Class D shares purchased at the reduced rate and
the sales charge applicable to the shares actually purchased through the Letter.
Class A or Class D shares equal to five percent of the intended amount will be
held in escrow during the 13-month period (while remaining registered in the
name of the purchaser) for this purpose. The first purchase under the Letter of
Intention must be at least five percent of the dollar
17
<PAGE> 70
amount of such Letter. If a purchase during the term of such Letter would
otherwise be subject to a further reduced sales charge based on the right of
accumulation, the purchaser will be entitled on that purchase and subsequent
purchases to the reduced percentage sales charge which would be applicable to a
single purchase equal to the total dollar value of the Class A or Class D shares
then being purchased under such Letter, but there will be no retroactive
reduction of the sales charges on any previous purchase.
The value of any shares redeemed or otherwise disposed of by the purchaser
prior to termination or completion of the Letter of Intention will be deducted
from the total purchases made under such Letter. An exchange from a MLAM-advised
money market fund into the Fund that creates a sales charge will count toward
completing a new or existing Letter of Intention from the Fund.
Merrill Lynch Blueprint(SM) Program. Class D shares of the Fund are
offered to participants in the Merrill Lynch Blueprint(SM) Program
("Blueprint"). In addition, participants in Blueprint who own Class A shares of
the Fund may purchase additional Class A shares of the Fund through Blueprint.
Blueprint is directed to small investors, group IRAs and participants in
certain affinity groups such as credit unions, trade associations and benefit
plans. Investors placing orders to purchase Class A or Class D shares of the
Fund through Blueprint will acquire the Class A or Class D 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 3.50% and $5,000.01 or more at the
standard sales charge rates disclosed in the Prospectus). In addition, Class A
or Class D 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 or Class D shares through Blueprint. Services, including
the exchange privilege, available to Class A and Class D investors through
Blueprint, however, may differ from those available to other investors in Class
A or Class D shares.
Class A and Class D shares are offered at net asset value 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 Employer Sponsored Retirement and Savings Plans
(as defined below) whose Trustee and/or Plan Sponsor has entered into a Merrill
Lynch Directed IRA Rollover Program Service Agreement.
Orders for purchases and redemptions of Class A or Class D 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.
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.
Employer Sponsored Retirement and Savings Plans. Class A and Class D
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 Code, deferred compensation plans within the meaning of
Sections 403(b) and 457 of the Code, other deferred compensation arrangements,
Voluntary Employee Benefits Association ("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
18
<PAGE> 71
Plans", provided the plan has accumulated $20 million or more in MLAM-advised
mutual funds (in the case of Class A shares) or $5 million or more in
MLAM-advised mutual funds (in the case of Class D shares). Class D shares may be
offered at net asset value to new Employer Sponsored Retirement or Savings
Plans, provided the plan has $3 million or more initially invested in
MLAM-advised mutual funds. Assets of Employer Sponsored Retirement or Savings
Plans sponsored by the same sponsor or an affiliated sponsor may be aggregated.
Class A shares and Class D shares also are offered at net asset value to
Employer Sponsored Retirement or Savings Plans that have at least 1,000
employees eligible to participate in the plan (in the case of Class A shares) or
between 500 and 999 employees eligible to participate in the plan (in the case
of Class D shares). 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 Blueprint, 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 or Class D shares at net
asset value has the option of (1) purchasing Class D shares at the initial sales
charge schedule disclosed in the Prospectus for purchases of up to $1,000,000
and at 0.75% for purchases of $1,000,000 or more, (ii) if the Employer Sponsored
Retirement or Savings Plan meets the specified requirements, purchasing Class B
shares with a waiver of the CDSC upon redemption, or (iii) if the Employer
Sponsored Retirement or Savings Plan does not qualify to purchase Class B shares
with a waiver upon redemption, purchasing Class B or Class C shares at their
respective CDSC schedule disclosed in the Prospectus.
Certain Employer Sponsored Retirement or Savings Plans, which were
permitted prior to October 21, 1994, to purchase Class A shares at the initial
sales charge schedule in the then current prospectus for purchases up to
$1,000,000 and at 0.75% for purchases of $1,000,000 or more, may purchase Class
A shares at the initial sales charge schedule disclosed in the Prospectus for
purchases of up to $1,000,000 and at 0.75% for purchases of $1,000,000 or more.
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, members of
the Boards of other MLAM-advised investment companies, directors and employees
of ML & Co. and its subsidiaries (the term "subsidiaries", when used herein with
respect to ML & Co., includes MLAM, FAM and certain other entities directly or
indirectly wholly-owned and controlled by ML & Co.), and any trust, pension,
profit-sharing or other benefit plan for such persons may purchase Class A
shares of the Fund at net asset value.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor if the following
conditions are satisfied. First, the investor must advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from a redemption of a
mutual fund that was sponsored by the financial consultant's previous firm and
was subject to a sales charge either at the time of purchase or on a deferred
basis. Second, the investor also must establish that such redemption had been
made within 60 days prior to the investment in the Fund, and the proceeds from
the redemption had been maintained in the interim in cash or a money market
fund.
19
<PAGE> 72
Class D 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 D shares of the Fund with proceeds from
a redemption of shares of such other mutual fund and the shares of such other
fund were subject to a sales charge either at the time of purchase or on a
deferred basis, and second, such purchase of Class D shares must be made within
90 days after such notice of termination.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a Merrill Lynch
financial consultant and who has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer if the following conditions are
satisfied: First, the investor must advise Merrill Lynch that it will purchase
Class D shares of the Fund with proceeds from the redemption of such shares of
other mutual funds and that such shares have been outstanding for a period of no
less than six months.
Second, such purchase of Class D shares must be made within 60 days after
the redemption and the proceeds from the redemption must be maintained in the
interim in cash or a money market fund.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation with
a public or private investment company. The value of the assets or company
acquired in a tax-free transaction may be adjusted in appropriate cases to
reduce possible adverse tax consequences to the Fund which might result from an
acquisition of assets having net unrealized appreciation which is
disproportionately higher at the time of acquisition than the realized or
unrealized appreciation of the Fund. The issuance of Class D shares for
consideration other than cash is limited to bona fide reorganizations, statutory
mergers or other acquisitions of portfolio securities which (i) meet the
investment objectives and policies of the Fund; (ii) are acquired for investment
and not for resale (subject to the understanding that the disposition of the
Fund's portfolio securities shall at all times remain within its control); and
(iii) are liquid securities, the value of which is readily ascertainable, which
are not restricted as to transfer either by law or liquidity of market (except
that the Fund may acquire through such transactions restricted or illiquid
securities to the extent the Fund does not exceed the applicable limits on
acquisition of such securities set forth under "Investment Objective and
Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
in obtaining such investments.
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares -- Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan") with respect to the account
maintenance and/or distribution fees paid by the Fund to the Distributor with
respect to such classes.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act. Among
other things, each Distribution Plan provides that the Distributor shall provide
and the Directors shall review quarterly reports of the disbursement of the
account
20
<PAGE> 73
maintenance fees and/or distribution fees paid to the Distributor. In their
consideration of each Distribution Plan, the Directors must consider all factors
they deem relevant, including information as to the benefits of the Distribution
Plan to the Fund and its related class of shareholders. Each Distribution Plan
further provides that, so long as the Distribution Plan remains in effect, the
selection and nomination of Directors who are not "interested persons" of the
Fund, as defined in the Investment Company Act (the "Independent Directors"),
shall be committed to the discretion of the Independent Directors then in
office. In approving each Distribution Plan in accordance with Rule 12b-1, the
Independent Directors concluded that there is a reasonable likelihood that such
Distribution Plan will benefit the Fund and its related class of shareholders.
Each Distribution Plan can be terminated at any time, without penalty, by the
vote of a majority of the Independent Directors or by the vote of the holders of
a majority of the outstanding related class of voting securities of the Fund. A
Distribution Plan cannot be amended to increase materially the amount to be
spent by the Fund without the approval of the related class of shareholder, and
all material amendments are required to be approved by the vote of the
Directors, including a majority of the Independent Directors who have no direct
or indirect financial interest in such Distribution Plan, cast in person at a
meeting called for that purpose. Rule 12b-1 further requires that the Fund
preserve copies of each Distribution Plan and any report made pursuant to such
plan for a period of not less than six years from the date of such Distribution
Plan or such report, the first two years in an easily accessible place.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on certain
asset-based sales charges such as the distribution fee and the CDSC borne by the
Class B and Class C shares but not the account maintenance fee. The maximum
sales charge rule is applied separately to each class. As applicable to the
Fund, the maximum sales charge rule limits the aggregate of distribution fee
payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of
Class B shares and Class C shares, computed separately (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges), plus (2)
interest on the unpaid balance for the respective class, computed separately, at
the prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from the payment of the distribution fee and the CDSC).
In connection with the Class B shares, the Distributor has voluntarily agreed to
waive interest charges on the unpaid balance in excess of 0.50% of eligible
gross sales. Consequently, the maximum amount payable to the Distributor
(referred to as the "voluntary maximum") in connection with the Class B shares
is 6.75% of eligible gross sales. The Distributor retains the right to stop
waiving the interest charges at any time. To the extent payments would exceed
the voluntary maximum, the Fund will not make further payments of the
distribution fee with respect to Class B shares, and any CDSCs will be paid to
the Fund rather than to the Distributor; however, the Fund will continue to make
payments of the account maintenance fee. In certain circumstances the amount
payable pursuant to the voluntary maximum may exceed the amount payable under
the NASD formula. In such circumstances payment in excess of the amount payable
under the NASD formula will not be made.
The following table sets forth comparative information as of October 31,
1994, with respect to the Class B shares and as of November 30, 1994, with
respect to the Class C shares of the Fund indicating the maximum allowable
payments that can be made under the NASD maximum sales charge rule and, with
respect to Class B shares the Distributor's voluntary maximum.
21
<PAGE> 74
<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(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
---------- --------- ----------- -------- -------------- --------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
FOR CLASS B SHARES -- DATA
CALCULATED AS OF OCTOBER 31,
1994 (IN THOUSANDS):
Class B Shares (for the fiscal
period August 3, 1990
(commencement of operations) to
October 31, 1994):
Under NASD Rule as Adopted...... $6,437,455 $ 402,341 $ 111,421 $513,762 $112,840 $ 400,923 $3,754
Under Distributor's Voluntary
Waiver........................ $6,437,455 $ 402,341 $ 32,187 $434,528 $112,840 $ 321,689 $3,754
FOR CLASS C SHARES -- DATA
CALCULATED AS OF NOVEMBER 30,
1994 (NOT ROUNDED):
Class C Shares (for the fiscal
period October 21, 1994
(commencement of public
offering) to November 30, 1994):
Under NASD Rule as Adopted...... $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
</TABLE>
- ---------------
(1) Purchase price of all eligible Class B or Class C shares sold during period
indicated other than shares acquired through dividend reinvestment and the
exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1%, as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. Of the
distribution fee payments made with respect to Class B shares prior to July
7, 1993, under the distribution plan in effect at that time, at the 0.75%
rate, 0.50% of average daily net assets has been treated as a distribution
fee and 0.25% of average daily net assets has been deemed to have been a
service fee and not subject to the NASD maximum sales charge rule.
(4) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any CDSC payments) is amortizing the unpaid
balance. No assurance can be given that payments of the distribution fee
will reach either the NASD maximum or, with respect to Class B shares, the
voluntary maximum.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended only for 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.
DEFERRED SALES CHARGES -- CLASS B AND CLASS C SHARES
As discussed in the Prospectus under "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares", while Class B shares
redeemed within four years of purchase are subject to a CDSC under most
circumstances, the charge is waived on redemptions of Class B shares in
connection with certain postretirement withdrawals from an Individual Retirement
Account ("IRA") or other retirement plan or on redemptions of Class B shares
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 1/2 in the case of an
22
<PAGE> 75
IRA or other retirement plan, or part of a series of equal periodic payments
(not less frequently than annually) made for the life (or life expectancy) or
any redemption resulting from the tax-free return of an excess contribution to
an IRA; or (b) any partial or complete redemption following the death or
disability (as defined in the Code) of a Class B shareholder (including one who
owns the Class B shares as joint tenant with his or her spouse), provided the
redemption is requested within one year of the death or initial determination of
disability. For the fiscal year ended October 31, 1992, the Distributor received
CDSCs 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 CDSCs of $10,977,755 with respect to redemptions of Class B
shares, all of which was paid to Merrill Lynch. For the fiscal year ended
October 31, 1994, the Distributor received CDSCs of $2,449,809 with respect to
redemptions of Class B shares, all of which was paid to Merrill Lynch. For the
fiscal period October 21, 1994 (commencement of public offering) to October 31,
1994, there were no redemptions of Class C shares resulting in payments of
CDSCs.
Merrill Lynch Blueprint(SM) Program. Class B shares are offered to certain
participants in 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 CDSC 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(SM) Program, 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 or Class D shares at net asset value has the
option of purchasing Class A or Class D 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 CDSC upon
redemption. The CDSC is waived for any Eligible 401(k) Plan redeeming Class B
shares. "Eligible 401(k) Plan" is defined as a retirement plan qualified under
Section 401(k) of the Code with a salary reduction feature offering a menu of
investments to plan participants. The CDSC 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 MLAM-advised mutual funds ("Eligible 401(a)
Plan"). Other tax qualified retirement plans within the meaning of Section
401(a) and 403(b) of the Code which are provided specialized services (e.g.,
plans whose participants may direct on a daily basis their plan allocations
among a menu of investments) by independent administration firms contracted
through Merrill Lynch also may purchase Class B shares with a waiver of the
CDSC. The CDSC also 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 Class B CDSC also is waived for any Class B shares
which are purchased by a Merrill Lynch rollover IRA that was funded by a
rollover from a terminated 401(k) plan managed by the MLAM Private Portfolio
23
<PAGE> 76
Group 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
NASD, 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 once daily, Monday through
Friday, as of 15 minutes after the close of business on the New York Stock
Exchange (generally, 4:00 p.m., New York time), on each day during which the New
York Stock Exchange is open for trading. The New York Stock Exchange is not open
on New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day. Net asset value is computed by
dividing 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 investment advisory
fees and any account maintenance and/or distribution fees, are accrued daily.
The per share net asset value of the Class B, Class C and Class D shares
generally will be lower than the per share net asset value of the Class A shares
reflecting the daily expense accruals of the account maintenance, distribution
and higher transfer agency fees applicable with respect to the Class B and Class
C shares and the daily expense accruals of the account maintenance fees
24
<PAGE> 77
applicable with respect to the Class D shares; moreover the per share net asset
value of Class B and Class C shares generally will be lower than the per share
net asset value of Class D shares reflecting the daily expense accruals of the
distribution fees and higher transfer agency fees applicable with respect to
Class B and Class C shares of the Fund. It is expected, however, that the per
share net asset value of the four classes will tend to converge (although not
necessarily meet) immediately after the payment of dividends or distributions,
which will differ by approximately the amount of the expense accrual
differentials between the classes.
Securities traded in the OTC market are valued at the last available bid
price 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 sale price in the case of exchange-traded options or, in the
case of options traded in the OTC market, the last asked price. Options
purchased by the Fund are valued at their last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC market, the
last bid price. Portfolio securities which are traded on stock exchanges are
valued at the last sale price (regular way) on the exchange on which such
securities are traded, as of the close of business on the day the securities are
being valued or, lacking any sales, at the last available bid price. 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 initially expressed in terms of non-U.S.
dollar currencies are translated into U.S. dollars at the prevailing market
rates as quoted by one or more banks or dealers on the day of valuation.
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, copies of the various plans described below and instructions
as to how to participate in the various services or plans, or how to change
options with respect thereto, can be obtained from the Fund, the Distributor or
Merrill Lynch. 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 statements, at least quarterly, from the
transfer agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income dividends
and long-term capital gain distributions. The statements will also show any
other activity in the account since the preceding statement. Shareholders will
receive separate transaction confirmations for each purchase or sale transaction
other than automatic investment purchases and the reinvestment of ordinary
income dividends and long-term capital gain distributions. A shareholder may
make additions to his Investment Account at any time by mailing a check directly
to the transfer agent.
25
<PAGE> 78
Share certificates are issued only for full shares and only upon the
specific request of a shareholder who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by a shareholder directly from the transfer agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the Class A or Class D shares are to be transferred
will not take delivery of shares of the Fund, a shareholder either must redeem
the Class A or Class D shares (paying any applicable CDSC) so that the cash
proceeds can be transferred to the account at the new firm or such shareholder
must continue to maintain an Investment Account at the transfer agent for those
Class A or Class D shares. Shareholders interested in transferring their Class B
or Class C shares from Merrill Lynch and who do not wish to have an Investment
Account maintained for such shares at the transfer agent may request their new
brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder at the transfer agent. If
the new brokerage firm is willing to accommodate the shareholder in this manner,
the shareholder must request that he be issued certificates for his shares and
then must turn the certificates over to the new firm for re-registration as
described in the preceding sentence.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if (s)he is an eligible Class A investor as described
in the Prospectus) or Class B, Class C or Class D shares at the applicable
public offering price either through the shareholder's securities dealer or by
mail directly to the Fund's transfer agent, acting as agent for such securities
dealers. Voluntary accumulation also can be made through a service known as the
Fund's Automatic Investment Plan whereby the Fund is authorized through
pre-authorized checks or automated clearing house debits of $50 or more to
charge the regular bank account of the shareholder on a regular basis to provide
systematic additions to the Investment Account of such shareholder. An investor
whose shares of the Fund are held within a CMA(R) or CBA(R) account may arrange
to have periodic investments made in the Fund in amounts of $100 or more ($1 for
retirement accounts) through the CMA(R)/CBA(R) Automated Investment Program.
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 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 or direct deposited on or about the payment date.
Shareholders may, at any time, notify the transfer agent in writing or by
telephone (1-800-MER-FUND) that they no longer wish to have their 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.
26
<PAGE> 79
SYSTEMATIC WITHDRAWAL PLANS -- CLASS A AND CLASS D SHARES
A Class A or Class D 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
or Class D shares of the Fund having a value, based on cost or the current
offering price, of $5,000 or more, and monthly withdrawals are available for
shareholders with Class A or Class D shares with such a value of $10,000 or
more.
At the time of each withdrawal payment, sufficient Class A or Class D
shares are redeemed from those on deposit in the shareholder's account to
provide the withdrawal payment specified by the shareholder. The shareholder may
specify either a dollar amount or a percentage of the value of his Class A or
Class D shares. Redemptions will be made at net asset value as determined as of
15 minutes after the close of business of the New York Stock Exchange
(generally, 4:00 p.m. New York time) on the 24th day of each month or the 24th
day of the last month of each quarter, whichever is applicable. If the exchange
is not open for business on such date, the Class A or Class D shares will be
redeemed at the close of business on the following business day. The check for
the withdrawal payment will be mailed, or the direct deposit of the withdrawal
payment will be made, on the next business day following redemption. When a
shareholder is making systematic withdrawals, dividends and distributions on all
Class A or Class D shares in the Investment Account are reinvested automatically
in Class A or Class D shares of the Fund, respectively. A shareholder's
Systematic Withdrawal Plan may be terminated at any time, without charge or
penalty, by the shareholder, the Fund, the Fund's transfer agent or the
Distributor.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be reduced
correspondingly. Purchases of additional Class A or Class D shares concurrent
with withdrawals are ordinarily disadvantageous to the shareholder because of
sales charges and tax liabilities. The Fund will not knowingly accept purchase
orders for Class A or Class D shares of the Fund from investors who maintain a
Systematic Withdrawal Plan unless such purchase is equal to at least one year's
scheduled withdrawals or $1,200, whichever is greater. Periodic investments may
not be made into an Investment Account in which the shareholder has elected to
make systematic withdrawals.
Alternatively, a Class A or Class D shareholder whose shares are held
within a CMA(R), CBA(R) or Retirement Account may elect to have shares redeemed
on a monthly, bimonthly, quarterly, semiannual or annual basis through the
CMA(R)/CBA(R) Systematic Redemption Program. The minimum fixed dollar amount
redeemable is $25. The proceeds of systematic redemptions will be posted to the
shareholder's account five business days after the date the shares are redeemed.
Monthly systematic redemptions will be made at net asset value on the first
Monday of each month, bimonthly systematic redemptions will be made at net asset
value on the first Monday of every other month, and quarterly, semiannual or
annual redemptions are made at net asset value on the first Monday of months
selected at the shareholder's option. If the first Monday of the month is a
holiday, the redemption will be processed at net asset value on the next
business day. The Systematic Redemption Program is not available if Fund shares
are being purchased within the account pursuant to the Automatic Investment
Program. For more information on the CMA(R)/CBA(R) Systematic Redemption
Program, eligible shareholders should contact their Financial Consultant.
27
<PAGE> 80
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds listed below. Under the Merrill
Lynch Select Pricing(SM) System, Class A shareholders may exchange Class A
shares of the Fund for Class A shares of a second MLAM-advised mutual fund if
the shareholder holds any Class A shares of the second fund in his account in
which the exchange is made at the time of the exchange or is otherwise eligible
to purchase Class A shares of the second fund. If the Class A shareholder wants
to exchange Class A shares for shares of a second MLAM-advised mutual fund, but
does not hold Class A shares of the second fund in his account at the time of
the exchange and is not otherwise eligible to acquire Class A shares of the
second fund, the shareholder will receive Class D shares of the second fund as a
result of the exchange. Class D shares also may be exchanged for Class A shares
of a second MLAM-advised mutual fund at any time as long as, at the time of the
exchange, the shareholder holds Class A shares of the second fund in the account
in which the exchange is made or is otherwise eligible to purchase Class A
shares of the second fund. Class B, Class C and Class D shares are exchangeable
with shares of the same class of other MLAM-advised mutual funds. For purposes
of computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares of
the Fund is "tacked" to the holding period of the newly acquired shares of the
other fund as more fully described below. Class A, Class B, Class C and Class D
shares are also exchangeable for shares of certain MLAM-advised money market
funds specifically designated below as available for exchange by holders of
Class A, Class B, Class C or Class D shares. Shares with a net asset value of at
least $100 are required to qualify for the exchange privilege, and any shares
utilized in an exchange must have been held by the shareholder for at least 15
days. It is contemplated that the exchange privilege may be applicable to other
new mutual funds whose shares may be distributed by the Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount equal
to the difference, if any, between the sales charge previously paid on the
outstanding Class A or Class D shares and the sales charge payable at the time
of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have taken
place, the "sales charge previously paid" shall include the aggregate of the
sales charge paid with respect to such Class A or Class D shares in the initial
purchase and any subsequent exchange. Class A or Class D shares issued pursuant
to dividend reinvestment are sold on a no-load basis in each of the funds
offering Class A or Class D shares. For purposes of the exchange privilege,
Class A and Class D shares acquired through dividend reinvestment shall be
deemed to have been sold with a sales charge equal to the sales charge
previously paid on the Class A or Class D shares on which the dividend was paid.
Based on this formula, Class A and Class D shares of the Fund generally may be
exchanged into the Class A or Class D shares of the other funds or into shares
of the Class A and Class D money market funds with a reduced or without a sales
charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively, of another
MLAM-advised mutual fund ("new Class B or Class C shares") on the basis of
relative net asset value per Class B or Class C share, without the payment of
any CDSC that might otherwise be due on redemption of the outstanding shares.
Class B shareholders of the Fund exercising the exchange privilege will continue
to be subject to the Fund's CDSC schedule if such schedule is higher than the
CDSC schedule
28
<PAGE> 81
relating to the new Class B shares acquired through use of the exchange
privilege. In addition, Class B shares of the Fund acquired through use of the
exchange privilege will be subject to the Fund's CDSC schedule if such schedule
is higher than the CDSC schedule relating to the Class B 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 or Class C shares, the
holding period for the outstanding Class B or Class C shares is "tacked" to the
holding period of the new Class B or Class C shares. For example, an investor
may exchange Class B shares of the Fund for those of Merrill Lynch Special Value
Fund, Inc. ("Special Value Fund") after having held the Fund Class B shares for
two and a half years. The 2% CDSC that generally would apply to a redemption
would not apply to the exchange. Three years later the investor may decide to
redeem the Class B shares of Special Value Fund and receive cash. There will be
no CDSC due on this redemption, since by "tacking" the two and a half year
holding period of Fund Class B shares to the three year holding period for the
Special Value Fund Class B shares, the investor will be deemed to have held the
new Class B shares for more than five years.
Shareholders also may exchange shares of the Fund into shares of a money
market fund advised by the Investment Adviser or its affiliates, but the period
of time that Class B or Class C shares are held in a money market fund will not
count towards satisfaction of the holding period requirement for purposes of
reducing the CDSC or, with respect to Class B shares, towards satisfaction of
the conversion period. However, shares of a money market fund which were
acquired as a result of an exchange for Class B or Class C shares of the Fund
may, in turn, be exchanged back into Class B or Class C shares, respectively, of
any fund offering such shares, in which event the holding period for Class B or
Class C shares of the Fund will be aggregated with previous holding periods for
purposes of reducing the CDSC. Thus, for example, an investor may exchange Class
B shares of the Fund for shares of Merrill Lynch Institutional Fund
("Institutional Fund") after having held the Fund Class B shares for two and a
half years and three years later decide to redeem the shares of Institutional
Fund for cash. At the time of this redemption, the 2% CDSC that would have been
due had the Class B shares of the Fund been redeemed for cash rather than
exchanged for shares of Institutional Fund will be payable. If, instead of such
redemption, the shareholder exchanged such shares for Class B shares of a fund
which the shareholder continued to hold for an additional two and a half years,
any subsequent redemption will not incur a CDSC.
Set forth below is a description of the investment objectives of the other
funds into which exchanges can be made:
Funds Issuing Class A, Class B, Class C and Class D Shares:
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).
29
<PAGE> 82
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.
MERRILL LYNCH ARIZONA
MUNICIPAL BOND FUND......... A portfolio of Merrill Lynch Multi-State
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.
MERRILL LYNCH ARKANSAS
MUNICIPAL BOND FUND......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Arkansas income
taxes as is consistent with prudent investment
management.
MERRILL LYNCH ASSET GROWTH
FUND, INC................... High total investment return, consistent with
prudent risk, from investment in United States
and foreign equity, debt and money market
securities the combination of which will be
varied both with respect to types of securities
and markets in response to changing market and
economic trends.
MERRILL LYNCH ASSET INCOME
FUND, INC................... A high level of current income through
investment primarily in United States fixed
income securities.
MERRILL LYNCH BALANCED FUND
FOR INVESTMENT AND
RETIREMENT, INC............. As high a level of total investment return as
is consistent with reasonable risk by investing
in common stock 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 as high a level of
income exempt from Federal and California
income taxes as is consistent with
30
<PAGE> 83
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 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.
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 to provide as high a level of
income exempt from Federal and Colorado income
taxes as is consistent with prudent investment
management.
MERRILL LYNCH CONNECTICUT
MUNICIPAL BOND FUND......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Connecticut
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 capital 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.
31
<PAGE> 84
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 to provide 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.
MERRILL LYNCH FLORIDA
MUNICIPAL BOND FUND......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide 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 of capital through investment
in a diversified portfolio of equity securities
placing particular emphasis on companies that
have exhibited an above-average growth rate in
earnings.
MERRILL LYNCH FUNDAMENTAL
VALUE PORTFOLIO
(available only for
exchanges by certain
individual retirement
accounts for which Merrill
Lynch acts as custodian).... A portfolio of Merrill Lynch Retirement Asset
Builder Program, Inc., a series fund, whose
objective is to provide capital appreciation
and income by investing in securities, with at
least 65% of the portfolio's assets being
invested in equities.
32
<PAGE> 85
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, INC.
(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
OPPORTUNITY PORTFOLIO
(available only for
exchanges by certain
individual retirement
accounts for which Merrill
Lynch acts as custodian).... A portfolio of Merrill Lynch Retirement Asset
Builder Program, Inc., a series fund, whose
objective is to provide a high total investment
return through an investment policy utilizing
United States and foreign equity, debt and
money market securities, the combination of
which will vary depending upon changing market
and economic trends.
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.
MERRILL LYNCH GLOBAL
SMALLCAP FUND, INC.......... Long-term growth of capital by investing
primarily in equity securities of companies
with relatively small market capitalizations
located in various foreign countries and in the
United States.
33
<PAGE> 86
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 primarily
engaged in the ownership or operation of
facilities used to generate, transmit or
distribute electricity, telecommunications, gas
or water.
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 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.
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 to provide 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 to provide 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 to provide as high a level of
income
34
<PAGE> 87
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 to provide 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 to provide 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 to provide 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.
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 to provide 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 to provide as high a level of
income
35
<PAGE> 88
exempt from Federal and New Jersey income taxes
as is consistent with prudent investment
management.
MERRILL LYNCH NEW MEXICO
MUNICIPAL BOND FUND......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and New Mexico
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 to provide 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 to provide 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 to provide as high a level of
income exempt from Federal and North Carolina
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH OHIO
MUNICIPAL BOND FUND......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide 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 to provide 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 and
Singapore.
36
<PAGE> 89
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 to provide 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 QUALITY
BOND PORTFOLIO
(available only for
exchanges by certain
individual retirement
accounts for which Merrill
Lynch acts as custodian).... A portfolio of Merrill Lynch Retirement Asset
Builder Program, Inc., a series fund, whose
objective is to provide a high level of current
income through investment in a diversified
portfolio of debt obligations, such as
corporate bonds and notes, convertible
securities, preferred stocks and governmental
obligations.
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.
37
<PAGE> 90
MERRILL LYNCH TEXAS MUNICIPAL
BOND FUND................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide 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 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 U.S. GOVERNMENT
SECURITIES PORTFOLIO
(available only for
exchanges by certain
individual retirement
accounts for which Merrill
Lynch acts as custodian).... A portfolio of Merrill Lynch Retirement Asset
Builder Program, Inc., a series fund, whose
objective is to provide a 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 WORLD INCOME
FUND, INC................... High current income by investing in a global
portfolio of fixed income securities
denominated in various currencies, including
multinational currencies.
Class A Share Money Market Funds:
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.
MERRILL LYNCH RETIREMENT
RESERVES MONEY FUND
(available only for
exchange 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.
38
<PAGE> 91
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.
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.
Class B, Class C and Class D Share
Money Market Funds:
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 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 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.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, shareholders should contact their
Merrill Lynch financial consultant who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other funds described above,
with shares for which certificates have not been issued may exercise the
exchange privilege by wire through their securities dealers. The Fund reserves
the right to require a properly completed Exchange Application. This exchange
privilege may be modified or terminated in accordance with the rules of the
Commission. The Fund reserves the right to limit the number of times an investor
may exercise the exchange
39
<PAGE> 92
privilege. Certain funds may suspend the continuous offering of their shares 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 for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended (the "Code"). If it so qualifies, the Fund (but not its
shareholders) will not be subject to Federal income tax on the part of its net
ordinary income and net realized capital gains which it distributes to Class A,
Class B, Class C and Class D shareholders (together, the "shareholders"). The
Fund intends to distribute substantially all of such income.
Dividends paid by the Fund from its ordinary income 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.
Any loss upon the sale or exchange of Fund shares held for six months or less,
however, will be treated as long-term capital loss to the extent of any capital
gain dividends received by the shareholder. Distributions in excess of the
Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. Distributions by the Fund, whether from ordinary income or capital
gains, 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 no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the 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
40
<PAGE> 93
conditions and limitations contained in the Code. For example, certain
retirement accounts cannot claim foreign tax credits on investments in foreign
securities held in the Fund. If more than 50% in value of the Fund's total
assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible, and intends, to file an election with
the Internal Revenue Service pursuant to which shareholders of the Fund will be
required to include their proportionate shares of such withholding taxes in
their U.S. income tax returns as gross income, treat such proportionate shares
as taxes paid by them, and deduct such proportionate shares in computing their
taxable incomes or, alternatively, use them as foreign tax credits against their
U.S. income taxes. No deductions for foreign taxes, 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. For this purpose, the Fund will allocate foreign taxes and
foreign source income among the Class A, Class B, Class C and Class D
shareholders according to a method (which it believes is consistent with the
Commission's exemptive order permitting the issuance and sale of multiple
classes of stock) that is based on the gross income allocable to Class A, Class
B, Class C and Class D shareholders during the taxable year, or such other
method as the Internal Revenue Service may prescribe.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring 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 shares in the absence of the exchange privilege. Instead,
such sales charge will be treated as an amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income and
capital gains in the manner necessary to 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
41
<PAGE> 94
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 for
which the Fund elects to have gain or loss treated as ordinary gain or loss
under Code Section 988 (as described below), gain or loss 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
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The Fund
may, nonetheless, elect to treat the gain or loss from certain forward foreign
exchange contracts as capital. In this case, gain or loss realized in connection
with a forward foreign exchange contract that is a Section 1256 contract will be
characterized as 60% long-term and 40% short-term capital gain or loss.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's transactions in options, futures, forward foreign
exchange contracts and its short sale of securities. Under Section 1092, the
Fund may be required to postpone recognition for tax purposes of losses incurred
in certain closing transactions in options, futures, forward foreign exchange
contracts and its short sale of securities.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income be derived from gains from the sale or other disposition
of securities held for less than three months. Accordingly, the Fund may be
restricted in effecting closing transactions within three months after entering
into an option 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.
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 income 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 and resulting in a capital gain for any
shareholder who received a distribution greater than the shareholder's tax basis
in Fund shares (assuming the shares were held as a capital asset). These rules
and the mark-to-market rules described above, however, will not apply to
42
<PAGE> 95
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, Class B, Class C and Class D shares in accordance with
formulas specified by the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A and Class D
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of the Class B and
Class C 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.
43
<PAGE> 96
Set forth in the tables below is total return information for the Class A,
Class B, Class C and Class D shares of the Fund for the periods indicated. As a
result of the implementation of the Merrill Lynch Select Pricing(SM) System,
Class A shares of the Fund outstanding prior to October 21, 1994, were
redesignated Class D shares, and historical performance data pertaining to
such shares is provided below under the caption "Class D Shares".
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
----------------------------- ----------------------------- -------------
REDEEMABLE REDEEMABLE
EXPRESSED AS VALUE OF A EXPRESSED AS VALUE OF A EXPRESSED AS
A PERCENTAGE HYPOTHETICAL A PERCENTAGE HYPOTHETICAL A PERCENTAGE
BASED ON A $1,000 BASED ON A $1,000 BASED ON A
HYPOTHETICAL INVESTMENT AT HYPOTHETICAL INVESTMENT AT HYPOTHETICAL
$1,000 THE END OF $1,000 THE END OF $1,000
PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD INVESTMENT
- -------------------------------------------- ------------- ------------- ------------- ------------- -------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C>
Inception (October 21, 1994) to October 31,
1994...................................... (76.43)% $ 961.20 (30.71)%
One Year Ended October 31, 1994............. (4.76)% $ 952.40
Inception (August 3, 1990) to October 31,
1994...................................... 2.50% $1,110.80
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C>
Inception (October 21, 1994) to October 31,
1994...................................... 0.12% $1,001.20 0.00%
One Year Ended October 31, 1994............. (1.02)% $ 989.80
One Year Ended October 31, 1993............. 4.63% $1,046.30
One Year Ended October 31, 1992............. (3.00)% $ 970.00
One Year Ended October 31, 1991............. 8.58% $1,085.80
Inception (August 3, 1990) to October 31,
1990...................................... 1.83% $1,018.30
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C>
Inception (October 21, 1994) to October 31,
1994...................................... (3.88)% $ 961.20 (1.00)%
Inception (August 3, 1990) to October 31,
1994...................................... 11.08% $1,110.80
</TABLE>
<TABLE>
<CAPTION>
CLASS C CLASS D
------------- -----------------------------
REDEEMABLE REDEEMABLE
VALUE OF A EXPRESSED AS VALUE OF A
HYPOTHETICAL A PERCENTAGE HYPOTHETICAL
$1,000 BASED ON A $1,000
INVESTMENT AT HYPOTHETICAL INVESTMENT AT
THE END OF $1,000 THE END OF
PERIOD THE PERIOD INVESTMENT THE PERIOD
- -------------------------------------------- ------------- ------------- -------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C>
Inception (October 21, 1994) to October 31,
1994...................................... $ 990.00
One Year Ended October 31, 1994............. (4.49)% $ 995.10
Inception (August 3, 1990) to October 31,
1994...................................... 2.10% $1,092.40
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C>
Inception (October 21, 1994) to October 31,
1994...................................... $1,000.00
One Year Ended October 31, 1994............. (0.51)% $ 994.90
One Year Ended October 31, 1993............. (0.35)% $ 996.50
One Year Ended October 31, 1992............. 5.28% $1,052.80
One Year Ended October 31, 1991............. (2.60)% $ 974.00
Inception (August 3, 1990) to October 31,
1990...................................... 9.36% $1,093.60
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C>
Inception (October 21, 1994) to October 31,
1994...................................... $ 990.00
Inception (August 3, 1990) to October 31,
1994...................................... 9.24% $1,092.40
</TABLE>
44
<PAGE> 97
In order to reflect the reduced sales charges in the case of Class A or
Class D shares, or the waiver of the CDSC in the case of Class B or Class C
shares applicable to certain investors, as described under "Purchase of Shares"
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
CDSC and therefore may reflect greater total return since, due to the reduced
sales charges or the waiver of sales charges, a lower amount of expenses is
deducted.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund was incorporated under Maryland law on April 18, 1990. It has an
authorized capital of 2,600,000,000 shares of Common Stock, par value $0.10 per
share, divided into four classes, designated Class A, Class B, Class C and Class
D Common Stock as follows: Class A Common Stock -- 1,000,000,000 shares; Class B
Common Stock -- 1,000,000,000 shares; Class C Common Stock -- 300,000,000
shares; and Class D Common Stock -- 300,000,000 shares. Class A, Class B, Class
C and Class D shares represent an interest in the same assets of the Fund and
are identical in all respects except that the Class B, Class C and Class D
shares bear certain expenses related to the account maintenance and/or
distribution of such shares and have exclusive voting rights with respect to
matters relating to such 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 multiple classes of Common Stock.
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 and/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 and have no preemptive
rights. Redemption and conversion rights are discussed 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.
45
<PAGE> 98
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, Class
B, Class C and Class D shares of the Fund based on the value of the Fund's net
assets on October 31, 1994, and its shares outstanding on that date is set forth
below. The offering price for Class B and Class C shares of the Fund is the net
asset value of Class B and Class C shares, respectively.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
-------- ------------- ------- -----------
<S> <C> <C> <C> <C>
Net Assets....................................... $58,746 $750,750,254 $ 891 $48,879,170
======= =========== ====== ==========
Number of Shares Outstanding..................... 7,246 92,649,107 110 6,030,437
======= =========== ====== ==========
Net Asset Value Per Share (net assets divided by
number of shares outstanding).................. $8.11 $8.10 $8.10 $8.11
Sales Charge (for Class A and Class D shares: -------- ------------- ------- -----------
4.00% of offering price (4.17% of net amount
invested))*.................................... .34 ** ** .34
-------- ------------- ------- -----------
Offering Price................................... $8.45 $8.10 $8.10 $8.45
======= =========== ====== ==========
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent, assumes maximum sales charge is
applicable.
** Class B and Class C shares are not subject to an initial sales charge but may
be subject to a CDSC on redemptions of shares. See "Purchase of
Shares -- Deferred Sales Charge Alternatives -- Class B and Class C Shares"
in the Prospectus and "Redemption of Shares -- Deferred Sales Charge -- Class
B Shares" herein.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 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, 4 Chase
MetroTech Center, 18th Floor, 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.
46
<PAGE> 99
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, 1995.
47
<PAGE> 100
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, 1994, 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, 1994 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, 1994, the results of its
operations, the changes in its net assets, and the financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Princeton, New Jersey
December 12, 1994
48
<PAGE> 101
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
Maturity Interest Value Percent of
Face Amount Date Issue Rate++ (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C>
COUNTRIES
Australia
A$ 43,800,000 7/15/96 Victoria Treasury Corp. (3) 12.50% $ 34,219,678 4.28%
Total Investments in Australia (Cost--$34,991,935) 34,219,678 4.28
Canada
C$ 39,046,000 2/01/96 Canadian Government Bonds (1) 6.00 28,469,538 3.56
62,300,000 3/15/96 Canadian Government Bonds (1) 4.75 44,553,973 5.57
22,850,000 8/01/96 Canadian Government Bonds (1) 6.50 16,582,851 2.08
Total Investments in Canada (Cost--$89,130,522) 89,606,362 11.21
European
Currency Units
ECU 18,200,000 1/21/97 United Kingdom Government Bonds (1) 5.25 21,889,134 2.74
Total Investments in European Currency Units
(Cost--$21,942,153) 21,889,134 2.74
49
<PAGE> 102
Germany
DM 33,700,000 9/20/96 Bundesobligation (1) 8.50 23,246,397 2.91
Total Investments in Germany (Cost--$23,428,386) 23,246,397 2.91
Italy
Lit 28,700,000,000 10/01/96 Buoni Poliennali del Tesoro (Italian
Government Bond) (1) 9.00 18,091,653 2.26
60,200,000,000 1/01/97 Buoni Poliennali del Tesoro (Italian
Government Bond) (1) 8.50 37,240,018 4.66
39,000,000,000 3/21/95 Cassaddi Risparmio Delle Provincie Lombarde (2) 7.96++++ 24,490,672 3.06
Total Investments in Italy (Cost--$78,544,206) 79,822,343 9.98
Mexico
MxP 154,802,510 11/03/94 Mexican Cetes (1) 13.50++++ 45,016,345 5.63
156,418,660 11/30/94 Mexican Cetes (1) 13.50++++ 44,993,019 5.62
27,344,000 2/02/95 Testobonos (3) 5.00 26,853,175 3.36
Total Investments in Mexico (Cost--$117,336,825) 116,862,539 14.61
New Zealand
NZ $ 91,485,000 11/15/95 New Zealand Government Bonds (1) 8.00 55,918,556 6.99
25,400,000 11/15/96 New Zealand Government Bonds (1) 9.00 15,673,583 1.96
Total Investments in New Zealand (Cost--$68,533,873) 71,592,139 8.95
Spain
Pta 8,400,000,000 11/30/96 Bonos del Estado (Spanish Government Bonds) (1) 10.55 67,323,381 8.42
Total Investments in Spain (Cost--$64,532,118) 67,323,381 8.42
Sweden
Skr 225,000,000 9/20/95 Swedish Treasury Bill (1) 9.3279++++ 28,936,794 3.62
Total Investments in Sweden (Cost--$27,246,355) 28,936,794 3.62
United Kingdom
Pound 12,500,000 9/01/97 United Kingdom Gilt (1) 8.75 20,660,063 2.58
Sterling
Total Investments in the United Kingdom
(Cost--$19,996,260) 20,660,063 2.58
United States
US$ 45,000,000 11/01/94 First Boston Corp. (The), Repurchase
Agreement* purchased on 10/31/94 (2) 4.75 45,000,000 5.63
44,392,165 11/01/94 Lehman Brothers, Repurchase Agreement* purchased on
10/31/94 (2) 4.70 44,392,165 5.55
43,000,000 11/01/94 Morgan (J.P.) & Co., Inc., Repurchase Agreement*
purchased on 10/31/94 (2) 4.75 43,000,000 5.38
42,000,000 11/01/94 PaineWebber Inc., Repurchase Agreement*
purchased on 10/31/94 (2) 4.70 42,000,000 5.25
72,000,000 12/07/94 Plus Capital Co., Ltd. Structured Note,
Principal Linked to U.S. $/Peso exchange rate,
collateralized by Mexican Cetes and other Peso
permitted investments (2)**+++ 5.625 71,820,000 8.98
22,500,000 9/30/96 US Treasury Notes (1) 6.50 22,383,990 2.80
74,300,000 8/15/97 US Treasury Notes (1) 6.50 73,255,194 9.16
Total Investments in the United States
(Cost--$342,445,688) 341,851,349 42.75
Total Investments (Cost--$888,128,321) 896,010,179 112.05
</TABLE>
50
<PAGE> 103
SCHEDULE OF INVESTMENTS (concluded)
<TABLE>
<CAPTION>
Expiration Strike Value Percent of
Par Value Date Issue Price (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C>
Currency Put
Options Written
US$ 22,800,000 Nov. 1994 Japanese Yen $ 98.80 $ (2,280) 0.0%
22,700,000 Nov. 1994 New Zealand Dollar 0.605 (2,270) 0.0
Total Options Written (Premiums Received--$37,510) (4,550) 0.0
Total Investments, Net of Options Written (Cost--$888,090,811) 896,005,629 112.05
Unrealized Depreciation on Forward Foreign Exchange Contracts++++++ (5,488,836) (0.69)
Liabilities in Excess of Other Assets (90,827,732) (11.36)
------------ -------
Net Assets $799,689,061 100.00%
============ =======
<FN>
Corresponding industry groups for securities (percent of net assets):
(1)Sovereign Government Obligations--70.56%
(2)Financial Services--33.85%
(3)Sovereign/Regional Government Obligations--Agency--7.64%
*Repurchase Agreements are fully collateralized by US Government & Agency Obligations.
**Indexed instrument for which the principal amount due at maturity is affected by the
relative value of the foreign currencies indicated.
+++Restricted Security.
++Certain Commercial Paper, US Treasury and Foreign Treasury Obligations are traded on
a discount basis; the interest rates shown represent the yield-to-maturity at the time
of purchase by the Fund. Other securities bear interest at the rates shown, payable at
fixed dates or upon maturity. Interest rates on floating rate securities are adjusted
periodically based on appropriate indexes.
The interest rates shown are those in effect at October 31, 1994.
++++Represents the yield-to-maturity on this zero coupon issue.
++++++Forward Foreign Exchange Contracts as of October 31, 1994 are as follows:
</TABLE>
<TABLE>
Unrealized
Expiration Appreciation
Date (Depreciation)
(Note 1c)
Foreign Currency Purchased
<S> <C> <C> <C>
A$ 18,447,584 November 1994 $ 116,497
DM 256,275,757 November 1994 3,239,038
DM 100,409,595 December 1994 (125,778)
ECU 18,019,895 November 1994 562,310
Pound
Sterling 30,108,673 November 1994 658,539
Lit 89,430,767,500 November 1994 849,004
Total (US$ Commitment--$375,342,399) $ 5,299,610
------------
Foreign Currency Sold
A$ 66,325,815 November 1994 $ (286,196)
C$ 61,456,481 November 1994 342,728
DM 364,047,538 November 1994 (4,296,610)
DM 98,201,185 December 1994 434,734
ECU 36,197,201 November 1994 (666,929)
Pound
Sterling 30,621,175 November 1994 (1,425,508)
Lit 99,696,599,898 November 1994 (1,590,756)
Lit 72,872,240,060 December 1994 (956,314)
NZ$ 116,841,074 November 1994 (863,300)
Pta 4,163,107,398 November 1994 221,102
Pta 4,615,018,593 December 1994 (833,962)
Skr 235,300,447 November 1994 (787,964)
Yen 2,282,250,000 December 1994 (105,978)
Yen 2,263,606,200 January 1995 26,507
Total (US$ Commitment--$820,107,197) $(10,788,446)
------------
Total Unrealized Depreciation--Net on
Forward Foreign Exchange Contracts $ (5,488,836)
============
See Notes to Financial Statements.
</TABLE>
51
<PAGE> 104
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of October 31, 1994
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$888,128,321) (Note 1a) $896,010,179
Cash 1,356,778
Foreign demand deposits (Note 1c) 1,917,916
Receivables:
Interest $ 18,979,539
Forward foreign exchange contracts (Note 1c) 1,314,079
Capital shares sold 573,279
Securities sold 329,253
Options written 12,540 21,208,690
------------
Deferred organization expenses (Note 1h) 13,344
Prepaid registration fees and other assets (Note 1h) 159,771
------------
Total assets 920,666,678
------------
Liabilities: Options written, at value (premiums received--$37,510) (Notes 1a & 1d) 4,550
Unrealized depreciation on forward foreign exchange contracts (Note 1c) 5,488,836
Payables:
Securities purchased 100,735,829
Capital shares redeemed 11,734,384
Dividends to shareholders (Note 1i) 1,386,792
Distributor (Note 2) 478,698
Investment adviser (Note 2) 365,599 114,701,302
------------
Accrued expenses and other liabilities 782,929
------------
Total liabilities 120,977,617
------------
Net Assets: Net assets $799,689,061
============
Net Assets Class A Shares of Common Stock, $.10 par value, 1,000,000,000
Consist of: shares authorized $ 725
Class B Shares of Common Stock, $.10 par value, 1,000,000,000
shares authorized 9,264,911
Class C Shares of Common Stock, $.10 par value, 300,000,000 shares authorized 11
Class D Shares of Common Stock, $.10 par value, 300,000,000 shares authorized 603,044
Paid-in capital in excess of par 833,013,549
Accumulated realized capital losses from investments and foreign currency
transactions--net (Note 7) (46,087,873)
Unrealized appreciation on investments and foreign currency transactions--net 2,894,694
------------
Net assets $799,689,061
============
Net Asset Class A--Based on net assets of $58,746 and 7,246 shares outstanding $ 8.11
Value: ============
Class B--Based on net assets of $750,750,254 and 92,649,107 shares outstanding $ 8.10
============
Class C--Based on net assets of $891 and 110 shares outstanding $ 8.10
============
Class D--Based on net assets of $48,879,170 and 6,030,437 shares outstanding $ 8.11
============
See Notes to Financial Statements.
</TABLE>
52
<PAGE> 105
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended October 31, 1994
<S> <C> <C> <C>
Investment Income
(Notes 1f & 1g): Interest and discount earned (net of $1,187,404 foreign withholding tax) $ 91,665,474
Expenses: Distribution fees--Class B (Note 2) 9,169,467
Investment advisory fees (Note 2) 6,995,186
Transfer agent fees--Class B (Note 2) 1,508,625
Custodian fees 915,093
Transfer agent fees--Class D (Note 2) 84,882
Printing and shareholder reports 81,390
Accounting services (Note 2) 65,501
Registration fees (Note 1h) 60,572
Professional fees 43,558
Directors' fees and expenses 35,029
Amortization of organization expenses (Note 1h) 17,792
Other 29,035
------------
Total expenses 19,006,130
------------
Investment income--net 72,659,344
------------
Realized & Realized loss from:
Unrealized Gain Investments--net $(11,175,541)
(Loss) on Foreign currency transactions (81,749,077) (92,924,618)
Investments & ------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net 25,296,245
(Notes 1c, 1g & 3): Foreign currency transactions (15,265,580) 10,030,665
------------ ------------
Net realized and unrealized loss on investments and foreign
currency transactions (82,893,953)
------------
Net Decrease in Net Assets Resulting from Operations $(10,234,609)
============
See Notes to Financial Statements.
</TABLE>
53
<PAGE> 106
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended October 31,
Increase (Decrease) in Net Assets: 1994 1993
<S> <C> <C> <C>
Operations: Investment income--net $ 72,659,344 $ 160,519,519
Realized loss on investments and foreign currency transactions--net (92,924,618) (253,242,731)
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net 10,030,665 188,784,948
-------------- --------------
Net increase (decrease) in net assets resulting from operations (10,234,609) 96,061,736
-------------- --------------
Distributions to Return of capital--net:
Shareholders Class A (58) (9,820,087)
(Note 1i): Class B (68,086,994) (150,699,432)
Class C (1) 0
Class D (4,572,291) 0
-------------- --------------
Net decrease in net assets resulting from distributions to shareholders (72,659,344) (160,519,519)
-------------- --------------
Capital Share Net decrease in net assets derived from capital share transactions (881,055,998) (1,543,047,053)
Transactions -------------- --------------
(Note 4):
Net Assets: Total decrease in net assets (963,949,951) (1,607,504,836)
Beginning of year 1,763,639,012 3,371,143,848
--------------- --------------
End of year $ 799,689,061 $1,763,639,012
=============== ==============
See Notes to Financial Statements.
</TABLE>
54
<PAGE> 107
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data Class A Class B
and ratios have been derived For the For the For the
from information provided in Period Period Period
the financial statements. Oct. 21, Dec. 28 Aug. 3
1994++ to 1990 to 1990++ to
Increase (Decrease) in Net Oct. 31, For the Year Ended October 31, Oct. 31, Dec. 27,
Asset Value: 1994** 1994** 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning
Operating of period $ 8.11 $ 8.65 $ 8.85 $ 9.84 $ 9.92 $ 10.00
Performance: ---------- ---------- ---------- ---------- ---------- ----------
Investment income--net .01 .50 .57 .72 .77 .39
Realized and unrealized loss
on investments and foreign
currency transactions--net -- (.58) (.20) (.99) (.08) (.08)
---------- ---------- ---------- ---------- ---------- ----------
Total from investment operations .01 (.08) .37 (.27) .69 .31
---------- ---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Return of capital--net (.01) (.47) (.57) (.72) -- --
Investment income--net -- -- -- -- (.77) (.39)
---------- ---------- ---------- ---------- ---------- ----------
Total dividends and distributions (.01) (.47) (.57) (.72) (.77) (.39)
---------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 8.11 $ 8.10 $ 8.65 $ 8.85 $ 9.84 $ 9.92
========== ========== ========== ========== ========== ==========
Total Based on net asset value per share .12%+++ (1.02%) 4.63% (3.00%) 6.93%+++ 3.40%+++
Investment ========== ========== ========== ========== ========== ==========
Return:***
Ratios to
Average
Net Assets: Expenses, excluding account
maintenance and distribution fees .97%* .77% .79% .75% .77%* .76%*
========== ========== ========== ========== ========== ==========
Expenses .97%* 1.52% 1.60% 1.50% 1.52%* 1.51%*
========== ========== ========== ========== ========== ==========
Investment income--net 6.28%* 5.68% 7.26% 7.60% 9.11%* 9.75%*
========== ========== ========== ========== ========== ==========
Supplemental Net assets, end of period
(in thousands) $ 59 $ 750,750 $1,664,602 $3,182,520 $5,918,769 $2,796,301
Data: ========== ========== ========== ========== ========== ==========
Portfolio turnover 259.50% 259.50% 284.62% 120.77% 153.72% 19.40%
========== ========== ========== ========== ========== ==========
<CAPTION>
The following per share data Class C Class D
and ratios have been derived For the For the For the
from information provided in Period Period Period
the financial statements. Oct. 21, Dec. 28 Aug. 3
1994++ to 1990 to 1990++ to
Increase (Decrease) in Net Oct. 31, For the Year Ended October 31, Oct. 31, Dec. 27,
Asset Value: 1994** 1994** 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning
Operating of period $ 8.11 $ 8.66 $ 8.85 $ 9.85 $ 9.92 $ 10.00
Performance: ---------- ---------- ---------- ---------- ---------- ----------
Investment income--net .01 .54 .61 .77 .82 .42
Realized and unrealized loss on
investment and foreign
currency transactions--net (.01) (.58) (.19) (1.00) (.07) (.08)
---------- ---------- ---------- ---------- ---------- ----------
Total from investment operations -- (.04) .42 (.23) .75 .34
---------- ---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Return of capital--net (.01) (.51) (.61) (.77) -- --
Investment income--net -- -- -- -- (.82) (.42)
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
55
<PAGE> 108
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data Class A Class B
and ratios have been derived For the For the For the
from information provided in Period Period Period
the financial statements. Oct. 21, Dec. 28 Aug. 3
1994++ to 1990 to 1990++ to
Increase (Decrease) in Net Oct. 31, For the Year Ended October 31, Oct. 31, Dec. 27,
Asset Value: 1994** 1994** 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C> <C>
Total dividends and distributions (.01) (.51) (.61) (.77) (.82) (.42)
---------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 8.10 $ 8.11 $ 8.66 $ 8.85 $ 9.85 $ 9.92
========== ========== ========== ========== ========== ==========
Total Based on net asset value per share .00%+++ (.51%) 5.28% (2.60%) 7.53%+++ 3.73%+++
Investment ========== ========== ========== ========== ========== ==========
Return:***
Ratios to
Average Expenses, excluding account
Net Assets: maintenance and distribution fees 1.34%* .76% .73% .75% .76%* .75%*
========== ========== ========== ========== ========== ==========
Expenses 2.14%* 1.01% .98% 1.00% .96%* .75%*
========== ========== ========== ========== ========== ==========
Investment income--net 5.63%* 6.19% 7.24% 8.11% 9.70%* 10.51%*
========== ========== ========== ========== ========== ==========
Supplemental Net assets, end of period
Data: (in thousands) $ 1 $ 48,879 $ 99,037 $ 188,623 $ 399,416 $ 211,006
========== ========== ========== ========== ========== ==========
Portfolio turnover 259.50% 259.50% 284.62% 120.77% 153.72% 19.40%
========== ========== ========== ========== ========== ==========
<FN>
*Annualized.
**Based on average shares outstanding during the period.
***Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
56
<PAGE> 109
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 four classes of shares under the Merrill Lynch Select Pricing
SM System. Shares of Class A and Class D are sold with a front-end
sales charge. Shares of Class B and Class C may be subject to a
contingent deferred sales charge. All classes of shares have
identical voting, dividend, liquidation and other rights and the
same terms and conditions, except that Class B, Class C and Class
D Shares bear certain expenses related to the account maintenance of
such shares and Class B and Class C Shares bear certain expenses
related to the distribution of such shares. Each class has exclusive
voting rights with respect to matters relating to its account
maintenance and distribution expenditures. The following is a
summary of significant accounting policies followed by the Fund.
(a) Valuation of 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 sale price for options written.
Options traded in the over-the-counter market are valued at the
last asked price for options written and the last bid price 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 Government
securities. Under such agreements, the bank or primary dealer agrees
to repurchase the security at a mutually agreed upon time and price.
The Fund takes possession of the underlying securities, marks to
market such securities and, if necessary, receives additions to such
securities daily to ensure that the contract is fully collateralized.
(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) receivables or payables
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.
The Fund may also purchase or sell listed or over-the-counter
foreign currency options, foreign currency futures and related
options on foreign currency futures as a short or long hedge against
possible variations in foreign exchange rates. Such transactions
may be effected with respect to hedges on non-US dollar denominated
securities owned by the Fund, sold by the Fund but not yet
delivered, or committed or anticipated to be purchased by the Fund.
(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
57
<PAGE> 110
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.
(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
transactions are recorded on the dates the transactions are
entered into (the trade dates). Interest income (including
amortization of discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined
on the identified cost basis.
(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. All of the ordinary income distributions paid
by the Fund during the fiscal year ended October 31, 1994 are
characterized as a return of capital.
(j) Reclassifications--Generally accepted accounting principles
require that differences between accumulated net realized capital
losses for financial reporting and tax purposes, if permanent, be
reclassified to paid-in capital. In connection with the adoption
of this accounting method, prior years' permanent book/tax
differences of $105,249,721 have been reclassified from accumulated
realized capital losses to paid in capital. These reclassifications
have no effect on net assets or net asset values per share.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). Effective
January 1, 1994, the investment advisory business of MLAM was
reorganized from a corporation to a limited partnership. Both
prior to and after the reorganization, ultimate control of MLAM
was vested with Merrill Lynch & Co., Inc. ("ML & Co."). The
general partner of MLAM is Princeton Services, Inc. ("PSI"), an
indirect wholly-owned subsidiary of ML & Co. The limited partners
are ML & Co. and Merrill Lynch Investment Management, Inc.
("MLIM"), which is also an indirect wholly-owned subsidiary of
ML & Co. The Fund has also entered into a Distribution Agreement
and a Distribution Plan 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 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. MLAM has entered into a Sub-Advisory
Agreement (the "Agreement") with Merrill Lynch Asset Management
U.K., Ltd. ("MLAM U.K."), an affiliate of MLAM, pursuant to
which MLAM pays MLAM U.K. a fee for providing investment advisory
services to the Investment Adviser with respect to the Fund in an
amount to be determined from time to time by the Investment
Adviser and MLAM U.K. but in no event in excess of the amount
that the Investment Adviser actually receives for providing
services to the Fund. For the year ended October 31, 1994, MLAM
paid MLAM U.K. a fee of $633,170 pursuant to such Agreement. 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.
58
<PAGE> 111
NOTES TO FINANCIAL STATEMENTS (concluded)
Pursuant to a distribution plan (the "Distribution Plan") adopted
by the Fund in accordance with Rule 12b-1 under the Investment
Company Act of 1940, the Fund pays the Distributor ongoing
account maintenance and distribution fees. The fees are accrued
daily and paid monthly at the annual rates based upon the average
daily net assets of the shares as follows:
<TABLE>
<CAPTION>
Account Distribution
Maintenance Fee Fee
<S> <C> <C>
Class B 0.25% 0.50%
Class C 0.25% 0.55%
Class D 0.25% --
</TABLE>
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to
the Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services
to Class B, Class C and Class D shareholders. The ongoing
distribution fee compensates the Distributor and MLPF&S for
providing shareholder and distribution-related services to Class
B and Class C shareholders.
For the year ended October 31, 1994, MLFD earned underwriting
discounts and MLPF&S earned dealer concessions on sales of the
Fund's Class A and Class D shares as follows:
<TABLE>
<CAPTION>
MLFD MLPF&S
<S> <C> <C>
Class A $ -- $ --
Class D $1,110 $10,678
</TABLE>
MLPF&S received contingent deferred sales charges of $2,449,809
relating to transactions in Class B Shares.
Financial Data Services, Inc. ("FDS"), an indirect wholly-owned
subsidiary of ML & Co., 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 MLAM, MLIM, PSI, MLFD, FDS, MLPF&S and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term
securities, for the year ended October 31, 1994 were
$4,490,166,539 and $5,312,697,739, respectively.
Net realized and unrealized gains (losses) as of October 31, 1994
were as follows:
<TABLE>
<CAPTION>
Realized Unrealized
Gains (Losses) Gains (Losses)
<S> <C> <C>
Investments:
Long-term $ (11,896,187) $ 7,916,612
Short-term -- (34,754)
Options purchased -- --
Options written 720,646 --
----------------- ---------------
Total investments (11,175,541) 7,881,858
----------------- ---------------
Currency transactions:
Options purchased $ (2,077,387) $ --
Options written 9,500,070 32,960
Forward foreign exchange contracts (78,925,539) (5,488,836)
Financial futures contracts -- --
Foreign currency transactions (10,246,221) 468,712
----------------- ---------------
Total currency transactions (81,749,077) (4,987,164)
----------------- ---------------
Total $ (92,924,618) $ 2,894,694
================= ===============
</TABLE>
Transactions in call options written for the year ended
October 31, 1994 were as follows:
<TABLE>
<CAPTION>
Par Value
Covered by Premiums
Written Options Received
<S> <C> <C>
Outstanding call options written at
beginning of year $ 112,433,062 $ 117,877
Options written 139,574,324,396 8,539,959
Options exercised (3,559,832,290) (2,116,754)
Options expired (136,126,925,168) (6,541,082)
----------------- ---------------
Outstanding call options written at
end of year $ -- $ --
================= ===============
</TABLE>
Transactions in put options written for the year ended
October 31, 1994 were as follows:
<TABLE>
<CAPTION>
Par Value
Covered by Premiums
Written Options Received
<S> <C> <C>
Outstanding put options written at
beginning of year $ 290,900,000 $ 451,290
Options written 17,505,822,404 16,723,870
Options exercised (2,187,569,949) (3,014,188)
Options expired (15,563,652,455) (14,123,462)
----------------- ---------------
Outstanding put options written at
end of year $ 45,500,000 $ 37,510
================= ===============
</TABLE>
59
<PAGE> 112
As of October 31, 1994, net unrealized appreciation for Federal
income tax purposes aggregated $5,925,546, of which $11,088,467
related to appreciated securities and $5,162,921 related to
depreciated securities. At October 31, 1994, the aggregate cost
of investments, for Federal income tax purposes was $890,084,633.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share
transactions was $881,055,998 and $1,543,047,053 for the years
ended October 31, 1994 and October 31, 1993, respectively.
Transactions in capital shares for each class were as follows:
<TABLE>
<CAPTION>
Class A Shares for the Period Dollar
October 21, 1994+ to October 31, 1994 Shares Amount
<S> <C> <C>
Shares sold 14,261 $ 115,671
----------------- ---------------
Total issued 14,261 115,671
Shares redeemed (7,015) (56,902)
----------------- ---------------
Net increase 7,246 $ 58,769
================= ===============
<FN>
++Commencement of Operations.
<CAPTION>
Class B Shares for the Year Dollar
Ended October 31, 1994 Shares Amount
<S> <C> <C>
Shares sold 3,848,634 $ 32,411,047
Shares issued to shareholders in
reinvestment of dividends
and distributions 4,300,343 36,195,588
----------------- ---------------
Total issued 8,148,977 68,606,635
Shares redeemed (107,865,898) (904,426,466)
----------------- ---------------
Net decrease (99,716,921) $ (835,819,831)
================= ===============
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)
================= ===============
Class C Shares for the Period Dollar
October 21, 1994+ to October 31, 1994 Shares Amount
Shares sold 111 $ 900
----------------- ---------------
Total issued 111 900
Shares redeemed (1) (8)
----------------- ---------------
Net increase 110 $ 892
================= ===============
<FN>
++Commencement of Operations.
<CAPTION>
Class D Shares for the Year Dollar
Ended October 31, 1994 Shares Amount
<S> <C> <C>
Shares sold 377,878 $ 3,322,360
Shares issued to shareholders in
reinvestment of dividends
and distributions 303,155 2,425,102
----------------- ---------------
Total issued 681,033 5,747,462
Shares redeemed (6,093,190) (51,043,291)
----------------- ---------------
Net decrease (5,412,157) (45,295,829)
================= ===============
<CAPTION>
Class D Shares for the Year Dollar
Ended October 31, 1993 Shares Amount
<S> <C> <C>
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)
================= ===============
</TABLE>
As a result of the implementation of the Merrill Lynch Select
Pricing System SM, Class A Shares of the Fund outstanding prior to
October 21, 1994, have been redesignated Class D Shares. There
were 6,102,407 shares redesignated amounting to $59,847,781.
5. Commitments:
At October 31, 1994, the Fund entered into forward foreign
exchange contracts under which it had agreed to purchase and sell
foreign currency with a value of approximately $23,651,000 and
$329,000, respectively.
6. Subsequent Event:
On November 17, 1994, the Fund's Board of Directors declared an
ordinary income dividend to shareholders in the amount of
$.035765 per Class A Share, $0.35217 per Class B Share, $0.02772
per Class C Share, and $0.038535 per Class D Share, payable on
November 18, 1994 to shareholders of record as of November 17,
1994.
7. Capital Loss Carryforward:
At October 31, 1994, the Fund had a capital loss carryforward of
approximately $43,048,000, of which $32,232,000 expires in 2000
and $10,816,000 expires in 2002. This amount will be available to
offset like amounts of any future taxable gains.
60
<PAGE> 113
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 a 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 the lowest expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic, or financial
conditions are unlikely to increase investment risk significantly. Bonds rated
AA are obligations for which there is a low expectation of investment risk.
Capacity for timely repayment of principal and interest is substantial, although
adverse changes in business, economic or financial conditions may lead to
increased investment risk albeit not very significantly.
"+" 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 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, sell or hold
a security inasmuch as it does not comment as to market price or suitability for
a particular investor. The ratings are based on current information furnished to
Standard & Poor's by the issuer or obtained from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may an occasion rely on unaudited financial information. The ratings
may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information.
I-1
<PAGE> 114
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 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 satisfactory capacity for timely repayment,
although such capacity may be susceptible to adverse changes in business,
economic, or financial conditions.
I-2
<PAGE> 115
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Investment Objective and Policies..... 2
Management of the Fund................ 11
Directors and Officers.............. 11
Compensation of Directors........... 12
Management and Advisory
Arrangements...................... 13
Purchase of Shares.................... 15
Redemption of Shares.................. 22
Portfolio Transactions and
Brokerage........................... 24
Determination of Net Asset Value...... 24
Shareholder Services.................. 25
Distributions and Taxes............... 40
Performance Data...................... 43
General Information................... 45
Description of Shares............... 45
Computation of Offering Price Per
Share............................. 46
Independent Auditors................ 46
Custodian........................... 46
Transfer Agent...................... 46
Legal Counsel....................... 47
Reports to Shareholders............. 47
Additional Information.............. 47
Independent Auditors' Report.......... 48
Financial Statements.................. 49
Bond and Commercial Paper Ratings..... I-1
Code # 11100-0295
</TABLE>
[LOGO]
MERRILL LYNCH
SHORT-TERM GLOBAL
INCOME FUND, INC.
ART WORK
STATEMENT OF
ADDITIONAL
INFORMATION
March 1, 1995
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE> 116
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission File due to ASCII-incompatibility and
cross-references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- --------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graphic paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
